LRE.L - Lancashire Holdings Ltd

[bookie71]

quarterly transcript

http://seekingalpha.com/article/3913066-lancashire-holdings-lcshf-ceo-alex-maloney-q4-2015-results-earnings-call-transcript?auth_param=8ao99:1bcffdh:acb486d2e4f9e5a683ca78cf0d3d7d04&uprof=44

[kab60]

Three underwriters left Cathedral and banks have been lowering price targets. I think it looks interesting trading below BV and just a tad above TBV but I'm really no expert so thought I'd like to hear what the gurus (there are plenty on this board!) thinks.

[racemize]

Three underwriters left Cathedral and banks have been lowering price targets. I think it looks interesting trading below BV and just a tad above TBV but I'm really no expert so thought I'd like to hear what the gurus (there are plenty on this board!) thinks.

 

I have latest BVPS at $6.07 USD vs $7.72 current price. 

[kab60]

Three underwriters left Cathedral and banks have been lowering price targets. I think it looks interesting trading below BV and just a tad above TBV but I'm really no expert so thought I'd like to hear what the gurus (there are plenty on this board!) thinks.

 

I have latest BVPS at $6.07 USD vs $7.72 current price.

Obviously, my bad - mixed $ and £. Just wondering if anyone has an updated view and whether or not the Cathedral people resigning is significant. It's really out of my usual zone but their historic results seems quiet extraordinary.

[fareastwarriors]

I think twacowfca is the real LRE expert here. You should get his thoughts.

[rjstc]

Yes. I would be very interested in his thoughts.

I think twacowfca is really the LRE expert here. You should get his thoughts.

[bookie71]

ditto

[Sunrider]

ditto

Indeed - especially since we're back down into the mid £5 range. Time to buy and wait for bad loss season for capital to wash out of the market?

[CorpRaider]

If you are giving me a quote at TBV, I'm interested.  :D

[kab60]

Alex Maloney bought 45k stock. And said this on Q4 cc (I like this guy):

 

"And then if history repeats itself, which it probably will, you’ve got a number of events quite quickly. And then you just look at the investment markets, there’s just so much going on. I think you’d go from -- I think the industry could go from looking vaguely okay to pretty awful quite quickly. And then you just overlay the human element of any market. So, our strategy, as we said earlier, at the moment is all about trying to be there for that market whatever that may be. And I think we all agree it won’t last very long when it comes. And you have to be in the best shape you can to take advantage of it and that at the moment whether it’s investing or underwriting, means capital preservation. You’ve got to have the capital. You’ve got to be ready to go. You’ve got to be in the best shape. That doesn’t mean we wouldn’t lose money. We are part of the market. We would surely expect to lose money in a very large event. But if we’re in good shape, we think we could take advantage post-loss.

 

So, you have to be patient; it’s quite boring. We’ve been saying it for a long period of time. But I’m more interested in trying to make more money in the future than what I am today because it’s incredibly hard trying to do anything today and reaching for any kind of yield now; there’s a huge risk associated with that."

[kab60]

Sorry but this Maloney guy is awesome. I'd love to get him om the cheap.

 

"I think on the front of integration, I think we’ve made some changes. I am sure going forward, if there’s things where we believe as a company that we can change things that make sense, we will do that. But there is no grand plan to do anything dramatic because quite honestly, we think we’re in great shape for 2016 already. We’ve got good business at Cathedral, good business at Lancashire, good business at Kinesis. So, I don’t feel the need to dramatically change things. If you think about some of the big companies and then their integration plans or the reason that they’re in M&A is generally because they’ve got too many people in the first place. There has never been too many people at Cathedral. There’s not too many people at Lancashire. There’s no expense synergies on a big enough scale that we would consider doing that. And these things are incredibly unsettling. So, there is no way we would do that when we’ve got two great businesses at the moment. So, we want people focus on their day job and making money for our shareholders, not worrying about their jobs. There’s far too much of that going on in our industry at the moment."

[twacowfca]

Q1 headline earnings were so so at $26M, but ROE, meaning change in fully converted BV/SH was excellent at +3.8%. Some of their gains on swaptions and other unrealized gains are not run through the income statement. 

 

Last year's contraction of their top line, mainly from their insuring upstream deep water platforms, has stabilized. They are down to their profitable core business in all lines, projecting flattish premiums for the rest of the year. 

 

They have only lost one account as a consequence of the not unexpected departure of Cathedral's founders at the expiration of their noncompete agreements this year along with three senior underwriters. Almost all  of Cathedral's Lloyds business is now dependent on broker relationships rather than direct relationships with clients.  Lancashire has excellent relationships with the brokers.  Therefore, very little of the value of Cathedral walked out the door with the founders who are a generation older than Alex and Paul.

