LRE.L - Lancashire Holdings Ltd

[gurpaul88]

http://www.bloomberg.com/news/articles/2015-03-27/oaktree-backed-insurer-seeks-2-billion-targets-ipo-by-5-years

 

Fidelis Insurance Holdings Ltd. led by Richard Brindle

 

http://www.artemis.bm/blog/2015/03/27/brindle-mcconachie-back-with-2b-fidelis-reinsurance-hybrid/

[Liberty]

http://www.bloomberg.com/news/articles/2015-03-27/oaktree-backed-insurer-seeks-2-billion-targets-ipo-by-5-years

 

Fidelis Insurance Holdings Ltd. led by Richard Brindle

 

http://www.artemis.bm/blog/2015/03/27/brindle-mcconachie-back-with-2b-fidelis-reinsurance-hybrid/

 

So that's where he went!

[CorpRaider]

I caught a couple of articles before mentioning that he was working on Fidelis.  Very interesting, although perhaps too cute by half for me.  I would rather see them partner up with a low fee value guy like even a Tom Gayner.  Not sure I want to do the "fools game", as labeled by Buffett, of having a highly paid consultant select multiple highly paid managers.

[TwoCitiesCapital]

What are the chances that the talent from Lancashire get poached by this company? It would seem only natural from Brindle to continue working with those he's been working with for the last several years.

[CorpRaider]

I was worried about it when he left and took McConchie with him.  There have been questions on the quarterly calls and on here about the concern.  The responses all seemed to indicate to me that while he's clearly formidable, he's also a bit abrasive.  I am not in a position to tell if this is accurate.  Clearly nearly everyone at Lancashire went to work for him at least once, so...

[rjstc]

I would like to hear what TWACOWCFA has to say. It seems as if LRE is still strong. They are in a soft market though. They still have some very good people running the operation. However I would like to have a very knowledgeable person comment who follows them very closely..

[peter1234]

I caught a couple of articles before mentioning that he was working on Fidelis.  Very interesting, although perhaps too cute by half for me.  I would rather see them partner up with a low fee value guy like even a Tom Gayner.  Not sure I want to do the "fools game", as labeled by Buffett, of having a highly paid consultant select multiple highly paid managers.

 

+1

 

Sounds like copying half of Berkshires's model without doing the work on the investing side.

Talking of an IPO in 3-5 years by a new start-up is certainly a sign of the times.

;)

[CorpRaider]

I would like to hear what TWACOWCFA has to say. It seems as if LRE is still strong. They are in a soft market though. They still have some very good people running the operation. However I would like to have a very knowledgeable person comment who follows them very closely..

 

Just a head's up; he has already commented on the potential for Brindle to start a new venture and poach Lancashire underwriters, back in the period just after Brindle left.  Its a page or two back.

[twacowfca]

Rigs Running Hot in Gulf of Mexico as Shale Scales Back: Energy

2015-02-19

 

By Zain Shauk

    (Bloomberg) -- While U.S. drilling on land has fallen along

with the price of crude, the risky and expensive drive to pull

oil from the depths of the Gulf of Mexico is showing little

evidence of a slowdown.

    Oil rigs working in the Gulf will increase by more than 30

percent this year compared with 2014, according to data from

Wood Mackenzie, an industry consultant. At the same time, the

number of land-based rigs has fallen by a third since October,

bearing the brunt of industry-wide cutbacks that have shed tens

of thousands of jobs in the U.S.

    The reasons are two-fold. The rise in deep-water drilling

stems from years of planning and billions of dollars already

invested, and the payoff can be considerable. Anadarko Petroleum

Corp.’s Lucius platform can handle as much as 80,000 barrels a

day from the six wells that feed into it, an output that would

take hundreds of onshore wells to reach, according to John

Christiansen, a company spokesman.

    “The economic life of these projects is in the decades,”

said Fadel Gheit, an analyst for Oppenheimer & Co. in New York.

“You’re going to milk this cow for another 30 years, so you

don’t care what the price of milk is today.”

