LRE.L - Lancashire Holdings Ltd

[twacowfca]

Enjoyed reading discussion. Have followed story + hoped I could buy at cheaper price that never came (yet?)

 

Would it be unrealistic to expect a "real rate of return" of 12% compounded annually? i.e 12% is nominal rate + inflation -seeing that it is a short tail insurer who insures opportunistically + prudently

-with all the money printing, all the real things we need to insure will need to be insured for higher replacement cost-maybe not this year, next year or the year after but eventually. (Giofranco, I know you like to consider macro trend-this is one that concerns me long term)

 

I would take a real rate of return annually of 12% (would make investment within tax defered account)

 

 

biaggio,

if I understood you well, you are concerned about future inflation, because inflation can be greatly detrimental to insurance performance. I think the last sentences in the Q3 2012 Hoisington Quarterly Review and Outlook express very well my own view on inflation:

 

“As commodity prices rose initially in all the QE programs, long-term Treasury bond yields also increased. However, those higher yields eventually reversed and generally continued to ratchet downward, reaching near record lows. The current Fed actions may be politically necessary due to numerous demands for them to act to improve the clearly depressed state of economic conditions. However, these policies will prove to be unproductive. Economic fundamentals will not improve until the extreme over-indebtedness of the U.S. economy is addressed, and this is in the realm of fiscal, not monetary policy. It would be more beneficial for the Fed to sit on the sidelines and try to put pressure on the fiscal authorities to take badly needed actions rather than do additional harm. Until the excessive debt issues are addressed, the multi-year trend in inflation, and thus the long Treasury bond yields will remain downward.”

 

I think it is still many years down the road, before we succeed in reducing overall debt to a sustainable level.

 

Furthermore, Mr. Brindle mostly concentrates on the short tail of the insurance and reinsurance markets, so I don’t see how inflation could turn out to be a significant concern. Of course, if he wants to grow Lancashire a little bit faster than he did until now, he might venture into underwriting longer lasting contracts, but he said many times he will consider doing so only if those contracts hold the promise to be solidly profitable. I am sure he will eventually consider the inflation threat very carefully!

 

giofranchi

 

 

 

Inflation is a general risk, but Lancashire is probably better situated than almost any other insurance company.  Firstly, they are entirely in short tail property.  Secondly, they have lower claims to eventually be paid in relation to the premiums they write than most other insurers because they have ultra low combined ratios.  Their property claims settle on average in about 18 months.  Therefore, their relatively low reserves to pay claims won't have much time to experience increased costs before they have to be paid in an inflationary period.

 

Here's where they will really be in the sweet spot when inflation kicks in with increased costs, followed  by higher interest rates.  They have $2 Billion + in assets, almost all in short duration high quality securities.  These earn perhaps 3% per annum or maybe $60M per year.  Fast forward a few years into the high inflation future.  Lancashire then has liquidated its low yield debt without loss because it is short duration.  Then, they might earn $160M a year on their assets if interest rates were 8% instead of 3%.

 

Meanwhile, competitors with long dated assets will have suffered losses on their principal before they can roll their assets over into higher yielding securities.

[rjstc]

twacowfca, giofranchi, thank you for the great discussion and information

 

 

I Completely agree. Very, very interesting and especially so for sticking to the subject with no histronics. Thanks again and keep it up

[Ross812]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

[twacowfca]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

[giofranchi]

I wouldn't buy their stock unless I had a long term perspective.

 

I completely agree. And, even if you do have a long term perspective, I would leave ample room to average down. You never know when the next Costa Concordia is going to happen!!  ;)

 

giofranchi

[twacowfca]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

[giofranchi]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

 

That’s exactly why I think you have developed a “feeling” for Lancashire that goes well beyond all your knowledge about the company. It is a true competitive advantage and a wonderful thing to have! And it is just great that you share it with us! I could read all the documents on Lancashire’s website and still “understand” a fraction of what you understand about the business. As a consequence, my predictions could never, never, never be as accurate as yours. We are not talking about recognizing an undervalued stock here. We are talking about recognizing a wonderful business that could go on delivering great results for many years into the future. The help of a person who followed the entire history of Lancashire so closely is very much appreciated!