 

Absent a big, industry wide loss event that would cause a dramatic spike in rates they could exploit, they are on track to pay this year's earnings out in a large dividend EOY.

[fareastwarriors]

Q1 headline earnings were so so at $26M, but ROE, meaning change in fully converted BV/SH was excellent at +3.8%. Some of their gains on swaptions and other unrealized gains are not run through the income statement. 

 

Last year's contraction of their top line, mainly from their insuring upstream deep water platforms, has stabilized. They are down to their profitable core business in all lines, projecting flattish premiums for the rest of the year. 

 

They have only lost one account as a consequence of the not unexpected departure of Cathedral's founders at the expiration of their noncompete agreements this year along with three senior underwriters. Almost all  of Cathedral's Lloyds business is now dependent on broker relationships rather than direct relationships with clients.  Lancashire has excellent relationships with the brokers.  Therefore, very little of the value of Cathedral walked out the door with the founders who are a generation older than Alex and Paul.

 

Absent a big, industry wide loss event that would cause a dramatic spike in rates they could exploit, they are on track to pay this year's earnings out in a large dividend EOY.

 

Thanks for the update twacowfca . Much appreciated.

[Sunrider]

Indeed.

Q1 headline earnings were so so at $26M, but ROE, meaning change in fully converted BV/SH was excellent at +3.8%. Some of their gains on swaptions and other unrealized gains are not run through the income statement. 

 

Last year's contraction of their top line, mainly from their insuring upstream deep water platforms, has stabilized. They are down to their profitable core business in all lines, projecting flattish premiums for the rest of the year. 

 

They have only lost one account as a consequence of the not unexpected departure of Cathedral's founders at the expiration of their noncompete agreements this year along with three senior underwriters. Almost all  of Cathedral's Lloyds business is now dependent on broker relationships rather than direct relationships with clients.  Lancashire has excellent relationships with the brokers.  Therefore, very little of the value of Cathedral walked out the door with the founders who are a generation older than Alex and Paul.

 

Absent a big, industry wide loss event that would cause a dramatic spike in rates they could exploit, they are on track to pay this year's earnings out in a large dividend EOY.

 

Thanks for the update twacowfca . Much appreciated.

[WhoIsWarren]

They have only lost one account as a consequence of the not unexpected departure of Cathedral's founders at the expiration of their noncompete agreements

 

It's been a rough few months for Lancashire and Alex in the public domain, but the reality is that behind the scenes the Cathedral situation hadn't been amicable for quite a time.  TWACOWFCA, it mightn't have been unexpected for you, but I didn't suspect anything was awry until Scales / Lynch left in November.  Moreover, while they picked up a large cheque in February (deferred payment from sale of their business to Lancs), it was surprising that the founders were willing to walk away from a second (and, if I'm not mistaken, potentially even larger) deferred payment due in two years' time.

 

However - however - the discontent hasn't been to the detriment of Lancashire shareholders, as the now departed founders carried out their underwriting roles impeccably.

 

An Insurance Insider article written at the time of Hamlin et al's departures referenced that Hamlin had taken over 90% of his book with him when he left to set up Cathedral.  When I read this I was concerned, as it called into question the value of what Lancashire had bought.  So it is comforting to hear that they've only lost one Cathedral account.  Now, we shouldn't raise the victory flag just yet, as so much of the book is written at 1/1, but assuming they get experienced replacement underwriters by the end of the year they should be ok.  Alex Maloney is certainly confident - he is quoted yesterday in the Insider as saying he would "bet the house" on Cathedral's top line holding up.  Also comforting is that Alex, Elaine (CFO) and newly appointed Chairman Peter Clarke bought a decent chunk of shares after the news of the departures broke.

 

Apart from that, the company is doing more or less what we expect of them - running a tight ship and waiting for more rational insurance pricing.  Personally I don't like to see the creeping exposure to hedge funds and corporate bonds.  These guys are underwriters, not investors, and should stick firmly to their circle of competence.  High quality govies all the way and if that means a (small) negative return, so be it.  I would be really unhappy if they were to get caught holding some less than ideal investments.

[WhoIsWarren]

Also comforting is that Alex, Elaine (CFO) and newly appointed Chairman Peter Clarke bought a decent chunk of shares after the news of the departures broke.

 

Just out now, Alex bought another 19k shares in the open market yesterday, which brings his purchasing up to c.U$500k since February.  His total cash comp in 2015 was c.$2.2m, so fair to say it's a reasonable purchase of stock and I think is a statement of his confidence in the future for the group.

