LRE.L - Lancashire Holdings Ltd

[twacowfca]

Gio I love that book!  Might have to reread it.

 

 

Yes, thank you gio for the reference.  I'll get a copy and read it.  :)

[giofranchi]

I've been running a few back of the envelope simulations of what impact Saltire and the earlier sidecar should have on Lancashire's ROE going forward.  I think these are likely to increase their prospective ROE by about one and a half to two percent. This doesn't seem like a lot, but it is important to maintain and increase their edge.  Their long term average ROE, including Brindle's years at Lloyd's has been 19.5%.  If that is relevant to future results, the use of these sidecars reasonably should boost prospective normalized ROE to 21%+.

 

There is also a qualitative aspect to this.  Lancashire's prospects in general are improved because scale has advantages.  It's likely that Lancashire can now access attractive opportunities that would have been beyond their capacity as a small company were it not for these sidecars.  :)

 

Thank you again and again! Please, just keep giving us such useful information!

 

giofranchi

[giofranchi]

Gio I love that book!  Might have to reread it.

 

October 13, 1933

 

I just finished reading a book called Mellon's Millions. In all thier business ventures they conservatively built up huge cash surplusses during time of prosperity. When a panic came they were able to absorb competitors for a song. During prosperous days their corporations advanced steadily but during depression they advanced by leaps and bounds. They showed rare business judgment. For instance they sold their ship-building company for an enormous price in 1917 at the height of the war boom - but the market for ships was gutted by time war ended. In 1930 they sold McClintic-Marshall Steel Co. to Bethlehem for an enormous price and on top of that Bethlehem assumed 12 million of McClintic Bonds. Since 1930 no steel co. has ever earned interest on bonds.

 

The Great Depression, A Diary - Benjamin Roth

 

Yes, I think it is a very interesting book!

 

giofranchi

 

 

[twacowfca]

Gio,

 

 

You asked for it. You got it.

 

Charles Mathias, their new chief risk officer is a neat guy.  He's smart and humble, in contrast to Brindle who is smart and says that he, "refuses to engage in false modesty". Charles and Richard were classmates at Oxford University in the early 1980's.  Charles and Richard both entered the P&C industry after college, but took different career paths.  Charles worked for a couple of multinational insurers and spent a number of years managing underwriting and operations, including  one in the US.  Richard recruited Charles to join him when Lancashire got started in late 2005.

 

Charles has been gracious to spend more than a long lunch with me on a few occasions.  He says that Lancashire is nothing like any other insurance company.  All the underwriters get together daily for a conference call with Richard to discuss the latest opportunities to write business.  Then they get back to the brokers or clients that day to let them know if they will take their risks.  They spend an amazing amount of time working long hours with brokers to deliver a product that is profitable for Lancashire and fits the clients' needs like a hand in a glove.

 

When there is a big loss event such as the NZ earthquake or the Japanese Tsunami, they fly half way around the world to fill the gap when other insurance companies are withdrawing after a big loss.  After the Japanese quake, they sent a payment to their biggest client immediately, long before they had time to file a claim.  Nobody does stuff like this!  Only Lancashire.  And their clients don't forget who went the extra mile with them.  A bunch of Lancashire employees even volunteered on their own time to go to some unfortunate area and help with a rebuilding project.

 

Here's what Charles and Richard have said about Saltire. It's more than a sidecar.  Saltire I is the first of hopefully a number of asset management  vehicles that will leverage LRE's industry leading expertise to capture a portion of the $30 billion of off balance sheet, collateralized ILS that seek returns that are not linked to the financial markets. Most of these are managed by people who are less than passionate and not particularly experienced in getting the very best  possible returns.  Lancashire owns a small piece of Saltire I to put themselves in the position that they have to eat their own cooking.  They hope that Saltire I will be the first of a number of these.  If that happens, Saltire will have it's own separate staff so that it won't distract from Lancashire's core operations.  :)

[giofranchi]

 

Gio,

 

 

You asked for it. You got it.

 

twacowfca,

it surely is not just me! I guess everyone on this board, who is interested in Lancashire (beyond me to understand why someone should not be interested in Lancashire…), is really thankful to you for sharing all that knowledge about the Company! How could it be otherwise?! :)

 

giofranchi

[beerbaron]

 

Gio,

 

 

You asked for it. You got it.

 

twacowfca,

it surely is not just me! I guess everyone on this board, who is interested in Lancashire (beyond me to understand why someone should not be interested in Lancashire…), is really thankful to you for sharing all that knowledge about the Company! How could it be otherwise?! :)

 

giofranchi

 

I'm not interested for tax considerations. I can't hold in my tax free savings account, retirement account broker won't trade on London's exchange and UK dividends are taxed as revenues in my margin account.

