LRE.L - Lancashire Holdings Ltd

[twacowfca]

Looking here:

 

http://www.lancashiregroup.com/lre_group/investor_relations/

 

They say they have $7.5 book value per share.  So at the recent $10+ they are trading for a 1.25+ premium.  Just curious what folks around here thing fair value is for this one?  

 

Current BV is probably about 4% higher because there haven't been any major loss events in April and May in the types of business they write  :)

[Myth465]

I dont think about Lancashire, just will wait and let it compound. I am up 30% on it and have a 30% dividend. It should trade at a premium to book. If we have a tough hurricane season they clean up, if we dont - they clean up .....

 

I sleep easy with this one, now just need 4-5 other holdings like it. My only plan is to sell at 2x book value, and to double down at book value or under. The pinks are too hard to get into and out of, and I think they benefit from cats oddly enough.

[tombgrt]

$7,50 * 1,04 = $7,8 current BV

= 4,765 GBP against 6,535 GBP price = 1,37x BV

 

Obviously it deserves a premium to book but this price I am not willing to lay down. But I wouldn't sell as a current owner either, still a decent yield.

[twacowfca]

Lancashire's financial strength rating was upgraded yesterday from A- to A by AM Best.  :)

[Liberty]

Has LRE ever talked about listing in the NYSE?

[twacowfca]

Has LRE ever talked about listing in the NYSE?

 

Never say never, but the LRE board has not been keen to list on the NYSE because of disagreeable aspects of Sarbox. LSE listing gives LRE a platform for favorable comparison with Lloyds insurers as well as Bermuda reinsurers.  Analysts that follow these stocks are finally starting to appreciate LRE's risk adjusted returns.  :)

[tombgrt]

LRE keeps giving, damn.

 

Sold any for better opportunities twacowfca or still your biggest holding?

[twacowfca]

LRE keeps giving, damn.

 

Sold any for better opportunities twacowfca or still your biggest holding?

 

Actually, added to our holdings a few weeks ago because there was nothing better available.  That still seems to be the case.  The thesis continues to be simple: Brindle and Lancashire combined have a 20 year record that averages about a 20% annual return on BV.  LRE tends to grow BV, with adjustment for dividends paid, about 6%/Q (+ or - 1%-2%) when there is no supercat in that quarter.  Let's guess that Q2 FDBV/SH grew to about the low end of that range because they might have some exposure to the smaller cats that quarter or there could be some adjustment to estimates of the very large industry losses in Q1.  Let's guess Q2 FDBV/SH was $7.90/SH.  

 

If 2011 doesn't have large hurricane losses (yet to be determined) it may turn out to be about an average year for LRE.  If so, they may earn about 20% on their current estimated $7.90FDBV/SH.  This should be enough to pay another big special dividend like the ones they paid in recent years, plus a couple of smaller dividends.  However, the only certainty is that they will not make their average return each year.  They will certainly hit a speed bump or even take a big hit every few years, but 20% average annual returns on BV is a reasonable expectation.  That 20% possible return makes no allowance for P/B or P/E multiple expansion or contraction.  Their multiple is not out of line, compared to their better peers, but their multiple and the industry multiple is low, compared to the total market multiple..  

 

They seem to have gotten better over the years.  It's possible that hitting their long term average return may be easier now than when they first started.  Their 100 and 250 year projected maximum losses have come down nicely in recent years.  It's possible to speculate that their average return going forward will be higher than in the past, especially in view of Solvency II and the prospect of a hard market in the not too distant future.   An average coupon of 20% on about $7.90 BV/SH is still better than anything else I see now, even with LRE's total return price up 50%+ in the last 12 months.   :)

 

 

 

 

[twacowfca]

Ho hum.  More boring quarterly results from LRE.  Q2 FCBV/SH up 6.1% to $7.96/SH.  Portfolio duration 1.8 years.  CR 41.2  Loss ratio 8.8%.  Notably, they did not have to strengthen reserves for the Tohoku earthquake as most of their peers did.  They were also able to activate their retro sidecar.  Their average renewal price index is up slightly from the elevated levels of last year.

