LRE.L - Lancashire Holdings Ltd

[nwoodman]

Hi twacowfca

 

I appreciate such a considered reply.  Do you have any idea who LRE would turn to for industry loss warranties?  Is there more or less counterparty risk than just reinsuring?  One last one are ILW's more likely to suffer mispricing? 

 

Thanks in advance

 

nwoodman

[twacowfca]

Hi twacowfca

 

I appreciate such a considered reply.  Do you have any idea who LRE would turn to for industry loss warranties?  Is there more or less counterparty risk than just reinsuring?  One last one are ILW's more likely to suffer mispricing? 

 

Thanks in advance

 

nwoodman

 

AIG is reportedly the big elephant that has been writing a lot of ILW's, mostly at the $20B level.  AIG projects their Sandy loss at $2B, far more than other insurers.  I don't know if that estimate includes any ILW's they wrote.

 

AIG has a history of picking up pennies in front of steamrollers as when they wrote a lot of cheap  CDS a few years ago that destroyed 90% of shareholder value.  Writing these recent cheap ILW's is small potatoes compared to writing the Notorious CDS.

 

The ILWs that AIG wrote were reportedly very cheap with a rate on line of about 5% of the coverage amount at the $20 B industry loss level.  Whether these were miss priced or not remains to be determined.  The great majority that they reportedly wrote at the $20B level may or may not be triggered.  Depending on loss development, AIG could fall on their face or dodge a bullet.  Time will tell.  :)

[giofranchi]

LRE's most probable loss in my opinion of $40M should be compared to their peers in London and Bermuda that write significant Cat coverage.  Once again, it appears that LRE's preliminary loss estimate is less than half of what most others who write a lot of cat coverage are experiencing.  For example, Beasley and Montpelier Re, two similar sized companies, project losses of $90M and $95M  respectively.

 

To put LRE's loss in perspective, a loss of $40M would be roughly equivalent to five or six weeks of earnings in a typical quarter that did not otherwise have a large catastrophe loss.

 

Very good (and reassuring) stuff!

And thank you very much for your answer about MKL and their new deal!

 

giofranchi

 

[twacowfca]

LRE's most probable loss in my opinion of $40M should be compared to their peers in London and Bermuda that write significant Cat coverage.  Once again, it appears that LRE's preliminary loss estimate is less than half of what most others who write a lot of cat coverage are experiencing.  For example, Beasley and Montpelier Re, two similar sized companies, project losses of $90M and $95M  respectively.

 

To put LRE's loss in perspective, a loss of $40M would be roughly equivalent to five or six weeks of earnings in a typical quarter that did not otherwise have a large catastrophe loss.

 

Very good (and reassuring) stuff!

And thank you very much for your answer about MKL and their new deal!

 

giofranchi

 

Thank you.  Most of the time Lancashire does much better than their peers when there is a big loss.  Keep in mind that they don't wear Teflon as when they had a larger exposure to Costa Concordia than most of their peers.  :)

[racemize]

Hi twacowfca

 

I appreciate such a considered reply.  Do you have any idea who LRE would turn to for industry loss warranties?  Is there more or less counterparty risk than just reinsuring?  One last one are ILW's more likely to suffer mispricing? 

 

Thanks in advance

 

nwoodman

 

AIG is reportedly the big elephant that has been writing a lot of ILW's, mostly at the $20B level.  AIG projects their Sandy loss at $2B, far more than other insurers.  I don't know if that estimate includes any ILW's they wrote.

 

AIG has a history of picking up pennies in front of steamrollers as when they wrote a lot of cheap  CDS a few years ago that destroyed 90% of shareholder value.  Writing these recent cheap ILW's is small potatoes compared to writing the Notorious CDS.

 

The ILWs that AIG wrote were reportedly very cheap with a rate on line of about 5% of the coverage amount at the $20 B industry loss level.  Whether these were miss priced or not remains to be determined.  The great majority that they reportedly wrote at the $20B level may or may not be triggered.  Depending on loss development, AIG could fall on their face or dodge a bullet.  Time will tell.  :)

 

Since I'm invested in AIG, (not to side track this thread), but do you have any idea how the losses would grow for them if it is greater than the $20B level?  (Feel free to respond in AIG thread, if you like)

[twacowfca]

Hi twacowfca

 

I appreciate such a considered reply.  Do you have any idea who LRE would turn to for industry loss warranties?  Is there more or less counterparty risk than just reinsuring?  One last one are ILW's more likely to suffer mispricing? 

 

Thanks in advance

 

nwoodman

 

AIG is reportedly the big elephant that has been writing a lot of ILW's, mostly at the $20B level.  AIG projects their Sandy loss at $2B, far more than other insurers.  I don't know if that estimate includes any ILW's they wrote.

