LRE.L - Lancashire Holdings Ltd

[twacowfca]

Slightly off topic!

 

Can anyone recommend a good book/s that would help me understand the re-insurance business?

 

Thanks!

 

In a nutshell, read the explanatory pages in some of the Montpellier Re annual reports.

[twacowfca]

There are quite a few aspects of LRE's 2013 results that suggest their normalized results should be improved.  It's helpful to view Lancashire and its peers through two windows:

 

The window to low cat years.

 

The window to large cat years, including a supercat year like 2005 occasionally).

 

Historically, the former has out numbered the latter by more than 3:1 measured by impact on international (re)insurers, but large cat years during the last decade have been much more frequent. This is not a bad thing for Lancashire compared to its peers because Lancashire is nimble to increase or decrease premiums written as rates spike or drop and to exploit opportunities. But the many catastrophes have drug down the returns and the price multiples of the whole industry, including Lancashire.  2013 was a low year for cats and the industry laggards stock prices surged while Lancashire, price has been flattish, allowing for the large dividends paid.

 

Oops, got to go. Later, I will explain why I think Lancashire's normalized earnings should be much higher than 2013's results.

 

 

First, the high cat years:

 

Lancashire has demonstrated less fragility to these than peers with similar exposure.  They sailed through the financial crisis and NZ earthquakes without a blip. Thai Floods Deepwater Horizon and Hurricane Sandy losses were a tiny fraction of the losses experienced by others.  Hurricane Ike, Chillean earthquake and Japanese Tsunami losses were substantially lower than their peers in that space.  Brindle's record for 13 years at Lloyd's didn't have a single loss year. 

 

The sensible conclusion is that Lancashire's record and Brindle's record support the idea that their normalized losses from catastrophes may be about half the average losses of other (re)insurers who reinsure those types of risks. Lancashire was able to produce double digit ROE in the years those catastrophes happened, a record no other similar company came close to matching.

 

But. . . Something's missing: Costa Concordia. Technically, that's a property claim, not a catastrophe as defined by the insurance industry, although it's certainly a catastrophe for those who lost love ones. The the amount of that claim is about three times the projected maximum loss from any ship loss for reasons that can be described as politics.  It has been a big loss for Lancashire, and deserves to be counted in assessing their long term ROE. However that long term ROE is still about 19% even with Costa Concordia. Putting Costa Concordia and other one offs in perspective is important for understanding whether 2013 results should be considered normal going forward for a low cat year.

 

To be continued. . .

 

In 2013, Lancashire added $37M to their loss reserves for Costa Concordia to cover the final political demands of the Italian government. That's a one off, the last claim topping off $97M total for Lancashire. Lancashire is not likely to see anything approaching that amount  from any non catastrophe claim in the future.  I think it's sensible to add this back most of this, say $32M, to their bottom line when normalizing results for 2013.

 

Lancashire and Cathedral appear to have had about $10M+ extra administrative costs in Q4 associated with the acquisition and LRE's launch of Kinesis. Lets add back most of this, $8M, because LRE is not a serial acquirer.  By the way dropping those expenses may bring their Q4 CR down from 71% to the low 60's.  :)

 

Now here's the gem. :) It's Cathedral. The financial supplement shows they made $38M last year, and that's with the extra administrative expense of the acquisition.  Yet Lancashire only consolidated their last two months results in Q4 income.

 

Going forward, it would seem that Normalized income for Lancashire in a low cat year may be considerably higher than 2013 results suggest.  :)

 

 

But wait! There 's more! ( sounds like a TV commercial.)

 

Not only is Lancashire's normalized income likely much higher than last year's, but note the high quality of the earnings, almost entirely made from underwriting, not investing. The duration of their portfolio is 1.0 years.  They made lest than 1/2.%  income from investing last year.  That's not much, but they didn't lose money in a year when most other insurance companies had sizeable mark to market losses on their portfolios.  That low duration and some cheap swaption hedges protected them from losing money when interest rates increased last year.  Whenever interest rates rise to a satisfactory level, they'll have cash to invest at a good rate.

[thefatbaboon]

Slightly off topic!

 

Can anyone recommend a good book/s that would help me understand the re-insurance business?

 

Thanks!

 

In a nutshell, read the explanatory pages in some of the Montpellier Re annual reports.

 

Just gone through a couple: do you mean within the 10K?  All I've found for the last few years is a 4 or 5 page letter from the CEO and then the K.

