LRE.L - Lancashire Holdings Ltd

[nwoodman]

Q3 Results out

 

http://www.lancashiregroup.com/lre_group/media/rns/rnsitem?id=3808737&t=popup

 

Sorry for the cut and paste but I reckon they summed up their quarter perfectly and the use of capitals is justified  ;D

 

 

"GROWTH IN FULLY CONVERTED BOOK VALUE PER SHARE, ADJUSTED FOR

 

DIVIDENDS, OF 7.9% IN Q3 2010, 15.9% YEAR TO DATE;

 

COMBINED RATIO OF 39.2% IN Q3 2010, 65.1% YEAR TO DATE;

 

SPECIAL DIVIDEND OF $1.40 PER COMMON SHARE"

 

 

 

The Lancashire Board of Directors has declared a special dividend to be paid out of retained earnings of $1.40 per common share (approximately £0.86 per common share at the current exchange rate), which results in an aggregate payment of approximately $213.0 million (the "Special Dividend"). The Special Dividend will be paid in pounds sterling on 19 January 2011 (the "Special Dividend Payment Date") to shareholders of record on 10 December 2010 (the "Record Date") using the GBP£/US$ spot market exchange rate at the close of business in London on the Record Date. 

 

 

[Myth465]

Glad I added  ;D.

 

I expected a low combined ratio but thats nuts. Still wondering what im missing a year later but glad im not watching from the sidelines.

 

Thanks again TWA.

 

Q4 should be just as good if not better due to releases. I am glad I hold in my Roth and look forward to the dividend. Very interesting.

[rranjan]

Myth - If I remember correctly you hold LCSHF.PK and not LRE.L. Pardon my ignorance but is there any practical difference between holding one over another? I have never bought anything listed at non-us exchange so I will appreciate any information related with tax issue.

[Guest Bronco]

The pinkies don't seem very liquid.  I tried to buy Lancashire thru etrade and couldn't get a purchase. 

 

 

[rranjan]

Broco - That's true. Thats why I was wondering about the implications of buying any securities at non-usa exchange. I know that you might get foreign tax ( on dividend??) but you can claim it back while filing your annual tax subjected to certain limitations. Since I have not looked into it at all, I an not sure about all advantages and disadvantages.

[Myth465]

Myth - If I remember correctly you hold LCSHF.PK and not LRE.L. Pardon my ignorance but is there any practical difference between holding one over another? I have never bought anything listed at non-us exchange so I will appreciate any information related with tax issue.

 

I dont know of any difference. Similar to holding FFH or FBK pinks. I was very skeptical. I do get my dividend and did get cash for the rights offering shares which were automatically sold for FBK. From a tax perspective I dont believe there is a difference. I know Canadian companies tend to take 15% back for tax purposes and you can claim these when you need to. I dont think the UK does anything like that. I get the Div without any tax hit unless its rolled in.

 

Also someone just bought. It sucks because they arent very liquid and on good news you will just have to pay up to get the shares you want. Its why I bought above book and prior to the release. They will pull back at some point though.

[Guest Bronco]

I guess Etrade would let you buy on the London Exchange, but that is too complex for a hick like me.

[twacowfca]

Glad I added  ;D.

 

I expected a low combined ratio but thats nuts. Still wondering what im missing a year later but glad im not watching from the sidelines.

 

Thanks again TWA.

 

Q4 should be just as good if not better due to releases. I am glad I hold in my Roth and look forward to the dividend. Very interesting.

 

 

We're on island time right now for a reinsurance continuing education seminar.  Have gained a better understanding of why our favorite company's better market niches are less attractive to competitors.  Prefer not to blab all the details, but it's basically about the institutional imperative.  Therefore, all their little, apparently shallow moats may be much deeper than it seems, and their edge generally lasting and not ephemeral.  :)

[Myth465]

I see I have gleaned a bit from the last investor day. Honestly it sounds like a combination of brass balls and good old fashion customer service.

 

They seem to really pick their spots and serve their key customers. A good example is with Energy. They feel the best assets are the ultra deep water semis because hurricanes go right over them. Next best is drillships because they can move, and worse jackets.