 

AIG has a history of picking up pennies in front of steamrollers as when they wrote a lot of cheap  CDS a few years ago that destroyed 90% of shareholder value.  Writing these recent cheap ILW's is small potatoes compared to writing the Notorious CDS.

 

The ILWs that AIG wrote were reportedly very cheap with a rate on line of about 5% of the coverage amount at the $20 B industry loss level.  Whether these were miss priced or not remains to be determined.  The great majority that they reportedly wrote at the $20B level may or may not be triggered.  Depending on loss development, AIG could fall on their face or dodge a bullet.  Time will tell.  :)

 

Since I'm invested in AIG, (not to side track this thread), but do you have any idea how the losses would grow for them if it is greater than the $20B level?  (Feel free to respond in AIG thread, if you like)

 

I don't think their losses will grow dramatically or disproportionately as the industry loss might creep above the $20B loss level, except for perhaps a bump up at the $20B industry loss level if they haven't included the ILWs they wrote in their estimate.  In my opinion, it is more likely than not that these won't be triggered because of the way their basis is calculated.  Their basis for calculation is lower than the basis used for some of the other industry loss estimates.  It's possible that AIG 's estimate will turn out to be a little on the high side, but nobody knows with any firm assurance exactly how these losses will develop because the impact of Sandy was so widespread and diverse.

[twacowfca]

The preliminary loss estimates for Sandy are in for the major Lloyd's insurers.  They range from 10% of equity down to 6.6% of equity.  Loss estimates from cat exposed Bermuda reinsurers are trending toward the lower end of the loss estimates of the Lloyd's insurers.  Lloyd's members have more capacity to write policies than most insurers as a result of the Lloyd's scheme to reinsure their members. The volatility of their results is thus relatively leveraged,compared to other peers.

 

Lancashire's estimated losses range from about 3% of equity up to a little above 4% of equity, except losses would probably be about 1 1/2% of equity if the ILW they bought is triggered by mounting  claims.

[twacowfca]

 

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.  :)

 

I plan on starting a position in my ROTH IRA.  The hardest part may be deciding what to sell in order to accumulate more.  Although, Jan 1 is coming up.

 

As far as dividend reinvestments, my return on capital will be dependent on what LRE is trading at.  If they were able to retain and deploy the capital, my return would be what rates they can invest it at.  The two can be very different.  Also, do you know if I would be paying the spread if I had my brokerage account automatically reinvest for me?

 

They'll withhold a portion of the dividend for foreign tax.  A poor location for a foreign dividend payer is the RothIRA.

 

 

There is a 10% UK tax credit on dividends that's good for UK residents to avoid some double taxation at the corporate and individual rates, but it's not a withholding tax.  Please clarify your comment.

[muscleman]

Gio, you bought LRE?

I notice that GLRE's severity business looks good too with very low composite ratio. IF they focused on that only, the underwriting result in the past few years would have been stunning.

But they can still blow up with one bad contract.

LRE may have the same risk. I think this business is probably as dangerous as selling call options.

 

Well, I sell call options and so far so good!! ;D

No, really, I don’t consider selling call options to be such a dangerous business… if you know what you are doing, have a well-conceived plan, and the discipline to stick to it.

Anyway, both GLRE and LRE deal with risks. In the insurance industry they are going to make money, if they are better than others in assessing risks, otherwise they will lose money. That’s why I am much more confident in LRE’s future underwriting performance: because, if there is a person who is good (actually, the best!) at assessing risk, that person is Mr. Brindle!

GLRE, on the contrary, is not proven. But I trust Mr. Einhorn’s judgment very much. And I think they have the luxury to underwrite very conservatively, because of Mr. Einhorn’s skills as an investor.

Mr. Buffett said that, if he were to start it all over again, he would buy a small insurance company and grow from there: my firm has not enough capital yet to follow his advice, but surely I can partner with people who are doing so.  :)

 

giofranchi

 

I haven't tracked the LRE story for too long, but I read from earlier part of this thread that LRE started in 2004? If that is true, then the underwriting history is pretty much as long as GLRE, and GLRE's severity line's composite ratio has been pretty low.

Or are you talking about the person, Mr Brindle? I assume that he has a very long proven record before starting LRE in 2004, but the underwriting manager in GLRE hasn't?

[giofranchi]

I haven't tracked the LRE story for too long, but I read from earlier part of this thread that LRE started in 2004? If that is true, then the underwriting history is pretty much as long as GLRE, and GLRE's severity line's composite ratio has been pretty low.

Or are you talking about the person, Mr Brindle? I assume that he has a very long proven record before starting LRE in 2004, but the underwriting manager in GLRE hasn't?