 

So boring.  Why can't they be an exciting insurance company like many others?  :D

[rmitz]

Ho hum.  More boring quarterly results from LRE.  Q2 FCBV/SH up 6.1% to $7.96/SH.  Portfolio duration 1.8 years.  CR 41.2  Loss ratio 8.8%.  Notably, they did not have to strengthen reserves for the Tohoku earthquake as most of their peers did.  They were also able to activate their retro sidecar.  Their average renewal price index is up slightly from the elevated levels of last year.

 

So boring.  Why can't they be an exciting insurance company like many others?   :D

 

What would you target for a selling price (i.e. richly valued and time to get out)?  I have no better ideas than 2x book.

[Myth465]

At 2x book I would have to start looking at selling...

[twacowfca]

Ho hum.  More boring quarterly results from LRE.  Q2 FCBV/SH up 6.1% to $7.96/SH.  Portfolio duration 1.8 years.  CR 41.2  Loss ratio 8.8%.  Notably, they did not have to strengthen reserves for the Tohoku earthquake as most of their peers did.  They were also able to activate their retro sidecar.  Their average renewal price index is up slightly from the elevated levels of last year.

 

So boring.  Why can't they be an exciting insurance company like many others?   :D

 

What would you target for a selling price (i.e. richly valued and time to get out)?  I have no better ideas than 2x book.

 

It would be arbitrary to target a selling point for such an excellent company.   Rather, any sale should be made with reference to better opportunities for the capital.  Our only substantial sales of LRE were during the market meltdown to provide funds to buy unbelievable bargains.  When these bounced to double or triple what we paid, we sold them and got back into LRE.  

 

Having their price near book value, as was the case until recently, does provide a greater margin of safety than currently, but the quality of the business and the long term record of 20% average annual returns On BV make a cash flow analysis appealing.  

 

Lets simplify this by assuming that the terminal value for LRE will be at P/B that is quite a bit higher than currently.  This is reasonable because the last business Brindle was involved with when he worked for Charman  was sold for 3 * book.  With this in mind, lets not speculate on if or when this might happen or try to do a present value analysis.  Instead, lets look at LRE as a bond with a coupon that should return a certain percentage on average each year with a possible redemption at a price that is higher than currently.  However, there is uncertainty about when or if such a takeout might happen or what the premium might be. Therefore, lets assign no value to this possibility, although that event could be lagniappe.

 

This leaves us with a conservative method of valuation that looks only at LRE's likely stream of owners's earnings.  The current price/book and the 20 year combined record of Bindle and Lancashire suggest about a 14% coupon at today's price.  They may actually do a little better than this on average, but lets stay with 14% to be conservative.

 

Bear in mind that LRE's earnings are owners' earnings in the best sense of that term, managed by people who excel at capital management as well as underwriting throughout the cycle.  :)

 

Owning LRE is comparable to BRK's owning insurance companies.  Both potentially have the ability very likely to return capital to the owners or parent company in a market meltdown, capital that could be used to pick up bargains, provided that a selloff doesn't coincide with a major insurance loss event.

[Liberty]

http://www.royalgazette.com/article/20110801/BUSINESS02/707279924&template=mobileart

 

Lancashire Holdings Ltd has announced the company will switch its tax base from Bermuda to the UK as it reported forecast-beating quarterly profit thanks to limited exposure to recent natural disasters.

Lancashire said it did not expect its tax bill to rise as a result of the move, as it would qualify for a three-year exemption from British rules on the tax treatment of companies with overseas interests, pending their reform.

Speaking to The Royal Gazette, Neil McConachie, Lancashire Group Holdings’ president, said that the move would make senior management decision-making faster and easier while reducing risks.

He said that the Bermuda operation would be largely unaffected by shift in tax base, but Dan Soares, CEO of Lancashire Insurance Company Ltd and group head of operations, said that a few of the senior Group executives might move to London as a result.

“From a Bermuda perspective it really highlights that competing jurisdictions are alive to the fact that they need to change policy and legislation to be attractive,” said Mr Soares.

