LRE.L - Lancashire Holdings Ltd

[WhoIsWarren]

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

 

Ha! I get you now.

 

In years to come I am sure we will be reading books about you too.... ;-)

[giofranchi]

Ha! I get you now.

 

In years to come I am sure we will be reading books about you too.... ;-)

 

;D ;D ;D

 

No… of course not! But let me explain nonetheless:

 

What I want Mr. Brindle to do is to go on posting ROEs around 19%, or in the high teens, and periodically distribute earnings to shareholders through very tax-efficient special dividends. That’s his job. And I count on him for it.

 

My job, instead, is to judge if LRE at 1.5xBV has a place in my firm’s portfolio of businesses. This is why I said I am the “strategist”… after all, who else should make such judgments for my firm?! And the answer is: provided Mr. Brindle goes on doing those things I count on him for, not only LRE at 1.5xBV has a place in my firm’s portfolio of businesses, but that place is second to no other business.

 

It also comes to my mind Mr. Buffett’s decision to buy BNSF: when that purchase was disclosed, I remember Prof. Greenwald, a very good and renowned value investor, stating that it made no sense, because the price paid for it was way too high… That’s another example of failing to think strategically, because price more often than not is basically all value investors see. ;)

 

Gio

 

[thefatbaboon]

Isn't the issue with LRE at 1.6*bv that even if you get the historical 19% return on book forever you're arithmetically limited to a 12% return?

 

12% is nothing to turn one's nose up at, but for equity it's not that exciting either. 

 

If one takes the returns of last year (ex. the currency gain related to Cathedral), and the outlook for current pricing, it looks more like an investor can expect 9%-10% returns if he pays 1.6*bv

 

Am I missing something?

[giofranchi]

Isn't the issue with LRE at 1.6*bv that even if you get the historical 19% return on book forever you're arithmetically limited to a 12% return?

 

12% is nothing to turn one's nose up at, but for equity it's not that exciting either. 

 

If one takes the returns of last year (ex. the currency gain related to Cathedral), and the outlook for current pricing, it looks more like an investor can expect 9%-10% returns if he pays 1.6*bv

 

Am I missing something?

 

Well, if you read Mr. Buffett latest letter, you will find that Manufacturing, Service and Retailing Operations, viewed as a single entity, in 2013 earned 16.7% after-tax on the capital they employ. That capital is $25 billion, and Berkshire has paid $53.7 billion for them.

Therefore, returns to Berkshire are around (16.7% / 53.7) x 25 = 7.8%.

And 12% is much better than 7.8%, right?

 

Therefore, I guess something is missing here… And it is the strategic meaningfulness of possessing a cash machine. If you know a better cash machine than LRE, of course go for it! Mr. Buffett is evidently satisfied with a $53.7 billion cash machine that is less efficient than LRE…

 

Here I am not talking about trading in and out LRE… I am talking about investing in the business for a very long time. Why do you think last year results are more likely to represent future long-term results than a track record of almost 30 years in the same business? ???

 

Gio

 

[thefatbaboon]

Gio,

 

I'm not saying that the last year is representative of what will come.  Hence, I used the 19%.  19% on 100 is 19.  If you pay 160 for the 100 and get the 19 the return is 19/160:  11.9%.  If one gets a return like last year (ex.currency) it would be 14/160: 8.8%.

 

So, I don't think it is at all unreasonable to estimate future returns on a 1.6*bv investment somewhere between 9% and 12%!

 

I haven't done the analysis of the Berkshire investments you mentioned.  But, off the top of my head, I can think of quite a few business with 5%-7% free cash flow yield AND growth between 4% and 7%.  Investments that would give an expectation of 9%-14% when you factor in intrinsic value growth that comes from the cash flow that is retained for growth. 

 

Furthermore, simple US indexes have historically given investors circa 10% returns - and wouldn't you say that a broad index has better risk characteristics than a small re-insurer?

 

LRE looks like an awesome little company and I'm sure it will do well but aren't there easier/safer ways to make 9%-12%?

[giofranchi]

Gio,

 

I'm not saying that the last year is representative of what will come.  Hence, I used the 19%.  19% on 100 is 19.  If you pay 160 for the 100 and get the 19 the return is 19/160:  11.9%.  If one gets a return like last year (ex.currency) it would be 14/160: 8.8%.

