LRE.L - Lancashire Holdings Ltd

[augustabound]

From what I've read, the bulk of the bill will be paid by municipal and provincial governments (Toronto and Ontario).

And of course hydro companies will raise rates to compensate for their "loses".

 

I haven't heard of much in the way of damages from trees falling or basements flooding..............................or freezing.

 

 

[original mungerville]

Gio,

 

Despite being one of the original board members from 10 years ago, I have never attended the dinner (although I made it to the annual meeting a couple of times).  In any case, I will go this year to the dinner for the first time. I am looking forward to it and would be pleased to meet you there.

[steph]

Hi,

I haven't read all 78 pages on this board concerning Lancashire, so maybe this has already been discussed.

I noticed that Crispin Odey, who is a well known and succesful hedge fund manager in London, is short Lancashire. This is maybe just to cover another long, but Crispin being very well connected in the London market, I thought it was important to mention.

[giofranchi]

Hi,

I haven't read all 78 pages on this board concerning Lancashire, so maybe this has already been discussed.

I noticed that Crispin Odey, who is a well known and succesful hedge fund manager in London, is short Lancashire. This is maybe just to cover another long, but Crispin being very well connected in the London market, I thought it was important to mention.

 

Well, of course, this is not good news… Did Mr. Odey explain the reasons he is short LRE? Without knowing his rationale, it is very difficult to judge how relevant this is to the LRE thesis discussed on this thread… Maybe, twacowfca already knew about this and could shed some light on Mr. Odey’s reasons.

Anyway, thank you for pointing this out! :)

 

Gio

 

[giofranchi]

In any case, I will go this year to the dinner for the first time. I am looking forward to it and would be pleased to meet you there.

 

Wonderful! It will be great to meet you there! :)

 

Cheers,

 

Gio

 

 

 

[twacowfca]

Hi,

I haven't read all 78 pages on this board concerning Lancashire, so maybe this has already been discussed.

I noticed that Crispin Odey, who is a well known and succesful hedge fund manager in London, is short Lancashire. This is maybe just to cover another long, but Crispin being very well connected in the London market, I thought it was important to mention.

 

That's interesting.  Where did you get that information?  Is there something in the UK like the required reporting of holdings  to the SEC in the US? Or the short interest report?

 

In the absence of facts, one might speculate that there have been lots of reasons for a hedge fund to be short LRE in the past year. In early 2012 Lancashire had gotten ahead of it's peers on valuation (if one thinks price movement is a random walk).  ??? That's reason enough for most hedge funds to short a stock, especially when the valuation of individual stocks was highly correlated as was the case during the first half of 2012.

 

Then, in the second half of 2012, Lancashire's peers who have been somewhat more volatile in their results, put up good underwriting numbers in a low  catastrophe period.  Meanwhile, Lancashire floated a stock offering.  That's always a good reason to short a stock, especially when a Greek Chorus is chanting that Lancashire's model is broken.

 

In my opinion, all of the above is short term noise.  Time will tell. :)

 

Oh, by the way, Lancashire paid two regular dividends plus two special dividends in 2012 if I'm not mistaken.  That's another way to return value to shareholders than through price action.  :)

[giofranchi]

In my opinion, all of the above is short term noise.  Time will tell. :)

 

I agree 100%. Though, it would be interesting to know Mr. Odey’s true reasons!

 

Gio

 

[steph]

I saw it on my Bloomberg terminal when looking at all the shareholders of LRE.

Tomorrow at the office I will look at this again and I will tell you how many he was short.

[cr6196]

You can see how many he is short by looking at the fsa short disclosure spreadsheet....you can get it through google although I can't remember how atm (it isn't easily searchable)...either way, you can get the same info at shorttracker.co.uk.

 

On Odey, this is a fairly big position worth about £16m (as of Friday) and it is, from what I have seen, fairly typical of them. I have seen them take a range of shorts but one tactic is definitely to look at value-ish stocks that are cheap by traditional metrics but have little growth potential (for example they are also short of Greegs and Admiral). To be clear, they definitely aren't short-term holders and are probably one of the most sophisticated investors in London. What I mean by this is that they often not only have a good understanding of companies but they understand what other people think of those companies. In this case, they will understand why people want to own Lancashire and they are actively going against this. I suspect the angle here, as suggested earlier, is that Lancashire are not going to be able to find ways to invest capital and so will not be able to grow. It is fairly easy to place the acquisition of Cathedral in this light and the general market is clearly quite liquid atm. In other words, it isn't very hard to see why someone would be short (it rarely is with value stocks). I think these positions can work out very well but I think they have misunderstood the staying power of shareholders here (for example, if LRE got into trouble I don't see this going down much more than 10/15%)...although it is difficult to see clear upside/catalyst from here. I don't think this would be part of a pair trade either (just to be clear).