 

giofranchi

[Green King]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

what ? i am confused (correct me if i am wrong.

Are you saying through your analysis of time series data. Key variable can have highly predictive accuracy.

When you use the predictive model constructed from those key variable to test it against the timer series data.

Hence Forth being able to predict the past through those key variable.

 

And you believe you can apply it in predicting part of the future .

If you can find the one or some the key variable that is important in predicting this timer series.

 

(In this example Brindle's Lloyd's record  ,  Lancashire returns and strength)

 

Also paper please  ;D

[twacowfca]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

what ? i am confused (correct me if i am wrong.

Are you saying through your analysis of time series data. Key variable can have highly predictive accuracy.

When you use the predictive model constructed from those key variable to test it against the timer series data.

Hence Forth being able to predict the past through those key variable.

 

And you believe you can apply it in predicting part of the future .

If you can find the one or some the key variable that is important in predicting this timer series.

 

(In this example Brindle's Lloyd's record  ,  Lancashire returns and strength)

 

Also paper please  ;D

 

Sorry for the confusion.  The study I mentioned concerned the epidemiology of a disease.  It was published in a medical journal.  It had nothing to do with business or security prices.  The point was that in both cases there was an inflection point where analyzing information about the past shifted to predicting the future concerning data that became available after the initial data set was studied or analyzed.  :)

[twacowfca]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

 

That’s exactly why I think you have developed a “feeling” for Lancashire that goes well beyond all your knowledge about the company. It is a true competitive advantage and a wonderful thing to have! And it is just great that you share it with us! I could read all the documents on Lancashire’s website and still “understand” a fraction of what you understand about the business. As a consequence, my predictions could never, never, never be as accurate as yours. We are not talking about recognizing an undervalued stock here. We are talking about recognizing a wonderful business that could go on delivering great results for many years into the future. The help of a person who followed the entire history of Lancashire so closely is very much appreciated!

 

giofranchi

 

You are very kind.  But there is a warning in your compliment.  Emotional attachment may become a ball and chain around the neck of an investor if the facts change.

 

However, people with  neurological deficits that render them incapable of feeling emotions have a great handicap when reasoning and making practical decisions.

 

With Lancashire, I agree that the emotional satisfaction of seeing my prediction confirmed to date has been a big plus.  It's entirely possible that Lancashire's outstanding record in business results could continue for as long as Brindle is at the helm and for many years afterward.  Think about Walter Schloss' amazing record for 50 years after Ben Graham retired or Warren's even longer record.  Time will tell.  ???

 

[giofranchi]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

 

That’s exactly why I think you have developed a “feeling” for Lancashire that goes well beyond all your knowledge about the company. It is a true competitive advantage and a wonderful thing to have! And it is just great that you share it with us! I could read all the documents on Lancashire’s website and still “understand” a fraction of what you understand about the business. As a consequence, my predictions could never, never, never be as accurate as yours. We are not talking about recognizing an undervalued stock here. We are talking about recognizing a wonderful business that could go on delivering great results for many years into the future. The help of a person who followed the entire history of Lancashire so closely is very much appreciated!

 

giofranchi

 

You are very kind.  But there is a warning in your compliment.  Emotional attachment may become a ball and chain around the neck of an investor if the facts change.

 

However, people with  neurological deficits that render them incapable of feeling emotions have a great handicap when reasoning and making practical decisions.

 

With Lancashire, I agree that the emotional satisfaction of seeing my prediction confirmed to date has been a big plus.  It's entirely possible that Lancashire's outstanding record in business results could continue for as long as Brindle is at the helm and for many years afterward.  Think about Walter Schloss' amazing record for 50 years after Ben Graham retired or Warren's even longer record.  Time will tell.  ???

 

 

I do believe that, as soon as a change happens in Lancashire, you will be among the very first ones to recognize it. Either it might be a change for the better or a change for the worse! Of course, I cannot say how you will take advantage of that early realization. Personally, I have discovered that I do not get emotionally attached to businesses. I do get emotionally attached to the people I live with, but never to the businesses I possess. And even with people I always try to keep in mind that they might be gone tomorrow (such is life, right?).

