I’m going to be gone Monday through Wednesday of next week on business, and my ability to blog will likely be curtailed.? I would simply like to offer two observations.? The first is on the FOMC.? Given the balance of all of the data, I believe that the FOMC will loosen by 25 basis points on Tuesday.? They will issue the standard “two-handed economist” language about troubles from inflation and financial/economic weakness, indicating that the FOMC is vigilant, and that nothing more is coming given present data, because the FOMC is in control.
The markets will be disappointed by 25 basis points, and will get excited by 50.? Language of the statement will matter some, but I can’t imagine that it will be that amazingly different from before.
One other note: I will write more about National Atlantic at a later date, but for now I am just holding my head in my hands and moaning.? I know there are forced sellers in the name, but to be at 40% of tangible book on a short-tailed name is notable.? It indicates that claim reserves at the end of the second quarter would be 50% light, to justify current valuations.
I’m not suggesting that anyone buy the name; for me, if it stays at these levels, it will be my largest personal loss.? I teach my children about investing through my losses.? If things don’t change, this will be lesson one.
Full disclosure: long NAHC
I have to agree that the Fed will likely lower by 25 basis points. The economy hasn’t shown an impending widespread meltdown that probably would have been needed to get 50.
You know, as an investor you cannot be faulted when a company acts outside the bounds. Perhaps, when the Big Four auditors left, an eyebrow should have been raised. When reserves were dropped by $30 million at year end, your belly should have hurt.
No, your lesson to your kids will be to find and follow value as you, their noble father has done. Trust but verify. And, maybe, learn that the Soprano’s were not the only crooks in New Jersey.
Burke, I read sarcasm but that is your perogative in writing and David’s for allowing in running the blog. What do you see that shows reserves should be $100 million or so higher? would you buy here (slowly would be my strategy as they thing has no real buyers stepping up right now obviously) or have you sold and are long gone. Is their business model that poor that they can never make money? That isn’t the worst viewpoint and closing is always an option. What would be left after closing in your opinion?
I was not sarcastic in my view of David as a noble man. Aquinas said that no man can be answerable for the misdeeds of those over whom he has no power. I believe that if the Company reports a normal fourth quarter the stock should bounce to $8-$10.00. Long-term, there really is no hope for NAHC. Too much competition, too high expense factor, poor management. A run-off is not the answer-it would take 5-10 years to liquidate. A stock buy=back won’t work becausr there is too little float.
The easiest end would come from a private purchase of the Company, a big reinsurance transaction to get rid of the book and then see where the chips fall.
However, the picture for a smooth year end is very cloudy-the Company fraudulently took down over $30 million of reserves at YE 2006. Only $12 million of these have been returned. The Company will could well report a loss of $5-10 million if it reclaims these reserves in the fourth quarter. I do not see $100 million of extra reserves needed. But as a caveat, that is based on information already tainted by fraud. If a large portion of the disappearing reserves related to 2004 or earlier losses, then the reserve triangles go out of the window. Ask David about reserve triangles.
If you want more history on NAHC and their business, take a look at http://www.valueinvestorsclub.com/value2/VIC/Guests/ViewThread.aspx?delay=45&id=2445&more=dtrue
You’ll probably have to register to see this, but it really helps describe how they got to where they are.
A couple of key extracts from here:
Proformance was formed by a bunch of insurance agents in New Jersey to write personal auto. The New Jersey auto insurance market is the 2nd most difficult market in the US; Massachusetts takes low honors. Proformance struggled during the 90?s but hit a jackpot of sorts in 2001 when Ohio Casulty agreed to a replacement carrier transaction (RCT) with Proformance. Ohio Casualty (OCAS) agreed to pay NAHC to take their New Jersey personal auto business off its hands. NAHC netted $38.4 million from the deal over five years, as well as $13.5 million in equity investment from OCAS. Similar deals were struck with Sentry Insurance and Metropolitan P&C in 2003. These transactions really helped stabilize the company.
Not that I know the details, but if the payments from OCAS ran from 2001 to 2006, you can see why the bad news is coming out in 2007, especially since competition has increased in New Jersey.
I’m long a little bit of NAHC from $9.50 and may add for a bounce when this stops going down, but am concerned (especially after burkehayden’s comments) about this as an investment.
If you want more history on NAHC and their business, take a look at the writeup on valueinvestors club at:
http://tinyurl.com/ysh5ec
You’ll probably have to register to see this, but it describes well how they got to where they are.
A key point from here:
Proformance was formed by a bunch of insurance agents in New Jersey to write personal auto. The New Jersey auto insurance market is the 2nd most difficult market in the US; Massachusetts takes low honors. Proformance struggled during the 90?s but hit a jackpot of sorts in 2001 when Ohio Casulty agreed to a replacement carrier transaction (RCT) with Proformance. Ohio Casualty (OCAS) agreed to pay NAHC to take their New Jersey personal auto business off its hands. NAHC netted $38.4 million from the deal over five years, as well as $13.5 million in equity investment from OCAS. Similar deals were struck with Sentry Insurance and Metropolitan P&C in 2003. These transactions really helped stabilize the company.
Not that I know the details, but if the payments from OCAS ran from 2001 to 2006, you can see why the bad news is coming out in 2007, especially since competition has increased in New Jersey.
I’m long a little bit of NAHC from $9.50 and may add for a bounce when this stops going down, but am concerned (especially after burkehayden’s comments) about this as an investment.
Thanks for the detailed comments Burke. The history post was a worthwhile read as well. I agree with Burke that these guys have to deliver the numbers for any upside from here.
For Burke Hayden:
You bring up a very good point, and indeed, most of the recent reserve change is from the 2004 and prior cell. Regarding reserve triangles, reviewing them is necessary, but not sufficient. Outside investors do not have enough data to evaluate reserves. They can try to evaluate management teams, and it looks like I failed there. When I first met NAHC management, I thought they were of average quality, and that I was getting a pretty average company at a bargain price. I would have to revise my opinion of managements down, but I don?t think they are dishonest, just less competent than their competitors. How much less competent is open to question.