 

So, I don't think it is at all unreasonable to estimate future returns on a 1.6*bv investment somewhere between 9% and 12%!

 

I haven't done the analysis of the Berkshire investments you mentioned.  But, off the top of my head, I can think of quite a few business with 5%-7% free cash flow yield AND growth between 4% and 7%.  Investments that would give an expectation of 9%-14% when you factor in intrinsic value growth that comes from the cash flow that is retained for growth. 

 

Furthermore, simple US indexes have historically given investors circa 10% returns - and wouldn't you say that a broad index has better risk characteristics than a small re-insurer?

 

LRE looks like an awesome little company and I'm sure it will do well but aren't there easier/safer ways to make 9%-12%?

 

Well, I didn’t really mean to argue with your analysis. Except of the fact it considers zero growth for LRE going forward, which I think is a bit pessimistic, you analysis is correct.

What I wanted to stress, instead, is the importance of regularly getting a 9% to 12% IN CASH!

It is extremely rare to get that, unless you own a private business.

Those companies you mentioned, probably retain the majority of their earnings, instead of distributing them. And when they distribute them, they usually do so in a very tax inefficient way… I have tried IEP, OAK and KMI… The amount of cash that was lost because of tax matters was simply outrageous! So much that I had to sell them…

And what about an index? Well, you got both problems: an index retains the majority of its earnings and is not tax efficient. No thanks!

LRE is the only public company that I look at as a possible replacement of the private businesses I own, when the cash generated by those businesses starts to lose relevance as a percentage of my firm’s equity.

And to possess a business, that periodically puts a significant amount of cash in my hands, is something I don’t want to let go… If I have to shift from engineering and for-profit education to LRE, so be it! Because always new ad free cash gives peace of mind and enables to behave opportunistically.

I am sure whoever has possessed such a cash machine knows what I mean and agrees with me. Business life gets so much easier! ;)

 

Gio

 

[giofranchi]

LRE is the only public company that I look at as a possible replacement of the private businesses I own, when the cash generated by those businesses starts to lose relevance as a percentage of my firm’s equity.

 

But why is it so?

By the very nature of LRE: it works in what is actually a niche business, where it has developed great skills and advantages, but has not much room for growth (this is not to say that future growth will be nonexistent! But it will surely be slow growth).

Therefore, I think LRE has the opportunity to keep generating a lot of cash with no true reason to retain it.

And it will give that cash to me. ;)

 

Gio

 

[jouni1]

how much taxes do you pay on dividends, gio?  i guess the situation isn't as bad all over the EU as it is here.

 

in theory i would love to invest in companies paying out almost all of their earnings but the dividend tax out here got bumped up again this year, to 25,5%. in the case of LLCs, as you mentioned it's even worse as the tax on them is 30%.

 

LRE would be my insurance investment of choice, but for companies in bermuda the tax situation is totally idiotic. bermudan dividends get taxed on income (not dividend) tax so i would have to pay around 40% extra tax on LRE's profit each year ::)

 

this has made me really prefer buybacks over dividends :( i really hate how the politicians keep limiting my investment possibilities. having a steady cash flow from investments without selling would make everything so much easier.

[thefatbaboon]

Totally agree with both of you regarding critical importance of taxes - and each person absolutely has to find what is most efficient for his/her particular circumstances.  And of course Gio I can't speak about your specific situation. 

 

I meant only to try and be clear that LRE is a return ON capital type of business. It needs to grow capital to grow returns. It's not very useful to talk of "growth".  Of course growth is not at all impossible!  But it would require the retention of part of the $19 or some kind of dilutive capital raise.  i.e. mathematically there doesn't seem to be a way to improve the 9%-12% CAGR. 

 

That all said - 9%-12% cash in hand as you say is a very handsome return in todays interest rate world!

[WhoIsWarren]

I don't want to get into the game of predicting precise future returns -- in my view the world is too complex.  Who knows if 19% is the right number -- could be higher, could be lower? What about the optionality of a really hard market, where I would expect Lancashire to make out big style? 

 

My personal view is to partner with PHDs, to use Mario Gabelli's term -- people who are Poor, Hungry and Driven.  Lancashire fits that bill.  I think investors at this price will do just fine over time.

 

I want to address the idea that Lancashire doesn't grow, which I think is a misperception.