    Large oil producers including Anadarko,  BP Plc, Chevron

Corp. and Royal Dutch Shell Plc are continuing to invest

offshore even as shrinking profits force them to cut back on

spending. BP has 10 rigs active in the Gulf of Mexico, which it

says is a company record.

    By contrast, in the oilfields of Texas, Colorado and North

Dakota, producers are scrambling to rein in drilling as

oversupplies have cut crude prices by more than half since June.

 

                          Last Steps

 

    It’s a different calculus for prolific deep-water wells,

which can produce far greater quantities of crude over a longer

time span than a typical onshore well. The new wells are the

latest step in a long-term development plan where much of the

investment -- in pipelines, platforms and subsea processing

systems -- already has been made.

    “When you’re 90 percent complete, you’re not going to

stop,” Gheit said.

    Gulf of Mexico production will jump from 1.4 million

barrels per day in 2014 to an average of 1.58 million barrels

per day in 2016, a 13 percent increase, according to Wood

Mackenzie projections. The growth in deep-water will add to

total U.S. output, which is projected to grow by 14 percent over

that period as rising efficiency continues to push shale

production up despite declines in drilling.

 

                        ‘Mega Projects’

 

    Deepwater oil developments are so enormous they are

referred to within the industry as “mega projects,” featuring

platforms that can cost as much as $2 billion, wells that cost

about $300 million to drill, and a system of pumps and

processing equipment along the seafloor that can add another

$100 million, Sandeen said.

    “These aren’t onshore projects where you’re going to

produce from a well for a few years,” said Jackson Sandeen, a

senior research analyst covering the Gulf of Mexico for Wood

Mackenzie. “These are 30 to 40 year projects where a slight

bump in the road in the short term is not really going to affect

the project in the long term.”

    The jump in rig activity in the deep Gulf of Mexico isn’t

focused on exploration wells, where companies seek to confirm

that oil prospects exist. Oil giants are cashing in on

previously confirmed discoveries by drilling wells into

reservoirs that have already proven to be productive, and where

they already have platforms built or under construction.

 

                          Falling Rates

 

    New projects, however, aren’t likely to get started unless

oil prices rise to around $75 for a sustained period, said Brian

Youngberg, an analyst for Edward Jones in St. Louis. That’s

leaving a fleet of brand new rigs entering the market with fewer

prospects for contracts.

    The rental rates for deep-water drilling rigs, which last

year cost more than $500,000 a day to operate, have already

fallen to $400,000 a day as fewer companies plan new projects,

said Cinnamon Odell, senior rig analyst for industry consultants

IHS Inc.

    The costs of deep-water wells during a time of low oil

prices is drawing some companies into partnerships to share

costs as they push ahead on existing projects. BP, Chevron and

ConocoPhillips earlier this year said they would collaborate as

they drill Gulf of Mexico wells in 24 jointly held offshore

leases. As part of the deal, BP sold Chevron half of its equity

interests in the Gila and Tiber fields. The three companies also

have joint ownership interests in exploration blocks east of

Gila, known as Gibson, where they plan to drill in 2015.

    By combining financial resources amid low crude prices, the

companies are increasing the likelihood that they can find and

develop new oil in the Gulf, which remains the most attractive

offshore oil region in the world, Youngberg said.

 

 

 

[racemize]

from the other Brindle thread today:

 

Brindle has a long history of writing terrorism and energy business, and many expected them to be cornerstone classes for Fidelis. But the former Lancashire executive described them as "probably the worst in the world" at the moment.

 

Found that quite troubling. 

[WhoIsWarren]

from the other Brindle thread today:

 

Brindle has a long history of writing terrorism and energy business, and many expected them to be cornerstone classes for Fidelis. But the former Lancashire executive described them as "probably the worst in the world" at the moment.

 

Found that quite troubling.

 

The Insurance Insider had an article the other day about how rates in Upstream Energy have collapsed, down 20-30% (presumably year-on-year).  Words like "carnage" have been bandied about quite a lot in the insurance world of late....here's another example.  However, what's hurting the energy market more than other areas is not only the big increase in supply but also the collapse in demand for energy cover -- less drilling activity, the lower oil price reducing insurable items, as well as companies buying less insurance cover as they look for ways to save cash.

