WhoIsWarren

I read Stephen Catlin's book a couple of years ago. Catlin set up Catlin Insurance in the 1980s and built it up into a major specialty insurer out of Lloyds, before selling out to XL Insurance in 2015. You may have seen that he's at it again, setting up Convex Insurance in 2019. As insurance books go, it's a light and enjoyable read, but there are enough learnings in it if you are not an insurance expert already. I liked it because it was written by a practitioner - I don't think there aren't too many of those books around. Whether it helps you with insurance turnaround stories is another matter (personally I think that is a very difficult if not dangerous pursuit). https://www.goodreads.com/book/show/35607655-risk-reward

I'll read of the MTB letter with interest. One thing is for sure, the First Citizens' letters are bland so bland.

Hi CorpRaider, Yes I'm still involved. Regarding your concern, I don't believe any compensation arrangement is perfect. If there are bad actors and a weak Board then whatever the metrics used they can be gamed. Regarding growth in TBVPS as a yardstick of how the bank is doing, I think it's as reasonable as you're going to get. It's over 3 years and is not very aggressive (max payout 36% growth over period, 11% p.a.). Intangibles are not a big feature of the b/s. And while ROE is not explicitly mentioned, growth in tangible book value per share is a function of RoE. There have been acquisitions it's true, but not that much really especially considering its strong b/s. In fact, the bank has bought back c.10% of shares outstanding in the last 18 months or so at above book value. I imagine they could have gotten more growth in book value through acquisitions? Finally, note the low level of management pay compared to other banks. CEO gets paid a modest basic $1m a year and his total comp is capped out at $3m. If they really wanted to screw shareholders, bumping up basic pay a maximums would be the first port of call. So overall I see is no evidence of abuse - in fact, quite the opposite. As you mention, the Holding family members collectively owns over 50% of the company, a stake worth almost $3bn today. CEO and Chairman Frank B. Holding Jr. owns at least 15% (maybe 20%?). So protecting (and safely growing) capital must be to the forefront. If they were stuck for cash, increasing the dividend (payout ratio less than 5%) would be an obvious first step.

I think this might be the one: https://www.cnbc.com/video/2019/02/25/why-warren-buffett-sold-berkshires-stake-in-oracle.html

I hope you're right there. I know they haven't become stupid of a sudden, but my confidence in their investment decision-making is wavering. Oh, me of little faith!! :o Thanks for your comments.

Maybe you're right that it's not a big deal, but it's not a theoretical risk. If the capital situation got bad enough they might have to raise capital (or at least have the threat of it hanging over them). They could cut back on underwriting / increasing inwards reinsurance, but it might be precisely when insurance pricing is really attractive. Mark-to-market can have a detrimental effect. If I'm not mistaken, a whole host of insurers (Europeans?) got into trouble in the early 2000s as a result of having too much equity exposure. I just hope management has run the scenarios and carefully considered the possible consequences.

Regarding Toys R Us Paul Rivett said: "we got a business that was making over 10 years $100m of EBITDA year after year....the company continues to generate EBITDA...." Unless I missed a clarification somewhere else, I took that to mean $100m was a 10 year average. Isn't it likely that more recent years have been tougher? $100m might not be a good benchmark for the future at all. I am also very wary of the idea that they got valuable real estate with a toy business thrown in for free - if the liabilities from one can transfer over to the other, then it's just wrong to talk about them as two parts. They know this too and when they make such statements I feel violated. I'm also interested in what you guys think about the last question on the earnings call, which was about the level of equity securities on the balance sheet and whether a mark-to-market of their securities in a -50% stock market environment could wipe out 50% of Fairfax's equity capital. He was giving rough numbers here of course, but it's a point worthy of serious consideration. Not just a question for Fairfax mind you, but compare and contrast with Berkshire (a lot of wholly-owned businesses). Paul's answer was pathetic -- this is "a stock picker's market", "we've got value stocks", we are "conservatively positioned", "we think there is....a potential for a trade deal that will extend the runway in the US..." -- but I will give him the benefit of the doubt for being caught on the hop. Even if they are right that their equity investments are cheap long-term, mark-to-market can have real business implications in the short term. Perhaps a hedge or, more simply, perhaps less equities is the answer? A separate but related point is why insurance companies are run with debt. I think there's enough risk in the business without it. Bundled up in there is a question about how much insurance underwriting risk is being taken on, how much risk has been laid off to reinsurers etc., so it's a complicated topic. It's not a free lunch though and I would personally prefer less than more. Perhaps this topic has been discussed somewhere else, if so apologies.

Cigarbutt - looking the share price alone is not fair the dividends since 2010 have been substantial! The dividend adjusted share price at the start of 2010 was £1.70 (i.e. a 3-bagger all in). Now if you'd said since 2013..... :( Actually, if I'm not mistaken Lloyd's records - with a quill pen - all merchant ships (above a certain size I presume) that go down. This isn't done by the underwriters, but rather one of the "waiters". Lloyd's is a very traditional place, really cool to go on a tour if you're ever in London. I'm sure you know it but Lloyd's is only one of Lancashire's four platforms. But the point you're making is valid - a lot of insurance is a commodity. To "beat the market" you either have to write niches that are more protected / have some barriers to entry, or else stay very disciplined. Lancashire tries to do a combination of the two. The second of these is much like what a good (value?) investor in the capital markets does. In fact there are similarities with the current investing and insurance markets don't you think? Low interest rates and falling perceptions of risk have encouraged investors into both.

