LRE.L - Lancashire Holdings Ltd

[Ross812]

giofranchi,

 

I don't know what happened to the RLI thread. The RLI thread was started by a ex-member so maybe it was deleted when he left. I'll see what I can do to come up with some information on RLI and start a new discussion topic. I do know off hand that their average 10 year combined ratio has been 85. They operate in a similar fashion to LRE.L, but place more emphasis on growing the business through acquisition. They have returned an average of 16.5% for the last 10 years for their shareholders and are very focused on absolute shareholder return. I'm a firm believer that with insurance companies underwriting comes first. Thus my interest in Lancashire.

 

There are very view businesses that could exist on only autopilot. If you consider the businesses with the right sort of business culture to continue to reward shareholders, the list grows. Bidvest, UPS, and INTC all make this list for me.

 

Bidvest has a very decentralized corporate structure that focuses on a common theme. Brian Joffe makes the big management decisions to enter new markets, but division managers are free to take their businesses in the direction they see fit. Bidvest approaches best in class small businesses with the proposition to reduce their overhead costs, provide access to capital, and allow them to grow regionally. The business is not acquired for its assets but for its people and their expertise.

 

UPS has a culture that focuses on ruthless efficiency. They're margin of safety grows every year because of the network effect and economies of scale. Their operation costs are basically fixed like a utility; every additional package they deliver adds to their bottom line. In addition, they can cut costs by improving efficiency. The more packages they handle, the more efficient they can become.

 

INTC is the one of the most (if not the most) technologically advanced company on earth. They invest 10B a year to further their knowledge, and are the only vertically integrated company in their business which will lead to a long term advantage. I think INTC and UPS have the opportunity to have true monopolies.

 

 

[giofranchi]

Ross812,

Bidvest, UPS, and Intel are wonderful businesses. No doubt about that.

This is your very interesting description of Bidvest:

 

Bidvest has a very decentralized corporate structure that focuses on a common theme. Brian Joffe makes the big management decisions to enter new markets, but division managers are free to take their businesses in the direction they see fit. Bidvest approaches best in class small businesses with the proposition to reduce their overhead costs, provide access to capital, and allow them to grow regionally. The business is not acquired for its assets but for its people and their expertise.

 

To me it sounds a lot like BRK! An outstanding manager who chooses and acquire businesses run by other outstanding managers, and let them work their magic. The common denominator always remains the same: outstanding manager.

 

And what about UPS?

 

UPS has a culture that focuses on ruthless efficiency. 

 

It is extremely hard to stay among the most efficient civil engineering firm in the metropolitan area of Milan, Italy. Can you imagine how unbelievably hard it must be to stay the most efficient courier worldwide? Of course, they enjoy monstrous competitive advantages! But I would sleep much better at night, if I knew an outstanding manager is at the helm of a machine that must constantly keep such an unbelievable level of efficiency!

 

Finally, Intel:

 

They invest 10B a year to further their knowledge

 

Invest 10B a year? And who chooses how? We all know how easy it is to throw away money! One or two dumb decisions and all of a sudden you find yourself in a deep hole… Better be sure that some outstanding manager is in charge of handling those billions!

 

This is not to say that Bidvest, UPS, and Intel are not wonderful businesses: they most surely are! Instead, it is just to point out that true outperformance, even for mighty machines like those three, hardly can be achieved without the right management.

 

giofranchi

[bargainman]

A question for folks in the US who've bought this stock, what broker do you use? I tried buying it with Interactive Brokers using the Pink Sheets ticker LCSHF, but was told they don't support this.  Apparently you have to trade it directly on the london exchange.  Has anyone used IB or any other broker to buy them?

[rjstc]

A question for folks in the US who've bought this stock, what broker do you use? I tried buying it with Interactive Brokers using the Pink Sheets ticker LCSHF, but was told they don't support this.  Apparently you have to trade it directly on the london exchange.  Has anyone used IB or any other broker to buy them?

