LRE.L - Lancashire Holdings Ltd

[giofranchi]

Q2 2013 Results

 

twacowfca, any comment?

 

Thank you,

 

giofranchi

2013-07-25-pr.pdf

q2-2013-fs.pdf

[twacowfca]

Q2 2013 Results

 

twacowfca, any comment?

 

Thank you,

 

giofranchi

 

In absolute terms : so, so results.  Relative to many of their peers, spectacular underwriting results. The adverse development on Costa Concordia is their only significant loss for the quarter. That would not be surprising if they were mainly a cat exposed reinsurer in a low cat loss quarter, but most of their exposure is on numerous policies exposed mainly to attritional losses.

 

An insignificant investment loss of 0.6% in a quarter of dramatically rising rates. A couple of P&C companies with longer duration portfolios yet to report could experience MTM portfolio losses of as much as 5% to 10%. 

 

The Costa Concordia loss development is astonishing.  Technically, it is a property loss, but the fact that it ran aground makes it more like a political/liability loss.  The Italian government's demand that it be refloated off the rocks rather than cut up has turned an attritional loss into a long tailed event.

 

Nevertheless, Lancashire's underwriting results continue to be the best among P&C companies despite that bizarre mini black swan.

 

Rains in the Southeast US have swamped that area as Mr Weather has pumped lots of energy out of the Gulf of Mexico.  This may augur well for a relatively mild storm season in the gulf.  :)

[giofranchi]

The Costa Concordia loss development is astonishing.  Technically, it is a property loss, but the fact that it ran aground makes it more like a political/liability loss.  The Italian government's demand that it be refloated off the rocks rather than cut up has turned an attritional loss into a long tailed event.

 

Nevertheless, Lancashire's underwriting results continue to be the best among P&C companies despite that bizarre mini black swan.

 

I agree… it is astonishing… just like many other things that happen in this country… (twacowfca, I think I will use my Canadian Passport pretty soon! ;D ;D).

Having turned into a long tailed event, do you expect it will cause a significant further drag on results for many quarters to come?

 

giofranchi

 

[twacowfca]

The Costa Concordia loss development is astonishing.  Technically, it is a property loss, but the fact that it ran aground makes it more like a political/liability loss.  The Italian government's demand that it be refloated off the rocks rather than cut up has turned an attritional loss into a long tailed event.

 

Nevertheless, Lancashire's underwriting results continue to be the best among P&C companies despite that bizarre mini black swan.

 

I agree… it is astonishing… just like many other things that happen in this country… (twacowfca, I think I will use my Canadian Passport pretty soon! ;D ;D).

Having turned into a long tailed event, do you expect it will cause a significant further drag on results for many quarters to come?

 

giofranchi

 

Quite the opposite. Anything is possible, but It is hard to imagine further adverse development on this, almost a year and a half after the event.  What typically happens with the London market insurers is that they wind up over reserved for events when there has been repeated adverse development.  Later, the reserves prove to be somewhat redundant and provide a kitty for later release.

[giofranchi]

Quite the opposite. Anything is possible, but It is hard to imagine further adverse development on this, almost a year and a half after the event.  What typically happens with the London market insurers is that they wind up over reserved for events when there has been repeated adverse development.  Then, later the reserves prove to be somewhat redundant and provide a kitty for later release.

 

A pity! ;D

I had hoped to have a clear reason to expect lower share prices in the future, to keep averaging down… Instead, I guess I will have to wait for the next mini black swan…  ;)

 

Thank you, twacowfca!

 

giofranchi

 

[twacowfca]

Quite the opposite. Anything is possible, but It is hard to imagine further adverse development on this, almost a year and a half after the event.  What typically happens with the London market insurers is that they wind up over reserved for events when there has been repeated adverse development.  Then, later the reserves prove to be somewhat redundant and provide a kitty for later release.

 

A pity! ;D

I had hoped to have a clear reason to expect lower share prices in the future, to keep averaging down… Instead, I guess I will have to wait for the next mini black swan…  ;)

 

Thank you, twacowfca!

 

giofranchi

 

Listened to the conference call replay today.  They all but said that they are considerably over reserved for Costa Concordia.  Recent developments suggest that substantial positive reserve development on that loss is much more likely than more adverse development. 