No problem. That was the positive narrative - there's a negative one too! :( :o Between 2017/18 Lancashire won't have made any money. I'm hoping it's because we're near the bottom of the cycle, but it's worrying that pricing not rebound more after last year's losses. The speed at which capital can be added to the market is different from the past -- in theory days rather than months/quarters. Perhaps poor horse (poor racecourse better analogy)?? However at current share price I am very confident that the private market value is quite a bit higher, not withstanding the fact that PMVs have come down over the last year or two.

Cigarbutt - yes, the marine loss largely relates to the one you mention. I understand this shipyard has been a long standing client and has never had a loss, so I think it's right to think of this as 'random clumping'. Tough times for the company, but there are reasons to be somewhat optimistic. There is very definitely a withdrawal of capacity from the specialty markets, partly driven by a Lloyd's stated objective to be more selective with business plan approvals for 2019. The results haven't been finalised yet but it seems like they're serious -- pressured by the rating agencies and the UK financial regulator. Even in the absence of actions by Lloyd's, specialty insurers are getting real about the pricing environment and are pulling out of poorly performing lines. You see announcements every week on this front, have done for a lot of this year. Not from Lancs though, as they always write for profit not for top line. In addition to improved specialty insurance pricing, Lancashire has added a couple of new teams in the last few months, as discussed at the last quarterly results / earnings call. It's worth pointing out that management has been VERY disciplined regarding bringing in new teams over the last few years -- making sure they can get the numbers to work, not just getting top line growth. For that they deserve huge credit. Now with the rest of the industry culling staff, top quality underwriters are more willing to move for more realistic salaries. It's reasonable to assume some will fancy the idea of working at an "underwriting first" shop like Lancashire. Don't expect dramatic moves, but 2-3-4 teams in 2019 would be nice. Factoring in some improved pricing and the 2 previously announced new teams, revenues and profits will increase by a reasonable rate in 2019, without factoring in any heroics. There could be other positives, for example the offshore energy market which has endured a rough 3-4 years.

As far as I'm aware there is no news specific to Lancashire. More sellers than buyers. Industry pricing continues to disappoint, which is quite a hit given the losses incurred last year. Who knows exactly what's going on there, but cheap money accepting mispriced risk could explain part of it. The one bright spot is that since the 2017 losses, many traditional insurers have been exiting loss-making lines of business, indicating point of max pain has probably been reached. Lancashire hasn't had much portfolio trimming to do as it never over-expanded and indeed it is able to pick up the odd good underwriter and round out its offering. There's no doubt that the group needs to have a wider portfolio offering in time, but now's not the time to aggressively do this. I really admire the Group for its patience. Hats off to the board and CEO Alex Maloney for resisting the siren call of growth. The path they've chosen certainly doesn't win the hearts and minds of "story" investors

Thanks Ben, I hadn't seen that. You see whether LUK participated in this? [Also, I wrote about them investing $105m.....but I was clearly wrong on that (as Scorpion quoted "We have invested $83.0 million in Golden Queen").]

Good spot Scorpion. I've never looked at LUK's Golden Queen interest in much detail as it's small, but it's a different legal entity from the quoted GQM that you're looking at. From LUK's 10-K: Golden Queen is a joint venture between Golden Queen Mining Co., Ltd. (“GQM”) and Gauss LLC (“Gauss”). We own 70% of Gauss, which in turn owns 50% of the joint venture, giving us an effective 35% interest in Golden Queen. GQM had $47m of debt at year end 2017, which obviously has a magnified effect on its equity value. I can't find financial statements for Gauss -- it might not have any debt (or even have net cash). Looking at the press release when the JV was announced (2014), Gauss invested $110m in Golden Queen and committed to invest a further $40m to build out the mine. LUK's 70% share of that investment would be $105m, so they've partially written down their investment already. Either way, it's a rounding error in terms of group valuation. But I suppose one could begin to wonder whether there are other assets on LUK's balance sheet that are valued too highly (on balance I don't think so).

In today's Financial Times, article mainly about BIP (sorry if this is posted in the wrong place). Specifically, the article highlights a natural gas pipeline asset that is owned jointly by BIP and Kinder Morgan, where BIP values the asset 70% higher than its partner. When asked to explain the differential, BIP management explains the difference between IFRS v's US GAAP accounting (fair value v's at cost). This isn't the first time we've seen this. In theory this makes sense and all could be dandy, but it does raise the prospect of aggressive accounting valuations. Author also mentions BIP's Bermudan incorporation, which affords less protections to investors. Overall the tone of the article is negative, without having anything concrete. https://www.ft.com/content/7efb9a6a-cbbc-11e7-aa33-c63fdc9b8c6c

A delayed response, but the latest presentation from the company might help answer your question. Your recollection is correct. They've loaded up on reinsurance, though I wouldn't say they are one of the least exposed insurers. Lancashire (ex. Cathedral) is essentially a tail risk (re)insurer, so it will be hit by these freak events - but when pricing isn't good they'll write less business and have more cover. A while back the company was saying that they were ideally set up for a market that has a series of medium sized (say $20bn) hits that will hurt the industry collectively but where they'll get off pretty lightly. So far, Harvey and Irma fit that bill. Year to date, the industry has been hit by $70-80bn of cat events versus a 10-year average of $60bn (and that's with 70% of the US hurricane season yet to go). So far, this is probably an "earnings story" for the industry, not a capital event if you know what I mean (though you could have a small number of individual insurers being disproportionately impacted) and so we shouldn't expect a major upward move in insurance pricing. One thing that will be interesting to watch is how the alternative capital market reacts. They could be hit with losses of c.$7bn according to Bernstein....a 10% or so hit to total capital invested. Some funds could get wiped out. Will this be enough to cause large swathes of the market to reconsider investing in them?? Probably not, but let's watch with interest. Lancashire_presentation_Sept_2017.pdf