 

Ok, it's true that group premiums are more or less flat since 2007. But think about it -- the starting point was a very hard market.  Not only did premiums written in 2007 include post-loss commoditised lines, but also reflected a general lack of capacity (business walking through the door) and high prices.  As the market has normalised and then softened, Lancashire has been very successful at replacing these voids with core, relationship-driven business.  By definition, this takes time to do, but it's been happening.  Let me show this by comparing 2007 with 2013.

 

2007 gross premiums written was $753m.  This included $123m of D&F.  As you know, Lancashire exited D&F in 2011, deeming it a non-core book.  D&F was just $10m of gross premiums in 2013.

 

Also, 2007 included $157m of GoM offshore gross premiums, which were elevated due to a lack of capacity post KRW (also they exited shelf-based assets post Ike).  GoM offshore was just $34m in 2013.

 

So simply excluding D&F and GoM offshore from both 2007 and 2013 gross written premiums, Lancashire has grown by 4.5% a year, or c.30% cumulative (from $468 to $611m).  The book is currently very much high-quality "core" and includes no post-loss opportunistic business, which you'll no doubt get an opportunity to write over a cycle.

 

Looking forward, there is every reason to expect some modest growth in the core.  For sure, in books like marine there probably won't be much chance of growth.  But elsewhere, energy and some of the property book will likely grow, not least simply as a result of GDP growth and increasing value of insurables.  There are also small new niches opening up all the time and there could a boom in AV52 should there be a change in TRIPRA.  This excludes opportunities for cross-selling as a result of the Cathedral deal.  I also think it's reasonable to assume that Cathedral has been held back to an extent in the past, due to their PE ownership structure (capital constrained).

 

Capital is another important area worth discussing.  On the recent earnings call, Alex Maloney said they would look to try to write energy and terrorism within Cathedral's syndicate 3010.  Together these lines make up one-third of group GWP.  This is all subject to Lloyd's approval and it is likely to be small to begin with, but if in time they are able to migrate a meaningful amount over this will be very return-enhancing (business written through Lloyd's requires far less capital -- might be 40-60% less, someone who knows might confirm this).

 

It's difficult to get a handle on how much capital the group requires, but here's one way to look at it.  Tangible capital currently is $1.6bn.  We know that Lancashire likes to have buffer capital to be able to write business in the event of a major cat.  From the PML information we can see that a 1/100 year GoM event would hit tangible capital by around 20%, so management must feel they have in excess of a 20% buffer to be able to write post loss -- let's call it 25-30%, or c.$450m, or 20ish% of the current market cap.  This is before any benefit from Lloyd's capital efficiency.  Excess capital puts the brakes on current returns, and you could back out the "ex surplus capital" RoE if you wanted, but excess capital in this soft market is the other side of the make-hay-in-a-hard-market coin.

 

In summary, you can see the number of options that LRE has to surprise.  I've picked out two of these, growth and capital / returns.  There are undoubtedly others, which is what you get from a nimble, smart operator such as Lancashire. None of this is quantifiable, but you just know it will be valuable over time.

 

[giofranchi]

mathematically there doesn't seem to be a way to improve the 9%-12% CAGR. 

 

Why do you say that? I mean, if you distribute all your earnings, I agree. You cannot grow. But, if you retain some of them, you surely can attain some growth. 12% annual return? It could be divided into a yield of 9%, while 3% goes to increase capital. If opportunities to underwrite with a CR in between 60% and 70% grow accordingly, next year a ROE of 19% will be on a larger capital. Therefore, the return on your investment will be higher than 12%. If you go on like that for 20 years, your annual compounded return will be 15%, not 12%.

 

Of course, this is not my thesis for LRE, and this is not the reason why I want to hold the company for a very long time.

 

Gio

 

[giofranchi]

how much taxes do you pay on dividends, gio?

 

First of all it is my firm that receives LRE’s dividends, not me. In Italy my firm pays 45% on MLPs’ distributions… a ridiculous tax rate! On LRE’s dividends, instead, it pays no taxes. Of course, this might change for the worse in the future… and I will then be forced to revalue my investment thesis accordingly.

 

Gio

 

[giofranchi]

I don't want to get into the game of predicting precise future returns -- in my view the world is too complex.  Who knows if 19% is the right number -- could be higher, could be lower? What about the optionality of a really hard market, where I would expect Lancashire to make out big style? 

 

My personal view is to partner with PHDs, to use Mario Gabelli's term -- people who are Poor, Hungry and Driven.  Lancashire fits that bill.  I think investors at this price will do just fine over time.