 

The wreck is an eyesore, by no means an environmental disaster.  It has become clear that stimulating the local eonomy is the motive behind the outrageous demands of the Italian Government.  The latest demand is that the ship not only be floated off the rocks, but that it be towed to an Italian port to be broken up despite the greater risk to the environment that would entail than cutting the ship up in situ or refloating it and towing it to a Turkish port where an experienced operation would know how to break it up properly. 

 

Ironically, the Italian port isn't deep enough or equipped to handle that job.  Therefore, the latest half a billion dollars of claims inflation is intended to be redirected toward massive improvements to that port.

 

This is Mickey Mouse stuff that would not be unexpected from a poor Marxist country like Equador or Venezuela.  It should be beneath the dignity of a great nation like Italy.  The claim inflation concerns Protection and Indemnity clubs that cover claims from companies headquartered in many nations.  This claim is ruining the renewal rates for those clubs.

 

The major international reinsurers have had enough.  Munich Re and the other big boys are now taking a great interest in how this claim settles.  Italy is a debtor nation.  Normally, the debtor is on the hook to the creditor.

 

On a happy note: The Lancashire leadership say that their portolio of policies has never been in better shape than now.  Their PMLs are low and their reward/risk has never been better.  :)

[giofranchi]

Thank you, twacowfca!

Do you know if there are transcripts of LRE conference calls available on the web? I now will listen to conference call, but I usually much prefer to read them… :)

 

giofranchi

 

[twacowfca]

Thank you, twacowfca!

Do you know if there are transcripts of LRE conference calls available on the web? I now will listen to conference call, but I usually much prefer to read them… :)

 

giofranchi

 

Go to  lancashiregroup.com

 

This will put you on their homepage.  Click on " listen to earnings call " when it rolls onto the screen (sometimes it is there, and a few seconds later it goes away)

 

Then register and click on the latest conf call audio.  :)

http://www.investorcalendar.com/IC/CEPage.asp?ID=171204

 

[WhoIsWarren]

twacowfca,

 

Did you ever discuss with management whether they considered if the exit from Direct & Facultative had the potential for damaging Lancashire's unique ‘culture’?  Was there any obvious resulting staff fallout?  Were laid off staff (9 of them, significant for the company's size) treated well?

 

You being a student of good management, I'm thinking this is something you've thought about already  ;)

 

I guess one repercussion could be as follows: what does the D&F episode teach underwriters about the implications of passing up poorly priced business?  Do they not have the incentive to sugar-coat opportunities for the morning call?

 

Also, do you have any insights into why they closed the Dubai office?  It was opened to some fanfare, and Brindle about the significant opportunities there were.  What went wrong in the meantime?

 

Cheers

[twacowfca]

twacowfca,

 

Did you ever discuss with management whether they considered if the exit from Direct & Facultative had the potential for damaging Lancashire's unique ‘culture’?  Was there any obvious resulting staff fallout?  Were laid off staff (9 of them, significant for the company's size) treated well?

 

You being a student of good management, I'm thinking this is something you've thought about already  ;)

 

I guess one repercussion could be as follows: what does the D&F episode teach underwriters about the implications of passing up poorly priced business?  Do they not have the incentive to sugar-coat opportunities for the morning call?

 

Also, do you have any insights into why they closed the Dubai office?  It was opened to some fanfare, and Brindle about the significant opportunities there were.  What went wrong in the meantime?

 

Cheers

 

 

Those are very good questions.

 

There are huge advantages of building up a competent, loyal staff.  But when doing that from scratch, as after their IPO, some underwriters may be better than others.  Their D&F business had been increasingly less profitable than their other business.  It 's a one off type of coverage and they came to realize that it was much harder to retain loyal clients who weren't very price sensitive than with their other specialty lines. 

 

I suspect that their B+ underwriters wound up concentrating on the not very profitable D&F business while the "A" team mostly handled a variety of other lines.  Letting them all go at once was probably the kindest way to pare down their staff.  Then, those decent underwriters could say they worked for one of the very best insurers and were let go as a result of discontinuing a line of business.  Brindle says they are doing everything possible to help them find other jobs. Meanwhile, LRE continues to hire other underwriters.

 

Setting up the Dubai office was an idea they had in 2007.  It never worked, and that office never wrote more than a million dollars of premium in a year.

 

When they make a mistake, they recognize it and move on.

[giofranchi]

Q2 2013 Presentation

 

See how property D&F has been replaced by property catastrophe: page 24.