I have used Schwab. Been happy.

[bookie71]

Schwab - no problem

[rmitz]

A question for folks in the US who've bought this stock, what broker do you use? I tried buying it with Interactive Brokers using the Pink Sheets ticker LCSHF, but was told they don't support this.  Apparently you have to trade it directly on the london exchange.  Has anyone used IB or any other broker to buy them?

 

I use IB and have owned LRE in the past.  Why wouldn't you just buy it on the london exchange?  If you're in a cash account the currency trades can be slightly annoying but it's not that bad.  The london exchange is far more liquid, the spread is better, etc.  I think I've also traded the pink sheets on Tradeking.

[benhacker]

I've bought LCSHF on optionsxpress in the past (>2yr ago).  Strongly recommend buying the London shares due to lower all-in trading costs unless you have a US only broker that is physically going to the London exchange and just doing the conversion to "F" shares for you as a courtesy (I believe AMTD will do this for >50k order sizes).

 

The spread is a huge cost, and also makes trading LCSHF tedious if you don't have a broker doing it locally.  Trading LRE on the London exchange is much easier.

 

Ben

[Ross812]

A question for folks in the US who've bought this stock, what broker do you use? I tried buying it with Interactive Brokers using the Pink Sheets ticker LCSHF, but was told they don't support this.  Apparently you have to trade it directly on the london exchange.  Has anyone used IB or any other broker to buy them?

 

I also use IB. Create a forex transaction to convert into GBP then buy LRE.L. The only thing that grinds my nerves is the transaction fee is 6 GBP ($9.60) which isn't bad but seems like robbery when you get used to $1 ! If you buy at the end of the month and you haven't been active that month it is essentially free since it comes off of your $10 month minimum.

[shoeless]

I think there is a "Stamp Duty Reserve Tax" of 0.5% on top of any broker fees when buying on the LSE. Not sure if there is one for the pink sheet.

 

 

[giofranchi]

Q3 2012 Results.

 

Richard Brindle, Group Chief Executive Officer, commented:

“Sandy has caused tragic loss of life and significant damage in its progress from the Caribbean through North America. Our thoughts at Lancashire go out to all those affected.

Thankfully, the third quarter has been relatively quiet in terms of catastrophes and we have not suffered significant risk losses so Lancashire has produced another strong set of results. The third quarter return on equity of 5.7%, and 13.2% for the year to date, continues our record of consistent increase in book value per share, including dividends. We have now generated a compound annual return of 19.4% since inception, and with a combined ratio for the quarter of 48.9%, our inception to date combined ratio now stands at 58.3%.

In our view, the market outlook in our lines of business is stable. Premium rates will come under pressure for the January renewals with more than enough capacity in the great majority of our lines, but we believe that our emphasis on risk selection helps us to produce superior results across the cycle. We are surprised with the over positive note which we have seen from some about rate increases, as we do not believe that this will carry into 2013 for most classes.

As ever, Lancashire will focus on servicing its core portfolio of insurance and reinsurance clients, who make up the majority of our portfolio, whilst looking for opportunistic areas of dislocation, or new demand, to leverage the Lancashire brand. With the ever growing flow of alternative funds into our market place, we also continue to explore opportunities to build partnerships with capital market participants seeking underwriters with a proven track record for building shareholder value.”

 

twacowfca, any comment?

 

giofranchi

2012-11-08-pr.pdf

[twacowfca]

Q3 is another boring event.  5.7 % ROE (increase in FCBV/SH), 48% CR,  $89.1M comprehensive income, mostly underwriting profit without any reserve releases.  This is about 23% ROE  annualized or 25% annual ROE if this quarter's result is extended and compounded.

 

Even with the $.90/SH special dividend, they should be going into the big January, 2013 renewals with a lot more capital than in the past.  Plus their cookie jar of reserves should be fairly full with no withdrawals this quarter.  They don't seem much concerned about the financial impact of Sandy on Q4 results.  I think that those relatively low losses will be mostly in their sidecar.