[bonkers]

What I do not like about this business is its limited ability to grow. If it could grow, it could be a wonderful business. Now it's only a cyclical dividend cow.

 

In 2006 annual report they wrote "...will deliver our overriding aim of creating attractive long term growth in book value per share for our shareholders". If I'm not mistaken, since then the book value per share has not grown at all.

 

Lower oil prices will almost certainly also limit their ability to grow in the oil segment, that used to be almost 30 % of business. Moving to niches they do not know how to underwrite might not be a good idea. I think we will see the effect of the Cathedral people leaving only early next year (when a lot of business is underwritten), when their NCCs have expired, and they have their new operations running, and fight for real for the old accounts.

 

I also assume that their ROE will be a bit lower than in the past cycles in the future. That might also be why some of the people left: they see this business model to be less than ideal for the current environment, and wanted to focus on something else.

 

Paying entire profits out as dividends is good, but with no reinvestment, the long-term return from the stock is roughly average dividend yield, or ave.ROE over the cycle / (P/BV), say 16 % / 1.3 = 12-13 % p.a. Maybe a bit better, if the book value (and profits) move higher at some point.

 

But still, not very attractive to me.

[WhoIsWarren]

What I do not like about this business is its limited ability to grow. If it could grow, it could be a wonderful business. Now it's only a cyclical dividend cow.

 

In 2006 annual report they wrote "...will deliver our overriding aim of creating attractive long term growth in book value per share for our shareholders". If I'm not mistaken, since then the book value per share has not grown at all.

 

Lower oil prices will almost certainly also limit their ability to grow in the oil segment, that used to be almost 30 % of business. Moving to niches they do not know how to underwrite might not be a good idea. I think we will see the effect of the Cathedral people leaving only early next year (when a lot of business is underwritten), when their NCCs have expired, and they have their new operations running, and fight for real for the old accounts.

 

I also assume that their ROE will be a bit lower than in the past cycles in the future. That might also be why some of the people left: they see this business model to be less than ideal for the current environment, and wanted to focus on something else.

 

Paying entire profits out as dividends is good, but with no reinvestment, the long-term return from the stock is roughly average dividend yield, or ave.ROE over the cycle / (P/BV), say 16 % / 1.3 = 12-13 % p.a. Maybe a bit better, if the book value (and profits) move higher at some point.

 

But still, not very attractive to me.

 

Bonkers, you raise a few valid points, though I disagree with some of your conclusions.

 

Lancashire management would like to have grown more over the last 10 years.  There are probably a few factors that have hindered them.  One reason was down to Brindle, who had very set ideas about what they would write and what they wouldn't (e.g. no Florida Cat, an attractive area to write).  Another is due to the difficulties they've had integrating the Cathedral people - an opportunity missed to add high-quality teams to the Lloyd's platform over the last c.2 years.  Also, to properly assess growth, don't forget that they are currently writing c.$350m through Kinesis.  And finally, obviously pricing is currently very soft, so it would be unfair not to take that into account (and crazy to expect them to grow against that backdrop).

 

It's worth drawing out the last of these points.  Remember that 2006 was post KRW in 2005 and the market was very hard, so they were able to write and make good money on almost everything they were shown.  For example, Lancashire wrote $113m of retro cover in 2006, a pretty commoditised line of business.  Their "core" book, which they often speak of, was very small as they had little reputational standing among clients.  Roll on to 2015 and they're down to their core book (including just $13m of retro), which has grown substantially over the decade.

 

To get a better sense of "underlying" growth of the business, I think we would have to compare Lancashire's writings post the next event.  Not only would they once again write attractively-priced commoditised lines that they don't currently write, but pricing for their entire book would likely be far better -- to give a sense of this, the Lancashire-calculated Renewal Price Index (RPI) is currently at 68 overall versus 100 in 2006.

 

The company would like to grow (I would say they would like to be double the size they currently are, organically), but only value-creating opportunities exist.  I admire them greatly for their fortitude in this regard.  They are under a lot of pressure to cave, because the M&A environment is such that a low P/B multiple for the stock puts them "in play".....and therefore risks management's jobs!  How many management teams do you know with such backbone?  How companies do we see growing even when it's not attractive for them to do so?

 

Regarding the impact on Cathedral being borne in 2016, you could be right.  See my previous posts on this.  The market rumour is that they're actively pursuing a couple of excellent, well-respected underwriters who have for years been doing the same small ticket property stuff as Hamblin et al.  Brokers will have no reason to move the business from Cathedral (which would require a full review of account - lots of work!).  Also, Lancashire is leveraging the fact that it pays significant commissions to brokers as a result of their outwards reinsurance programs.  If a broker were to move business away from Cathedral they would find themselves losing Lancashire's revenues.  For these reasons, plus management's display of confidence, I'm satisfied the impact will be relatively small.