 

As always, the credible "market leaders" with strong and long relationships are doing better than the following firms / newcomers (including Fidelis).  The Insider article quotes one underwriter who states that there has been "no noticeable withdrawal of capacity -- you're only seeing isolated examples where people are coming off covers".  Lancashire's strategy in this soft market is to capitalise on the strength of their relationships while taking advantage on the weakness of the marginal players  - for example, buying cheap reinsurance.  Same in energy; me-too insurers wanting to get on a ticket are being offered unattractive first-loss layers.  In this way, although rates have collapsed, sector leaders (including Lancashire) are able to (partially) protect profitability.

 

In Terrorism, rates have been falling for a number of years, as a lack of incidents have undoubtedly lulled some into underestimating the risk.  I understand that in some cases terrorism is being included for free or cheaply in All Risks policies.

 

But really all of this is a sign of the times.  In Satellite, there have been a number of payouts in the last 18 months, yet rates haven't really reacted.  You saw the same in the Aviation market last year and although the Aviation War market initially moved up last summer in reaction to the heavy losses suffered, rate increases subsequently moderated / reversed so that net-net the increase has been pretty modest.

 

Lancashire is acting cautiously, as evidenced by the level of reinsurance it has bought, and waiting opportunistically for better times.

 

It's also planning for the future by looking to capitalise on any fallout from the M&A activity.  One way is to look to pick up more business from brokers unwilling to give as much to merged entities as they were previously giving to the same separate entities; another way is to look to hire top notch teams that inevitably become disaffected by the change M&A brings.

[WhoIsWarren]

I notice that between them Invesco and Woodford Asset Management now own 27% of Lancashire.

 

As you'll no doubt be aware, Neil Woodford left Invesco last year after 26 years in the company to set up on his own.  I think Woodford had been a supporter of Lancashire since its early days, though not in huge size.  The team he left behind at Invesco has more than doubled their ownership of the company since -- despite being hit by large redemptions, as money followed Woodford to his new fund.

 

I don't have much visibility into Woodford's funds, but on the website the Woodford Equity Income Fund is £6bn, so if his Lancashire holding is in there it's around 1.7% of the fund.

 

On the short side, Odey Asset Management has continued to increase its short position - they are now short 11m shares, or -5.6% of the company.  This time last year Odey was short 3.6m shares.

[Ross812]

Q2'15 results out:

 

http://www.lancashiregroup.com/en/media/press-releases/2015/q2-2015-results.html

 

Not great, but expected...

[Kiltacular]

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/insurance/11850083/Japanese-firm-mulls-2bn-swoop-for-FTSE-insurer-Amlin.html

 

MSI’s offer is the latest in a series of deals in the sector, with Brit being bought by a Canadian rival for 1.6 times its book value earlier in February, and Catlin going for 1.5 times December.

Shore Capital analyst Eamonn Flanagan called the price for Amlin “quite remarkable” and showed how much foreign buyers were willing to pay for the insurance expertise of London businesses.

“Stephen Catlin trumpeted what a good deal he got for Catlin and that just covered its cost of capital,” Mr Flanagan said. “This shows what a company that makes twice its cost of capital is worth.”

Mr Flanagan said he expected the remaining four UK insurers in the sector – Beazley, Hiscox, Lancashire and Novae – to be targets for predators, with Asian or Far Eastern groups the most likely buyers.

“Asia is where the volume of trade is and London is where the access to work is,” he added, saying that the cheap money environment meant financing for such a deal would not be a problem, though the 2.4 times premium being paid for Amlin “is probably where the roof for a deal would be”.

[TwoCitiesCapital]

I'm seeing all of these notes about insurers getting taken out and it seems that there is hope from some that LRE gets taken out for a 2x multiple or something like that. What is the likelihood that the current management/board agrees to a sale? In hindsight, it seems that would be have been more likely had Brindle stayed, but is the new management team attached the company they helped build or are they likely to sell if the price is right?