 

Charles will become their Chief Risk officer in 2013.  I suspect that he, like Neil, is looking forward to returning to the big island.  Elaine is to become an executive director of Lancashire.

 

The really big news is Saltire.  This is a most unusual sidecar.  It is the first in the industry to offload non cat risk to outside investors.  This should be very popular because Lancashire knows how to be nimble to exploit opportunistically across different classes of business. :)

[giofranchi]

Q3 is another boring event.  5.7 % ROE (increase in FCBV/SH), 48% CR,  $89.1M comprehensive income, mostly underwriting profit without any reserve releases.  This is about 23% ROE  annualized or 25% annual ROE if this quarter's result is extended and compounded.

 

Even with the $.90/SH special dividend, they should be going into the big January, 2013 renewals with a lot more capital than in the past.  Plus their cookie jar of reserves should be fairly full with no withdrawals this quarter.  They don't seem much concerned about the financial impact of Sandy on Q4 results.  I think that those relatively low losses will be mostly in their sidecar.

 

Charles will become their Chief Risk officer in 2013.  I suspect that he, like Neil, is looking forward to returning to the big island.  Elaine is to become an executive director of Lancashire.

 

The really big news is Saltire.  This is a most unusual sidecar.  It is the first in the industry to offload non cat risk to outside investors.  This should be very popular because Lancashire knows how to be nimble to exploit opportunistically across different classes of business. :)

 

Thank you very much! As always, very interesting comments!

A 48,9% combined ratio is even better than their already outstanding average! But probably that’s just because Q3 “has been relatively quiet in terms of catastrophes”.

It seems Mr. Brindle is not seeing the beginning of any hard market yet.

 

giofranchi

[Ross812]

Even with the $.90/SH special dividend, they should be going into the big January, 2013 renewals with a lot more capital than in the past. 

 

Did you see the special dividend per share somewhere? I  read the Reuters report stating the special dividend was $173 million implying the special dividend would be $1.09/share with 158.11 million shares outstanding. Am I missing something?

 

I became a shareholder at 842p a few days ago. I look forward to becoming much more familiar with Lancashire in the coming years!

 

 

[giofranchi]

Even with the $.90/SH special dividend, they should be going into the big January, 2013 renewals with a lot more capital than in the past. 

 

Did you see the special dividend per share somewhere? I  read the Reuters report stating the special dividend was $173 million implying the special dividend would be $1.09/share with 158.11 million shares outstanding. Am I missing something?

 

I became a shareholder at 842p a few days ago. I look forward to becoming much more familiar with Lancashire in the coming years!

 

Ross812,

in the document I have attached a few hours ago, you can find the right amount of the special dividend declared. twacowfca is right: it is $0,90 per common share.

 

giofranchi

[giofranchi]

Even with the $.90/SH special dividend, they should be going into the big January, 2013 renewals with a lot more capital than in the past. 

 

Did you see the special dividend per share somewhere? I  read the Reuters report stating the special dividend was $173 million implying the special dividend would be $1.09/share with 158.11 million shares outstanding. Am I missing something?

 

I became a shareholder at 842p a few days ago. I look forward to becoming much more familiar with Lancashire in the coming years!

 

Ross812,

in the document I have attached a few hours ago, you can find the right amount of the special dividend declared. twacowfca is right: it is $0,90 per common share.

 

giofranchi

 

Dividends

Lancashire announces that its Board has declared a special dividend for 2012 of $0.90 per common share (approximately £0.56 per common share at the current exchange rate), which will result in an aggregate payment of approximately $145 million. The dividend will be paid in Pounds Sterling on 19 December 2012 (the “Dividend Payment Date”) to shareholders of record on 30 November 2012 (the “Record Date”) using the £ / $ spot market exchange rate at 12 Noon London time on the Record Date.