 

I want to address the idea that Lancashire doesn't grow, which I think is a misperception.

 

Ok, it's true that group premiums are more or less flat since 2007. But think about it -- the starting point was a very hard market.  Not only did premiums written in 2007 include post-loss commoditised lines, but also reflected a general lack of capacity (business walking through the door) and high prices.  As the market has normalised and then softened, Lancashire has been very successful at replacing these voids with core, relationship-driven business.  By definition, this takes time to do, but it's been happening.  Let me show this by comparing 2007 with 2013.

 

2007 gross premiums written was $753m.  This included $123m of D&F.  As you know, Lancashire exited D&F in 2011, deeming it a non-core book.  D&F was just $10m of gross premiums in 2013.

 

Also, 2007 included $157m of GoM offshore gross premiums, which were elevated due to a lack of capacity post KRW (also they exited shelf-based assets post Ike).  GoM offshore was just $34m in 2013.

 

So simply excluding D&F and GoM offshore from both 2007 and 2013 gross written premiums, Lancashire has grown by 4.5% a year, or c.30% cumulative (from $468 to $611m).  The book is currently very much high-quality "core" and includes no post-loss opportunistic business, which you'll no doubt get an opportunity to write over a cycle.

 

Looking forward, there is every reason to expect some modest growth in the core.  For sure, in books like marine there probably won't be much chance of growth.  But elsewhere, energy and some of the property book will likely grow, not least simply as a result of GDP growth and increasing value of insurables.  There are also small new niches opening up all the time and there could a boom in AV52 should there be a change in TRIPRA.  This excludes opportunities for cross-selling as a result of the Cathedral deal.  I also think it's reasonable to assume that Cathedral has been held back to an extent in the past, due to their PE ownership structure (capital constrained).

 

Capital is another important area worth discussing.  On the recent earnings call, Alex Maloney said they would look to try to write energy and terrorism within Cathedral's syndicate 3010.  Together these lines make up one-third of group GWP.  This is all subject to Lloyd's approval and it is likely to be small to begin with, but if in time they are able to migrate a meaningful amount over this will be very return-enhancing (business written through Lloyd's requires far less capital -- might be 40-60% less, someone who knows might confirm this).

 

It's difficult to get a handle on how much capital the group requires, but here's one way to look at it.  Tangible capital currently is $1.6bn.  We know that Lancashire likes to have buffer capital to be able to write business in the event of a major cat.  From the PML information we can see that a 1/100 year GoM event would hit tangible capital by around 20%, so management must feel they have in excess of a 20% buffer to be able to write post loss -- let's call it 25-30%, or c.$450m, or 20ish% of the current market cap.  This is before any benefit from Lloyd's capital efficiency.  Excess capital puts the brakes on current returns, and you could back out the "ex surplus capital" RoE if you wanted, but excess capital in this soft market is the other side of the make-hay-in-a-hard-market coin.

 

In summary, you can see the number of options that LRE has to surprise.  I've picked out two of these, growth and capital / returns.  There are undoubtedly others, which is what you get from a nimble, smart operator such as Lancashire. None of this is quantifiable, but you just know it will be valuable over time.

 

When twacowfca is not available… just ask WhoIsWarren! ;)

 

Gio

 

[giofranchi]

If I have to shift from engineering and for-profit education to LRE, so be it!

 

“To shift” might be misleading… Of course, I won’t abandon either engineering or for-profit education… Instead, LRE’s cash is simply added to the cash provided by both engineering and for-profit education. What really matters to me is that the cash generated by those 3 businesses, viewed as a single entity, and then handed to me, stays a meaningful percentage of my firm’s equity. :)

 

Gio

 

[twacowfca]

I don't want to get into the game of predicting precise future returns -- in my view the world is too complex.  Who knows if 19% is the right number -- could be higher, could be lower? What about the optionality of a really hard market, where I would expect Lancashire to make out big style? 

 

My personal view is to partner with PHDs, to use Mario Gabelli's term -- people who are Poor, Hungry and Driven.  Lancashire fits that bill.  I think investors at this price will do just fine over time.

 

I want to address the idea that Lancashire doesn't grow, which I think is a misperception.