 

giofranchi

[twacowfca]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

 

That’s exactly why I think you have developed a “feeling” for Lancashire that goes well beyond all your knowledge about the company. It is a true competitive advantage and a wonderful thing to have! And it is just great that you share it with us! I could read all the documents on Lancashire’s website and still “understand” a fraction of what you understand about the business. As a consequence, my predictions could never, never, never be as accurate as yours. We are not talking about recognizing an undervalued stock here. We are talking about recognizing a wonderful business that could go on delivering great results for many years into the future. The help of a person who followed the entire history of Lancashire so closely is very much appreciated!

 

giofranchi

 

You are very kind.  But there is a warning in your compliment.  Emotional attachment may become a ball and chain around the neck of an investor if the facts change.

 

However, people with  neurological deficits that render them incapable of feeling emotions have a great handicap when reasoning and making practical decisions.

 

With Lancashire, I agree that the emotional satisfaction of seeing my prediction confirmed to date has been a big plus.  It's entirely possible that Lancashire's outstanding record in business results could continue for as long as Brindle is at the helm and for many years afterward.  Think about Walter Schloss' amazing record for 50 years after Ben Graham retired or Warren's even longer record.  Time will tell.  ???

 

 

I do believe that, as soon as a change happens in Lancashire, you will be among the very first ones to recognize it. Either it might be a change for the better or a change for the worse! Of course, I cannot say how you will take advantage of that early realization. Personally, I have discovered that I do not get emotionally attached to businesses. I do get emotionally attached to the people I live with, but never to the businesses I possess. And even with people I always try to keep in mind that they might be gone tomorrow (such is life, right?).

 

giofranchi

 

The Bible says:

 

 

"You do not know what tomorrow will bring.  For life is but a vapor that appears for a little while and then vanishes away."

 

    -- James 4:14

 

 

"For God so loved the world, that he sent his only Son.  That whosoever believes in him should not perish, but have eternal life."

 

      -- John 3:16

 

              :)

[giofranchi]

Twacowcfa,

 

I'm interested in opening a small position in lre.l on the London exchange. It seems like Lancashire usually announces a special dividend in November. Do you typically notice a run up leading into the dividend? I usually average into positions over a six month to one year time frame. Would you advise waiting until after the dividend or does lancashire tend to hold its value. It seems from looking at the charts like I should wait, but I know you get a feel for how a company trades after holding it for a period of time. When averaging in I start with 1%, and doubble my holdings with each purchase. I plan on eventually establishing a 4-8% position.

 

Regards,

 

Ross

 

Thank you for the great discussion and calling attention to this company. It seems like the British version of RLI which has been a great investment for me.

 

I hesitate to suggest an opportune time for purchase of  their stock.  They have done so well that delay has not often been rewarded.  However, there are times when Mr. Market  becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry.  Early this year, LRE had a bigger piece of Costa Concordia than their peers.  No big deal other than to remind the market that they don't walk on water.  However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor.

 

They are a little idiosyncratic.  Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit.  This year they are a little behind their own curve, but catching up.  I wouldn't buy their stock unless I had a long term perspective.

 

For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date.  Then regain that drop within a few weeks. 

 

That's past.  Does the future recap the past?  Well, as Niels Bohr said, "Prediction is very difficult, especially about the future."  :)

 

 

My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote  a few years ago.  The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades.  The correlations and  confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time.

 

Then, seven more years of data became available for the key variable to correlate with another time series that was current.  Suddenly, this was now from my point of view a prospective study.  I was looking back to the future to see what was going to happen!  My palms literally began to sweat as I updated the two time series on the run chart.  The more complete time series had reversed its direction.  Would the newly available data for the key variable also reverse and follow that lead?  My palms began to sweat more. 

 

Yes, it did!  Suggesting conditional causality.

 

This is why I have rational and emotional confidence at a high level for Lancashire.  I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire.  This has now been supported by the ongoing prospective point of view since then. 