In addition to the special dividend payment to shareholders, approximately $28 million in aggregate will be paid on the Dividend Payment Date to holders of share warrants issued by the Company pursuant to the terms of the warrants.

 

giofranchi

[Ross812]

Thanks I missed the 58 million to warrant holders. I read the attachment just now. The underwriting results look great. I love insurers who make money writing insurance.

[twacowfca]

Q3 is another boring event.  5.7 % ROE (increase in FCBV/SH), 48% CR,  $89.1M comprehensive income, mostly underwriting profit without any reserve releases.  This is about 23% ROE  annualized or 25% annual ROE if this quarter's result is extended and compounded.

 

Even with the $.90/SH special dividend, they should be going into the big January, 2013 renewals with a lot more capital than in the past.  Plus their cookie jar of reserves should be fairly full with no withdrawals this quarter.  They don't seem much concerned about the financial impact of Sandy on Q4 results.  I think that those relatively low losses will be mostly in their sidecar.

 

Charles will become their Chief Risk officer in 2013.  I suspect that he, like Neil, is looking forward to returning to the big island.  Elaine is to become an executive director of Lancashire.

 

The really big news is Saltire.  This is a most unusual sidecar.  It is the first in the industry to offload non cat risk to outside investors.  This should be very popular because Lancashire knows how to be nimble to exploit opportunistically across different classes of business. :)

 

Thank you very much! As always, very interesting comments!

A 48,9% combined ratio is even better than their already outstanding average! But probably that’s just because Q3 “has been relatively quiet in terms of catastrophes”.

It seems Mr. Brindle is not seeing the beginning of any hard market yet.

 

 

giofranchi

 

Brindle and his team always speak in cautionary terms about the hardness of "the market".  In truth, with their nimbleness, they go to where "the market" is the sweetest.  Rates are at record levels in the lines where they write the great majority of their coverage.  Very few insurers have the discipline to exit an entire class of business such as D&F as they did recently when it didn't have the  necessary margin for them.  This seems prescient as that class of business may be quite exposed to losses from Sandy.

 

:)

[giofranchi]

Brindle and his team always speak in cautionary terms about the hardness of "the market".  In truth, with their nimbleness, they go to where "the market" is the sweetest.  Rates are at record levels in the lines where they write the great majority of their coverage.  Very few insurers have the discipline to exit an entire class of business such as D&F as they did recently when it didn't have the  necessary margin for them.  This seems prescient as that class of business may be quite exposed to losses from Sandy.

 

:)

 

You know, it very rarely happens I like a business so much that it makes me wonder: “Well, I just invested half the capital I would like to see deployed in that business… will I ever get the chance to buy it at a cheaper price, or am I fooling myself and I will lose the boat?”. Usually I don’t fall victim to such an emotional weakness. But… Lancashire is really testing my discipline!

And I guess part of the fault is yours, because of all the wonderful things you write about the company and its management!!  ;D ;D

Thank you,

 

giofranchi

[twacowfca]

During the conference call today, It became clear what Saltire is all about.  It's unique, and I don't think it's likely that another company can emulate it.

 

Saltire is all about relationships and how to scale up from numerous one off high risk / high return opportunities that frequently pop up especially at Lloyd's and within shouting distance of Lloyd's.  It is necessary to understand how Lloyd's operates and has operated almost from its beginning to appreciate how sweetly Lancashire is positioned for profiting from this buzzing, constantly shifting market. 

 

The Underwriters in and around Lloyd's don't decide to accept risk based on the rational probability of experiencing a loss, for the most part.  What they do is "make book" the way a bookie makes book by accepting bets on a horse race.  The bookie's object is to have a balanced book on each race that guarantees him a small profit no matter which horse wins.  Thus, he may accept a bet on a horse at 20 : 1 odds an hour before race time.  However, as race time draws near, and it appears that he will lose money on his entire book for that race if that 20 to 1 long shot wins, the bookie will lay off his risk perhaps by paying another bookie at 10:1 odds for protection against that same horse winning. 