 

They will work with key customers to get a disproportionate amount of semis and take on a relatively low amount of jackups. They will also work and deal with key customers - giving them breaks when they need to and basically taking care of them. With energy they also rushed in after DWH when many were probably sucking their thumb and calculating risks. This leads to high pricing with probably less risk because operators would likely be much safer on a go forward basis. Most of the other lines are contracting right now.

 

So that points to me that they really just pick their spots and service key customers. I think its a sustainable moat as long as they stay small. Which is why the focus on non empire building and staying nimble.

 

Thats my take, I am sure yours is much more sophisticated.

[twacowfca]

I see I have gleaned a bit from the last investor day. Honestly it sounds like a combination of brass balls and good old fashion customer service.

 

They seem to really pick their spots and serve their key customers. A good example is with Energy. They feel the best assets are the ultra deep water semis because hurricanes go right over them. Next best is drillships because they can move, and worse jackets.

 

They will work with key customers to get a disproportionate amount of semis and take on a relatively low amount of jackups. They will also work and deal with key customers - giving them breaks when they need to and basically taking care of them. With energy they also rushed in after DWH when many were probably sucking their thumb and calculating risks. This leads to high pricing with probably less risk because operators would likely be much safer on a go forward basis. Most of the other lines are contracting right now.

 

So that points to me that they really just pick their spots and service key customers. I think its a sustainable moat as long as they stay small. Which is why the focus on non empire building and staying nimble.

 

Thats my take, I am sure yours is much more sophisticated.

 

 

You've got it!  Why make it complicated.   :)  

 

Most of the rest of what they do is merely tweaking the basic concept.  For example, on Deepwater Horizon, they liked the elemental risk (storm risk) better than the non elemental risk, perhaps because the owner and the operator did not have an outstanding safety record.  This may have been one reason why they reinsured a big chunk of the non elemental risk.  Thus, they were still able to serve the client without taking on undue risk.  :)

 

[Guest Bronco]

TWA - any slide decks from the presentation you can post?

 

Also, I am sympathetic to your island excursion when I am stuck looking at miserable Giants stadium from my window.  Not a lot of beauty in Rutherford NJ.

[Myth465]

Very interesting twacowfca.

 

I really like the Management team. They remind me of LUK. It seems like they locked themselves in a room for a few weeks designing the company and have stuck to their knitting. They have a winning strategy that works quite well when one is small. If they were focused on growing they would have just become another insurance company. You cant pick the spots when you are a significant player in the industry.

 

Stay Nimble, focus on ROIC (return capital when its too much via buybacks and dividends).

Dont bet the farm on investing (a small profit center that has relatively low risks).

Pick your spots and react vs acting (reduce when prices suck and jump on something when it runs).

 

They may get 1-3 good years out of energy and then something else will hit. In the meantime capital will be returned. They even went as far as building the dividends into the warrants which leads me to believe this was the plan all along.

 

[twacowfca]

Very interesting twacowfca.

 

I really like the Management team. They remind me of LUK. It seems like they locked themselves in a room for a few weeks designing the company and have stuck to their knitting. They have a winning strategy that works quite well when one is small. If they were focused on growing they would have just become another insurance company. You cant pick the spots when you are a significant player in the industry.

 

Stay Nimble, focus on ROIC (return capital when its too much via buybacks and dividends).

Dont bet the farm on investing (a small profit center that has relatively low risks).

Pick your spots and react vs acting (reduce when prices suck and jump on something when it runs).

 

They may get 1-3 good years out of energy and then something else will hit. In the meantime capital will be returned. They even went as far as building the dividends into the warrants which leads me to believe this was the plan all along.

 

 

 

That's a good take on their culture, Myth.  

 

IMO rates for energy coverage in the gulf may continue to be hard for some time because insurers have been burned three years of the last six: KRW in 05, Ike in 08 and  Deepwater Horizon this year.  It's very possible that rates in general will be hardening nicely by the time energy rates may normally be about to soften.  This may help keep elemental energy coverage rates at satisfactory pricing because energy wouldn't be one of the few classes that would have attractive pricing.

[mpauls]

Too bad they don't appear to invest in equities.

[Myth465]

Too bad they don't appear to invest in equities.

 

I see this as a strength. They stick to their knitting. In 2008 investments didnt kill them like just about every other insurer (except for FFH). Unfortunately there are very few people I want investing capital. Plus they are doing quite well with emerging market bonds.