Sincerely, I don't mind this kind of things… if a profitable business stops working, get out of it and find a good replacement! I have done so already two or three times in my still young business career and never had any regrets. Employees might suffer a bit? Of course… and these are never easy decisions to take for the man at the helm… but ultimately you want to see him do what should be done to maximize the firm’s profitability. Well, at least… that’s what I want to see! ;D

 

Also very interesting: underwriting comes first: lessons learned

We stick to the “single peril” higher layers to avoid flood, these perils are not adequately understood, modeled or rated

That’s another way to say the market is inefficient, right? twacowfca, can you comment on that? What exactly are those “single peril” higher layers?

 

Thank you,

 

giofranchi

q2-2013-investor-presentation.pdf

[twacowfca]

Q2 2013 Presentation

 

See how property D&F has been replaced by property catastrophe: page 24.

 

giofranchi

 

This is an example of how they can write more business profitably.  However, they limit the amount of exposure they have to a relatively low projected maximum loss.  If their PML grows beyond a conservative limit, they will offload some of their risk to their sidecar or take advantage of some of the dumb money coming into cat exposure to pick up a bargain ILW or reinsurance.  :)

[twacowfca]

Q2 2013 Presentation

 

See how property D&F has been replaced by property catastrophe: page 24.

Sincerely, I don't mind this kind of things… if a profitable business stops working, get out of it and find a good replacement! I have done so already two or three times in my still young business career and never had any regrets. Employees might suffer a bit? Of course… and these are never easy decisions to take for the man at the helm… but ultimately you want to see him do what should be done to maximize the firm’s profitability. Well, at least… that’s what I want to see! ;D

 

Also very interesting: underwriting comes first: lessons learned

We stick to the “single peril” higher layers to avoid flood, these perils are not adequately understood, modeled or rated

That’s another way to say the market is inefficient, right? twacowfca, can you comment on that? What exactly are those “single peril” higher layers?

 

Thank you,

 

giofranchi

 

For example, their exposure to the Japanese earthquake was limited to property damage from earth movement.  That saved them a bundle as most of their competitors reached for a higher rate and as a result were exposed to flood, a peril that can snowball exponentially.

[giofranchi]

For example, their exposure to the Japanese earthquake was limited to property damage from earth movement.  That saved them a bundle as most of their competitors reached for a higher rate and as a result were exposed to flood, a peril that can snowball exponentially.

 

Ah! Ok! And why do you think those perils are not adequately understood?

 

giofranchi

[WhoIsWarren]

There are huge advantages of building up a competent, loyal staff.  But when doing that from scratch, as after their IPO, some underwriters may be better than others.  Their D&F business had been increasingly less profitable than their other business.  It 's a one off type of coverage and they came to realize that it was much harder to retain loyal clients who weren't very price sensitive than with their other specialty lines. 

 

I suspect that their B+ underwriters wound up concentrating on the not very profitable D&F business while the "A" team mostly handled a variety of other lines.  Letting them all go at once was probably the kindest way to pare down their staff.  Then, those decent underwriters could say they worked for one of the very best insurers and were let go as a result of discontinuing a line of business.  Brindle says they are doing everything possible to help them find other jobs. Meanwhile, LRE continues to hire other underwriters.

 

Thanks.  So if I understand you correctly, if there were any A-rated underwriters in D&F, they were shifted out into more profitable, "core" lines of business?

 

Anyway, from what you're saying, management thought about the implications alright.

 

See how property D&F has been replaced by property catastrophe

 

I also am interested in property cat.  Brindle made an interesting comment on the Q2:12 earnings call.  He said that while D&F is cyclical and clients come and go according to pricing etc., "Property cat, by contrast, is a very mature market, relationships both with brokers and cedents are very important.....And, if you treat your brokers with respect, which we always do, it's very possible to create a strong, sort of through-cycle portfolio."

 

I find this really interesting.  He's effectively saying that there are genuine barriers to entry in property cat, right?  Can the same be said of the rest of the "core" relationships (which make up the c.70% of group annual premiums)?

 

Another thing.  Looking back since IPO, LRE has grown property cat from zero in 2006 and $20m in 2007 to around $100m in 2012, and presumably it's going higher.  Clearly they like this area, but I'm wondering how come it's been built up slowly.  Presumably it's because it takes time to develop the broker / cedent relationships.  And because the company has put a lot of effort into developing relations since IPO -- not just in property cat -- I imagine that there's quite a lot of "latent potential" in the company.  That is, future business for which some cost has already been borne?  Am I losing the run of myself with such thoughts?