 

Ok, it's true that group premiums are more or less flat since 2007. But think about it -- the starting point was a very hard market.  Not only did premiums written in 2007 include post-loss commoditised lines, but also reflected a general lack of capacity (business walking through the door) and high prices.  As the market has normalised and then softened, Lancashire has been very successful at replacing these voids with core, relationship-driven business.  By definition, this takes time to do, but it's been happening.  Let me show this by comparing 2007 with 2013.

 

2007 gross premiums written was $753m.  This included $123m of D&F.  As you know, Lancashire exited D&F in 2011, deeming it a non-core book.  D&F was just $10m of gross premiums in 2013.

 

Also, 2007 included $157m of GoM offshore gross premiums, which were elevated due to a lack of capacity post KRW (also they exited shelf-based assets post Ike).  GoM offshore was just $34m in 2013.

 

So simply excluding D&F and GoM offshore from both 2007 and 2013 gross written premiums, Lancashire has grown by 4.5% a year, or c.30% cumulative (from $468 to $611m).  The book is currently very much high-quality "core" and includes no post-loss opportunistic business, which you'll no doubt get an opportunity to write over a cycle.

 

Looking forward, there is every reason to expect some modest growth in the core.  For sure, in books like marine there probably won't be much chance of growth.  But elsewhere, energy and some of the property book will likely grow, not least simply as a result of GDP growth and increasing value of insurables.  There are also small new niches opening up all the time and there could a boom in AV52 should there be a change in TRIPRA.  This excludes opportunities for cross-selling as a result of the Cathedral deal.  I also think it's reasonable to assume that Cathedral has been held back to an extent in the past, due to their PE ownership structure (capital constrained).

 

Capital is another important area worth discussing.  On the recent earnings call, Alex Maloney said they would look to try to write energy and terrorism within Cathedral's syndicate 3010.  Together these lines make up one-third of group GWP.  This is all subject to Lloyd's approval and it is likely to be small to begin with, but if in time they are able to migrate a meaningful amount over this will be very return-enhancing (business written through Lloyd's requires far less capital -- might be 40-60% less, someone who knows might confirm this).

 

It's difficult to get a handle on how much capital the group requires, but here's one way to look at it.  Tangible capital currently is $1.6bn.  We know that Lancashire likes to have buffer capital to be able to write business in the event of a major cat.  From the PML information we can see that a 1/100 year GoM event would hit tangible capital by around 20%, so management must feel they have in excess of a 20% buffer to be able to write post loss -- let's call it 25-30%, or c.$450m, or 20ish% of the current market cap.  This is before any benefit from Lloyd's capital efficiency.  Excess capital puts the brakes on current returns, and you could back out the "ex surplus capital" RoE if you wanted, but excess capital in this soft market is the other side of the make-hay-in-a-hard-market coin.

 

In summary, you can see the number of options that LRE has to surprise.  I've picked out two of these, growth and capital / returns.  There are undoubtedly others, which is what you get from a nimble, smart operator such as Lancashire. None of this is quantifiable, but you just know it will be valuable over time.

 

When twacowfca is not available… just ask WhoIsWarren! ;)

 

Gio

 

been in China last two weeks.

 

LRE's normalized owners earnings at should be about 12% of the current price with half the down volatility of most peers after buying their recent cat cover of $100M over the first $100M of loss.  that might be a loss of about 14% of capital for their max 100 year loss or about 6% of capital for a cat loss of up to $209M.

 

In that event, they should be able to exploit the subsequent spike in rates. That's a big advantage that flows from their risk profile.

[giofranchi]

been in China last two weeks.

 

I hope the trip to China was fine and you have enjoyed your staying there! :)

 

Cheers,

 

Gio

 

[WhoIsWarren]

 

LRE's normalized owners earnings at should be about 12% of the current price with half the down volatility of most peers after buying their recent cat cover of $100M over the first $100M of loss.  that might be a loss of about 14% of capital for their max 100 year loss.

 

In that event, they should be able to exploit the subsequent spike in rates. That's a big advantage that flows from their risk profile.

 

Thanks for the colour.

[argonaut]

http://otp.investis.com/clients/uk/lancashiregroup/rns/regulatory-story.aspx?cid=326&newsid=394887

 

Am I reading this correctly that restricted stock units with an exercise price of .50 us per share were issued? I thought at least for USA  firms the price had to be close to market at the time they are issued..so the incentive was growth not just built in profit...I don't red a lot of these plus of course it's on the London exchange which may have different regulations...