[link01]

That's interesting.  Where did you get that information?  Is there something in the UK like the required reporting of holdings  to the SEC in the US? Or the short interest report?

 

found a little something about this indirectly here:

 

http://www.marketfolly.com/2012/11/hedge-fund-short-positions-in-uk-lone.html

 

snippet:

 

"...The new rules require that where a fund's net short position reaches 0.2% of the issued share capital of a company they need to privately notify the FSA. Notification is also required again at each 0.1% increment after that. This is in relation to both increases and decreases of the position.  The obligation to privately report positions also extends to net short positions in sovereign debt and positions in uncovered sovereign credit default swaps (CDS).

 

ESMA has published a list of the different thresholds for each Member State in these instruments.  Public disclosure is required for net short positions of shares that reach 0.5% of the issued share capital of the company concerned and each 0.1% increment above that.  Additionally disclosure is required publically when the position subsequently falls below 0.5%."

 

[eggbriar]

you can find it here:

 

http://www.fca.org.uk/firms/markets/international-markets/eu/short-selling-regulations/notifications-disclosures

 

look for the spreadsheet download on the upper right side

 

Odey, 1.14% position, initiated 10/16/13

 

also, Och-Ziff, .56%, initiated 11/29/13

[steph]

Odey is short 2.074.030 shares. They added slightly to their short in the last quarter.

Och-Ziff is short 1.017.961 shares.

Moore Capital is short 873.276 shares.

 

Compared to what they manage these positions are not very significant.

[twacowfca]

You can see how many he is short by looking at the fsa short disclosure spreadsheet....you can get it through google although I can't remember how atm (it isn't easily searchable)...either way, you can get the same info at shorttracker.co.uk.

 

On Odey, this is a fairly big position worth about £16m (as of Friday) and it is, from what I have seen, fairly typical of them. I have seen them take a range of shorts but one tactic is definitely to look at value-ish stocks that are cheap by traditional metrics but have little growth potential (for example they are also short of Greegs and Admiral). To be clear, they definitely aren't short-term holders and are probably one of the most sophisticated investors in London. What I mean by this is that they often not only have a good understanding of companies but they understand what other people think of those companies. In this case, they will understand why people want to own Lancashire and they are actively going against this. I suspect the angle here, as suggested earlier, is that Lancashire are not going to be able to find ways to invest capital and so will not be able to grow. It is fairly easy to place the acquisition of Cathedral in this light and the general market is clearly quite liquid atm. In other words, it isn't very hard to see why someone would be short (it rarely is with value stocks). I think these positions can work out very well but I think they have misunderstood the staying power of shareholders here (for example, if LRE got into trouble I don't see this going down much more than 10/15%)...although it is difficult to see clear upside/catalyst from here. I don't think this would be part of a pair trade either (just to be clear).

 

Thank you cr6196 for your excellent intelligence.

 

It seems that their horizon is at least medium term, but very different than our long term view.  They are short two of the very best companies, considering their long term records, run by their founders. That's not a good long term bet.  It's reminiscent of the large short position in LRE in Q3 of 2008 before it took off in the last quarter of 2008 when everything else was going south.

 

Is there any money to be made by lending out LRE shares?  We have a £ denominated holding through a full service broker in various accounts and funds that is not inconsiderable.

 

What's their short thesis on Admiral?

[Ian L]

Aside from sharp losses due to a huge catastrophe, we might say the downside to the valuation of the shares could be about book value (though many of us here would say that would be extremely cheap for Lancashire). As has been discussed in this thread, Lancashire tend to be quite good at limiting their downside to potential catastrophes compared to their peers.

However the cost of carry including short stock rate may be close to 10% depending upon special dividends. Odey needs Lancashire to revalue quickly, as if it took 5 years for it to go down, then even if it went down to book value he might be sitting on a loss. I wonder if he has seen any catalysts.

 

Alternatively, does anyone know if he has a long position in another insurance company, possibly one trading closer to book value?