 

Lord Keynes, described this bookmaking process at Lloyd's over a century ago in his famous Essay on Probability.  Here's how I think this is going to work for Saltire.  Lancashire's office is a stones throw from Lloyd's. 

 

It's after 4 PM (1600)and a broker at Lloyds is frantically trying to lay off some risk for a client.  He's willing to pay double the usual rate to, in effect, "close a book" for a client.  All the people at Lloyds are getting ready to go home, and he's not getting interest in his offer.  Now he's willing to pay triple the usual rate, but everyone is leaving.  Aha! He walks out of Lloyd's and over to Lancashire's office a block away.  There, a cordial underwriter welcomes him and they discuss his need.  The Lancashire underwriter realizes that the rate the broker's client is willing to pay is a great deal, but accepting it would expose Lancashire to unacceptable tail risk.  However, the broker's need is perfect for their new sidecar, Saltire.  He tells the broker that he is very optimistic that they will be able to accept that risk. He will have a decision for the broker no later than late morning tomorrow after Lancashire's daily underwriting conference call.  :)

[giofranchi]

During the conference call today, It became clear what Saltire is all about.  It's unique, and I don't think it's likely that another company can emulate it.

 

Saltire is all about relationships and how to scale up from numerous one off high risk / high return opportunities that frequently pop up especially at Lloyd's and within shouting distance of Lloyd's.  It is necessary to understand how Lloyd's operates and has operated almost from its beginning to appreciate how sweetly Lancashire is positioned for profiting from this buzzing, constantly shifting market. 

 

The Underwriters in and around Lloyd's don't decide to accept risk based on the rational probability of experiencing a loss, for the most part.  What they do is "make book" the way a bookie makes book by accepting bets on a horse race.  The bookie's object is to have a balanced book on each race that guarantees him a small profit no matter which horse wins.  Thus, he may accept a bet on a horse at 20 : 1 odds an hour before race time.  However, as race time draws near, and it appears that he will lose money on his entire book for that race if that 20 to 1 long shot wins, the bookie will lay off his risk perhaps by paying another bookie at 10:1 odds for protection against that same horse winning. 

 

Lord Keynes, described this bookmaking process at Lloyd's over a century ago in his famous Essay on Probability.  Here's how I think this is going to work for Saltire.  Lancashire's office is a stones throw from Lloyd's. 

 

It's after 4 PM (1600)and a broker at Lloyds is frantically trying to lay off some risk for a client.  He's willing to pay double the usual rate to, in effect, "close a book" for a client.  All the people at Lloyds are getting ready to go home, and he's not getting interest in his offer.  Now he's willing to pay triple the usual rate, but everyone is leaving.  Aha! He walks out of Lloyd's and over to Lancashire's office a block away.  There, a cordial underwriter welcomes him and they discuss his need.  The Lancashire underwriter realizes that the rate the broker's client is willing to pay is a great deal, but accepting it would expose Lancashire to unacceptable tail risk.  However, the broker's need is perfect for their new sidecar, Saltire.  He tells the broker that he is very optimistic that they will be able to accept that risk. He will have a decision for the broker no later than late morning tomorrow after Lancashire's daily underwriting conference call.  :)

 

Ah! That’s why Mr. Brindle said the fact that everybody else is getting ready to leave work and go home at 4 pm is a great competitive advantage for Lancashire!!

Great! :)

 

giofranchi

[rjstc]

Very interesting to help further understand their thinking. Thanks for all this. Ron

[giofranchi]

Brindle and his team always speak in cautionary terms about the hardness of "the market".  In truth, with their nimbleness, they go to where "the market" is the sweetest.  Rates are at record levels in the lines where they write the great majority of their coverage.  Very few insurers have the discipline to exit an entire class of business such as D&F as they did recently when it didn't have the  necessary margin for them.  This seems prescient as that class of business may be quite exposed to losses from Sandy.