[giofranchi]

Not only is Lancashire's normalized income likely much higher than last year's

, but note the high quality of the earnings, almost entirely made from underling, not investing. The duration of their portfolio is 1.0 years.  They made lest than 1/2.% comprehensive income from investing last year.  That protected them from losing money when interest rates increased last year.  When interest rates increase, it won't hit their portfolio value.

 

Yes! I had noticed that! And, of course, I like it. Lancashire will probably keep on putting cash in our hands, when cash is most useful: during times of trouble! :)

 

Gio

 

[twacowfca]

Slightly off topic!

 

Can anyone recommend a good book/s that would help me understand the re-insurance business?

 

Thanks!

 

In a nutshell, read the explanatory pages in some of the Montpellier Re annual reports.

 

Just gone through a couple: do you mean within the 10K?  All I've found for the last few years is a 4 or 5 page letter from the CEO and then the K.

 

No, their annual report about three years ago had a good summary of how reinsurers work and a good glossary of industry terms.  That may be a regular feature; I think I've seen that more than once in their annual reports.  A bound copy will be better for retention than accessing it online.  Peruse it; fondle it. Mark it up. Then you'll retain it.  :)

[thefatbaboon]

Slightly off topic!

 

Can anyone recommend a good book/s that would help me understand the re-insurance business?

 

Thanks!

 

In a nutshell, read the explanatory pages in some of the Montpellier Re annual reports.

 

Just gone through a couple: do you mean within the 10K?  All I've found for the last few years is a 4 or 5 page letter from the CEO and then the K.

 

No, their annual report about three years ago had a good summary of how reinsurers work and a good glossary of industry terms.  That may be a regular feature; I think I've seen that more than once in their annual reports.  A bound copy will be better for retention than accessing it online.  Peruse it; fondle it. Mark it up. Then you'll retain it.  :)

 

I'm all ready to print it out and fondle the hell out of it but I can't seem to find it!  (this is an issue I've come upon in other areas of life)

[JBird]

On page 166 of the '13 annual report, section 29 details the company's statutory capital requirements. It indicates that Lancashire "LICL" + "LUK" in aggregate had $1.4 billion in capital & surplus at year-end, versus the required minimum of $275 million.

 

Theoretically, could this roughly $1.1 billion in excess capital be distributed to shareholders without restricting current policy writing volume?

[CorpRaider]

You guys sure are circumspect about the divvy slash.  I thought this had attracted a pretty yield focusd investor base that would/will sell first and ask questions later in response to a divvy cut.

[ERICOPOLY]

But I would never bet against Mr. Loeb in the long run. On the contrary, I would gladly partner with him. And I probably will do in the not too distant future. :)

 

This guy?

 

"Prem Watsa bend over the hedge funds have something special for you."

 

http://www.cnbc.com/id/42035716

 

[sys]

You guys sure are circumspect about the divvy slash.  I thought this had attracted a pretty yield focusd investor base that would/will sell first and ask questions later in response to a divvy cut.

 

unfortunately, that doesn't seem to have been the case.

 

i'd guess that the volatile nature of the dividend has kept the most reactionary dividend investors away.

[giofranchi]

But I would never bet against Mr. Loeb in the long run. On the contrary, I would gladly partner with him. And I probably will do in the not too distant future. :)

 

This guy?

 

"Prem Watsa bend over the hedge funds have something special for you."

 

http://www.cnbc.com/id/42035716

 

Sure… He was short FFH… Mr. Watsa cannot be too fond of him, right? Yet, you very well know how difficult it really is not to be skeptical about FFH during its “lean years”… ;) And despite that mistake, Mr. Loeb is a self-made billionaire, with an outstanding track record of building wealth for almost 20 years now, who writes constantly and consistently about his investment strategies and ideas. He is still young and will be at the top of his game for decades to come. Since I have followed him, I have witnessed many good and very successful investment thesis, and no major blunder on his part.

Now he has partnered with Mr. Berger, who has an outstanding track record as an insurance and reinsurance underwriter himself: and imo that’s exactly what an astute entrepreneur would have done. :)

Anyway, there is a TPRE thread: if you wish, we could continue this discussion over there.

 

Gio

 

[CorpRaider]

And now they are pals in BBRY, eh?  Stranger than fiction, indeed.  hah! 