[giofranchi]

Sincerely, I don’t understand… Mr. Odey might be one of the most sophisticated investors in London… but I don’t understand anyway… Yes, I am clearly a bit dumb! ::)

Why do people continue to value LRE on a BV basis? When it is selling for just 10 times ttm earnings? And when those earnings are all fcf? And when LRE enjoys a wonderful tax regime? Even if it doesn’t grow anymore (and I think it is an extremely pessimistic point of view… I would never bet against someone like Mr. Brindle!), at these prices you get an owners earning yield of 10%. Why go short something that earns double digits, when you can find true overvaluation everywhere else in this market? ???

 

Gio

 

[WhoIsWarren]

Does anyone know if he has a long position in another insurance company, possibly one trading closer to book value?

 

I've dug a little bit around Bloomberg.  From what I can tell, Odey has reported positions in 50 stocks, with longs totalling around U$2.2bn and shorts totalling U$1.4bn.  Odey has something like U$11bn AuM, so clearly we're not getting anything like the full picture.

 

Among its biggest short positions are Peugeot and fund managers Aberdeen Asset Management and Ashmore Group (U$132m, U$130m and U$108m respectively, compared to the U$26m short in LRE).  Like Lancashire and Admiral, Ashmore is an owner operator, with Mark Coombs owning over 40% of the company.  And like Lancashire, Ashmore trades on an undemanding P/E. (My knowledge of Ashmore ends there!).

 

As for its reported longs, I can't see any obvious insurance offsets to the Lancashire short.

 

Gio, I don't understand Odey's position either, but you know as well as I do that they aren't simply looking at P/B and ignoring the TTM P/E.  For whatever reason, they obviously expect profitability to fall -- perhaps dramatically.

 

And as for thinking that LRE couldn't fall more than 10-15% if it got into trouble, to that I would say: rubbish! Sorry cr6196, but that sounds like a major case of anchoring.  Never forget that every stock could fall 100%.  Let's not assume that Odey is less smart than us -- "medium-term investors".  I would bet someone in that firm has read all 78 pages of this thread and has simply come to a different conclusion.

 

I know I haven't added much to this conversation - you all know this already.  I just thought I'd "gently" caution against hubris! 

 

[And I'm long LRE -- I'm on your side.  So don't shoot the messenger]

[giofranchi]

Gio, I don't understand Odey's position either, but you know as well as I do that they aren't simply looking at P/B and ignoring the TTM P/E.  For whatever reason, they obviously expect profitability to fall -- perhaps dramatically.

 

And as for thinking that LRE couldn't fall more than 10-15% if it got into trouble, to that I would say: rubbish! Sorry cr6196, but that sounds like a major case of anchoring.  Never forget that every stock could fall 100%.  Let's not assume that Odey is less smart than us -- "medium-term investors".  I would bet someone in that firm has read all 78 pages of this thread and has simply come to a different conclusion.

 

I know I haven't added much to this conversation - you all know this already.  I just thought I'd "gently" caution against hubris! 

 

[And I'm long LRE -- I'm on your side.  So don't shoot the messenger]

 

Well, I guess you are right. And I have no problem in revaluing an investment of mine… if and when the facts change. Unfortunately, that “perhaps dramatically fall in profitability” Mr. Odey expects is not justified by any of the facts I am aware about. After more or less 25 years of great profitability, Mr. Brindle all of a sudden becomes just average… Of course, it is possible that the future parts ways with the past, even dramatically, but in the absence of clear and well founded reasons for it to do so, we should act as if past and future do rhyme.

 

Gio

 

[cr6196]

I believe that the reason Odey is short has nothing to do with earnings, Mr.Brindle, or anything else. Rather they expect that at some point in the future investors will get sick of the lack of growth and sell. The story with Admiral is almost exactly the same (although Admiral has been more successful I think). Admiral is very well-run but the industry is not moving the right way so it cannot grow. Therefore, it doesn't matter if you have the best management because you know they won't try and push grow in a soft cycle. Admiral trades at a premium to comps so Odey is betting that it will realign. I agree that in the very long-term this is a bad trade, the point though is that you might have to wait a very long time and by this point your return is destroyed. I see more sense in shorting LRE as Admiral has proven that it can reinvest large amounts of money. Again though, I believe Odey have underestimated the staying power of LRE investors and the negative carry must be killing them.

 

The reason they aren't short higher valuation stocks is because they aren't very good shorts. I am fairly sure that Ashmore isn't the same type of position as it occupies a very different position in the mindset of investors and they are short of Aberdeen too (as mentioned before, this is a fairly big part of how they short i.e. opinions, not companies). This isn't a pair trade because Odey, generally, don't do pair trades (afaik, UK L/S funds in general don't like pair trades).