Mr McConachie said that while Lancashire Holdings would become tax resident in the UK, its Bermuda arm would continue to operate under the Bermuda tax regime and to be regulated by the Bermuda Monetary Authority.

[nwoodman]

some interesting commentary from Brindle. I guess they will either be right or wrong, but at least the pricing is now far more favorable.

 

http://www.propertycasualty360.com/2011/08/12/jan-1-cat-rates-to-soar-bermuda-execs-at-odds-on-f

 

And at Lancashire, Brindle says his company doubled its Japan premium this year—where renewal pricing jumped 160-180 percent—and started writing in Australia and New Zealand. “We’ve always been vastly skeptical of Australasia business,” says Brindle. “We do not worship at the altar of diversification,” he adds, referring to a strategy that put competitors in Australia and New Zealand when catastrophe events hit those areas.

 

Following the cat events, he reports 400-500 percent price changes for Australasia. “As you would expect us to do, we’ve taken advantage of that.”

 

In contrast, Platinum’s Price says there’s no clear sign of a hard market in Australia, and reports that Platinum nonrenewed its entire New Zealand book.

 

“It’s not obvious to me—in light of increasing exposures—that we actually have substantially better net pricing than prior to the events. So it isn’t clear that you have a truly hard market in Australasia,” he says, citing specific scientific reports of heightened seismic risk in New Zealand—one indicating that the probability of a greater than magnitude 6 quake in the next six months is 30 percent in the Canterbury region.

 

“Rates on line are nowhere near that level in New Zealand,” he says, referring to premium-to-limit ratios.

 

“You’re getting more money for the contract, yes, but you also have a substantially elevated risk level. Is that a hard market for cat? Not by my definition,” Price concludes.

 

Brindle scoffs at such logic. He reports that Lancashire is writing in high enough layers that it won’t get tagged for losses unless a there’s a major quake in one of New Zealand’s biggest cities.

 

“Without getting into names, it’s pretty strange when you see companies publicly announcing they’re pulling out of Australasia when the rating is certainly the highest level any of us can remember. That seems to be a very odd move,” Brindle says.

[twacowfca]

http://www.royalgazette.com/article/20110801/BUSINESS02/707279924&template=mobileart

 

Lancashire Holdings Ltd has announced the company will switch its tax base from Bermuda to the UK as it reported forecast-beating quarterly profit thanks to limited exposure to recent natural disasters.

Lancashire said it did not expect its tax bill to rise as a result of the move, as it would qualify for a three-year exemption from British rules on the tax treatment of companies with overseas interests, pending their reform.

Speaking to The Royal Gazette, Neil McConachie, Lancashire Group Holdings’ president, said that the move would make senior management decision-making faster and easier while reducing risks.

He said that the Bermuda operation would be largely unaffected by shift in tax base, but Dan Soares, CEO of Lancashire Insurance Company Ltd and group head of operations, said that a few of the senior Group executives might move to London as a result.

“From a Bermuda perspective it really highlights that competing jurisdictions are alive to the fact that they need to change policy and legislation to be attractive,” said Mr Soares.

Mr McConachie said that while Lancashire Holdings would become tax resident in the UK, its Bermuda arm would continue to operate under the Bermuda tax regime and to be regulated by the Bermuda Monetary Authority.

 

This is a huge benefit for US owners of taxible accounts.  The large dividends LRE pays will now be "qualifying", taxed at the 15% rate because the US has a tax treaty with the UK.  :) 

[rijk]

looks like the current market volatility has dragged down LRE approx 10%

 

i have been looking to buy LRE but it never seems to come down......

 

does this look like a reasonable entry point?

 

two tax related questions:

-does ameritrade withhold the 15% dividend tax on LCSHF?

-if you buy LRE in the UK, is dividend tax withheld at source (by the broker)?

 

regards

rijk

[twacowfca]

looks like the current market volatility has dragged down LRE approx 10%

 

i have been looking to buy LRE but it never seems to come down......

 

does this look like a reasonable entry point?

 

two tax related questions:

-does ameritrade withhold the 15% dividend tax on LCSHF?

-if you buy LRE in the UK, is dividend tax withheld at source (by the broker)?