 

http://www.ft.com/intl/cms/s/0/648ab300-95c9-11e3-9fd6-00144feab7de.html#axzz2tgwjKLHd

[giofranchi]

The Kinesis facility executes its first “Special Draw” to underwrite off-cycle collateralised reinsurance

 

19 Feb 2014

 

Lancashire Holdings Limited ("Lancashire" or the "Company") has today announced that Kinesis Capital Management Limited ("KCM") has carried out its first "special draw". Investors were invited to subscribe in Kinesis Holdings I Limited ("Kinesis Holdings") to enable its subsidiary Kinesis Reinsurance I Limited ("Kinesis Re") to underwrite fully collateralised reinsurance business outside the customary reinsurance market renewal season. This follows the successful fund-raising conducted earlier in the year, which permitted Kinesis Re to underwrite its first tranche of fully collateralised multi-class reinsurance agreements incepting around 1 January 2014 with combined aggregate limits in excess of USD 250 million.

 

Darren Redhead, KCM's Chief Executive Officer, said:

 

"Our stated strategy is to allow investors access to the collateralised reinsurance market on a regular and opportunistic basis. I am very pleased that within a week of negotiating an indicative order with a client, Kinesis had secured firm funding commitments from its existing investors. This deal demonstrates the flexibility of the new Kinesis facility and our ability to move rapidly in aligning our investors' capital with the bespoke reinsurance needs of our clients. Given the limited size of this first special draw we were able to work with our advisors to fulfil demand with our existing investors but expect to be able to further expand our panel of investors later in the year in preparation for the mid-year reinsurance renewal season."

 

http://www.lancashiregroup.com/media/releases/2014/19-02-2014.aspx

 

 

Gio

 

[accutronman]

Credit Suisse latest take on LRE. TP of 860 p

 

In line 4Q13 earnings, special divi disappointed: Lancashire reported a

solid 4Q13 PBT figure of $55mn, bang in line with consensus. However, the

shares reacted negatively in response to a proposed special dividend of just

$0.2 per share. Post the results we have made minor upward adjustments to

our EPS expectations for 2014/15, reflecting the increased proportion of

earnings from Kinesis. Our TP of 860p implies 18% upside from the current

share price.

■ Reaction to near term capital return overdone – remain Outperform:

The level of special dividend paid at the end of 2013 was dependent upon

the speed of integration of Cathedral. Therefore we view the near term figure

as less important than future guidance on the group's capital management

policy. Management commentary stated clearly that Lancashire expects to

pay out most (if not all) of its earnings going forward. With the commitment

to capital return unchanged and the stock trading on a 2014E dividend yield

of 10.7%, we believe any worries over the dividend policy are overstated.

We anticipate that the launch of Kinesis, as well as the diversifying benefit of

the Cathedral book within the group portfolio, may also prove to be positive

for the stock, bringing greater earnings stability over 2014/15.

■ Not expensive relative to peers: Lancashire trades on 8.2x 2015E

earnings and c1.8x Spot TNAV for a RoTE of 20.5%. However, this is not

out of line with peers such as Amlin (U/P) on 10.2x and 1.6x for returns of

14.8%, while also offering a greater yield.

[Ian L]

The Kinesis facility executes its first “Special Draw” to underwrite off-cycle collateralised reinsurance

 

19 Feb 2014

 

Lancashire Holdings Limited ("Lancashire" or the "Company") has today announced that Kinesis Capital Management Limited ("KCM") has carried out its first "special draw". Investors were invited to subscribe in Kinesis Holdings I Limited ("Kinesis Holdings") to enable its subsidiary Kinesis Reinsurance I Limited ("Kinesis Re") to underwrite fully collateralised reinsurance business outside the customary reinsurance market renewal season. This follows the successful fund-raising conducted earlier in the year, which permitted Kinesis Re to underwrite its first tranche of fully collateralised multi-class reinsurance agreements incepting around 1 January 2014 with combined aggregate limits in excess of USD 250 million.

 

Darren Redhead, KCM's Chief Executive Officer, said:

 

"Our stated strategy is to allow investors access to the collateralised reinsurance market on a regular and opportunistic basis. I am very pleased that within a week of negotiating an indicative order with a client, Kinesis had secured firm funding commitments from its existing investors. This deal demonstrates the flexibility of the new Kinesis facility and our ability to move rapidly in aligning our investors' capital with the bespoke reinsurance needs of our clients. Given the limited size of this first special draw we were able to work with our advisors to fulfil demand with our existing investors but expect to be able to further expand our panel of investors later in the year in preparation for the mid-year reinsurance renewal season."