[thefatbaboon]

mathematically there doesn't seem to be a way to improve the 9%-12% CAGR. 

 

Why do you say that? I mean, if you distribute all your earnings, I agree. You cannot grow. But, if you retain some of them, you surely can attain some growth. 12% annual return? It could be divided into a yield of 9%, while 3% goes to increase capital. If opportunities to underwrite with a CR in between 60% and 70% grow accordingly, next year a ROE of 19% will be on a larger capital. Therefore, the return on your investment will be higher than 12%. If you go on like that for 20 years, your annual compounded return will be 15%, not 12%.

 

Of course, this is not my thesis for LRE, and this is not the reason why I want to hold the company for a very long time.

 

Gio

 

Hi Gio,

 

Sorry for delay.

 

My mistake - it looks like I made an important error.  If the stock market values retained capital at a premium to book value (as indeed it should if it is returning 19%) then it is indeed possible that an investor today can get a greater than 12% return.

 

Pay 160 for 100 returning 19….

 

Option 1, Withdraw and don't reinvest Dividends

Year 0: 160

Year 1: 160 + 19

Year 2: 160 + 19 + 19

Result:  Around 12% simple interest.

 

Option 2, Reinvest Dividends at 1.6*bv

Year 0: 160

Year 1: 160 + 19 (buys total 111.9 of bv)

Year 2: 179 + 21.3

Result: Around 12% compound interest

 

Option 3, Company retains 100%, reinvests incremental capital at 19% and the market values incremental capital at 1.6*bv

Year 0: 160

Year 1: 160 + (19 new bv * 1.6) = 190.4

Year 2: 190.4 + (22.6 new bv * 1.6)  = 226.6

Result: A 19% compound return

 

So, the more capital that can be retained and reinvested at 19% (and valued at 1.6*) the more the return tends away from 12% towards 19%!

 

It is possible that I am mistaken again!  So please correct me if this is wrong.

[twacowfca]

mathematically there doesn't seem to be a way to improve the 9%-12% CAGR. 

 

Why do you say that? I mean, if you distribute all your earnings, I agree. You cannot grow. But, if you retain some of them, you surely can attain some growth. 12% annual return? It could be divided into a yield of 9%, while 3% goes to increase capital. If opportunities to underwrite with a CR in between 60% and 70% grow accordingly, next year a ROE of 19% will be on a larger capital. Therefore, the return on your investment will be higher than 12%. If you go on like that for 20 years, your annual compounded return will be 15%, not 12%.

 

Of course, this is not my thesis for LRE, and this is not the reason why I want to hold the company for a very long time.

 

Gio

 

Hi Gio,

 

Sorry for delay.

 

My mistake - it looks like I made an important error.  If the stock market values retained capital at a premium to book value (as indeed it should if it is returning 19%) then it is indeed possible that an investor today can get a greater than 12% return.

 

Pay 160 for 100 returning 19….

 

Option 1, Withdraw and don't reinvest Dividends

Year 0: 160

Year 1: 160 + 19

Year 2: 160 + 19 + 19

Result:  Around 12% simple interest.

 

Option 2, Reinvest Dividends at 1.6*bv

Year 0: 160

Year 1: 160 + 19 (buys total 111.9 of bv)

Year 2: 179 + 21.3

Result: Around 12% compound interest

 

Option 3, Company retains 100%, reinvests incremental capital at 19% and the market values incremental capital at 1.6*bv

Year 0: 160

Year 1: 160 + (19 new bv * 1.6) = 190.4

Year 2: 190.4 + (22.6 new bv * 1.6)  = 226.6

Result: A 19% compound return

 

So, the more capital that can be retained and reinvested at 19% (and valued at 1.6*) the more the return tends away from 12% towards 19%!

 

It is possible that I am mistaken again!  So please correct me if this is wrong.

 

You're getting it.  Cathedral has had better than 19% ROE.  That acquisition should continue to produce a better return than other options such as having paid out more of LRE's extra capital in dividends. It's also a potential compounding machine that opens up more high return options for future reinvestment in good business.  :)

[giofranchi]

Hi Gio,

 

Sorry for delay.

 

My mistake - it looks like I made an important error.  If the stock market values retained capital at a premium to book value (as indeed it should if it is returning 19%) then it is indeed possible that an investor today can get a greater than 12% return.