 

I have had a huge and quite unfair advantage over Mr. Market as tempus fugit.  It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold.  Never the less, this is still probabalistic.  It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards.  :)

 

 

That’s exactly why I think you have developed a “feeling” for Lancashire that goes well beyond all your knowledge about the company. It is a true competitive advantage and a wonderful thing to have! And it is just great that you share it with us! I could read all the documents on Lancashire’s website and still “understand” a fraction of what you understand about the business. As a consequence, my predictions could never, never, never be as accurate as yours. We are not talking about recognizing an undervalued stock here. We are talking about recognizing a wonderful business that could go on delivering great results for many years into the future. The help of a person who followed the entire history of Lancashire so closely is very much appreciated!

 

giofranchi

 

You are very kind.  But there is a warning in your compliment.  Emotional attachment may become a ball and chain around the neck of an investor if the facts change.

 

However, people with  neurological deficits that render them incapable of feeling emotions have a great handicap when reasoning and making practical decisions.

 

With Lancashire, I agree that the emotional satisfaction of seeing my prediction confirmed to date has been a big plus.  It's entirely possible that Lancashire's outstanding record in business results could continue for as long as Brindle is at the helm and for many years afterward.  Think about Walter Schloss' amazing record for 50 years after Ben Graham retired or Warren's even longer record.  Time will tell.  ???

 

 

I do believe that, as soon as a change happens in Lancashire, you will be among the very first ones to recognize it. Either it might be a change for the better or a change for the worse! Of course, I cannot say how you will take advantage of that early realization. Personally, I have discovered that I do not get emotionally attached to businesses. I do get emotionally attached to the people I live with, but never to the businesses I possess. And even with people I always try to keep in mind that they might be gone tomorrow (such is life, right?).

 

giofranchi

 

The Bible says:

 

 

"You do not know what tomorrow will bring.  For life is but a vapor that appears for a little while and then vanishes away."

 

    -- James 4:14

 

 

"For God so loved the world, that he sent his only Son.  That whosoever believes in him should not perish, but have eternal life."

 

      -- John 3:16

 

              :)

 

 

Words of enduring wisdom: beautiful and inspiring, just like the first time I read them.

 

giofranchi

[muscleman]

I am new to this thread but it looks interesting. I have two newbie questions.

1. Since this company is new, is it possible that it seeks risky insurance policies for shorter term profit boosts? (Like AIG did before 2007?) I think this may be less likely for this company because it is doing short term policies primarily.

2. What is exactly their book value? In their website it says $8.05 per share? That is kind of strange as it is trading at over 800 pounds per share right now.

[racemize]

I am new to this thread but it looks interesting. I have two newbie questions.

1. Since this company is new, is it possible that it seeks risky insurance policies for shorter term profit boosts? (Like AIG did before 2007?) I think this may be less likely for this company because it is doing short term policies primarily.

2. What is exactly their book value? In their website it says $8.05 per share? That is kind of strange as it is trading at over 800 pounds per share right now.

 

It's 800 pence.  I wish they listed their book value in pence as well (for easy comparison), but oh well.

[muscleman]

I am new to this thread but it looks interesting. I have two newbie questions.

1. Since this company is new, is it possible that it seeks risky insurance policies for shorter term profit boosts? (Like AIG did before 2007?) I think this may be less likely for this company because it is doing short term policies primarily.

2. What is exactly their book value? In their website it says $8.05 per share? That is kind of strange as it is trading at over 800 pounds per share right now.

 

It's 800 pence.  I wish they listed their book value in pence as well (for easy comparison), but oh well.

 

OK. Then that is really interesting. An excellent insurance company trading close  to book. I would dip more into this and try to buy around book value.

What do you think is their edge? They don't seem to be the Prem or Buffet type of super investors, but they make most of the money from their nimble underwritting.

 

Where would I get their book value per share in pound? I tried to find their financial reports but all are pointing to the $. :(

[racemize]

I'm assuming the best way is to just use a dollars to pound conversion on their listed book value (from the website or last report).  As for the edge, I'm not the expert (I'm still digging into the reports now), and the comments from twacowfca in this thread has it summed up as well as I understand it.

[rmitz]

I am new to this thread but it looks interesting. I have two newbie questions.