 

regards

rijk

 

 

The LRE stockholders just approved moving LRE's tax status to UK. It may take a while longer for that to be approved and become official, hopefully by EOY.  

 

This could be a good entry point, but you might be able to buy it cheaper if the market continues to tank.  It looks like the hurricane season will be low loss, but to be sure, you might wait till mid September.   Sept 10 is the mid point of the damage potential for the Gulf and Atlantic, but hurricanes after that point in time rarely hit the oil patch.  Risk shifts eastward then away from the western Gulf to the Florida and Atlantic region.  :)

[rijk]

thanks for your feedback twa

 

the tax questions apply to the new configuration, i.e. after moving to the UK

 

regards

rijk

[accutronman]

Latest from Citi on Lancashire. Great company plus you get a cool looking dog on the annual reports:

 

Niche underwriter with excellent track record — Lancashire’s focus on niche

short tail re/insurance lines has been a great success and it has one of the best

underwriting track records (avg 55% COR since 2005 vs. avg sector 83% COR). Its

sizeable catastrophe exposure (32% premiums) has been tested by large losses a

number of times and we believe downside risk has been well managed – eg it has

one of the lowest exposures to 2011 losses (7% equity vs. Lloyd’s avg 16%). We

also see Lancashire’s aviation and marine portfolios (avg 24% underwriting profits

2006-10) as an underappreciated source of low-volatility earnings.

 

 Well positioned for all markets — If the market remains soft in 2012, we think

Lancashire will exploit pockets of better pricing (eg Accordion side car for retro

business) and return surplus capital to shareholders. If the market hardens

significantly in 2012, Lancashire’s strong capital position is a differentiator and its

smaller size gives it the ability to respond more rapidly than peers. Lancashire

already has one of the highest exposures to lines where pricing is increasing – eg

reinsurance and energy represent 56% premiums. Its simple operating structure

helps to manage risk through a daily u/w call with all senior mgt and maintains u/w

discipline as it does not have to write business just to cover a large fixed cost base.

 

 Low dependence on investment returns — Lancashire has a strong investment

return track record, eg it was one of few companies to report a positive return in 2008.

Lancashire’s earnings also have lower dependence on investment returns than

larger peers (28% profits vs. Lloyd’s avg 41% profits), which is a source of resilience.

 

 Sector-leading capital management — Lancashire has the best capital

management track record of all its Lloyd’s peers (117% of IPO capital returned to

shareholders). We are confident Lancashire will only retain capital if underwriting

opportunities are accretive to ROE. This enhances ROEs in a soft market and

should give the market confidence if Lancashire needs to raise capital. We review

scenarios for a capital return in 2011 and estimate that, if H2 losses are in line with

our budget, Lancashire could pay a $138m or 49p per share special dividend.

 

 Rated BUY despite strong performance — We see further upside because: i) the

current valuation of 1.2x 2012E NTA is not expensive in absolute terms given we

forecast 15% RONTA for 2012 (during a hardening market Lloyd’s stocks can trade

up to 1.8x), ii) in our view, Lancashire offers the best choice for both a soft and a

hard market, and iii) we believe Lancashire’s simple operating model deserves a

scarcity premium and we expect investors will continue to favour ‘quality’ companies.

Our target price of 864p implies 22% upside potential.

[Myth465]

Too bad there was never a real sell off hear.

[nwoodman]

Q3 Results out

 

http://www.lancashiregroup.com/lre_group/media/releases/2011/2011-11-04/

 

solid results and nice return of excess capital

[tombgrt]

Very nice again.

 

Still looking to buy but not at the current price. P/BV 1.43 isn't expensive but it is compared to the other current bargains out there imo.

[Myth465]

I wish all my companies performed like LRE....

 

This has been the most hassle free holding in my portfolio.

[sdev]

I wish all my companies performed like LRE....

 

This has been the most hassle free holding in my portfolio.

 

haha - agreed. Although I bet that's how all Madoff clients felt before the ball dropped.  :P

[Myth465]

LOL I was thinking something similar to that as I was typing. I really like the dividends for that reason  ;D