Search Results for: "National Atlantic"

Could Have Been a Lot Worse…

Could Have Been a Lot Worse…

Posted on by David Merkel

One month down, eleven to go?? Can we stick our heads out of the foxhole yet?

Personally, I was off just a little in January.? Comparing myself against a bunch of value indexes, which did better than growth indexes in January, I did better than all of them.? We’ll see what the future brings, though, these things can turn on a dime.

So what worked for me?? Arkansas Best, National Atlantic (not out of the woods yet), Charlotte Russe, Gehl, YRC Worldwide, Alliance Data Systems, Reinsurance Group of America, and Honda.

What hurt?? Nam Tai, Gruma, Valero, Deutsche Bank, Royal Bank of Scotland, and Anadarko Petroleum.

Common factors:

  • Financials with complexity got hurt
  • Energy was lackluster at best
  • Industrials, Retail, and Trucking did well
  • Value took less pain
  • What got whacked before went up

One final note here.? Look at this graph from Bespoke.? The “sea change” there mirrors my own turn in performance.? What does that tell me?? Perhaps it tells me that in late 2007 there were a lot of hedge funds liquidating positions that value managers liked to own.? After the end of the year, the selling pressure ebbed, and value seekers came in.? At RealMoney today, both Cramer and Marcin were commenting on they could find stuff to buy when the market was down in the morning.? I agreed; I haven’t seen this many good values since 2002.? I’m not counting on anything here, but I think my portfolio has attractive valuations and prospects.? Much as I am not crazy about the macro environment in many ways, I have some confidence that my portfolio should do better than the S&P 500 in 2008.

Full disclosure: long NTE GMK VLO DB APC RBS ABFS NAHC CHIC GEHL YRCW ADS RGA HMC

Current Industry Ranks

Current Industry Ranks

Posted on by David Merkel

Just a short post this evening because I’m tired, and not feeling that well. Here is an Excel file containing my industry ranks for year end 2007:

Year End 2007 Industry Ranks

Remember, this can be used two ways. In the short run, the “hot industries,” the ones in the red zone, can be bought if one follows a fast turnover momentum-type strategy. For those of us with lower turnover value-type strategies, we buy industries in the green zone, but insist on quality, and attempt to analyze how transient the industry troubles are likely to be. Note that I’m not looking at all industries in the green zone — areas affected by the housing and finance sectors, for example.

One more brief note, since a couple of readers e-mailed me on this. It looks like the forced sellers of National Atlantic are done. Also, the compensation decisions for the three senior executives give them some compensation if a deal goes through. I’m not smiling on this one yet, and things could still go badly wrong. Use caution here.

Full disclosure: Long NAHC

Post 400

Post 400

Posted on by David Merkel

Time to take a moment to reflect on what?s happened over the last hundred posts (as WordPress counts them), together with what has been going on in my life, and what is in store for the future on my blog.? Ten months is a long time in blog terms.? Let’s start with what I have gotten right and wrong.

Right:

Wrong:

  • National Atlantic
  • Stock-picking generally
  • Blog programming

In general, my macro commentary has been pretty accurate.? At this juncture, being bearish on the dollar and credit have been winners.? No telling when that will change.? That said, my hand has gone cold in the market since value stocks went cold.? Beating the value index is not enough for me, thank you.? National Atlantic is a continuing problem, though it seems to have found buyers around $4.

Now, if someone had told me when I started this blog that more than one-third of my readers would be outside the US, I would not have believed it.? 19% of my readers are from Canada, 7% from the UK and 4% each from Uruguay and the Netherlands.? Hey, thanks for reading me; I hope what I write is relevant to you.? And thanks to the readers from China, Germany, France, Brazil, Singapore, Hong Kong, Australia, Japan, Spain, Italy, India, South Korea, Taiwan, and Bermuda.? I may not be a global traveler, but my blog gets around.