 

Thanks for any input

[twacowfca]

Here's a thoughtful update on Lancashire.  The stock price gradually sold off after founding CEO, Richard Brindle resigned, until reaching bottom this January. That was not unexpected as the original thesis was that Brindle as CEO at the company's IPO was quite exceptional, with the best track record as an underwriter at Lloyd's of London in the 1980's and 1990's.

 

Would Lancashire lose it's edge with Brindle's departure?  Results suggest their excellence in underwriting and capital management continues.  The key managers Maloney, Gregory and Whelan, who came aboard within a few months of their IPO almost ten years ago, and now Scales with the acquisition of Lloyd's underwriters Cathedral, are still running the company, sticking to the discipline they learned from Brindle and their focus on building lasting relationships with clients and brokers.

 

They have returned over two and a half times their original capital to shareholders as the stock price has more than doubled since 2006, weathering the financial crisis and numerous catastrophes better than any other insurer.  Their returns continue to lead their peers in the recent, soft market. Their long term ROE is above 18% and they will likely have a low double digit return of about 12 % ROE this year with less volatile results than most insurers.  In Q3 a number of insurers had significant portfolio losses as risk premiums spiked in the quarter, but Lancashire sailed through that with only a tiny blip.

 

 

 

 

 

[gary17]

Very impressive indeed. 

 

I have been looking at this name - haven't pulled the trigger mainly because it gets into currency exchange for me.

 

 

 

Gary

[racemize]

Anyone have the latest transcript?  Seeking Alpha is being very slow (hopefully they post at some point).

[Liberty]

Wow

 

http://www.bloomberg.com/news/articles/2015-12-07/lancashire-slumps-on-report-cathedral-capital-ceo-cfo-dismissed

[TwoCitiesCapital]

Wow

 

http://www.bloomberg.com/news/articles/2015-12-07/lancashire-slumps-on-report-cathedral-capital-ceo-cfo-dismissed

 

If both were dismissed, it seems obvious that it was some kind of misconduct. Always suspicious when they don't announce what that misconduct was though...

[fareastwarriors]

Surprised to see there was not some kind of PR piece.

[twacowfca]

Wow

 

http://www.bloomberg.com/news/articles/2015-12-07/lancashire-slumps-on-report-cathedral-capital-ceo-cfo-dismissed

 

If both were dismissed, it seems obvious that it was some kind of misconduct. Always suspicious when they don't announce what that misconduct was though...

 

 

 

Normally, A CEO departure along with the CFO is a huge red flag, but that is not the situation here.

Lancashire did extensive due dilligence before acquiring Cathedral, and their operations have been consolidated in the same office for the last year.  Everyone knows everybody at Lloyd's, and those departing have a good reputation for financial integrity.

 

Lancashire's officers are still in their thirties and the two departing are sixtyish. Integration of operations is never easy, and it would be remarkable if two excellent but much older founders did not experience some discomfort and feel somewhat less important as part of a larger organization than when they were running the show.

 

Their non compete agreements run out in a few months. The potential downside to their departure is that they could take some key underwriters with them, just as that was the main risk with Brindle's leaving two years ago, although that didn't happen. That would of course not be a positive for Lancashire, but likely of minor consequence because Cathedral represents more or less 15% to 20% of Lancashire's economic value with a large part of that value merely being part of Lloyds.

 

It seems likely that Lancashire will be able to keep most if not all of Cathedral's key people after the two founders depart.  If not, Cathedral and Lancashire are now integrated and the Lancashire and Cathedral staff has been remarkably stable. In view of that stability, it's likely that Lancashire will adjust fairly well even if they do lose a few of the key people at Cathedral.

 

[gary17]

twacowfca

 

may I get your thoughts on Lancashire performance in a rising rate environment. Also, do you think they can maintain the dividend ? ( I believe an analyst asked this question in the last call). also, why is their ROA decreasing ?

 

Thanks

Gary

 

Wow

 

http://www.bloomberg.com/news/articles/2015-12-07/lancashire-slumps-on-report-cathedral-capital-ceo-cfo-dismissed

 

If both were dismissed, it seems obvious that it was some kind of misconduct. Always suspicious when they don't announce what that misconduct was though...