 

Finally, if you think that the downside here is 100% then I am not totally sure why you would invest. This obviously depends on what you think the upside might be but, in most cases, you would need to think you were right over 90% of the time to justify an investment over the long-term. It isn't anchoring, it is just thinking about risk and return properly (imo).

 

(Another point on Admiral I didn't include as it doesn't compare well with Lancashire is the pressure from the Competition Commission on "additional service revenues". I doubt that this is the reason for the Odey short, Esure is more exposed to these trends, but is something to consider).

[WhoIsWarren]

Unfortunately, that “perhaps dramatically fall in profitability” Mr. Odey expects is not justified by any of the facts I am aware about. After more or less 25 years of great profitability, Mr. Brindle all of a sudden becomes just average… Of course, it is possible that the future parts ways with the past, even dramatically, but in the absence of clear and well founded reasons for it to do so, we should act as if past and future do rhyme.

Gio

 

I agree.  That's why I own the stock.

 

Never forget that every stock could fall 100%.

 

Finally, if you think that the downside here is 100% then I am not totally sure why you would invest.

 

cr6196......I should apologise for wading in with big boots.  I'm not trying to pick a fight here, I'm just stating the fact that every company could fall to zero.  I think the probability of LRE going to zero is very (very very) small.  But 10-15% is surely not the extent of how much LRE could fall in value if it got into trouble.

 

My LRE thesis is along the lines of most others on the thread -- great people / culture who will likely figure things out over time and create lots of value.  They could get into trouble along the way -- perhaps fatally so -- but on a (non-scientifically calculated) probability-weighted basis I believe it's good / great value here.

 

Hope that's clear.

[twacowfca]

May I express my heartfelt appreciation to the recent posters who have provided a much needed reality check on enthusiasm for Lancashire.  The best way to evaluate a thesis is to attempt to falsify it, not by seeking confirmation of possible bias.  Once again, many thanks.

 

May I add that my enthusiasm is undiminished.

[cr6196]

Unfortunately, that “perhaps dramatically fall in profitability” Mr. Odey expects is not justified by any of the facts I am aware about. After more or less 25 years of great profitability, Mr. Brindle all of a sudden becomes just average… Of course, it is possible that the future parts ways with the past, even dramatically, but in the absence of clear and well founded reasons for it to do so, we should act as if past and future do rhyme.

Gio

 

I agree.  That's why I own the stock.

 

Never forget that every stock could fall 100%.

 

Finally, if you think that the downside here is 100% then I am not totally sure why you would invest.

 

cr6196......I should apologise for wading in with big boots.  I'm not trying to pick a fight here, I'm just stating the fact that every company could fall to zero.  I think the probability of LRE going to zero is very (very very) small.  But 10-15% is surely not the extent of how much LRE could fall in value if it got into trouble.

 

My LRE thesis is along the lines of most others on the thread -- great people / culture who will likely figure things out over time and create lots of value.  They could get into trouble along the way -- perhaps fatally so -- but on a (non-scientifically calculated) probability-weighted basis I believe it's good / great value here.

 

Hope that's clear.

 

For 1 in 100 wind and 1 in 250 quake their probable maximum loss as of Jan 2013 was slightly under 15%. Given that the book has shrunk since then I expect this is somewhat lower now. That (and my understanding of how other people view the stock) is what my estimate was based on.

[giofranchi]

May I add that my enthusiasm is undiminished.

 

Yes! And let me add one thing more: I would gladly welcome a substantial decline in its price. LRE is the best alternative to an wholly owned operating business, that can be found and bought on any stock exchange. At least, as far as I know. Those who think it is important and very useful to continuously replenish their cash reserve, but do not possess a thriving operating business, and don’t have the resources yet to buy one, should seriously welcome a substantial decline in its price. ;) (Ah! And, of course, then take advantage of it!! :) )

 

Gio

 

[giofranchi]

If this thing goes down to 735 GBp, I will buy more. :)

 

Gio

[WhoIsWarren]

If this thing goes down to 735 GBp, I will buy more. :)

 

Gio

 

[shhh! Keep it down.  Don't you know that computers are scraping information from websites such as these and are -- as we speak -- devising algorithms to cunningly profit from this information.]

 

Ehhhh......hi Gio......you mean 635 or perhaps 435, right??  ;)

[giofranchi]

[shhh! Keep it down.  Don't you know that computers are scraping information from websites such as these and are -- as we speak -- devising algorithms to cunningly profit from this information.]

 

Ouch!! … I am so naive … !!  ;D ;D

 

Gio