Transatlantic Holdings: A Value Proposition Worth Consideration

Aug.28.10 | About: Transatlantic Holdings (TRH)
Today’s Investment Observation is Transatlantic Holdings (NYSE:TRH). According to Yahoo Finance,

Transatlantic Holdings, Inc., through its subsidiaries, offers reinsurance capacity for a range of property and casualty products, directly and through brokers, to insurance and reinsurance companies, in domestic and international markets.

Transatlantic Holdings has increased the dividend every year for 20 years in a row. According to TRH’s May 20, 2010 press release, the company plans to increase the dividend by 5% on September 17, 2010, for shareholders of record on September 3, 2010.

In our analysis of Transatlantic Holdings, we’ll first address the technical pattern of Edson Gould’s Altimeter. The altimeter suggests to us that TRH is severely undervalued in relation to the dividend. The red horizontal line is the indicated level where TRH would normally be considered undervalued at $84 per share. On the extreme end of the overvalued range, TRH would trade at approximately $162 as indicated by the blue horizontal line.
Value Line Investment Survey has estimated that TRH would be around the $75 range by 2013. We opt to err on the side of caution on this matter and have taken the view that from the current price of $48.52, we could reasonably expect that TRH could rise to $67 or 38% over the next 2-3 years. However, our investment strategy requires that if we get a 10% gain in less than a year in a tax-deferred account then we’re considering the next best investment alternative.

According to Value Line Investment Survey, Transatlantic Holdings (TRH) is fairly valued at 10x earnings. Using the more conservative (lower) estimated earnings figure for 2010 by Value Line, TRH should return to the fair value of $65.50. Again, this is far above the current price by 35%. Value Line also indicates that TRH has a (2009) book value of $60.77 per share. Based on the current market price, TRH is selling 25.25% below book value. Dow Theory ascribes a fair value of $51.15 based on the peak of July 6, 2007 and the trough on March 9, 2009. Because the book value is higher than the Dow Theory fair value figure, I suspect that TRH will far exceed my upside targets.

When speaking of the risks to our investment view of Transatlantic Holdings, we cannot avoid the question of the black hole of AIG (NYSE:AIG). The close relationship between AIG and TRH, through AIG’s prior majority ownership (59%) of TRH and funneling of business to the reinsurer, probably is the reason that TRH started moving towards the undervalued level from December 4, 2001 to March 9, 2009. According to Value Line, now that the AIG holdings of TRH stock have been sold off completely, there is one less issue to deal with in that regard. This concern was confirmed with the following statement from TRH’s 10-Q:

As a result of its reduced ownership percentage, the AIG Group is no longer considered a related party after March 15, 2010” - Transatlantic Holdings, 10-Q August 6, 2010 (PDF link), page 25, Accessed August 27, 2010.

There still is the matter of how TRH will do if AIG isn’t around to provide a “guaranteed” stream of business. I’m of the mindset that TRH had some really nice training wheels with AIG but the company has been more than ready and able to go it alone. Obviously, we can see that the failure of AIG affected TRH but it didn’t put TRH out of business. So far, as corporate transitions go, TRH seems to have weathered the storm. Going forward, the primary concern for TRH should be catastrophic events which seem to increase, in magnitude, year after year.
Disclosure: Long TRH