 

:)

 

You know, it very rarely happens I like a business so much that it makes me wonder: “Well, I just invested half the capital I would like to see deployed in that business… will I ever get the chance to buy it at a cheaper price, or am I fooling myself and I will lose the boat?”. Usually I don’t fall victim to such an emotional weakness. But… Lancashire is really testing my discipline!

And I guess part of the fault is yours, because of all the wonderful things you write about the company and its management!!  ;D ;D

Thank you,

 

giofranchi

 

June 6, 1933

...

I am afraid the opportunity to buy a fortune in stocks at about 10 cents on the dollar is past amd so far I have been unable to take advantage of it.

It is my conclusion that the successful investor must cultivate the habit of "patience". He must be able to hold his money and wait until it is really the time to buy. In this panic it meant waiting over 3 years until stocks were really at rock bottom and selling at less than 1/10 of their normal value. I suppose the real investor would then have the patience and courage to wait until normal times returned before selling. Patience to wait for the right moment - courage to buy or sell when the time arrives - and liquid capital - these are the 3 essentials as I see it now.

 

The Great Depression, A Diary - Benjamin Roth

 

On the other hand, I am very well conscious of the fact that Lancashire is not average at all. Instead, it is a gem to hold for the very long time! What applies to the averages, certainly does not apply to Lancashire.

I always really like to leave ample room to average down... but Lancashire tempts me otherwise...

 

giofranchi

[petec]

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

[twacowfca]

Brindle and his team always speak in cautionary terms about the hardness of "the market".  In truth, with their nimbleness, they go to where "the market" is the sweetest.  Rates are at record levels in the lines where they write the great majority of their coverage.  Very few insurers have the discipline to exit an entire class of business such as D&F as they did recently when it didn't have the  necessary margin for them.  This seems prescient as that class of business may be quite exposed to losses from Sandy.

 

:)

 

You know, it very rarely happens I like a business so much that it makes me wonder: “Well, I just invested half the capital I would like to see deployed in that business… will I ever get the chance to buy it at a cheaper price, or am I fooling myself and I will lose the boat?”. Usually I don’t fall victim to such an emotional weakness. But… Lancashire is really testing my discipline!

And I guess part of the fault is yours, because of all the wonderful things you write about the company and its management!!  ;D ;D

Thank you,

 

giofranchi

 

June 6, 1933

...

I am afraid the opportunity to buy a fortune in stocks at about 10 cents on the dollar is past amd so far I have been unable to take advantage of it.

It is my conclusion that the successful investor must cultivate the habit of "patience". He must be able to hold his money and wait until it is really the time to buy. In this panic it meant waiting over 3 years until stocks were really at rock bottom and selling at less than 1/10 of their normal value. I suppose the real investor would then have the patience and courage to wait until normal times returned before selling. Patience to wait for the right moment - courage to buy or sell when the time arrives - and liquid capital - these are the 3 essentials as I see it now.

 

The Great Depression, A Diary - Benjamin Roth

 

On the other hand, I am very well conscious of the fact that Lancashire is not average at all. Instead, it is a gem to hold for the very long time! What applies to the averages, certainly does not apply to Lancashire.

I always really like to leave ample room to average down... but Lancashire tempts me otherwise...

 

giofranchi

 

 

Then, you should also consider BRK.  Both are great businesses with potential defensive characteristics in a bear market.  Lancashire's large dividends that could be deployed to pick up bargains in a market crash are dependent on their underwriting , not financial conditions.  Plus, LRE's stock pulled a Fairfax and went up in late 08 and 09 as almost all other stocks tanked.  (full disclosure: past results are not necessarily indicative of future success)  :)

 

BRK as discussed has the famous Buffett Put, currently with a "strike price" of just a hair under $82.00/SH.  If that put holds, as I think it will, BRK could be sold in a market decline for a negligible loss and the proceeds used to bottom fish.  :)

[twacowfca]

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.  :)