Okay, so we got the bounce.? Or, at least the start of it; the market is not short-term oversold anymore.? The reasons behind the rally are a lot smaller than the run we had today; chalk it up to a previously oversold market.
So where do we go from here?? I’m not sure.? None of the long term problems that the market faces have changed, but neither has the relatively low yields of investment grade corporate debt.
One stock that lagged today was National Atlantic.? After the close they announced that they had appointed Bank of America to look into strategic options.? Not sure why they chose BofA; Citigroup brought them public, and kept coverage on them amid their stumbles, not like some.? National Atlantic should jump a little tomorrow.? (Boing!)? Personally, I view the odds of an outright buyout as low, but who can tell here?? The discount to book is significant, and I regard the DAC and tax assets as valuable; they should be included in tangible book.? At this point also, the reserves are clean; they’ve been scrubbed every which way, and should be regarded as sufficient.
National Atlantic is my largest position, and I expect to realize something over $10 before this is done.? Be aware that the stock is illiquid, and that operating results have been uneven over time, to put it mildly.
Full disclosure: long a very illiquid little stock, NAHC
The Hovde’s have lost what: $15 million on NAHC. It is no wonder you are no longer there. You assume reserves are clean. How about the $30 million right down at the end of last year. They haven’t brought all of that back. they will! When your basic writings are not profitable DAC is worthless!. There is no equity in money losing business.
Your analysis is faulty in both the numbers and the business itself. There is no room for an NAHC in the New Jersey market. A bounce will occur but it is that last rising of the Titanic before it slips under.
My reasons for leaving Hovde had more to do with philosophy — I like long-only management. I don’t like shorting. Also, I had family members to tend to.
NAHC has been profitable over the last 4.75 years. Do the math, the DAC is fine. From past experience, particularly in a short-tail business, if there is any question on the DAC not being recoverable, they would write it down.
NAHC management had no incentive to understate the loss once they realized that it would be big. They had several third parties check the reserves, and implicitly, the DAC. There is a bit of an assumption here, yes, but one that is reasonable given the way insurance companies normally behave.
And yes, prior to the loss I though the reserving was fine also, and I was proven wrong. So much for external reserve analyses. I did all of the normal checks, but no external checks of public information can catch fraud.
NAHC has been a profitable company only if you include the fees from transfers. These are one shot deals and never should have flowed through as ordinary income.
NAHC no longer has a large, reputable accounting firm making its results almost pro forma suspect.
NAHC no longer has a strong business focus. It’s auto business is dismal. It is trying to recast itself as what: a commercial carrier with a Texas auto business. That’s unique!
NAHC has a wishy-washy Board hand picked by it’s CEO.
Why is Gorman giving himself options instead of rewarding employees or management?
Why did Gorman take down $30 million reserves at the end of last year?
How does the Company hope to extricate itself from it’s auto disaster?
How can the Company survive as it’s better risks flee to better capitalized, lower price competitors.
I appreciate your efforts to support this Company. But emotion should be replaced by reason. Having disappointed investors so often, aren’t you placing your male organ under the knife for a Company that does not deserve it?
Burke, take it down a notch. I’m a gentleman, so I don’t get that kind of tone. You’re free to criticize me, and I have admitted publicly that I have been wrong so far on NAHC. I take risks, ordinarily prudent risks, and I’ve worked for and with insurance companies for 21 years — I think I know something about them.
The fees from the transfers should be counted in earnings — they should have been used to strengthen reserves for the replacement carrier transactions, rather than taken directly into income. As one of my old bosses used to say, “it’s a question of income statement geography,” meaning that depending what you want to prove, you can characterize it differently, and legitimately.
You are correct on the auditor. That is a concern, though a number of reputable firms have looked at the reserves. Truth, though, I’ve rarely met an auditor among the big firms that was really any good. The most they do is check cash flows, and reserving is the real issue.
NAHC’s focus is still NJ-centric. I’m not crazy about the diversification efforts. Personally, I would focus on making NJ auto more expense-efficient, and re-tune the underwriting model.
Your characterization of the board is a bit severe. Some of the board members it might be true of, but there are some good businessmen on the board. Whether they are exercising any influence is another question. The company was Jim Gorman’s baby from the beginning. It remains that now.
I could be wrong, but there are options or incentives for the management of NAHC and its workers.
It is common to do reserve reviews at year-end. Given the nature of the fraud at NAHC, which was going on then, they could have taken down reserves in good faith. My own review of the reserves indicated sufficiency at that time.
Their business model with their partner agents does not rely on being lowest price. Wealthier clients are less price sensitive; they just want risks covered. They know their agent, but often not the company.
I’m not trying to support this company; I write about investing because I enjoy it (even when I fail — note Scottish Re). As time has progressed, my own estimate of the value of the firm has come down. But good investment management looks forward, not behind. Even if the existing book of business throws off no underwriting profits going forward, there will still be profits from their unlevered, low risk investment portfolio. To an acquirer that can take out costs there would be more profit still.
There are many personal lines writers that don’t have a significant presence in NJ. Some have interest; it’s just a question of the right price. With a short-tailed company, return of the capital is fairly rapid, so after merging it into a larger book, an acquirer would not experience cash flow difficulties.
Burke, my neck is on the line every time I write, and every time I invest. I get things wrong occasionally. I blow one up every now and then, but my winners more than pay for my losers. I eat my own cooking here. Criticize me if you like, but I’ve more than paid my way at the firms I have worked for, and for those that I have written for. I will get things wrong; now, and in the future. But if I don’t write what I think is correct, even if it is just a hunch, I’m not doing my readers justice.
