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COMPANY OF THE MONTH
By Mr. R. Max Bowser
July 2004
PAULA FINANCIAL
Nasdaq Symbol: PFCO
Bowser Rating: 9
Price Last 24 Months
$0.36 to $5.00
QUOTE ---- NEWS
Paula Financial is an insurance agency, operating with two principal subsidiaries--Pan American Underwriters Inc.
in California and Pan American Underwriters Insurance Agents and Brokers Inc. in Arizona.
PFCO's commission income is derived from the placement of group health, property and casualty (emphasizing workers'
compensation) and some life and disability insurance.
In 2002, workers' compensation sales accounted for 43% of total revenue, compared to 52% in 2001. The change in
emphasis has been accelerated by the discontinuance in 2002 of an insurance company that underwrote workers' compensation
insurance. The company now has greater freedom to pursue other interests.
A small percentage of Paula's business originates in Arizona, where it has an office in Phoenix. In California,
besides its corporate headquarters in Pasadena, it has 12 other facilities in that state. (PFCO has access to 200
property and casualty insurance companies and more than 100 life and health carriers.)
Crop Insurance
Paula is the largest producer of crop insurance in the western U.S. And, this program which is overseen by the
U.S. Dept. of Agriculture, has grown for PFCO since 2002, when it recruited a team that writes up large-account
agribusiness.
Furthermore, as an example of how PFCO is expanding in this area, in 2003, it purchased the existing book of business
of Roudebush & Avina Insurance Agency in Modesto, CA. Roudebush specializes in crop insurance for commercial
wine grape owners.
Health Insurance
Paula has been able to provide group health insurance to seasonal farm labor, an underserved market segment. For
example, PFCO has long-term relationships with select medical providers in Mexico who treat non-resident farm workers
in California and Arizona. They have access to treatment in selected Mexican communities.
First Quarter Earnings
Our statistical chart shows earnings up to December 31, 2003. . . . In
the first quarter of this year, ending March 31, total revenue climbed to $5.2 million compared to $4.6 million
a year earlier. In the same period, net income jumped to $460,000 from $310,000 in 2002. (The company is now on
the path to revenues of over $20 million in 2004, which will be a record.
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2001(A)
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2002(A)
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2003(A)
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| Revenue |
$12,118,000
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$13,689,000
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$19,396,000
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| Net Income (LOSS) |
$(31,292)
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$580,000
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$1,428,000
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| Working Capital |
$(3,301,000)
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$627,000
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$2,439,000
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| Book Value |
$0.91
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$1.09
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$1.51
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| Total Shares |
6,966,079
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7,023,379
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6,196,145
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| Float |
N/A
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N/A
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3,650,000
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(A) 6 MONTHS ENDING FEB 28.
Dividend
Last December, the company completed the refinancing of its outstanding debt. The new credit facility is a significant
improvement in both interest and repayment terms. Additionally, the new agreement provided for the payment of cash
dividends.
On May 23, CEO Jeff Snider announced that the company's financial picture has improved so much that a quarterly
dividend would be reinstated. The first one--$0.015 per common share--was paid to holders of record on June 8 and
will be distributed June 28.
The board of directors has said that cash dividends will be "part of our quarterly routine." . . . .
Progress is being made in reducing long-term bank debt. In Dec '02, it was $1,450,000. Now, it's $1,076,000, (Pres.
Snider says "we will be out of debt by the end of 2005.")
Workers' Comp in California
That workers' comp in California is a mess is well-known, centering on the abuse of benefits. There was a great
deal of shopping for sympathetic courts and doctors. As a result, hypothetically speaking, if a worker bruised
his knee, he could get a $100,000 settlement.
That situation is being relieved by reforms just passed by the California legislature. However, in Aug' 03, the
State Compensation Insurance Fund, which provides the largest single market for workers' comp, reduced the commission
it paid PFCO from 8% to 5 1/2%.
The company anticipated this commission reduction and has, as we've noted, expanded into other areas. Also, when
the commission was 8%, the company provided certain free services for which they now charge. (Service fees rose
to $602,000 in 2003 from $36,000 in 2001.
For large employers, Paula offers an alternative risk Bermuda-based workers' compensation captive called AGGCAP,
which has been in operation for two years and is, in effect, a self-funded alternative to conventional workers'
compensation insurance.
Management
Jeffery A. Snider, 51, is chairman, president and chief executive officer. He is also the largest shareholder,
owning 23.5% of the stock.
The executive branch was bolstered in March by the promotion of Bob Underwood to President of Pan American Underwirters.
He joined Paula in Jul '02 and has extensive insurance experience in the agri-business community in California
and Arizona.
This stock is very volatile. By the time you read this, it may be over $3.00 a share.
Office: 87 Green Street, Ste. 206, Pasadena, California 91105, 626/844-7100,
Fax: 626/844-7144, no Web site.
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