 

Looked into it 4 years ago and all I could do was look at the nice dividends press release.  :'(

 

BeerBaron

[twacowfca]

Once again, from publicly disclosed information, Lancashire's exposure to Sandy appears to be much lower than their peers' exposures.  Interestingly, their loss may go down if Sandy crosses the $20B threshold for total insured industry loss as some are predicting. This is because they found a bargain a few months ago, a$40M ILW that attaches at the $20B industry loss level. :)  Most of their exposure appears to be at extremely high levels if their usual pattern of writing coverage holds, but they do have a relatively small exposure at a level that should be breached.  :)

[twacowfca]

More info on Saltire.  The idea came about because Lancashire wished there was some product they could access to lay off their own very specific risk profile without any basis risk that is always present with prepackaged ILS.  No one had the knowledge of how to model Lancashire's very specific risk and design something that fit them like a hand in a glove.  Then they realized that they were the only one with the detailed in depth knowledge to do this for the syndicates and companies at Lloyd's. So they did it.  The brokers love it and are enthusiastic about selling it.  :)

 

I think it's going to be a huge hit.  If I'm right, they will have an enormous moat  because of their detailed knowledge of that market and all the players associated with Lloyd's.  I'll be surprised if Saltire I doesn't have new brothers and sisters that Lancashire will birth year after year to follow their older brother.  :)

[rjstc]

Great info. Thanks very much. Ron

 

[twacowfca]

Great info. Thanks very much. Ron

 

You're very welcome.  :)

[wknecht]

What an incredible record this company has. The numbers are really just unbelievable. And though not a ton of history developed yet, those loss triangles are a thing of beauty!

 

Really tough for me to pull the trigger at these prices though. (It seems a number of folks have said that on this thread...so far to their financial detriment). In any case, it appears this company has built something pretty special, and I'll be paying close attention going forward.

 

Keep up the great dialogue, it has been very informative.

[Myth465]

This has been my most problem free holding. I got in at BV and wont sell a share until 2x book. After the special dividend I will have recovered about 40% of my original investment. If only I had reinvested...

 

twacowfca do me a favor and let me know when you buy something else  ;).

[rjstc]

+1.  Never would have found it myself. It's been great and I've really learned a lot on this thread and board. I've kept adding to my position as well.I don't try to time. I might always be waiting for the absolute best price. Same with Berkshire. Some more of these types would be great.

[jay21]

+1.  Never would have found it myself. It's been great and I've really learned a lot on this thread and board. I've kept adding to my position as well.I don't try to time. I might always be waiting for the absolute best price. Same with Berkshire. Some more of these types would be great.

 

A few suggestions: MKL and NICK in the financial world.  NICK is facing some headwinds but seems to be very cheap for a growing company.

 

twacowfca, thanks for this idea.  It is probably the best company that I became aware through an internet board.  If only their strategy were scalable and they were able to compound! One of great things about of this company to me is that it is completely uncorrelated to the financial market.  Their securities are all extremely safe (agencies, treasuries, ABS).  Also, they do not depend too much on the insurance cycle it appears because their process allows them to go anywhere.  So they should have great returns regardless of economic and insurance cycles. 

 

[rjstc]

What an incredible record this company has. The numbers are really just unbelievable. And though not a ton of history developed yet, those loss triangles are a thing of beauty!

 

Really tough for me to pull the trigger at these prices though. (It seems a number of folks have said that on this thread...so far to their financial detriment). In any case, it appears this company has built something pretty special, and I'll be paying close attention going forward.

 

Keep up the great dialogue, it has been very informative.

 

I'm wondering if you might be waiting for a long time? I'm thinking this might be like a Munger type buy where the price is not cheap but over a period of time compared to most it will turn out to be a really good equity because it is just a really well run company with a great manager. I personally have continued to add thinking that as it stands and for a long time frame it's really going to work well.

[giofranchi]

What an incredible record this company has. The numbers are really just unbelievable. And though not a ton of history developed yet, those loss triangles are a thing of beauty!

 

Really tough for me to pull the trigger at these prices though. (It seems a number of folks have said that on this thread...so far to their financial detriment). In any case, it appears this company has built something pretty special, and I'll be paying close attention going forward.

 

Keep up the great dialogue, it has been very informative.

 

I'm wondering if you might be waiting for a long time? I'm thinking this might be like a Munger type buy where the price is not cheap but over a period of time compared to most it will turn out to be a really good equity because it is just a really well run company with a great manager. I personally have continued to add thinking that as it stands and for a long time frame it's really going to work well.

 

+1

But I am leaving some room to average down anyway. I always do!