 

These guys are great at writing insurance. The best I have come across. They can make 30 - 40% writing insurance. With those kind of returns I dont want them doing much else.

[twacowfca]

Too bad they don't appear to invest in equities.

 

 

In a sense they do invest in "equity".  They have made a large equity investment that has compounded 20% per annum: their own stock!  :)

 

There is a problem for insurers that invest in equity.  The rating agencies greatly discount equity investments when assessing capital required to support the payment of claims.  Liquidity is very important in short tail business.  

[rmitz]

I see this as a strength. They stick to their knitting. In 2008 investments didnt kill them like just about every other insurer (except for FFH). Unfortunately there are very few people I want investing capital. Plus they are doing quite well with emerging market bonds.

 

These guys are great at writing insurance. The best I have come across. They can make 30 - 40% writing insurance. With those kind of returns I dont want them doing much else.

 

Right.  Since they *do* return their excess capital, not being aggressive with investments isn't a huge issue.

[stahleyp]

Does Brindle own a lot? I have no idea where to find this for most international companies.

[Myth465]

This is from my write up from last year. I found the info from thumbing through the filings on the website.

 

It was accurate at one point but may not be right now. Also the warrants collect dividends which makes perfect sense. I think people who have been there since day one may have a low or no cost basis. I believe the hedge fund was Crescent or something like that and it sold it shares in LRE to LRE earlier in the year. Its how the bought back a huge chunk.

 

Filter #3 – Does it have management I can trust?

 

Lancashire is run by Richard Brindle, who was the long-time deputy underwriter to John Charman at Lloyds from the mid 1980s to 1999.   Over that period, their average return was 17 percentage points better than the market, and they never had a losing year.   Their business (“Tarquin”) was backed in 1994 by the predecessor fund to Capital Z and was sold to Ace in 1998 for a gain of approximately 5x.   Capital Z obviously knew Brindle quite well from these days and their involvement in Lancashire stems from this.  Both Brindle and Charman soon left Ace.  Both resurfaced following 9/11.  Charman founded Axis, which has generated the best ROE of the Bermuda “Class of 2001” (19%, versus the next best, ACGL, at 17%, after which it drops dramatically).  Brindle resurfaced at AIG’s Lloyds business.    You will find that Brindle is not your average insurance executive.  In addition to having a great track record and having learned the business from the best person in the business, he is young, very smart, savvy and tough operator.  

 

Management seems to have a large holding of warrants. These warrants also receive dividend payments which appears to help Management in properly managing the balance sheet. I have updated Lancashire to an Owner Manager holding due to large holdings being held by the Board and Management. One Board Member controls a hedge fund which owns 13% of LRE and that the rest of the Management team owns warrants and shares of around 10% - 13%.

 

[Myth465]

Page 66

 

http://www.investis.com/l/lancashire_insurance/2009/ar09.pdf

 

My numbers are very dated. I would take the 2009 numbers and account for the buyback.

[stahleyp]

myth, that looks good enough for me. Thanks for the help, as always! :)

[Myth465]

Also please let me know what you come up with for current insider ownership. Im lazy.

 

It looks like we are getting revalued with a small bit of multiple expansion. Im not sure if it will stick around after the dividend and am not sure if I want it to. LRE is one of the few insurers I would hold these days past book. I think conservatively they are worth 1.5 BV and in a hard market maybe up to 2x.

[bookie71]

A new presentation

http://www.lancashiregroup.com/lre_group/investor_relations/results_presentations/presentations/

[biaggio]

Numbers are impressive.

 

My question is what would prevent smart insurance guys like FFH, MKL, BRK from underwriting the same properties which would decrease profits/decrease underwriting results.

 

Numbers look too good to be true

 

Thanks for posting presentation

[beerbaron]

Numbers are impressive.

 

My question is what would prevent smart insurance guys like FFH, MKL, BRK from underwriting the same properties which would decrease profits/decrease underwriting results.

 

Numbers look too good to be true

 

Thanks for posting presentation

 

FFH and LRE are totally different structures. FFH relies on investment income while LRE relies on Underwriting profit. FFH would not have grown as fast if it had used LRE model. LRE model is limited to a small underwriting size, their capital structure will shrink and grow with cycles. The best of both worlds woul be FFH to buy LRE and then take the profits and invest it for us.

 

BeerBaron