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  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    We are applying 15x forward price to earnings multiple to $2.47 earnings per share in 2017 to get to a $37 share price. Alternatively, book value per share will grow to $17 by 2017 and applying a 2.25x multiple, we get to a similar valuation of $38. It is incorrect to use 1x P/B for a company with such a high ROE and growth. I get to 2.25x P/B implied multiple by multiplying 15x P/E with 15% ROE. Please see our answer to "Rcsam" for more details on how insurance companies trade.
    Feb 5, 2015. 02:35 PM | 2 Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    DAC over UPR is the best metric to look at which we actually mentioned in our last comment and it has been stable around 15% for the last three quarters.

    If you look at most successful historical turnarounds, it takes 1-3 years to turn them around. Mr. Karfunkel acquired GMAC in 2010, and it took him 2-3 years as well, which is a long time.

    National General has grown mostly through acquisitions by buying renewal rights and acquiring distressed companies, which doesn't have the similar affect as Progressive growing organically.

    We never said that National General is "next Progressive". Progressive is a standard auto insurance company, whereas National General is a specialty insurance company operating in the niche lines.
    Feb 5, 2015. 10:16 AM | Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    The beauty of National General’s business is that it has very short tail lines i.e. policies and reserves durations somewhere between 6 to 18 months, which allows not much room for any financial engineering. Therefore, things that people worry about AmTrust is not as concerning for National General (for further accounting details, please see the paragraph “AmTrust Short Thesis and National General”).

    We didn’t pick 1Q14 for the deferred acquisition cost (DAC) comparison, but you did. In your last comment you mentioned that DAC has increased by 15% (It actually increased by only 12.8%) in the last 6 months, therefore, we provided the comparison with earned premiums from Q1 to Q3, which is for the last 6 months. Besides, you originally picked the right period because Tower acquisition numbers are only included in this year, but not in the last year, so year over year comparison might not be relevant. On earned premiums vs. DAC, earned premiums are the right one to look at. We are actually being conservative when we take that approach, because for a growing company net written premiums will be always higher than net earned premiums as growth is earned over the duration of policy. GAAP accounting states that revenues should be matched and earned with the expenses over the period of service. Earned premiums are the revenues for an insurance company, therefore, should be compared with DAC. Again, by picking net earned premiums we are being conservative. But let’s forget all of this and compare net written premiums with DAC year over year as you suggested. DAC increased 75% vs. net written premium increased 168% and net earned premium increased 159.9% year over year. If you really want to see how management is doing in terms of financial engineering than we suggest you look at DAC as a % of unearned premium reserves (UPR), which tells you how quickly the management is amortizing DAC to recognize commission expenses vs. unearned premium revenue by amortizing UPR. This ratio has been fairly constant for the last 3 quarters around 15%.

    We recommend reading the paragraphs “Superior underwriting platform and organization capability” and “Segment overview” to understand why National General’s loss ratio is better than the industry. To summarize it again, National General writes insurance in the niche lines such as auto in North Carolina, RVs, policies through exclusive affinity channels and homeowner policy in north east, which are all highly profitable. Big companies plug and play business model doesn’t really work well in these niche markets as big companies like to utilize their scale. This is the reason why National General leads North Carolina market instead of Progressive. Overtime, the management has done a good job in finding these niche lines, which is the bread and butter of National General. Progressive business model is different. Progressive loss ratios of 72.5% are even above Allstate and the industry average of 67.4%. A part of that is because Progressive has an unbelievable low expense ratio because of its unique platform, and so it can afford to get customers at a lower price to maximize its bottom line.

    We don’t want to go in circles on Progressive. Again, we also think very highly of Progressive as a company and that is not what we are trying to compare here. Hope this help, and we respect you challenging the thesis.
    Feb 4, 2015. 05:59 PM | 2 Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    $7.50 invested in AmTrust (AFSI) with Mr. Karfunkel post its IPO in November 2006 would have been worth $52.00 today, which is a ~7x return on the money invested in ~ 8 years, and a 26% IRR. AmTrust is an another commercial property and casualty (P&C) insurance company founded by Mr. Karfunkel. Mr. Karfunkel had no prior experience running a P&C Company before finding AmTrust. One of the most important quality of a successful CEO is capital allocation (As highlighted in the famous book “The Outsiders”), which becomes even more important in running a financial company. Mr. Karfunkel is an excellent capital allocator based on his track record (Please see “Investment thesis details” and the paragraph on “Acquisition history” for more details).