 

http://www.lancashiregroup.com/media/releases/2014/19-02-2014.aspx

 

 

Gio

 

Interesting. I wonder what size it was - hopefully large.

[giofranchi]

Credit Suisse latest take on LRE. TP of 860 p

 

Thank you for this one. :)

 

Gio

[twacowfca]

The Kinesis facility executes its first “Special Draw” to underwrite off-cycle collateralised reinsurance

 

19 Feb 2014

 

Lancashire Holdings Limited ("Lancashire" or the "Company") has today announced that Kinesis Capital Management Limited ("KCM") has carried out its first "special draw". Investors were invited to subscribe in Kinesis Holdings I Limited ("Kinesis Holdings") to enable its subsidiary Kinesis Reinsurance I Limited ("Kinesis Re") to underwrite fully collateralised reinsurance business outside the customary reinsurance market renewal season. This follows the successful fund-raising conducted earlier in the year, which permitted Kinesis Re to underwrite its first tranche of fully collateralised multi-class reinsurance agreements incepting around 1 January 2014 with combined aggregate limits in excess of USD 250 million.

 

Darren Redhead, KCM's Chief Executive Officer, said:

 

"Our stated strategy is to allow investors access to the collateralised reinsurance market on a regular and opportunistic basis. I am very pleased that within a week of negotiating an indicative order with a client, Kinesis had secured firm funding commitments from its existing investors. This deal demonstrates the flexibility of the new Kinesis facility and our ability to move rapidly in aligning our investors' capital with the bespoke reinsurance needs of our clients. Given the limited size of this first special draw we were able to work with our advisors to fulfil demand with our existing investors but expect to be able to further expand our panel of investors later in the year in preparation for the mid-year reinsurance renewal season."

 

http://www.lancashiregroup.com/media/releases/2014/19-02-2014.aspx

 

 

Gio

 

Interesting. I wonder what size it was - hopefully large.

 

They stated it wasn't large, probably about $50 million. Kinesis, as with its predecessor, Saltire, probably has a limit of about $50M per client. Then, if one client takes a big hit, the vehicle might show a small profit for that year.

 

The big news is that Kinesis finally seems on the way to realizing its potential as a unique, bespoke product that is not easily matched, especially by ILS providers that have no skill in doing the necessary work to customize a competing product.

The upcoming mid year placements could grow nicely.  Goldman Sacks is feeding investors to them.  Lancashire should be able to ramp this up if it continues to gain traction.

[WhoIsWarren]

I think I remember from a while back someone requesting the chart of Brindle's Lloyd's track record.  I found it in an old investor presentation (Dec 2009), page 46 of the link below.  For die-hard Lancashire-ites, it's worth quickly flicking through the presentation -- there's a few nice examples of how they do business.

 

I came across the link by accident.  On the recent Q4:13 earnings call, Alex Maloney mentioned that thy had "agreement party status on 80% of our business written in 2013".  I wanted to find what this number was a few years ago.  Well it was 62% in 2009.  This, combined with the "36% increase in submissions to LICL and LUK, excluding the D&F line, which is in run-off....", shows LRE's continued (if not increasing) "relevance" in this new alternative insurance world.

 

http://www.lancashiregroup.com/~/media/Files/L/Lancashire-Group/Attachments/presentations/2009/2009-12-16.pdf

[giofranchi]

I think I remember from a while back someone requesting the chart of Brindle's Lloyd's track record.  I found it in an old investor presentation (Dec 2009), page 46 of the link below.  For die-hard Lancashire-ites, it's worth quickly flicking through the presentation -- there's a few nice examples of how they do business.

 

I came across the link by accident.  On the recent Q4:13 earnings call, Alex Maloney mentioned that thy had "agreement party status on 80% of our business written in 2013".  I wanted to find what this number was a few years ago.  Well it was 62% in 2009.  This, combined with the "36% increase in submissions to LICL and LUK, excluding the D&F line, which is in run-off....", shows LRE's continued (if not increasing) "relevance" in this new alternative insurance world.

 

http://www.lancashiregroup.com/~/media/Files/L/Lancashire-Group/Attachments/presentations/2009/2009-12-16.pdf

 

Thank you, WhoIsWarren!

Much appreciated as usual! :)

 

Gio

[WhoIsWarren]

I came across this blog recently: www. http://deconstructingrisk.com

 

The writer has done a couple of Lancashire reports, the latest of which followed the year-end results.  From reading, I would say the writer works in the insurance industry, or at the very least keenly follows it.  As such there are some good insights and overall I think the report / comments are worth reading.

