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Category Archives: Transatlantic Holdings
Transatlantic Holdings Acquisition Complete
On March 6, 2012, the acquisition of Transatlantic Holdings (TRH) was completed by Alleghany Corp. (Y). On several occasions we have made specific reference to the undervalued nature of the Transatlantic Holdings. Below is a performance chart of TRH after appearing on our May 7, 2011 Dividend Watch List.
In several accounts that we manage, TRH was already a large holding. However, we couldn’t help but load up on additional shares after Alleghany Corp. announced that they put in a bid for TRH. We were glad that TRH reject the lowball bid by Warren Buffett’s Berkshire Hathaway (BRK-A).
When requested by Alleghany whether we wanted cash or shares, we took shares in the taxable accounts and cash in the tax-deferred accounts. As luck would have it, the redemptions of our TRH shares into cash/stock comes in time for our recommendation to reduce exposure to the stock market based on Dow Theory’s non-confirmation.
Posted in acquired, Transatlantic Holdings, TRH
Transatlantic Holdings (TRH) Is Making Waves
On August 27, 2010, we recommended that investors consider the purchase of Transatlantic Holdings (TRH). In our assessment of TRH, we felt that the stock had a good chance of rising to $67 within 3 years. On the extreme end of overvaluation, we felt that Transatlantic Holdings (TRH) could be worth between $84 and $162. In the same article we said the following:
“…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.”
Our aversion to excessive gains had paid off. On November 2, 2010 we recommended that holders of Transatlantic Holdings (TRH) sell their shares with a gain of 10.78% in approximately 68 days. As demonstrated in the chart below, such a recommendation came within two days of the high for the last year. After our recommendation to sell, TRH fell from $53.52 to $44.00 in the following 7 months.
Now, Transatlantic Holdings (TRH) is in the cross hairs of Allied World Holdings (AWH). With TRH selling comfortably below book value and AWH’s takeover offer also coming in below book value there is serious opportunity for TRH to move considerably higher. TRH sports a book value that is estimated between $66 and $79 per share depending on the source you chose. With the battle for the company that is expected to come over TRH, we can expect that if a merger or takeover does occur it should start at the $66 level which is in stark contrast to Allied World Holdings' offer of $51.50.
As soon as the deal was announced, Transatlantic’s largest shareholder, Davis Selected Advisors LP, indicated that they might oppose the deal because they believe that the $51.50 offer is too low (Bloomberg article here). Not far behind Davis Advisors, Tweedy Browne Co. has said that they’re also against a merger that prices TRH below book value (Bloomberg article here).
Our most recent Dividend Watch List (June 12, 2011) made specific reference to Transatlantic Holdings as a potential investment opportunity. We believe that as the market goes through its corrective phase, purchases of TRH, a company that has increased the dividend for over 20 years in a row, would be reasonably rewarded.
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Sell Transatlantic Holdings at the Market
It is now time to recommend that Transatlantic Holdings (TRH) be sold at the market. The stock has performed moderately since the Investment Observation was issued on August 27, 2010. It is highly recommended that anyone who bought the stock based on our insight should re-read the posting. Shortly after our recommendation, TRH fell as low as -1.75% before heading higher.
In the pursuit of "seeking fair profits" the returns that this stock has provided within the last 68 days say that it is necessary to consider alternative opportunities. The key to investment success and a key principle of economics is to seek the best alternatives.
Transatlantic Holdings (TRH) was recommended when it closed at $48.52 on August 27th. Based on today's closing price of $53.52, TRH has gained 10.78% (including reinvested dividends.) By catching the stock eight days before the ex-dividend date, we were able to boost the total return from 10.31% to 10.78% a change of 4.56%.
The annualized return on this position would be close to 57%. Selling this stock now generates a return of 6.73x greater than the amount of the dividend yield if held for a full year. Additionally, the 10.78% gain exceeds the return on a 30-year treasury purchased on August 27, 2010 by 2.92x.
Those not interested in following through with our sell recommendation can feel comfortable knowing that TRH is a great long-term holding with a 10.78% downside cushion since our investment observation. As the price of TRH rises, it should be noted that the stock faces significant upside resistance at $53.76, $54.00 and $55.59.
As we have indicated in the purposes and function of this site, our goal is to:
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Maximize the annual yield of each trade.
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Reduce the time between buying and selling of each stock.
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Exceed the annual yield of government guaranteed alternatives in each trade.