 

And finally -- I think this is linked to the above -- it's noticeable how much the net acquisition ratio has increased over time -- from 12% in 2007 to 20% in 2012.  And within the different segments, the net acquisition ratio ranges from c.12% in Property to 30-40% in Marine.  Does a higher net acquisition ratio (in essence, the broker commission, right?) imply stronger broker relationships and higher barriers to entry?

 

I know -- lots of questions in here.  Any help appreciated.

[giofranchi]

I know -- lots of questions in here.  Any help appreciated.

 

Ah… twacowfca, what can I say?! I am surely a much less demanding (and much more superficial!) student!! ;D ;D

 

giofranchi

[WhoIsWarren]

I know -- lots of questions in here.  Any help appreciated.

 

Ah… twacowfca, what can I say?! I am surely a much less demanding (and much more superficial!) student!! ;D ;D

 

giofranchi

 

Well it's true!! I have so many questions about this company and I am afraid that I will eventually break twacowfca's patience and he'll stop responding to me  :-\ :-X

 

I am planning to speak to the company directly to put my many questions to them, but it's much better to be "educated" in these areas beforehand so that I can better judge management responses  ;)

[giofranchi]

I know -- lots of questions in here.  Any help appreciated.

 

Ah… twacowfca, what can I say?! I am surely a much less demanding (and much more superficial!) student!! ;D ;D

 

giofranchi

 

Well it's true!! I have so many questions about this company and I am afraid that I will eventually break twacowfca's patience and he'll stop responding to me  :-\ :-X

 

I am planning to speak to the company directly to put my many questions to them, but it's much better to be "educated" in these areas beforehand so that I can better judge management responses  ;)

 

Ah, well, as far as I am concerned, I am enjoying it very much! So, please don’t stop!! (Sorry twacowfca! ;D ;D)

 

giofranchi

[rjstc]

I know -- lots of questions in here.  Any help appreciated.

 

Ah… twacowfca, what can I say?! I am surely a much less demanding (and much more superficial!) student!! ;D ;D

 

giofranchi

 

 

 

Well it's true!! I have so many questions about this company and I am afraid that I will eventually break twacowfca's patience and he'll stop responding to me  :-\ :-X

 

I am planning to speak to the company directly to put my many questions to them, but it's much better to be "educated" in these areas beforehand so that I can better judge management responses  ;)

 

Ah, well, as far as I am concerned, I am enjoying it very much! So, please don’t stop!! (Sorry twacowfca! ;D ;D)

 

giofranchi

 

+1  Following closely with much interest as always. Ron

[twacowfca]

For example, their exposure to the Japanese earthquake was limited to property damage from earth movement.  That saved them a bundle as most of their competitors reached for a higher rate and as a result were exposed to flood, a peril that can snowball exponentially.

 

Ah! Ok! And why do you think those perils are not adequately understood?

 

giofranchi

 

I think that the peril of flood is becoming better understood after flood caused more than half the damage after hurricane Sandy.  The latest modeling software from RMS does a much better job of modeling flood risk than before that event.  Even so, that software predicts that only 20% of hurricanes with US landfalls will experience flood damage greater than windstorm damage.

 

Brindle and his risk management team are ahead of the curve on these issues with their collegiate approach and long experience.  Charles Mathias was Richard's classmate at Oxford. Their entire underwriting team has been mentored by old hands with 30 years of experience reflecting on unmodeled risks.

[twacowfca]

There are huge advantages of building up a competent, loyal staff.  But when doing that from scratch, as after their IPO, some underwriters may be better than others.  Their D&F business had been increasingly less profitable than their other business.  It 's a one off type of coverage and they came to realize that it was much harder to retain loyal clients who weren't very price sensitive than with their other specialty lines. 

 

I suspect that their B+ underwriters wound up concentrating on the not very profitable D&F business while the "A" team mostly handled a variety of other lines.  Letting them all go at once was probably the kindest way to pare down their staff.  Then, those decent underwriters could say they worked for one of the very best insurers and were let go as a result of discontinuing a line of business.  Brindle says they are doing everything possible to help them find other jobs. Meanwhile, LRE continues to hire other underwriters.

 

Thanks.  So if I understand you correctly, if there were any A-rated underwriters in D&F, they were shifted out into more profitable, "core" lines of business?

