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I recently bought a starter position in Zenith National Insurance (ZNT) for long term investment. I'm not in ZNT for just a swing trade and think there is a good chance the stock may double (or more) over the next three years.

ZNT is a holding company established in 1971 with assets of approximately $2.7 billion. Through its subsidiaries, it provides Workers' Compensation insurance. In Sept. 2005, ZNT exited the re-insurance business which has allowed the company to be more focussed.

Here are some of the reasons I like it:

1) Low P/E of 6 times earnings.

2) The combined ratio (losses to premiums) for the three months ending June 30 was 61.7%. The combined ratio averaged 66.3% in 2006 and 80.9% in 2005. Combined ratios this low for an insurance company is fabulous performance, and ZNT has done a great job here. The industry average combined ratio is closer to 100%.

3) Insider buying: Seven recent insider buys in August. No insider sells in August.

4) Dividend increase: ZNT just raised its quarterly dividend by an impressive 19%. It now pays $0.50 a quarter and yields around 4.60%. ZNT has doubled its dividend payout since 2005.

5) Book value growth: ZNT has been rapidly growing its shareholder's equity. Here are the year end figures for the last three years:

  • 2004 481MM
  • 2005 692MM
  • 2006 920MM
  • June 2007 1004MM
  • 6) ZNT's credit rating was upgraded by A.M. Best in April.

    7) Many insurance company stocks have been depressed lately because of fears that they own sub-prime mortgages in their investment portfolios, but "the market" has mistakenly included ZNT in that category. ZNT actually has a very conservative investment portfolio. As of June 30, 2007, their portfolio was comprised of mainly low risk GNMA's, US Treasuries and highly rated corporates and municipals. There is also very little interest rate risk. The duration of the fixed maturity portfolio including short-term investments is only 2.8 years.

    Full Disclosure: I am long ZNT.

    Source: 7 Reasons To Like Zenith National Insurance