Stock Mart: Gainsco

Texas financier Richard Rainwater may prove to be the rainmaker insurer Gainsco (GNA) needs.

Gainsco shareholders are scheduled to vote Sept. 21 on whether to accept a $31.6 million investment from Rainwater's Goff-Moore Strategic Partners. In exchange, Goff-Moore will take two board seats and get 6.2 million shares, giving it a 23% stake in Gainsco with the option to buy as much as 35%. Goff-Moore already owns a small stake.

Rainwater brings a savvy investment eye and big league clout to a minor player. And Goff-Moore sees plenty of potential in Gainsco.

"Gainsco is in our hometown. It is New York Stock Exchange-traded," says Randy Chappel, Rainwater's sidekick and principal at Goff-Moore. "At the time we announced the deal, it was trading at below book value. And it has a CEO that we think is overqualified to be a CEO of a company that size."

Gainsco sells general liability and property insurance to small trucking firms, taxi fleets and auto garages. These "nonstandard" customers are considered higher margin because they're less price competitive than general auto and property categories. The Fort Worth, Texas-based insurer made over two-thirds of its $106 million in revenue last year from sales in the Southeast, Texas and California.

"With the capital backing, our main growth engine for the long term will be acquisitions," says Glenn Anderson, the CEO who came to Gainsco after a management shakeup and the subsequent retirement of CEO Joe Macchia in April 1998.

Anderson, who formerly held executive positions with Baltimore-based insurer USF&G and Fireman's Fund Insurance, was handpicked to steer the makeover by John Goff, who heads Goff-Moore and has been a Gainsco director since 1997.

One of the first moves by Anderson's team was to administer some bitter medicine by restructuring the amount of reserves the company carried to cover possible claims. "The company had lost focus and had mortgaged its future by not putting up proper reserves," says Michael Paisan, an analyst with Keefe Bruyette & Woods. "The adjustment was painful. The stock got crushed." (Paisan hasn't officially initiated coverage of the company. Keefe hasn't performed recent underwriting for Gainsco.)

As a result, Gainsco posted a loss in 1998, the first time it had done so since going public in 1988. "The last two years the company fell off track," says Anderson.

But in this year's first six months, the company earned $4 million, or 19 cents a share.

"We want to expand and become sort of a family of specialty boutique companies," says Anderson. He declines to name possible acquisition targets, but says they may be similar to the $18 million purchase a year ago of Lalande Group, a privately owned Miami-based auto insurer. Analysts note that Anderson needs to show that additions will help lower the company's overall cost structure.

Investors are showing some confidence in Anderson's plan. Gainsco's stock has rebounded from its 52-week low of 3 15/16 on June 9. It closed unchanged Friday at 6 9/16. Despite its rise, some still consider it a bargain. Based on the First Call/Thomson Financial consensus estimate of 50 cents a share next year, the company's price-to-earnings ratio is about 13, while its growth rate is 25%. In addition, it trades just above its book value of $5.20 a share.

Another benefit from the Goff-Moore's major stake in the company is that the Rainwater group will take over management of Gainsco's $200 million investment portfolio. While insurance companies must keep a certain amount of their assets in stable and low-yielding investments such as Treasury bills, Goff-Moore is expected to be slightly more aggressive.

"We're not going to go crazy, but we obviously think we can do better than Treasuries without taking a lot of extra risk," says Goff-Moore's Chappel.

Michael Lamb, an analyst who covers Gainsco for suburban Kansas City research firm Wealth Monitors, recommends the company as a strong buy in part because of the Rainwater investment. Lamb expects to see the share price reach 12 sometime in the next year and a half.

"These people [Rainwater and the Goff group] do things in the billions, the question is why have they taken the time and interest to get control of a little $150 million inconsequential insurance company," Lamb says.

"It's not an investment to them. It's a vehicle to use. And five years from now they will still be running it," Lamb adds. "You can compare it to Berkshire Hathaway (BRK.A) in its infancy because they will be running it to maximize the investment portfolio and to increase the dollars by growing internally and through acquisitions."

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