Where? do my readers come from?? In order, Abnormal Returns, The Kirk Report, The Big Picture, Stumble Upon, The Street.com, FT Alphaville, Random Roger, and VIX and More.? Most of the rest find me through search engines (Google) or RSS.? Seeking Alpha (Aleph — Shalom) is another source, and really don’t know how big that is, as well as other syndicators.

For the last four months, I have been trying to obtain work or build an asset management business.? Though the latter has been cold, I have received several job prospects, and I should have an announcement soon on what I will be doing.? I have sometimes said that this blog is an option on a business.? That has proven true for me.

Other improvements have been the continuing series on personal finance and book reviews.? Both of those came as a result of reader feedback.

On the negative side, the job hunt has left me little time to contribute to RealMoney.? Most of my blogging is at night, and RM is during the day, when I am trying to work.? I’ll see how much I can contribute to RM in the future.? I owe them a debt of gratitude for inviting me to write for them.? It sharpened my investment writing skills more than I would have expected.

Also on the negative side, I know that I have to do blog repairs.

  • My left margins aren’t quite right.
  • My top banner should lead back to the home page.
  • I need to anti-alias my banner.
  • An error message comes up when comments are posted (the comments do post, though).
  • The same is true when I post articles.
  • My descriptive permalinks are gone.
  • And more…

Anyone with a good lead on PHP programming should e-mail me.? I suspect the changes should not be too great.? Otherwise, I will? slog on, and do it myself.

In closing I want to thank referrers, syndicators, readers, blogs who link here, and especially commenters (even if you don?t agree, but keep it civil.? I end with a question for my readers.? What do you all want from my blog?

  • More on equities
  • More book reviews
  • More macro commentary
  • More personal finance
  • Something else
  • Or, the same mix that you are currently getting

Let me know.? It is a pleasure to write for all of you.

Full Disclosure: Long NAHC

Ave Atque Vale et Mea Culpa

Ave Atque Vale et Mea Culpa

Posted on by David Merkel

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

Boing!

Boing!

Posted on by David Merkel

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

Gone for Two Days

Gone for Two Days

Posted on by David Merkel

Sorry, but off on church business for two days.? As a parting shot, this is what I wrote on RealMoney yesterday:

 
 

David Merkel
What Do You Say When You Are Wrong?
11/8/2007 5:34 PM EST

Well, I say I was wrong, then. Wrong about National Atlantic. Ordinarily, reserving at short-tail insurers is hard to mess up, because the claim cash flows quickly reveal mistakes. This is one of the exceptions to the rule.I hate losing money; the only thing I hate more is losing money for others. My sympathies to anyone who has lost along with me. I am still playing on this one, because the company is valued as if it will never make money again, and my opinion is that they will make money again, or, there might be M&A activity.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider National Atlantic to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Position: still long NAHC, longer even


 David Merkel
How Do You Minimize The Costs Of Being Wrong?
11/8/2007 6:40 PM EST

You diversify. Even with National Atlantic, my portfolio was even with the market today. Though it was my largest position, it was still only one of my positions, at less than 5% of the portfolio. Diversification is underrated, and we neglect it to our peril.Please note that due to factors including low market capitalization and/or insufficient public float, we consider National Atlantic to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Position: long NAHC

Holding My Nose, Still

Holding My Nose, Still

Posted on by David Merkel

Three companies of mine reported after the bell, Flagstone, Deerfield, and National Atlantic. I’ll take them in that order.

Flagstone beat handily, as I would have expected a property-centric reinsurer to do in this environment. Let’s see what optimism tomorrow brings. At 96-97% of book value, it seems cheap, but I can’t imagine property reinsurance rates will be that robust next year.

Deerfield is a little more tricky. They took a loss due to mark-to-market events in their portfolio. REIT taxable income is reasonable at 50 cents/share, and much of the writedown is a GAAP anomaly that shaves $1.20 off of the current book value. Economic book value is $11.84, which provides some support to the stock. The dividend of 42 cents is still intact. There is reasonable excess liquidity, even after the increase in repo margins during the third quarter. Let’s see what the market thinks.