    For the competitive advantage, please see the section “National General Competitive advantage”.

    National General’s deferred acquisition cost (DAC) has gone up only 12.8% from the first quarter 2014 vs. net premiums earned has gone up over 20% in the same period. DAC is a capitalized prepaid asset on the balance sheet, which is used under GAAP accounting to match commission expenses with net premiums earned over a year. A DAC should grow in line with premiums, and a conservative management might amortize DAC at a higher rate than premiums resulting in a DAC growth rate lower than premiums growth rate, which seems to be the case here.

    First of all, Progressive is an excellent Company with good management. We mentioned that National General is growing at a higher rate than Progressive and has a sticky niche short tail business, so it should potentially trade at a higher or similar multiple as Progressive. National General has a higher expense ratio than Progressive, but its loss ratios are significantly lower. As a result, National General P&C segment margins in the last similar period were even slightly higher than Progressive. In the third quarter of 2014, National General reported 90.7% combined ratio (opposite of underwriting operating margin) in their P&C segment vs. Progressive reported 92.5%. National General’s P&C segment loss and expense ratios were 62.5% and 28.2% vs. Progressive’s 72.5% and 20.0% in the third quarter 2014, respectively. Both National General and Progressive lead the personal line property and casualty industry average expense ratio of 30.0%, whereas, National General has significantly lower loss ratio than the industry average of 67.4%. Right now, National General is running below its full operating and financial leverage of 1.8x and 25% to 30% debt/ capital. As National General grows its premiums by deploying more capital and integrates Tower and Imperial, we believe the scale will provide even better margins in long term. Note as we highlighted in the write-up, we think that expense ratios will go up next year as National General integrates Tower before coming down the following year.

    Since Mr. Karfunkel acquired GMAC, not only he has turned it into a leading profitable company in the industry by cutting expenses and by developing a great operating platform, but also grown the company in high profitable lines. We have visited and seen their state of the art operational centers ourselves, and compared to their peers (Please see the paragraph on technology for more details). That appears to me a sign of a good operator and capital allocator.
    Feb 3, 2015. 02:02 PM | 4 Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    Price to book value (P/B) multiple is driven mainly by return on average equity (ROAE), growth of earnings and quality of a business. I believe National General is superior in all of the above than White Mountain. ROAE: NGHC >15% vs. WTM <10%; Earnings growth at National General over 20% vs. WTM earnings barely growing; NGHC is a writer of a short tail, sticky niche primary insurance with strong competitive advantage vs. WTM subsidiaries serves more of a commoditized longer tail business, which is more risky. In addition, WTM has a reinsurance mix, which is seeing an influx of capital driving rates down, whereas primary insurance market is still seeing positive rates.

    Insurance valuation accounting: Insurance companies really trade on Price to earnings (P/E) multiple, because P/B is always looked in conjunction with ROAE, where higher the ROAE, higher the P/B. If you do a regression between P/B and ROE for these companies, it has a high correlation. Therefore, the slope of the curve i.e. if you divide P/B by ROE gives you a P/E multiple. The reason why you want to look at P/B in conjunction with ROAE rather than just P/E alone is because some of the balance sheet movements such as change in Accumulated Other Comprehensive Income (AOCI), doesn't flow through an income statement.
    Jan 31, 2015. 11:51 AM | 2 Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    Thanks. There is no conflict of interest. National General collapsed its Quota share with the third party last year. Going forward there is no intercompany reinsurance with Maiden. Furthermore, Karfunkel family owns 62% of National General vs. only 28% of Maiden, so his interests are more aligned with National General’s shareholders. The cost is going down in long term mainly because of consolidating the IT system, saving lease expenses, and because of other cost savings. The Company does have operating leverage in its business, because its platform is highly scalable. I don’t perceive retaining more premiums as necessary taking more risk because earlier National General was not retaining enough premiums. Historically, National General was keeping only 50% of the premiums because it was growing really fast. As it raised more capital and realized these policies were highly profitable, it collapsed the reinsurance. Now its retention is more in line with the industry.
    Jan 31, 2015. 11:45 AM | 2 Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    Thanks! Good questions. Yes, I have spent a lot of time with this company. I have been speaking to the management since pre-IPO when they did their first 144-a offering below $11.