Sorry if my tone is strident. I get that way when I believe management forgets that the shareholders own the Company.
Twice you have used the word “fraud” in discussing NAHC. Can you be more specific?
Thanks, Burke. Fraud — I don’t mean this in the technical legal sense, but in the sense that internal controls were deliberately compromised by lower level workers for their own reasons. I have seen this in insurance companies that I have worked for, and I have had to clean it up on occasion.
I remember one guy who everyone thought could handle the really hard stuff; truth was, when he couldn’t solve one, he just threw it in his bottom right hand drawer. He got canned when the complaints found him, but then the company has bigger problems. At other companies, I have seen negative accounting surprises questioned, while positive ones slip through. In those cases, the negative surprises get explained away, and build up until they are too big to ignore.
My own question on the conference call asked about this indirectly, because regardless of how the results arrive, the business has been underpriced. Here were my comments:
And our next question comes from David Merkel, private investor.
Q: Hi guys.
A: Good morning, David.
Q: How are you doing?
A: We have been better, frankly.
Q: Yeah, I can believe it. Here is my question, I understand about the adjustments this quarter and I can understand how they might ? how they can come about, but what does it imply for your overall ability to generate underwriting profits in the future? Because it would seem that, if I look at your results from 2002 to the present, it looks like ? I mean, there are some things that I’d have to back out, but it looks like you’re pretty close if not just a little above 100 for a combined ratio. Do you think you are going to able to generate underwriting profits in the future? And if so, how are you going to get your loss ratio down enough to do that?
A: Hi David. When you look at our current run rate for the automobile line of business, we are right about mid 70s for a loss and LAE ratio. So in our zeal to control our expenses, we have an underwriting result in auto that is right around 100 to 102. Our homeowners, on the other hand, moving down towards 50%. We believe the margins are good there. And the ? our commercial property business, a high severity line obviously but extremely profitable loss ratios below 30% right now. So the growth in the profitable lines fortunately, which homeowners never was for us but now is becoming, the homeowners and commercial growth is one way for us to keep at that underwriting profit level or close to it. Q: Okay. I am a shareholder and let’s see where we go from here.
Is NAHC a great company? No. Is it as bad as the current price? I don’t think so, but I could (as always) be wrong.
David, that answer to your question sounds awful in at least three different ways. First, they didn’t really address your point. Second, they think that homeowner rates going up for Atlantic coastal regions despite a run of hurricane free years during global warming is just an entry in their profit column. And third, they apparently think their expense control has been zealful (expenses look high relative to their gross).
Clearly, the largest expense item is the commission paid to agents. Well, when your book is produced by “shareholder agents” reducing those commissions is a no go. Why should agents receive commissions forever? How much work do they do after the first year to justify the expense?
The direct writers, who clearly need mass, have won the expense game because they are in control of their costs.
That is one of the great problems here: the book goes bad, the ability to increse prices is limited and the ability to reduce expenses is almost no-existant. Try swimming in a straight-jacket.
Compared to SAFT, one of David’s other picks that sells auto using an agent model, NAHC SGA is 30.8% of premiums vs. 27.8% of premiums for SAFT. Does NAHC break out their executive compensation?
While the AM Best action was not shocking it is a further sign of management’s loss of confidence. Maybe they need to release more info to sooth the waters. David, can you get them to release their reserve triangles? Maybe if we can see what the developed loss ratios are by accident year we can get a feel of whether the problem is the older stuff or newer.
David,
What do you think that this means for NAHC’s business? I’m wondering if a downgrade does occur, how likely the brokers that they use will be willing to place business with their affluent clients. Given that their target is the less-price senstive customers, I think they may lose a good chunk of their business to their competitors who are better secured.
Any thoughts?
Brent,
Not so long ago, the issue in NJ was availability, not AM Best rating. Now, with stiff competition, the Best rating will become an issue. Again, it is the better risks that leave first as they have the easiest time gaining replacement coverage. This adverse selection will affect NAHC rather quickly once AM Best downgrades. It will also make reinsurance more expensive which may make the company’s move into Worker’s Comp a very expensive move.
Thanks Burke. The stock is even cheaper this morning (probably based on the downgrade). I wish I knew how strong management really was. If they’re good or even reasonably competent, the stock is so cheap that it will be a great buy. If they’re poor (and I’m starting to get that impression), maybe $5.30 is not cheap enough!
I’ll keep watching
Rate decreases being submitted. Look like they are trying to minimize the effects of the decrease by making decreases tied to multi-products, customer longevity, and additional cost coverages. Seems to be a good approach to addressing issues of required reductions.
Have shown good success in previous years as seen from SEC filing below:
Massachusetts Private Passenger Rate Decisions
Year State Mandated Safety Insurance
Change Change
________________________________________
2007 (11.7) (4.7)
2006 (8.7) (6.8)
2005 (1.7) 0.1
2004 2.5 6.1
2003 2.7 6.9
2002 0.0 5.2
2001 (8.3) 0.0
2000 0.7 7.4
1999 0.7 10.9
1998 (4.0) 2.8
See SEC 10-Q filing if not clear.
Note, above port refers to Safety Insurance.
Did you see their response to AM Best press release? Sometimes it is best to take your medicine and move on. Trying to turn the news into some positive message about premum growth is just stupid. It just raises more questons about the ability of management to manage!
Obviously the market is not happy.