1. Since this company is new, is it possible that it seeks risky insurance policies for shorter term profit boosts? (Like AIG did before 2007?) I think this may be less likely for this company because it is doing short term policies primarily.

2. What is exactly their book value? In their website it says $8.05 per share? That is kind of strange as it is trading at over 800 pounds per share right now.

 

It's 800 pence.  I wish they listed their book value in pence as well (for easy comparison), but oh well.

 

OK. Then that is really interesting. An excellent insurance company trading close  to book. I would dip more into this and try to buy around book value.

What do you think is their edge? They don't seem to be the Prem or Buffet type of super investors, but they make most of the money from their nimble underwritting.

 

Where would I get their book value per share in pound? I tried to find their financial reports but all are pointing to the $. :(

 

It's not really close to book value right now.  Just put "8.05 USD to GBP" into google and you'll get your answer...then remember to mentally multiply by 100 for pence.

[Ross812]

BV = 8.05 USD x GBP/1.6 USD x 100 pence/GBP = 503 pence.

 

It is trading about 1.73x BV. It's not cheap.

[twacowfca]

I'm assuming the best way is to just use a dollars to pound conversion on their listed book value (from the website or last report).  As for the edge, I'm not the expert (I'm still digging into the reports now), and the comments from twacowfca in this thread has it summed up as well as I understand it.

 

Their assets are mostly in dollar denominated securities, and claims are mostly in dollars.  Appropriately, their financial reporting is in US Dollars, but the stock trades in pence on the LSE.  Q2 2012 FCBV/SH is $8.05 in dollars.  Therefore, PRICE/FCBV/SH is above 1.6 as of Q2.  However, Q3 should be a low loss quarter, so BV may be up about 6% (+ (-) 1%) when they report Q3 in three more weeks.  So far Q4 appears to be low loss.  If that continues as Is typical in Q4, It's likely that EOY FCBV/SH, including any large special dividend that is often paid around EOY, should be close to $9.00. 

 

Their history suggests that their BV, including dividends paid may increase about 25% or so in a year when they don't experience a large loss, usually from a supercat.  That's about half the time.  All in all, their long term average, including the CEO's record for many years when he was the chief underwriter for two syndicates at Lloyd's of London has been to increase BV or other returns to shareholders or "names" at Lloyd's by about 19.4% per annum (or perhaps 19.5% per annum if Q3 of this year is good).

 

You ask a good question about tail risk.  They do tend to gravitate to the top layers of exposure, but they have been tested twice, in 08 and 11 with super catastrophes.  Happily, they not only survived in good shape, but amazingly earned about 10% on their capital in those years, much better than their peers with catastrophe exposure, and better than most insurance companies earn in an average year.

 

:)

[Ross812]

Lancashire's BV growth + dividends supports the valuation. From what I understand, Brindle will try to keep Lancashire small and nimble and throw off underwriting earnings as either dividends or buybacks. The risk in buying Lancashire 70% above BV is key man risk. As long as Brindle is at the helm the investment will do fine, but it is pretty dependent on one mans health and acumen. I think LRE.L is a great company, but I cannot allocate a large amount of my portfolio to it because the lost of Brindle will cause a likely permanent impairment of 35%. It would take roughly 15 quarters to earn your capital back at 16% to justify the 1.7x BV right now.

[twacowfca]

Lancashire's BV growth + dividends supports the valuation. From what I understand, Brindle will try to keep Lancashire small and nimble and throw off underwriting earnings as either dividends or buybacks. The risk in buying Lancashire 70% above BV is key man risk. As long as Brindle is at the helm the investment will do fine, but it is pretty dependent on one mans health and acumen. I think LRE.L is a great company, but I cannot allocate a large amount of my portfolio to it because the lost of Brindle will cause a likely permanent impairment of 35%. It would take roughly 15 quarters to earn your capital back at 16% to justify the 1.7x BV right now.

 

Good summary of the risks.  A couple of quibbles, though. It's possible that their current BV is about 1.6 now if Q3 is a low loss quarter.  We might guess that it is more likely than not that Q4 will also be low loss because we are almost to the end of October, and their greatest exposure, windstorm, is very low this time of year.  If Q4 shapes up that way, current price/BV At EOY plus any special dividend may be about 1.5. 