Now for the problem child, National Atlantic, which takes an 83 cent loss. Here’s the main offending paragraph from the press release:

“For the three months and nine months ended September 30, 2007, reserves have increased by $17.6 million and $9.4 million, respectively, principally as a result of the strengthening of the reserves for bodily injury claims. During the third quarter it was determined that the Company’s policy related to claims handling procedures and reserving practices were not applied consistently, primarily within the bodily injury claims unit. As part of the resolution of this matter, the Company retained an independent claims consulting firm.”

For a company the size of National Atlantic, these are huge reserve changes, particularly for a short-tail line like auto. What I am about to write here is only a guess, but this likely was building up since sometime in 2006. One of the reasons I am willing to be a little more bullish on short-tail insurers is that it is a lot harder to get the reserve wrong. Looks like I am getting one of the rare events that teaches greater caution. (That said, my average cost is $8.85, so I’m not that badly hurt.) Given the large reserve change this period, ordinarily, the decks are cleared for future periods, but who can tell for sure? Also, this places the combined ratio since 2002 at 103.7%. It makes me think that the company will do well to eke out any underwriting profit.

I’ll be listening to the call tomorrow. What’s the endgame here? Given the marginal ability to earn underwriting profits, perhaps the company would best be reconciled by merging with another firm. That wasn’t my opinion over the past three years, but it is my opinion now. There are many firms that could have an interest at the right price, which probably approximates the book value of $13.28. That said, many of them may have kicked the tires already and passed, some probably thinking that a bid at book value would not be honored. All I can say is, give it a shot. Rumor is that Commerce wasn’t offering more than book, so if you want a greater presence in NJ personal lines, it may be available at a reasonable price.

Full disclosure: long FSR DFR NAHC

Buying Cheap and Holding My Nose

Buying Cheap and Holding My Nose

Posted on by David Merkel

How comfortable would you be buying National Atlantic Holdings?

Or Deerfield Triarc?


Or YRC Worldwide?

I could go on, after all, recently I bought some Redwood Trust, and a number of smaller cap value names that don’t seem to be getting much respect right now. Value as a strategy is lagging now, and I am feeling that in my performance. Financials that deal with mortgages are out of favor also.
So why mortgage REITs now? Take a look at this chart of the 10-year Treasury yield less that on mortgage REITs:

Mortgage REIT yield spread
Yields are pretty high relative to “safe” Treasuries, comparable with 1990 and mid-2002 spreads. Only the bad old days of 1974 surpass the yield spreads of this era by a significant amount. As I recall, REITs had a really bad name in the late 1970s after the mid-decade shellacking. I remember technical terms like “fraud,” but then, I was an impressionable teenager with an active imagination. 🙂

Now consider this chart of the 10-year Treasury yield less that on equity REITs:

Equity REIT Yield Spread

The result is closer to fair value. I certainly would not call equity REITs as a group cheap; future returns rely on property price appreciation, which doesn’t seem likely to me at present.
Now, I’m not endorsing all mortgage REITs. Review funding structures and excess liquidity; you want excess cash flow and conservatism at this point. Heroics offer more downside than upside here.

As for YRC Worldwide, trucking is needed in our economy, and even with some slowdown, YRC should still make money, just not as much. On National Atlantic, I would only say that it seems that there is a forced seller in the name now, and when he is exhausted, the stock will lift. It is difficult to destroy a personal lines insurer with a conservative balance sheet. At 60% of a conservative book value, I can live with adverse outcomes.

Remember, do you own due diligence here. Just because it looks cheap does not mean it can’t get cheaper.

Full disclosure: long RWT NAHC DFR YRCW

A Tale of Two Insurance Companies

A Tale of Two Insurance Companies

Posted on by David Merkel

Before I start this evening, I would simply like to say that revamping the website is more complicated than I initially intended, but I want to do something that looks good, and works well.? I also want to get it right the first time, or soon enough after that to have no noticeable glitch in service.