 

Anyway, from what you're saying, management thought about the implications alright.

 

See how property D&F has been replaced by property catastrophe

 

I also am interested in property cat.  Brindle made an interesting comment on the Q2:12 earnings call.  He said that while D&F is cyclical and clients come and go according to pricing etc., "Property cat, by contrast, is a very mature market, relationships both with brokers and cedents are very important.....And, if you treat your brokers with respect, which we always do, it's very possible to create a strong, sort of through-cycle portfolio."

 

I find this really interesting.  He's effectively saying that there are genuine barriers to entry in property cat, right?  Can the same be said of the rest of the "core" relationships (which make up the c.70% of group annual premiums)?

 

Another thing.  Looking back since IPO, LRE has grown property cat from zero in 2006 and $20m in 2007 to around $100m in 2012, and presumably it's going higher.  Clearly they like this area, but I'm wondering how come it's been built up slowly.  Presumably it's because it takes time to develop the broker / cedent relationships.  And because the company has put a lot of effort into developing relations since IPO -- not just in property cat -- I imagine that there's quite a lot of "latent potential" in the company.  That is, future business for which some cost has already been borne?  Am I losing the run of myself with such thoughts?

 

And finally -- I think this is linked to the above -- it's noticeable how much the net acquisition ratio has increased over time -- from 12% in 2007 to 20% in 2012.  And within the different segments, the net acquisition ratio ranges from c.12% in Property to 30-40% in Marine.  Does a higher net acquisition ratio (in essence, the broker commission, right?) imply stronger broker relationships and higher barriers to entry?

 

I know -- lots of questions in here.  Any help appreciated.

 

I don't know for a fact that the underwriters who were let go were subpar.  They are probably well above average for the industry, but may not have been a close fit with Lancashire's demanding culture with long hours and collegiate discussion of risks.

 

When Lancashire IPO'd they wrote a lot of retro after rates went through the roof after the four cat 5 hurricane landfalls in the US in 2005. Retro is the most commoditized of all coverage.  Lancashire likes to take advantage of retro when rates are high, but that drives up their PML's.  they have lowered PMLs associated with retro they have written in recent years by offloading most of that risk to their sidecars where their financial partners cover about 80% of that risk.

 

Catastrophe coverage is bound by relationships.  The cedant wants the coverage to be there after "the big one" for the cedant without rate gouging.  That means trust which grows over time.  Please see the previous comment on this thread about what LRE did to cultivate the relationship with the Japanese Insurers after the tragedy there in 2011.

 

Commissions are generally higher when there are lasting relationships than with commoditiezed coverage. But the expense ratio can jump around for other reasons:multiyear deals, renewals, etc. please listen to the last two conference calls.

[WhoIsWarren]

I know -- lots of questions in here.  Any help appreciated.

 

I don't know for a fact that the underwriters who were let go were subpar.  They are probably well above average for the industry, but may not have been a close fit with Lancashire's demanding culture with long hours and collegiate discussion of risks.

 

When Lancashire IPO'd they wrote a lot of retro after rates went through the roof after the four cat 5 hurricane landfalls in the US in 2005. Retro is the most commoditized of all coverage.  Lancashire likes to take advantage of retro when rates are high, but that drives up their PML's.  they have lowered PMLs associated with retro they have written in recent years by offloading most of that risk to their sidecars where their financial partners cover about 80% of that risk.

 

Catastrophe coverage is bound by relationships.  The cedant wants the coverage to be there after "the big one" for the cedant without rate gouging.  That means trust which grows over time.  Please see the previous comment on this thread about what LRE did to cultivate the relationship with the Japanese Insurers after the tragedy there in 2011.

 

Commissions are generally higher when there are lasting relationships than with commoditiezed coverage. But the expense ratio can jump around for other reasons:multiyear deals, renewals, etc. please listen to the last two conference calls.

 

As always, that's very helpful, muchas gracias twacowfca.  I'm sure you know this already, but a lot of people are hanging on your every word on this thread and elsewhere.  I am so keen to learn more from you, but am conscious of not "over-staying my welcome", if you know what I mean.  Please, let me know if my questions are being too demanding of your time!