 

Pay 160 for 100 returning 19….

 

Option 1, Withdraw and don't reinvest Dividends

Year 0: 160

Year 1: 160 + 19

Year 2: 160 + 19 + 19

Result:  Around 12% simple interest.

 

Option 2, Reinvest Dividends at 1.6*bv

Year 0: 160

Year 1: 160 + 19 (buys total 111.9 of bv)

Year 2: 179 + 21.3

Result: Around 12% compound interest

 

Option 3, Company retains 100%, reinvests incremental capital at 19% and the market values incremental capital at 1.6*bv

Year 0: 160

Year 1: 160 + (19 new bv * 1.6) = 190.4

Year 2: 190.4 + (22.6 new bv * 1.6)  = 226.6

Result: A 19% compound return

 

So, the more capital that can be retained and reinvested at 19% (and valued at 1.6*) the more the return tends away from 12% towards 19%!

 

It is possible that I am mistaken again!  So please correct me if this is wrong.

 

Yes! You are absolutely right!

Now the question is: what do you want?

As far as I am concerned, the answer is option 1. Maybe option 2… But I surely don’t plan to reinvest dividends indiscriminately. Certainly I don’t care about option 3, and I don’t think LRE is the best vehicle out there for option 3.

I want option 1 with very tax-efficient and very predictable special dividend distributions. And I want to use all that cash opportunistically. ;)

 

Gio

 

[giofranchi]

You're getting it.  Cathedral has had better than 19% ROE.  That acquisition should continue to produce a better return than other options such as having paid out more of LRE's extra capital in dividends. It's also a potential compounding machine that opens up more high return options for future reinvestment in good business.  :)

 

Sorry twacowfca,

I know you look at LRE as you look at every other investments of yours. Therefore, I understand your point of view.

Instead, I look at LRE more as a strategic investment, one that fulfills a role no other investment can inside my firm’s portfolio, with the exception of the businesses I personally manage. If it stops paying large, predictable, and tax-efficient special dividends, I won’t know where else to look for a constant replenishment of my cash reserve… and I certainly wouldn’t welcome it... even if LRE truly had the potential to become a compounding machine!

 

Gio

 

[Guest ajc]

Lancashire discusses its Kinesis offering and why it’s different

 

During the firms recent earnings call, executives of global specialty insurance and reinsurance provider Lancashire Holdings discussed the firms Kinesis Capital Management third-party reinsurance capital unit and why it is different.

 

With its Kinesis offering Lancashire has tried to bring something different to the ILS and collateralized reinsurance market, playing to its strengths as a specialty insurance and reinsurance provider to offer something different to both investors in Kinesis and the group’s clients.

 

Kinesis offers capital markets investors a unique reinsurance linked investment opportunity as the only third-party capital manager which is currently solely focused on specialty lines of reinsurance business. The reinsurance contracts underwritten at Kinesis tend to be multi-class as well, further differentiating it from other opportunities to invest directly in the returns of the reinsurance market...

 

http://www.artemis.bm/blog/2014/03/04/lancashire-discusses-its-kinesis-offering-and-why-its-different/

 

 

[giofranchi]

Lancashire discusses its Kinesis offering and why it’s different

 

During the firms recent earnings call, executives of global specialty insurance and reinsurance provider Lancashire Holdings discussed the firms Kinesis Capital Management third-party reinsurance capital unit and why it is different.

 

With its Kinesis offering Lancashire has tried to bring something different to the ILS and collateralized reinsurance market, playing to its strengths as a specialty insurance and reinsurance provider to offer something different to both investors in Kinesis and the group’s clients.

 

Kinesis offers capital markets investors a unique reinsurance linked investment opportunity as the only third-party capital manager which is currently solely focused on specialty lines of reinsurance business. The reinsurance contracts underwritten at Kinesis tend to be multi-class as well, further differentiating it from other opportunities to invest directly in the returns of the reinsurance market...

 

http://www.artemis.bm/blog/2014/03/04/lancashire-discusses-its-kinesis-offering-and-why-its-different/

 

Thank you very much for posting this! :)

 

Gio

[giofranchi]

Lancashire - Money Making Machine With At Least 45% Upside

 

http://seekingalpha.com/article/2079833-lancashire-money-making-machine-with-at-least-45-percent-upside?isDirectRoadblock=false&source=email_rt_article_readmore&uprof=25

 

 

Gio