|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||106||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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Business: National Atlantic Holding Company is a holding company whose primary business is Proformance Insurance Company (“Proformance”). It also has three ancilliary businesses: Riverview Professional Services (“RPS”), National Atlantic Insurance Agency (“NAIA”) and Mayfair Reinsurance Company (“
Proformance was formed by a bunch of insurance agents in
The remaining businesses are not significant from an earnings point but they are important.
Replacement Carrier Transactions (RCT): While they have grown organically, the biggest growth has come from RCT’s. Let me explain the dynamics. Once a company starts writing personal auto in NJ, regulatory requirements, such as “take all comers” clauses, make it difficult to withdraw. However, regulators will approve a replacement carrier transaction whereby one insurer can transfer renewal rights to another insurer.
One initial concern that I had on the RCT was adverse selection. I spoke with the CFO, Frank Prudente, about the RCT process.
The Sentry and Met P&C RCT’s involved a combined payment of $10.9 million, plus a $10.0 million equity investment from Met P&C.
The current RCT’s are with The Hartford for 8,500 policies and
Strategy: The competitive market for personal auto insurance has led them to write more homeowners and small commercial. They have created a personal package policy that they call High Proformance Policy that combines auto, homeowners, boat and umbrella. This helps them compete against monolines like GEICO, Even though they are paying for the RCT’s with The Hartford and Hanover, they can leverage the deal by expanding beyond personal auto insurance. They have an overview slide show that you can access at that may help explain what they are doing:
The commercial business is primarily general liability and commercial auto. They do not cover property or workers comp.
Regulation: The NJ legislature enacted the Automobile Insurance Competition & Choice Act (AICC) in 2003 that introduced reforms to make the auto insurance market more competitive. AICC had two significant impacts to
Commissions: The overall commission expense is 13%. This consists of 15% on new personal auto policies and 12% on renewal. Homeowners pay 18% for new and 15% for renewal. The RCT business handled by NAIA is paid between 7-8%. These rates are slightly high but not surprising from a company formed by agents and who have agents as shareholders.
Ratings: AM Best recently upped their rating from “B” to “B+”. In speaking with the CFO, Frank Prudente, he mentioned that their last BCAR from AM Best actually put them in “A-“ territory but that Best has been reluctant to make major ratings changes after last year’s hurricane season. This has been frustrating for management because they had a “B” rating all through the 90’s when they were losing money. They are now profitable, and received a capital infusion from last year’s IPO.
Reserves: In 2005, they had $10 million of adverse reserve development. This was primarily driven by a court case, DiProspero v. Penn et al, where the New Jersey Supreme Court struck down legislation that had limited plaintiffs ability to sue for non-economic damages, i.e. pain and suffering. This took place in 3rd quarter of 2005 and so far, it seems like they did the right thing in increasing reserves for this. In fact,
In prior years, any reserve releases have been small, which leads to questions about adequate reserving. I believe part of the issue has been the change in RCT economics. Previously, they could afford to run higher combined ratios because they made up for it in fees. Now that they have to pay for RCT’s, they have to show an underwriting profit. I also believe having public shareholders, including the Partner Agents as shareholders, now makes them more focused on turning a profit.
Investments: Their portfolio is fairly straightforward for a P&C insurer: Lots of bonds, with a tendency towards government agency debt (Fannie, Freddie, Farmer, FHLB). The bonds all have ratings of “A” and higher. Stocks comprise a little over 4% of the investment portfolio, with 2/3 in indices. There are no alternative investments. The good news is that investment income is up dramatically from its low two years ago and is making a solid contribution to the bottom line. That comes at a price to the mark-to-market on the balance sheet and in the 1st Quarter 2006,
Valuation: TBV is $12.18 as of
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