 

This is speculative, of course, and it's not good to count chickens before they are hatched.  The point is that it doesn't take long to close the gap between P/BV if the expected return continues to match their long term record.  Two more "average" years after a good Q3 and Q4 could get them within spitting distance of price parity with book value -- that is assuming that the price doesn't increase.  :)

 

:)

 

One more point.  Lancashire is a gem.  They have nice niches where they are lead underwriters.  I would be surprised if they did not continue to do nearly as well with Brindles hand picked and personally trained staff for a few years at least if something should happen to Brindle.  However, their corporate culture could be more subject to losing its edge over time if they lost their CEO. 

 

I hope I haven't confused people with my comments regarding the desirability of having a terminal value in a DCF present value analysis.  That is the common methodology to simplify the analysis.  In real life, changes that are associated with regression to the mean are usually gradual.

 

Syndicates at Lloyds that have good niches (the reference for valuing LRE) tend to retain their premium value even when they lose a key person because the broker and client relationships are not easily broken.  One such well regarded manager of Lloyds syndicates, Hardy's, lost about half its book value after the 2011 - 2012 catastrophes.  Yet such was its regard, that it was taken over at a price of  more than 1.5 times its remaining BV.  :)

[Ross812]

Lancashire's BV growth + dividends supports the valuation. From what I understand, Brindle will try to keep Lancashire small and nimble and throw off underwriting earnings as either dividends or buybacks. The risk in buying Lancashire 70% above BV is key man risk. As long as Brindle is at the helm the investment will do fine, but it is pretty dependent on one mans health and acumen. I think LRE.L is a great company, but I cannot allocate a large amount of my portfolio to it because the lost of Brindle will cause a likely permanent impairment of 35%. It would take roughly 15 quarters to earn your capital back at 16% to justify the 1.7x BV right now.

 

Good summary of the risks.  A couple of quibbles, though. It's possible that their current BV is about 1.6 now if Q3 is a low loss quarter.  We might guess that it is more likely than not that Q4 will also be low loss because we are almost to the end of October, and their greatest exposure, windstorm, is very low this time of year.  If Q4 shapes up that way, current price/BV At EOY plus any special dividend may be about 1.5. 

 

This is speculative, of course, and it's not good to count chickens before they are hatched.  The point is that it doesn't take long to close the gap between P/BV if the expected return continues to match their long term record.  Two more "average" years after a good Q3 and Q4 could get them within spitting distance of price parity with book value -- that is assuming that the price doesn't increase.  :)

 

:)

 

One more point.  Lancashire is a gem.  They have nice niches where they are lead underwriters.  I would be surprised if they did not continue to do nearly as well with Brindles hand picked and personally trained staff for a few years at least if something should happen to Brindle.  However, their corporate culture could be more subject to losing its edge over time if they lost their CEO. 

 

I hope I haven't confused people with my comments regarding the desirability of having a terminal value in a DCF present value analysis.  That is the common methodology to simplify the analysis.  In real life, changes that are associated with regression to the mean are usually gradual.

 

Syndicates at Lloyds that have good niches (the reference for valuing LRE) tend to retain their premium value even when they lose a key person because the broker and client relationships are not easily broken.  One such well regarded manager of Lloyds syndicates, Hardy's, lost about half its book value after the 2011 - 2012 catastrophes.  Yet such was its regard, that it was taken over at a price of  more than 1.5 times its remaining BV.  :)

 

I agree 15 quarters is over conservative. In fact, when writing my previous post I considered that bv would likey be reported roughly 5% higher in a few weeks. My job is to allocate money to provide an absolute return which means i have to avoid a permanent loss. If something was to happen to Brindle, i would not be suprised to see an immediate 20% drop and the market would require the company ex-brindle to perform for several years in order to regain its premium. I absolutely believe Lancashire is a gem, I'm just hesitant to allocate too much capital to such a specialized company with key man risk. You can see my investments in my signature. I like dividends, and quality but I'm not afraid to put a lot of money in one idea if I see a margin of safety. Bidvest is currently 30% of my portfolio. Chesepeake preferred are almost 20%.

