National Interstate: A Specialty Insurance Spin-Off

| About: National Interstate (NATL)

The Richfield, Ohio based insurance firm, National Interstate Corp. (NASDAQ:NATL) engages in specialty property and casualty insurance. Founded in 1989, the company was originally a subsidiary of Great American Insurance Company, which in turn is a subsidiary of American Financial Group, Inc. (NYSE:AFG).

NATL had its IPO in February, 2005 and already enjoys a market capitalization around $500 million, floating around that of competitors Bristol West Holdings Inc. (BRW), Safety Insurance Group Inc. (NASDAQ:SAFT) and Direct General Corp. (DRCT). NATL is currently a constituent in our Clear Spin-off Index licensed for the ETF trading under the symbol (NYSEARCA:CSD).

The firm’s operations include the underwriting and selling of insurance in transportation, servicing companies such as big truckers down to individual drivers. NATL also offers some niche products such as general commercial insurance to small businesses in Alaska and Hawaii, and personal insurance for owners of RVs and water vehicles in the U.S.
Currently operating through independent agents, brokers, agencies, and through the internet, it employs over 300 people in five offices across the country. NATL is set on growing the company through a policy of flat pricing in order to constantly renew clients while marketing to new ones.

We can also get a sense of management’s confidence in the long-term performance of the business from its recent actions. Since the IPO, the company has issued an annual dividend and then changed its policy to issue quarterly dividends. Last month, the company approved a 25% increase to this quarterly dividend, bringing it to $0.05 per share.

As we carefully screen its fundamental data, we begin to see a fuller picture of the company's operations. Its operating margins are a solid 22.94%, compared to the property and casualty insurance industry average of 19.86%. The company has also been growing significantly faster than the industry, with a year over year quarterly revenue growth of 14.90%; almost triple the industry average of 5.20%. NATL also provided a strong 22.79% return on equity [ROE] for its shareholders this year.

Currently, a comparison of the NATL price to earnings [P/E] ratio of 14.59 to the 10.44 industry average initially points to overvaluation. We gain a clearer perspective when factoring in growth. The company’s price to earnings to growth [PEG] ratio is 0.92, just below the industry’s already low average of 0.93. These factors do not point to an under- or over-valued stock, and the fundamentals of this spin-off certainly signal potential for the future.

Another interesting perspective on full and fair valuation is that the stock is thinly covered by Wall Street sell-side analysts. This can be another indication that the firm, with continued fundamental growth and some press, could gain favor with analysts. Once the stock is better covered, it can gain trading volume and additional institutional interest.

Disclosure: National Interstate Corp. is a constituent in the Clear Spin-Off index licensed for the Claymore/Clear Spin-Off ETF [AMEX:CSD]. Mr. Corn is CEO and founder of Clear Indexes LLC which publishes the index and he owns shares of the ETF: CSD. He does not directly own shares in NATL.

NATL 1-yr chart

natl chart

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