 

http://deconstructingrisk.com/2014/02/18/lancashire-so-much-to-answer-for/

 

 

[giofranchi]

I came across this blog recently: www. http://deconstructingrisk.com

 

The writer has done a couple of Lancashire reports, the latest of which followed the year-end results.  From reading, I would say the writer works in the insurance industry, or at the very least keenly follows it.  As such there are some good insights and overall I think the report / comments are worth reading.

 

http://deconstructingrisk.com/2014/02/18/lancashire-so-much-to-answer-for/

 

 

 

WhoIsWarren,

you already know how I see this thing: imo a 19% ROE at 1.5xBV is a very good investment.

But let’s suppose ROE is coming down…

LRE for me still is a “strategic investment”. And, studying great entrepreneurs of the past, one of the lessons that is very clear to me is they never were too cheap, when a strategic investment was involved. They were always willing to pay up for a strategic investment.

Why LRE is strategic? Because you want to possess a cash machine. And because LRE has scale, at least if compared to the equity of my firm. I own two cash machines, but they both lack scale. And, as the equity of my firm gets larger, the relevance of the cash they will provide me will gradually shrink. Not so with LRE: all I have to do is to purchase more shares.

Therefore, what I ask myself follows: is there a public company that will distribute to its owners more cash than LRE, and which enjoys a better tax regimen than LRE?

As long as the answer is no, and as long as LRE share price comes down, I will keep on buying. :)

 

Gio

 

[Aurelius]

I've read this thread with great interest. Thanks to twacowfca for taking time to answer and educate. And thanks to Giofranchi and others for questions and good discussions!

 

I've bought into LRE as well. I like that I'm getting a high quality shareholder friendly company operated by an excellent manager for a decent price:

• ROE 19% (possibly higher) for 1.53 PB with modest growth seems pretty good in this environment. Especially considering low future expected returns based on CAPE, Tobin Q and GMO's work. Of course this assumes ROE=19% or higher is sustainable.
  

 

Via blog:

So, do I make an exception for Lancashire? First, even though the share price hasn’t performed well and currently trades around Stg7.30, the stock remains highly valued around 180% tangible book.

 

Why is the blogger focusing on 1,8% tangible book as opposed to book value?

[WhoIsWarren]

 

And, studying great entrepreneurs of the past, one of the lessons that is very clear to me is they never were too cheap...

 

Gio

 

And that's the trouble with investing, isn't it.  If we only knew for certain who those damned "great entrepreneurs" were, we'd do just fine.... :-)

 

It's a bit like those "7 habits of highly effective people".  It's important to study those unsuccessful people too!

 

And on that topic, anyone come across a good book on business / entrepreneurial failures?  I read Don Keough's "The Ten Commandments for Business Failure", which was good but not quite what I was looking for. He takes what went right for Coke and surmised that not doing these things would lead to failure.  I'm looking for the guys that on the face of it did everything right, but still failed -- not due to bad luck, but because our idea of what makes a successful person is misplaced.

 

 

Anyhow, let's hope that Brindle is one of the good guys :-)

[giofranchi]

And that's the trouble with investing, isn't it.  If we only knew for certain who those damned "great entrepreneurs" were, we'd do just fine.... :-)

 

I was thinking about Mr. Rockefeller: building Standard Oil, he very rarely bargained hard to obtain the best price at all costs… Instead, he knew where he was going and was willing to pay up (not to overpay!) to get there.

 

Anyhow, let's hope that Brindle is one of the good guys :-)

 

But I was not referring to Mr. Brindle as a strategist… I was talking about ME! ;)

 

Gio

[WhoIsWarren]

Why is the blogger focusing on 1,8% tangible book as opposed to book value?

 

I guess tangible is the more conservative measure of net worth i.e. no value attributed to the surplus over book value paid for Cathedral.

 

Or perhaps he uses it because, for insurance capital purposes, intangible assets are not admissible?

 

At the end of the day, when we think about a book multiple, we must have an idea about what RoE the capital can generate.  The RoTE and RoE will relate to P/TB and P/B respectively -- either way it makes no difference to me.

 

I respect blogger's view that LRE is expensive.  It depends on one's circumstances, one's risk appetite.....or to put it in a CAPM framework, one's cost of capital.  He may just have a higher threshold than you and a number of other holders on this thread.