 

I hadn't gotten around to reading the Q2:13 conference call 'til now -- it's quite a good one, some good explanations of how the industry works and how they're navigating it.  But as always, my still superficial industry / company knowledge means I think I understand most of what's being said, but that last 10% is the real difference between knowing and not knowing!  :(

 

From the Q2 call, it would seem that all or almost all of the insurance portfolio is core (Alex Maloney -- "We use the word core a lot about our insurance portfolio").  And increasingly they think property cat should also be considered core.  Right now, following the exit from retro, they're down to basically writing core business.  [How come they're able to exit retro with no job losses or restructuring?  Probably because they want to re-enter when pricing is good, whereas they don't feel the same way about D&F?]

 

I read on a previous call how core relationships implicitly means that when capital is scarce and good underwriters are thin on the ground, Lancashire doesn't turn the screw on their clients; similarly, when capital is plenty, the clients don’t look to reduce pricing to below adequate levels.  Yet -- and I don't know this for sure -- it would seem that prices in core lines do fluctuate.  In pure commodity lines like retro (and D&F?), pricing can swing wildly (can be up hundreds of percent in a really hard market, right?).  What's the range of pricing in "core" lines over a cycle -- are we talking about plus or minus 5%, or 20%, or what?  I'm trying to understand this area better, as the more stable is pricing in core lines, the more we can have confidence that the expense ratio won't ramp in a very soft market (same costs spread over less premium income).

 

There was a couple of references to attritional losses in the Q1 and Q2 conference calls.  On the Q1 call, Alex Maloney said "Our aversion to the attritional losses, which allows us to maintain a tight operating structure, was well demonstrated...".  I looked up "attritional losses" on Google and I think it's losses below a certain size -- is that correct?  Why are such losses avoided?  Is it because they are costly to deal with and take up too much time for a small team like Lancashire?  If so, this would tie in with the "something on CNN" type of exposures that they write.

 

If I could sneak in a last question while I'm at it, would you have any idea about how many brokerage firms LRE is dealing with, whether such brokers are small, niche operators or if it's mostly Aon/Marsh/Willis?  There was a reference in a previous conference call or Annual Report to the small number of brokers they deal with.  With management saying they are intensifying their marketing efforts, do they mean expanding the number of brokerage firms and brokers they are dealing with, or whether it's more a case of doing more with the people they already have relations with ("hey, you know us already, but did you know that we can also do this and this for you and your client").  Perhaps this isn't important really, I'm just curious as to how the whole process works.

 

Finally, I was also interested to read from the Q2 call that "third party capital.....makes it easy for us to make savings on our outwards reinsurance".  Obvious really, but I hadn't thought of it previously.  Always nice to avoid paying a broker, eh!

[giofranchi]

Hi WhoIsWarren,

can you tell me where you find the transcripts of the conference calls? :)

 

Thank you,

 

giofranchi

[WhoIsWarren]

Hi WhoIsWarren,

can you tell me where you find the transcripts of the conference calls? :)

 

Thank you,

 

giofranchi

 

gio -- I get them from Bloomberg, which it sounds like you don't have.  Capital IQ (also very costly, but less so) does earnings transcripts, though I'm not that familiar with this service and am not sure how good their coverage is.  There may be other cheaper solutions out there, someone on the board might be able to point you in the right direction.

 

I have to say I find reading transcripts quite educational -- some companies more so than others.  I always try to read a number of years of earnings transcripts when I research a stock.  Now, did I say that understand all that I read??  :-[

 

 

[twacowfca]

I know -- lots of questions in here.  Any help appreciated.

 

I don't know for a fact that the underwriters who were let go were subpar.  They are probably well above average for the industry, but may not have been a close fit with Lancashire's demanding culture with long hours and collegiate discussion of risks.

 

When Lancashire IPO'd they wrote a lot of retro after rates went through the roof after the four cat 5 hurricane landfalls in the US in 2005. Retro is the most commoditized of all coverage.  Lancashire likes to take advantage of retro when rates are high, but that drives up their PML's.  they have lowered PMLs associated with retro they have written in recent years by offloading most of that risk to their sidecars where their financial partners cover about 80% of that risk.

 

Catastrophe coverage is bound by relationships.  The cedant wants the coverage to be there after "the big one" for the cedant without rate gouging.  That means trust which grows over time.  Please see the previous comment on this thread about what LRE did to cultivate the relationship with the Japanese Insurers after the tragedy there in 2011.

 

Commissions are generally higher when there are lasting relationships than with commoditiezed coverage. But the expense ratio can jump around for other reasons:multiyear deals, renewals, etc. please listen to the last two conference calls.