National Atlantic — for any that bought on my words, you can see why I mentioned buying under $9.75.? I knew there was a big seller out there, and now I know who it is: Loeb Partners.? As of the filing, they still owned 7.1% of the company, and have been sellers well into the 9.70-9.80 region.? As a result, there will be pressure on the stock for a while, the same way there was pressure when Commerce Group was indiscriminately selling stock into the market after the failed takeover.

Once Loeb is done, the stock should lift, and it looks like they are somewhat price sensitive.? This could take while.? If NAHC gets driven below $9, I will be adding more.? But there is no new fundamental data driving the stock at present, just a jilted activist.

Assurant will likely be down tomorrow on the suspension of its buyback.?? I have explained the issues before on the finite reinsurance accounting, and the issues are unchanged since then.

Personally, I think the SEC is trying to make an example out of Assurant, because all of the allegations, if true, aren’t material to the economics of Assurant.? They may lose a number of key employees, but their bench is deep, and the business won’t be harmed.? The value in Assurant derives from their well-protected leading positions in niche insurance markets; that will not be changed by the SEC investigation, or any fines handed out.

If Assurant drops below $48, I will be adding.

Full disclosure: long NAHC AIZ

Tickers Mentioned: NAHC AIZ CGI

My Newest Insurance Holding

My Newest Insurance Holding

Posted on by David Merkel

Earlier today I wrote at Realmoney:

Good Things Come in Small Packages

8/29/2007 11:49 AM EDT

Every now and then, the market serves up a bargain that is hard to realize, because trading liquidity is poor. I was acquiring this stock for just me, and it took ten days for me to do it. (If at the end of this, you want to buy some, use limit orders. Do not use a market order, and do your own due diligence, please.) National Atlantic Holdings is a small (primarily) personal lines insurer selling almost entirely in New Jersey. No debt. 6.9x 2007 and 2008 earnings, 69% of tangible book. It has relatively defensible boundaries in its lines of business, though no one is totally immune from the dangers of over-competition in the personal lines marketplace. I have met management, and I think that they are competent.

Risks:

  • Up against larger companies that may be more aggressive in pricing.
  • Though NJ is good at present for insurance, the legal system has delivered some nasty surprises in the past.
  • Small insurers are subject to the “Law of Small Numbers,” which means that a small number of untoward events can knock the earnings for a loop.
  • They have missed earnings more frequently than many investors would like. There are a lot of burned value investors here.

    • There’s more, but these are the basic points that you can begin with as you do your own due diligence.

    Please note that due to factors including low market capitalization and/or insufficient public float, we consider National Atlantic Holdings to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

    Position: long NAHC

    Now for the rest of the story: my average cost is $9.60, and I would not recommend buying above $9.75. There has been some big player liquidating his stake at prices under $10, and I am not sure that he is done. There are significant buyers underneath $9.60, but as with many traders they don’t automatically buy when the sellers arrive there. They let the market sag, and then slowly suck in shares at the bid, while letting the bid back up.

    I mentioned the law of small numbers above. Well, that can work two ways. When the small numbers result in few claims in a quarter, the stock can pop, and it gets even better if it happens a few times in a row — then a pattern gets inferred by investors, and often wrongly so, but the price runs then.

    There is another risk I did not mention above. They are entering a new state, Texas, and new lines (though not in a big way) in New Jersey. I always worry when insurers do that, because they tend to underestimate the risks involved. That said, NAHC tends to be conservative here, and that ameliorates the risk. That, and the CEO own 13% of the company; he has grown it himself, and doesn’t want to spoil what he has built.

    Beyond that, their asset portfolio is clean, in my opinion. Their business in NJ depends on partner agents who primarily market to the wealthy of NJ, and try to cover their full insurance needs through package policies that cover their personal insurance needs, and sometimes their business insurance needs. This allows NAHC to compete away from Progressive and GEICO.

    Again, there is more to this story, but please do your own due diligence, and if you do buy, be price-sensitive, and don’t use a market order.

    Full disclosure: long NAHC

    Tickers mentioned: NAHC, PGR

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