 

giofranchi

[twacowfca]

+1.  Never would have found it myself. It's been great and I've really learned a lot on this thread and board. I've kept adding to my position as well.I don't try to time. I might always be waiting for the absolute best price. Same with Berkshire. Some more of these types would be great.

 

A few suggestions: MKL and NICK in the financial world.  NICK is facing some headwinds but seems to be very cheap for a growing company.

 

twacowfca, thanks for this idea.  It is probably the best company that I became aware through an internet board.  If only their strategy were scalable and they were able to compound! One of great things about of this company to me is that it is completely uncorrelated to the financial market.  Their securities are all extremely safe (agencies, treasuries, ABS).  Also, they do not depend too much on the insurance cycle it appears because their process allows them to go anywhere.  So they should have great returns regardless of economic and insurance cycles.

 

I agree that Lancashire's prospects are bright.  Be aware that there will come a time when they hit a speed bump and underperform their peers for more than a quarter or two.  They have done relatively well every time there has been a super cat, but they are contrarian.  There will come a time when they jump on a post catastrophe situation with high rates and get burned when the very unlikely event happens again the very next year.  We saw this on a small scale in the last two years when they jumped on toranado exposed coverage after rates spiked after the enormous losses two or three years ago.  Then, the losses continued the following year.  Their loss was only about $10M, but the same thing could happen on a larger scale. 

 

My point is this.  Lancashire trades at 1.5 to 1.6 times BV.  That's a bargain compared to the average S&P company, but it's high compared to their peer group.  The time will come when they do underperform for more than a few months.  When that happens, there may be a P/E contraction, despite their stirling long term record.  The problem is that it may take a long time before they stumble and there may not be a great buying opportunity unless they take a hard fall that their peers avoid. 

 

All in all, I would not recommend buying LRE outside of a bargain P/ B range unless the buyer was prepared to hold their stock for the long run.

[giofranchi]

I agree that Lancashire's prospects are bright.  Be aware that there will come a time when they hit a speed bump and underperform their peers for more than a quarter or two.  They have done relatively well every time there has been a super cat, but they are contrarian.  There will come a time when they jump on a post catastrophe situation with high rates and get burned when the very unlikely event happens again the very next year.

 

That's the reason why, as much as I like Lancashire, I still leave some room to eventually average down! ;)

 

giofranchi

[biaggio]

I agree that Lancashire's prospects are bright.  Be aware that there will come a time when they hit a speed bump and underperform their peers for more than a quarter or two.  They have done relatively well every time there has been a super cat, but they are contrarian.  There will come a time when they jump on a post catastrophe situation with high rates and get burned when the very unlikely event happens again the very next year.

 

That's the reason why, as much as I like Lancashire, I still leave some room to eventually average down! ;)

 

giofranchi

 

Gio, how do you allocate your cash in this situation where it appears like a good/great equity but fully or fairly valued. Say for example you would like to have a 10% holding i.e you would like to average in to 10%. Do you buy an initial 2.5% + add gradually + opportunistically for example or would you buy more or less?

[jay21]

+1.  Never would have found it myself. It's been great and I've really learned a lot on this thread and board. I've kept adding to my position as well.I don't try to time. I might always be waiting for the absolute best price. Same with Berkshire. Some more of these types would be great.

 

A few suggestions: MKL and NICK in the financial world.  NICK is facing some headwinds but seems to be very cheap for a growing company.

 

twacowfca, thanks for this idea.  It is probably the best company that I became aware through an internet board.  If only their strategy were scalable and they were able to compound! One of great things about of this company to me is that it is completely uncorrelated to the financial market.  Their securities are all extremely safe (agencies, treasuries, ABS).  Also, they do not depend too much on the insurance cycle it appears because their process allows them to go anywhere.  So they should have great returns regardless of economic and insurance cycles.

 

I agree that Lancashire's prospects are bright.  Be aware that there will come a time when they hit a speed bump and underperform their peers for more than a quarter or two.  They have done relatively well every time there has been a super cat, but they are contrarian.  There will come a time when they jump on a post catastrophe situation with high rates and get burned when the very unlikely event happens again the very next year.  We saw this on a small scale in the last two years when they jumped on toranado exposed coverage after rates spiked after the enormous losses two or three years ago.  Then, the losses continued the following year.  Their loss was only about $10M, but the same thing could happen on a larger scale. 

 

My point is this.  Lancashire trades at 1.5 to 1.6 times BV.  That's a bargain compared to the average S&P company, but it's high compared to their peer group.  The time will come when they do underperform for more than a few months.  When that happens, there may be a P/E contraction, despite their stirling long term record.  The problem is that it may take a long time before they stumble and there may not be a great buying opportunity unless they take a hard fall that their peers avoid. 

