Gainsco (GANS): A Dark Nonstandard Auto Insurer That’s Cheap Based on Recent Underwriting Results
Gainsco (GANS) is a dark stock. It does not file with the SEC. However, it does provide both statutory (Gainsco is an insurer) and GAAP financial reports on its website. These reports go back to 2012 (so, covering the period from 2011 on). Not long before 2011, Gainsco had been an SEC reporting company. Full 10-Ks are available on the SEC’s EDGAR site. Anything I’ll be talking about with you here today about Gainsco’s historical financial performance has been cobbled together through a combination of GAAP financials for the holding company (Gainsco), statutory financials for the key insurance subsidiary (MGA), and old 10-Ks.
Before I even describe what Gainsco does, let’s start with the company’s combined ratio.
An insurer’s combined ratio is the flipside of its profit margin. However, it covers only the underwriting side of the business. It ignores investment gains on the float generated by underwriting. A combined ratio of 100 means that economically the insurer is getting use of its float at no cost. A combined ratio above 100 means the float costs the insurer something. A combined ratio below 100 means the insurer is making a profit even before it invests the float. The combined ratio has two parts. One is the loss ratio. The other is the expense ratio. These ratios are calculated as fractions of the premium revenue the insurer takes in. So, the loss ratio gives us some idea of how much higher the insurer is pricing its premiums than actual losses will be. For example, a loss ratio of 75% would indicate the insurer priced premiums at about $1.33 for every $1 it lost (100%/75% = 1.33x). The expense ratio gives you an idea of how much of premiums are eaten up immediately by things like commissions, marketing, and a lot of the fixed costs of running an insurance operation. It’s everything other than the stuff that relates to losses.
Here is Gainsco’s combined ratio from 1998-2018 (excluding 2010):
1998: 134%
1999: 99%
2000: 124%
2001: 163%
2002: 143%
2003: 105%
2004: 97%
2005: 95%
2006: 108%
2007: 98%
2008: 99%
2009: 100%
EXCLUDED
2011: 99%
2012: 103%
2013: 99%
2014: 96%
2015: 99%
2016: 99%
2017: 94%
2018: 94%
Something obviously changed there. Till about 2004, Gainsco did other things besides “nonstandard” auto insurance. For the last 15 years, it’s stuck to just writing nonstandard auto insurance in a few (mostly Southern) states.
My guess is that about 80% of drivers seeking coverage in the total U.S. auto insurance market – this might be a bit different in the states Gainsco is in – would be considered standard or preferred risks. So, Gainsco only writes coverage for the bottom 20% of drivers. Gainsco is more of a niche business than just that though. A lot of Gainsco’s policyholders are Spanish speaking. And most are drivers in the states of Texas and South Carolina. My best guess is that Gainsco’s policyholder base is disproportionately made up of: 1) Spanish speaking drivers, 2) …
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