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Should You Buy It? Zenith's Zing

Zenith National Insurance shares are inexpensive, and the company operates in a lucrative niche.

Zenith National Insurance


is trading closer to its nadir these days. Shares of the workers' compensation insurer are down 20% from their June highs, closing Wednesday at $41.19.

That said, two company insiders have stepped in to purchase a total of 5,000 shares over the past week. While their timing is not always perfect, I view insider buying when a stock is down as a sign that a company's fortunes could recover soon.

With that in mind, I'm here to answer readers' questions: Should you buy it? Does Zenith provide value at current levels, or can the stock move even lower in the coming quarters?

Zenith primarily sells to small and medium-sized businesses with lower risk profiles. The company deals with a lot of retail and restaurant locations and does a majority of its business in California and Florida. California Gov. Arnold Schwarzenegger vetoed two bills in California last September, where premiums are among the highest in the country, that effectively reduced claims costs for the insurers and premiums for businesses.

Zenith posted solid second-quarter results June 24, earning $1.75 a share, up 20% year over year and12 cents ahead of the consensus analyst estimate. The gains came even though revenue fell 18% from the previous year to $219.1 million, as the company's accident-loss ratio fell 140 basis points year over year, to 49.9% of revenue.

The sales decline came as price competition in the California market hurt insurance premiums. A state-run insurance fund owns about half the market in that state, while Zenith is one of the largest private-sector firms that competes for the remainder of the worker's compensation business in the nation's largest state.

Rather than selling more insurance plans at lower prices, management opted to wait for a better pricing environment than lock itself in at lower rates and yet Zenith still posted much better than expected second-quarter earnings.

At current levels, Zenith is valued at just 6.4 times expected full-year profit of $6.48 a share. While that is well below the historical average, the company's 1.5 price-to-book ratio is more in line with its peer group, according to Bloomberg. This is a measure of the value of a company's shareholder equity, which is the most common price metric used in the insurance business.

Still, I believe that readers should take notice of Zenith's 4.1%

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dividend yield, which is more than two percentage points above the payout of the average

S&P 500

stock. The company's dividend can be comfortably covered with 26% of expected 2007 earnings. Investors at the close of trading July 24 qualified for the upcoming Aug. 14 payment of 42 cents a share.

Zenith is downright cheap at current levels, and I believe that readers should follow the insiders and consider buying the stock. The company operates in a lucrative niche of the insurance market, one that most of the larger names in the business have ignored, making it a potential takeover target. In the meantime, I believe the pricing issues in California should improve by the end of the year and that the shares can trade back up toward $50.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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