 

You may be right on assuming a lower RoE going forward.  I believe that, all else equal, the company will produce a higher risk-adjusted return in the future (Alex's stamp on the company is to take less tail risk than Brindle).  Of course, one could argue that the insurance industry has gotten structurally tougher, what with all the various new forms of capital and the speed at which they can be deployed.  This is probably  the case, but saying that I wouldn't be so quick to underestimate the power of relationships that Lancashire's people possess.

 

Out of interest, a 12-13% long term return doesn't seem that attractive you you??? In my mind, that's probably twice what the market will deliver from here.  You must have an embarrassment of riches in your investment portfolio.  Share your ideas! :-)

[accutronman]

Latest from MS. Price target reduced to 593p

 

Too early to buy. We are positive on Lancashire's commitment to protecting capital, as shown by further reducing its peak exposures at 1 April and buying more reinsurance, as well a slightly improved market outlook in 2016. However, we still see risks in 2016 that include recent underwriter departures at Cathedral (although we note that management have made new underwriting hires), and a fundamentally challenging pricing environment. We also note that underwriting profits have been supported by relatively high reserve releases - given Lancashire's is much shorter tail than peers we are concerned that reserve releases could quickly decline should the loss environment reverse.

[racemize]

Anyone have the latest transcript?  Seeking Alpha always sits on their ass for it.

[eggbriar]

Anyone have the latest transcript?  Seeking Alpha always sits on their ass for it.

 

 

http://finance.yahoo.com/news/edited-transcript-lre-l-earnings-194827892.html

[Spillo]

Does anyone have a view whether an active hurricane season would be a good or bad thing for LRE?

 

On the one hand LRE would take losses albeit their net exposure has been cut alot over the past 3 years,due to unattractive rates and risk/reward.

 

However on the other hand, a large catastrophe could drive irrational capital out of the sector and boost rates and future returns in Cat/reinsurance. That is exactly what happened in 2005… so perhaps can it happen again or is it different this time?

[WhoIsWarren]

Does anyone have a view whether an active hurricane season would be a good or bad thing for LRE?

 

On the one hand LRE would take losses albeit their net exposure has been cut alot over the past 3 years,due to unattractive rates and risk/reward.

 

However on the other hand, a large catastrophe could drive irrational capital out of the sector and boost rates and future returns in Cat/reinsurance. That is exactly what happened in 2005… so perhaps can it happen again or is it different this time?

 

High industry losses should be good for Lancashire.  That assumes that management has been as good as their word in reigning in their underwriting risk appetite / buying the right kind of reinsurance etc.  This will be a period that will hopefully (re) underline their underwriting credentials (after a fair bit of change in personnel in the last 2 years) where they not only survive high industry losses but also materially outperform their peers.

 

The losses have to be big enough to make a real dent in industry capital and cause a reappraisal of the risk-reward of allocating capital to insurance.  I don't have numbers to hand, but I've read about the amount of capital sitting on the sidelines of insurance, waiting to pounce post event.  To get a really hard market that endures for a decent time period, I'd say you would need an event (or events) that make people think - "Wow, I didn't think about that".....or "It's going to cost how much??"

 

I'm not giving any particularly unique insights here......the consensus opinion I would say.  Perhaps you were looking for a different angle?

[Jurgis]

IMO (re)insurance would harden significantly in two possible cases:

 

1. Global financial crisis + somewhat high cat season or two. This is Prem's scenario: business hardens because capital on sidelines is not there.

 

2. Like WhoIsWarren said - way outsized cat losses because of climate change perhaps. Something that scares the capital big.

 

BTW, Spillo says "hurricane season". If you read Fairfax Q2 report, you may realize that major cats this year are events that you probably haven't even heard about - or associated with being big cats. At least that's the impression I got. But perhaps you guys follow the cats more than I do. ;)

[WhoIsWarren]

When people think about major cats it's Gulf of Mexico hurricane or Japanese / Californian earthquakes.  Collectively, it's been quite subdued on those fronts for a number of years -- the other day I came across the link below on GoM hurricanes, which I thought was interesting.

 

http://voices.nationalgeographic.com/2016/08/15/will-u-s-luck-hold-during-peak-of-hurricane-season/

 

There have been quite a lot of largish-sized losses in the last year or so, such as Canadian floods / wildfire, Tianjin explosion, a number of oil-related claims, aviation / war payouts.  It's been pleasing to see Lancashire doing well against that backdrop.  They said they had bought reinsurance with lower attachment points, meaning that they've been protected from higher frequency of medium-sized claims.  It bodes well for their likely losses post some major cat events.