 

 

 

Normally, A CEO departure along with the CFO is a huge red flag, but that is not the situation here.

Lancashire did extensive due dilligence before acquiring Cathedral, and their operations have been consolidated in the same office for the last year.  Everyone knows everybody at Lloyd's, and those departing have a good reputation for financial integrity.

 

Lancashire's officers are still in their thirties and the two departing are sixtyish. Integration of operations is never easy, and it would be remarkable if two excellent but much older founders did not experience some discomfort and feel somewhat less important as part of a larger organization than when they were running the show.

 

Their non compete agreements run out in a few months. The potential downside to their departure is that they could take some key underwriters with them, just as that was the main risk with Brindle's leaving two years ago, although that didn't happen. That would of course not be a positive for Lancashire, but likely of minor consequence because Cathedral represents more or less 15% to 20% of Lancashire's economic value with a large part of that value merely being part of Lloyds.

 

It seems likely that Lancashire will be able to keep most if not all of Cathedral's key people after the two founders depart.  If not, Cathedral and Lancashire are now integrated and the Lancashire and Cathedral staff has been remarkably stable. In view of that stability, it's likely that Lancashire will adjust fairly well even if they do lose a few of the key people at Cathedral.

[twacowfca]

twacowfca

 

may I get your thoughts on Lancashire performance in a rising rate environment. Also, do you think they can maintain the dividend ? ( I believe an analyst asked this question in the last call). also, why is their ROA decreasing ?

 

Thanks

Gary

 

Wow

 

http://www.bloomberg.com/news/articles/2015-12-07/lancashire-slumps-on-report-cathedral-capital-ceo-cfo-dismissed

 

If both were dismissed, it seems obvious that it was some kind of misconduct. Always suspicious when they don't announce what that misconduct was though...

 

 

 

Normally, A CEO departure along with the CFO is a huge red flag, but that is not the situation here.

Lancashire did extensive due dilligence before acquiring Cathedral, and their operations have been consolidated in the same office for the last year.  Everyone knows everybody at Lloyd's, and those departing have a good reputation for financial integrity.

 

Lancashire's officers are still in their thirties and the two departing are sixtyish. Integration of operations is never easy, and it would be remarkable if two excellent but much older founders did not experience some discomfort and feel somewhat less important as part of a larger organization than when they were running the show.

 

Their non compete agreements run out in a few months. The potential downside to their departure is that they could take some key underwriters with them, just as that was the main risk with Brindle's leaving two years ago, although that didn't happen. That would of course not be a positive for Lancashire, but likely of minor consequence because Cathedral represents more or less 15% to 20% of Lancashire's economic value with a large part of that value merely being part of Lloyds.

 

It seems likely that Lancashire will be able to keep most if not all of Cathedral's key people after the two founders depart.  If not, Cathedral and Lancashire are now integrated and the Lancashire and Cathedral staff has been remarkably stable. In view of that stability, it's likely that Lancashire will adjust fairly well even if they do lose a few of the key people at Cathedral.

 

 

The whole market is in a soft patch.  When that happens, most insurance companies want to look good even if that means reaching for yield and writing the same monetary  amount of business, even when the rates go down and the risk goes up. There was an article in the WSJ this weekend about the big hit to AIG's and Allstate's book value because they loaded up on junk bonds that have been going down the toilet.

 

Lancashire's different. Their conservative portfolio is much like BRK's: short on duration and long on quality.  They approach underwriting the same way: get out of commoditized business when the rates deteriorate and maintain relationships with core brokers end clients.  If that means the top line hoes down what they do is return extra capital they no longer require to shareholders.

 

They have paid monster dividends totaling about $2.60/ share since December last year.  A those dividends were mostly special or extra.  Elaine told analysts not to expect anything very big in Q1 after the $0.95 per share they recently paid.

 

But, with a long term point of view, don't forget that they have returned about 2.8 times their original equity to shareholders since 2007, two years after their IPO. :)

[rjstc]

Thanks twacowfca. Always good to read your thoughts about LRE.