Investment observations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research you can buy the stock at a lower price. Ideally the stock should be held in a tax-deferred account and should not consist of less than 20% of your holdings. Personally, we prefer holding only 2-3 stocks at a time.
For a portfolio of $10,000 with a 20% position that gains 10.78%, the impact on the entire portfolio is 2.16%. This is contrasted with the same portfolio with a 5% position that gains 10.78%, the impact on the entire portfolio is 0.54%. By choosing generally conservative dividend increasing stocks at or near a new low, the odds of success are increased in your favor making the assumed increase in risk worthwhile.
Sell recommendations are intended to deal with the short-term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the Investment Observation was made (please avoid making this mistake.) We aim for modest returns, therefore we are happy with 9-12% annual gains.
It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours as detailed in our article "Automatic Orders Don't Provide Protection." This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, we would rather leave some money on the table rather than have it taken away from us by the trades that are placed by institutions and market makers.
Investment Policy Q&A
A Reader Asks:
In reading "lessons learned from our worse picks", the key 'lesson' was 'not adhering to our rules', mainly "one rule is to side-step stocks that have had recent cuts or no annual increase in the dividend."
Yet, Northern [Trust] has had no increases in 3 years (so even before the crash).
I realize that one should not be totally dogmatic in an investment approach. Perhaps a large % of the "good" picks also showed similar dividend lags...but then why would it be "a rule"?
Our Response:
Thanks for the great observation. This site tracks current and former Dividend Achievers. This means that stocks that had a history of dividend increases will likely be included in our investment decisions at some point in the future, even if they don’t have a current history of dividend increases. We track companies that did have a history of dividend increases because cutting the dividend may have been done for strategic purposes.
One matter about the article titled “Lessons Learned From Our Worst Picks” is that we probably didn’t put enough emphasis on how recent a dividend policy has changed. We don’t mind if there isn’t an increase nor does it matter that there is a cut. What matters most is how recent such action took place and for what reason.
In the article mentioned above, we did say the following about cuts that occurred in stocks that we selected:
“What we should have done is wait one full year after the cut, or lack of an increase, to determine the viability of the company. Keep in mind that a cut in the dividend isn’t a death sentence. In fact, cutting the dividend might be the best management move to make. However, current shareholders of the company might abandon the stock if they have a policy to hold stocks with a steady dividend (as we advise investors to do.)”
Northern Trust (NTRS) happens to be the perfect example of our investment approach in action. Based on the history of dividend increases, Northern Trust was expected to increase the dividend on December 8, 2008. However, the economic environment, as uncertain as it was, did not warrant such actions from the board. The most prudent action was to conserve as much cash as possible.
It is interesting to note that according to Value Line Investment Survey, Northern Trust earned $3.24 per share in 2007 and $3.47 in 2008. Although the cash was available, NTRS made a prudent and accurate decision to maintain, rather than increase the dividend since 2009 earnings came in at $3.16. Despite a drop in earnings in 2009 and the economic turmoil of 2007 to 2009, the book value of NTRS has climbed from $20.44 in 2007 to $26.50 in 2009. A decision on the dividend that was made in 2008 anticipated the decrease in earnings in 2009 is what we should expect for a “well” run organization.
The management at Northern Trust (NTRS) continues to demonstrate a high level of competency that rewards the shareholders and account holders equally. First, by not overreaching as the bubble grew, NTRS avoided jeopardizing the well being of their clients. Second, by taking appropriate actions in response to the “crisis” that swirled around them by not increasing the dividend in order to conserve cash, NTRS positioned themselves to fight another day; which ultimately benefits the shareholders.
Historically, we have been reticent to make any recommendations of companies in the financial services industry, especially banks. However, the last three recommendations of Transatlantic Holdings (TRH), Wesco Financial (WSC) and Northern Trust (NTRS) have demonstrated an exceptional ability to weather the most recent storm. These characteristics, not increasing or cutting the dividend before a crash, were demonstrated by some of the best corporations with similar dividend increasing histories before the crash of 1929. This explains why we wouldn't rule out a company that has embarked on a new dividend policy.
Thank you for a great question and for carefully reading our material.
Posted in Northern Trust, NTRS, Transatlantic Holdings, TRH, Wesco Financial, wsc
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Investment Observation: Transatlantic Holdings (TRH) at $48.52
Today’s Investment Observation is Transatlantic Holdings (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 (TRH) 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 (TRH), 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 (TRH), we cannot avoid the question of the black hole of 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 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.