[twacowfca]

Lancashire's BV growth + dividends supports the valuation. From what I understand, Brindle will try to keep Lancashire small and nimble and throw off underwriting earnings as either dividends or buybacks. The risk in buying Lancashire 70% above BV is key man risk. As long as Brindle is at the helm the investment will do fine, but it is pretty dependent on one mans health and acumen. I think LRE.L is a great company, but I cannot allocate a large amount of my portfolio to it because the lost of Brindle will cause a likely permanent impairment of 35%. It would take roughly 15 quarters to earn your capital back at 16% to justify the 1.7x BV right now.

 

Good summary of the risks.  A couple of quibbles, though. It's possible that their current BV is about 1.6 now if Q3 is a low loss quarter.  We might guess that it is more likely than not that Q4 will also be low loss because we are almost to the end of October, and their greatest exposure, windstorm, is very low this time of year.  If Q4 shapes up that way, current price/BV At EOY plus any special dividend may be about 1.5. 

 

This is speculative, of course, and it's not good to count chickens before they are hatched.  The point is that it doesn't take long to close the gap between P/BV if the expected return continues to match their long term record.  Two more "average" years after a good Q3 and Q4 could get them within spitting distance of price parity with book value -- that is assuming that the price doesn't increase.  :)

 

:)

 

One more point.  Lancashire is a gem.  They have nice niches where they are lead underwriters.  I would be surprised if they did not continue to do nearly as well with Brindles hand picked and personally trained staff for a few years at least if something should happen to Brindle.  However, their corporate culture could be more subject to losing its edge over time if they lost their CEO. 

 

I hope I haven't confused people with my comments regarding the desirability of having a terminal value in a DCF present value analysis.  That is the common methodology to simplify the analysis.  In real life, changes that are associated with regression to the mean are usually gradual.

 

Syndicates at Lloyds that have good niches (the reference for valuing LRE) tend to retain their premium value even when they lose a key person because the broker and client relationships are not easily broken.  One such well regarded manager of Lloyds syndicates, Hardy's, lost about half its book value after the 2011 - 2012 catastrophes.  Yet such was its regard, that it was taken over at a price of  more than 1.5 times its remaining BV.  :)

 

I agree 15 quarters is over conservative. In fact, when writing my previous post I considered that bv would likey be reported roughly 5% higher in a few weeks. My job is to allocate money to provide an absolute return which means i have to avoid a permanent loss. If something was to happen to Brindle, i would not be suprised to see an immediate 20% drop and the market would require the company ex-brindle to perform for several years in order to regain its premium. I absolutely believe Lancashire is a gem, I'm just hesitant to allocate too much capital to such a specialized company with key man risk. You can see my investments in my signature. I like dividends, and quality but I'm not afraid to put a lot of money in one idea if I see a margin of safety. Bidvest is currently 30% of my portfolio. Chesepeake preferred are almost 20%.

 

 

Bidvest is also a great company, led by another best of class CEO, Brian Joffe.  Lancashire, though at 1.6 P/B looks like the better buy, however, than Bidvest at 3.1 P/B.  as they have similar ROE, if I'm not mistaken.  Also, I think Bidvest has a lot more debt than LRE.

 

In truth, companies with fairly young and healthy owner/operator founder CEO's with most of their personal assets in their businesses, do much better than other companies.  If these companies were removed from the S&P 500, the remaining businesses would have had pitiful returns, the worst asset class of all. 

 

The life expectancy of apparently healthy people like Brindle and Joffe is 99%+ per annum.  Plus where would they go? Sell their pride and joys that are a pleasure to manage and go to work as a hired hand at a mega cap company with more politics than the US election?

[giofranchi]

Lancashire's BV growth + dividends supports the valuation. From what I understand, Brindle will try to keep Lancashire small and nimble and throw off underwriting earnings as either dividends or buybacks. The risk in buying Lancashire 70% above BV is key man risk. As long as Brindle is at the helm the investment will do fine, but it is pretty dependent on one mans health and acumen. I think LRE.L is a great company, but I cannot allocate a large amount of my portfolio to it because the lost of Brindle will cause a likely permanent impairment of 35%. It would take roughly 15 quarters to earn your capital back at 16% to justify the 1.7x BV right now.