 

All in all, I would not recommend buying LRE outside of a bargain P/ B range unless the buyer was prepared to hold their stock for the long run.

 

Thanks for the insight.

 

I think for a company like LRE the price is very important.  They have not grown the company that much so you are paying for an earnings stream and not so much for growth.  Contrast this with BRK, where you could have paid a high price and the company would grow to catch up to your price.

 

twacowfca, do you have any insight on the reinvestment opportunities of LRE?  Or will they always remain small?

[giofranchi]

I agree that Lancashire's prospects are bright.  Be aware that there will come a time when they hit a speed bump and underperform their peers for more than a quarter or two.  They have done relatively well every time there has been a super cat, but they are contrarian.  There will come a time when they jump on a post catastrophe situation with high rates and get burned when the very unlikely event happens again the very next year.

 

That's the reason why, as much as I like Lancashire, I still leave some room to eventually average down! ;)

 

giofranchi

 

Gio, how do you allocate your cash in this situation where it appears like a good/great equity but fully or fairly valued. Say for example you would like to have a 10% holding i.e you would like to average in to 10%. Do you buy an initial 2.5% + add gradually + opportunistically for example or would you buy more or less?

 

My goal is to allocate 15% of my firm’s capital to Lancashire. Right now I am at little more than 7%. It is enough for it to be a very profitable position, if what twacowfca predicts never happens and LRE goes on performing quite satisfactorily. Vice versa, if the so-called bump in the road finally happens, I will double down with much greed… ehm… pleasure! ;D

That’s what I usually do with owner-operators, which are the only kind of businesses I invest in: they tend to be such good money machines, that I don’t want to miss the boat, but, at the same time, I want to be able and ready to strike, if chance offers me a home run!

 

giofranchi

[biaggio]

Thanks gio

[giofranchi]

Thanks gio

 

You are welcome! I have found that position sizing is much of a “personal” thing: what I am perfectly confortable with might sound the dumbest thing on earth to someone else… Hope what I have written makes at least some sense to you! :)

 

giofranchi

[rjstc]

Gio. I think you are right on target.

[twacowfca]

+1.  Never would have found it myself. It's been great and I've really learned a lot on this thread and board. I've kept adding to my position as well.I don't try to time. I might always be waiting for the absolute best price. Same with Berkshire. Some more of these types would be great.

 

A few suggestions: MKL and NICK in the financial world.  NICK is facing some headwinds but seems to be very cheap for a growing company.

 

twacowfca, thanks for this idea.  It is probably the best company that I became aware through an internet board.  If only their strategy were scalable and they were able to compound! One of great things about of this company to me is that it is completely uncorrelated to the financial market.  Their securities are all extremely safe (agencies, treasuries, ABS).  Also, they do not depend too much on the insurance cycle it appears because their process allows them to go anywhere.  So they should have great returns regardless of economic and insurance cycles.

 

I agree that Lancashire's prospects are bright.  Be aware that there will come a time when they hit a speed bump and underperform their peers for more than a quarter or two.  They have done relatively well every time there has been a super cat, but they are contrarian.  There will come a time when they jump on a post catastrophe situation with high rates and get burned when the very unlikely event happens again the very next year.  We saw this on a small scale in the last two years when they jumped on toranado exposed coverage after rates spiked after the enormous losses two or three years ago.  Then, the losses continued the following year.  Their loss was only about $10M, but the same thing could happen on a larger scale. 

 

My point is this.  Lancashire trades at 1.5 to 1.6 times BV.  That's a bargain compared to the average S&P company, but it's high compared to their peer group.  The time will come when they do underperform for more than a few months.  When that happens, there may be a P/E contraction, despite their stirling long term record.  The problem is that it may take a long time before they stumble and there may not be a great buying opportunity unless they take a hard fall that their peers avoid. 

 

All in all, I would not recommend buying LRE outside of a bargain P/ B range unless the buyer was prepared to hold their stock for the long run.

 

Thanks for the insight.

 

I think for a company like LRE the price is very important.  They have not grown the company that much so you are paying for an earnings stream and not so much for growth.  Contrast this with BRK, where you could have paid a high price and the company would grow to catch up to your price.

 

twacowfca, do you have any insight on the reinvestment opportunities of LRE?  Or will they always remain small?

 

 

You could create a synthetic growth stock from LRE by reinvesting your dividends.  This would work very well in a non taxable account.

 

They appear positioned to grow a little this coming year after their recent debt sale. They have hinted that they could probably write a lot of potentially profitable business if rates hardened after a bad hurricane this fall.  That's what happened.  We'll see if that's what they do.  :)