    Your instinct is right that insurance can be a commoditized business, but in a commoditized business companies with low cost always do better than others. National General has lower cost than most of its peers with industry leading ROEs of 15%. It does it through its scale in niche insurance market, superior technology, strategic relationships, and superior capital allocation and underwriting skills. National general differentiate itself with one of the best loss ratios and expense ratios in the industry similar to Progressive. Please see the paragraph on acquisitions and Tower and Imperial acquisitions, which goes in detail about the management superior capital allocation skills.

    Mr. Weiner sold stocks under rule 10b5-1, which allows major holders to sell a predetermined number of shares at a predetermined time. It basically allows him to diversify his wealth as he got these lots at a very attractive price pre-IPO, which have almost doubled since then.
    Jan 31, 2015. 11:43 AM | 3 Likes Like |Link to Comment
  • National General: 100% Upside, A+ Management, High-Quality, Under-The-Radar [View article]
    Thanks! I would be surprised if you can’t as it trades over 135,500 shares ($2.4 million) a day on NASDAQ. Liquidity should further improve if National General decide to raise more capital for future acquisitions with a higher float.
    Jan 31, 2015. 11:32 AM | 1 Like Like |Link to Comment
  • AVG: Stale Short Thesis = Great Opportunity! [View article]
    this was a trade based on the short interest being too high. since i wrote the article the short interest has come down by over 50%. As of now, i currently am not confident in a near term catalyst to bring it down further. no strong view.
    Dec 23, 2013. 10:28 AM | Likes Like |Link to Comment
  • Our Favorite Misleading, Factually Inaccurate, And Utterly Illogical Statements From Veeva's Underwriters' Initiation Reports [View article]
    any updated thoughts after the quarterly results?
    Dec 6, 2013. 09:20 AM | Likes Like |Link to Comment
  • Autobytel A Potential Triple: 1x Sales For Double-Digit, Profitable Growth Is Rare [View article]
    if you look at the comments section of my ROVI article, you will see that i sold a long time ago. the same is the case with AVG. AVG is lower than when my article came out, but if you look at the comments section for when i sold, you will see that i sold at a profit. i do not have a view on ROVI right now but am discouraged given the lack on insider buying. p/e of ABTL is currently high because margins are low. operating margins were 6% last Q up from about 3% in the quarter before. they have already shown great operating leverage as revenue grows.
    Dec 4, 2013. 08:56 AM | Likes Like |Link to Comment
  • Autobytel A Potential Triple: 1x Sales For Double-Digit, Profitable Growth Is Rare [View article]
    i don't know if it will dip or not. it is a fact that the stock is up a lot and that the top holder has been reducing. it is also a small cap. it makes sense that one's sizing should reflect that.
    Nov 29, 2013. 12:33 PM | 1 Like Like |Link to Comment
  • Double Your Money With Phoenix New Media, China's Online Content King [View article]
    interesting idea. Definitely understand why they should have premium pricing but why is it that pricing is currently so low?
    Nov 6, 2013. 02:33 PM | Likes Like |Link to Comment
  • Altisource Asset Management (AAMC) Is A Great Short [View article]
    I am new to REITs but if a lot of the value from RESI is going to AAMC, why isn't RESI a short?
    Oct 18, 2013. 08:47 AM | Likes Like |Link to Comment
  • AVG: Stale Short Thesis = Great Opportunity! [View article]
    after thinking more about this idea and doing some more work, I have decided to exit. While I still think it is cheap and the high short interest is unwarranted, I am less confident in a near term catalyst to squeeze the shorts further given what PERI just reported and the back-end loaded guidance for the full year. The idea was always more of a trade vs investment and I think I got a good portion of the short covering I was looking for over the last couple of months.
    Aug 12, 2013. 10:21 AM | Likes Like |Link to Comment