 

Good summary of the risks.  A couple of quibbles, though. It's possible that their current BV is about 1.6 now if Q3 is a low loss quarter.  We might guess that it is more likely than not that Q4 will also be low loss because we are almost to the end of October, and their greatest exposure, windstorm, is very low this time of year.  If Q4 shapes up that way, current price/BV At EOY plus any special dividend may be about 1.5. 

 

This is speculative, of course, and it's not good to count chickens before they are hatched.  The point is that it doesn't take long to close the gap between P/BV if the expected return continues to match their long term record.  Two more "average" years after a good Q3 and Q4 could get them within spitting distance of price parity with book value -- that is assuming that the price doesn't increase.  :)

 

:)

 

One more point.  Lancashire is a gem.  They have nice niches where they are lead underwriters.  I would be surprised if they did not continue to do nearly as well with Brindles hand picked and personally trained staff for a few years at least if something should happen to Brindle.  However, their corporate culture could be more subject to losing its edge over time if they lost their CEO. 

 

I hope I haven't confused people with my comments regarding the desirability of having a terminal value in a DCF present value analysis.  That is the common methodology to simplify the analysis.  In real life, changes that are associated with regression to the mean are usually gradual.

 

Syndicates at Lloyds that have good niches (the reference for valuing LRE) tend to retain their premium value even when they lose a key person because the broker and client relationships are not easily broken.  One such well regarded manager of Lloyds syndicates, Hardy's, lost about half its book value after the 2011 - 2012 catastrophes.  Yet such was its regard, that it was taken over at a price of  more than 1.5 times its remaining BV.  :)

 

I agree 15 quarters is over conservative. In fact, when writing my previous post I considered that bv would likey be reported roughly 5% higher in a few weeks. My job is to allocate money to provide an absolute return which means i have to avoid a permanent loss. If something was to happen to Brindle, i would not be suprised to see an immediate 20% drop and the market would require the company ex-brindle to perform for several years in order to regain its premium. I absolutely believe Lancashire is a gem, I'm just hesitant to allocate too much capital to such a specialized company with key man risk. You can see my investments in my signature. I like dividends, and quality but I'm not afraid to put a lot of money in one idea if I see a margin of safety. Bidvest is currently 30% of my portfolio. Chesepeake preferred are almost 20%.

 

 

Bidvest is also a great company, led by another best of class CEO, Brian Joffe.  Lancashire, though at 1.6 P/B looks like the better buy, however, than Bidvest at 3.1 P/B.  as they have similar ROE, if I'm not mistaken.  Also, I think Bidvest has a lot more debt than LRE.

 

In truth, companies with fairly young and healthy owner/operator founder CEO's with most of their personal assets in their businesses, do much better than other companies.  If these companies were removed from the S&P 500, the remaining businesses would have had pitiful returns, the worst asset class of all. 

 

The life expectancy of apparently healthy people like Brindle and Joffe is 99%+ per annum.  Plus where would they go? Sell their pride and joys that are a pleasure to manage and go to work as a hired hand at a mega cap company with more politics than the US election?

 

 

Ross812,

I understand the “key man risk” you are talking about. Unfortunately, I don’t really believe in outperformance, without an outstanding manager who achieves it. To look for businesses that could go on autopilot and outperform means to shrink the investment universe to just 2 or 3 ideas… And even those extremely rare exceptions might turn out to be nothing more than the proverbial philosopher's stone… I believe outperformance is achieved by hard-wired and intense entrepreneurship and through the will of very driven individuals.

Mr. Brindle is 49 and, as twacowfca has rightly pointed out, just two years of “mediocre” performance will be needed to close the gap between price valuation and BV. Then your downside will be protected. I think it will take really a tragic event for Mr. Brindle to leave LRE within two years…

Anyway, I like to spread the “key man risk” among 5 to 10 outstanding managers. That’s why I am curious about RLI. I see you have an investment in RLI: does a thread already exist about RLI? If not, why won’t you start one?

 

giofranchi