 

As always, that's very helpful, muchas gracias twacowfca.  I'm sure you know this already, but a lot of people are hanging on your every word on this thread and elsewhere.  I am so keen to learn more from you, but am conscious of not "over-staying my welcome", if you know what I mean.  Please, let me know if my questions are being too demanding of your time!

 

I hadn't gotten around to reading the Q2:13 conference call 'til now -- it's quite a good one, some good explanations of how the industry works and how they're navigating it.  But as always, my still superficial industry / company knowledge means I think I understand most of what's being said, but that last 10% is the real difference between knowing and not knowing!  :(

 

From the Q2 call, it would seem that all or almost all of the insurance portfolio is core (Alex Maloney -- "We use the word core a lot about our insurance portfolio").  And increasingly they think property cat should also be considered core.  Right now, following the exit from retro, they're down to basically writing core business.  [How come they're able to exit retro with no job losses or restructuring?  Probably because they want to re-enter when pricing is good, whereas they don't feel the same way about D&F?]

 

I read on a previous call how core relationships implicitly means that when capital is scarce and good underwriters are thin on the ground, Lancashire doesn't turn the screw on their clients; similarly, when capital is plenty, the clients don’t look to reduce pricing to below adequate levels.  Yet -- and I don't know this for sure -- it would seem that prices in core lines do fluctuate.  In pure commodity lines like retro (and D&F?), pricing can swing wildly (can be up hundreds of percent in a really hard market, right?).  What's the range of pricing in "core" lines over a cycle -- are we talking about plus or minus 5%, or 20%, or what?  I'm trying to understand this area better, as the more stable is pricing in core lines, the more we can have confidence that the expense ratio won't ramp in a very soft market (same costs spread over less premium income).

 

There was a couple of references to attritional losses in the Q1 and Q2 conference calls.  On the Q1 call, Alex Maloney said "Our aversion to the attritional losses, which allows us to maintain a tight operating structure, was well demonstrated...".  I looked up "attritional losses" on Google and I think it's losses below a certain size -- is that correct?  Why are such losses avoided?  Is it because they are costly to deal with and take up too much time for a small team like Lancashire?  If so, this would tie in with the "something on CNN" type of exposures that they write.

 

If I could sneak in a last question while I'm at it, would you have any idea about how many brokerage firms LRE is dealing with, whether such brokers are small, niche operators or if it's mostly Aon/Marsh/Willis?  There was a reference in a previous conference call or Annual Report to the small number of brokers they deal with.  With management saying they are intensifying their marketing efforts, do they mean expanding the number of brokerage firms and brokers they are dealing with, or whether it's more a case of doing more with the people they already have relations with ("hey, you know us already, but did you know that we can also do this and this for you and your client").  Perhaps this isn't important really, I'm just curious as to how the whole process works.

 

Finally, I was also interested to read from the Q2 call that "third party capital.....makes it easy for us to make savings on our outwards reinsurance".  Obvious really, but I hadn't thought of it previously.  Always nice to avoid paying a broker, eh!

 

Thank you WhoIsWarren for your insightful questions.  I am always happy to help others gain understanding, especially after others have done some homework.  A teacher may think that he is an expert on a subject, but teachers gain wisdom while answering interesting questions.

 

Core business refers to established profitable business that is mutually  beneficial to the client and the insurer.  Retro coverage is basically solicited in an auction that goes to the lowest bidder, subject to an acceptable rating, for the reinsurance needs of another reinsurance company  It is easy to write and doesn't require a large staff as policy limits are frequently high.

 

Lancashire regularly updates its own renewal price index (RPI) in its quarterly and annual reports with the changes from previous periods.  Reading this helps one understand how rates are hardening or softening in their markets.

 

D&F is labor intensive, pricing many one of a kind risks, where there may not be a lasting relationship with a client.  It may take  more staff to write D&F per dollar of premium than for other types of coverage.

 

Attritional losses simply means non catastrophe losses, typically one loss at a time, not widespread losses. Some times an attritional loss may be large as with Costa Concordia, but usually it is relatively small.  A single loss such as a fire may be a catastrophe for the client, but it would not be in the category of catastrophe as defined by the industry even if the loss was large. However, a conflagration or a tornado that destroyed many small homes probably would be categorized as a catastrophe.

 

The big brokerages represent most of the clients Lancashire insures, but there are smaller brokers too. 

 

I hope these answers are helpful.  :)