 

Well, I really shouldn’t be the one to answer your question: twacowfca is much more knowledgeable than me both with regard to the insurance/reinsurance industry as a whole and, of course, with regard to Mr. Brindle and his very peculiar skills. Anyway, what I can tell you is that imho Mr. Brindle is an outlier, someone who achieved a 19% ROE for 20+ years with very low volatility in an industry as competitive as insurance. And that amazing result was achieved just through his shrewd and opportunistic underwriting skills, because he almost always followed an extremely conservative investment policy. In any downturn (and I certainly don’t know when, but I am positive a new downturn is awaiting for us somewhere down the road) LRE will be very robust: exceptional underwriting coupled with very low investment risk is where you want to be during any crisis!

I don’t know Mr. Hedges or Mr. Courtis track record, before joining GLRE, but I guess they cannot hold a candle to Mr. Brindle… That being said, I hope I am wrong: if Mr. Hedges should turn out to be as good an underwriter as Mr. Brindle is, GLRE’s future will be a bright one indeed! (and I will make a lot of money!! :) )

 

giofranchi

[jay21]

GLRE is a much different business than LRE.  GLRE was formed to provide float for Einhorn.  They only write severity business when they think they are getting a very good deal (and that's evident in the loss ratios).

[twacowfca]

I haven't tracked the LRE story for too long, but I read from earlier part of this thread that LRE started in 2004? If that is true, then the underwriting history is pretty much as long as GLRE, and GLRE's severity line's composite ratio has been pretty low.

Or are you talking about the person, Mr Brindle? I assume that he has a very long proven record before starting LRE in 2004, but the underwriting manager in GLRE hasn't?

 

Well, I really shouldn’t be the one to answer your question: twacowfca is much more knowledgeable than me both with regard to the insurance/reinsurance industry as a whole and, of course, with regard to Mr. Brindle and his very peculiar skills. Anyway, what I can tell you is that imho Mr. Brindle is an outlier, someone who achieved a 19% ROE for 20+ years with very low volatility in an industry as competitive as insurance. And that amazing result was achieved just through his shrewd and opportunistic underwriting skills, because he almost always followed an extremely conservative investment policy. In any downturn (and I certainly don’t know when, but I am positive a new downturn is awaiting for us somewhere down the road) LRE will be very robust: exceptional underwriting coupled with very low investment risk is where you want to be during any crisis!

I don’t know Mr. Hedges or Mr. Courtis track record, before joining GLRE, but I guess they cannot hold a candle to Mr. Brindle… That being said, I hope I am wrong: if Mr. Hedges should turn out to be as good an underwriter as Mr. Brindle is, GLRE’s future will be a bright one indeed! (and I will make a lot of money!! :) )

 

giofranchi

 

 

Lancashire IPO'd Dec. 2005, but didn't write a significant amount of business until 2006.  2006 was a low loss year, but Lancashire trailed their peers that year because they unavoidably lagged in having net written premiums to recognize Even so, they have handily outperformed all other P&C companies on average since their IPO.

 

Brindle is a key guy, but what Lancashire does is hard to emulate because standard bureaucratic procedures handicap other companies.  Their situation is like Southwest Airlines outlier performance vs other US Airlines.  No other Airline has been able to get their flight crews to clean the cabins if necessary to match Southwest's  quick turnaround time between flights that is one of their competitive advantages.  Similarly, Lancashire's strength now resides in their corporate culture and is  not necessarily dependent on having Brindle at the helm.

 

Interestingly,  Lancashire is getting a lot of Brownie Points from their relatively low level of losses projected from Hurricane Sandy.  Even Citi's analyst, who has been the most insightful of all the analysts  covering Lancashire about their strengths,  has been surprised at how low their projected losses are.  He had informally estimated that they would take a hit of about $100M, comparable to the 7% to 10% hit to equity experienced by other cat exposed Lloyd's and Bermuda insurers instead of the 3% to 4% loss they recently projected.  :)

[giofranchi]

GLRE is a much different business than LRE.  GLRE was formed to provide float for Einhorn.  They only write severity business when they think they are getting a very good deal (and that's evident in the loss ratios).

 

Brindle is a key guy, but what Lancashire does is hard to emulate because standard bureaucratic procedures handicap other companies.  Their situation is like Southwest Airlines outlier performance vs other US Airlines.  No other Airline has been able to get their flight crews to clean the cabins if necessary to match Southwest's  quick turnaround time between flights that is one of their competitive advantages.  Similarly, Lancashire's strength now resides in their corporate culture and is  not necessarily dependent on having Brindle at the helm.

 

Well, if a very peculiar corporate culture is LRE’s source of success, I don’t really think LRE and GLRE are that much different! GLRE’s staff is composed by just 24 people, who take all the decisions. Brendan Barry is Chief Underwriter Officer and has a staff of only 8 people. GLRE probably is as free from “standard bureaucratic procedures” as LRE is.

Certainly, how you use the capital gathered collecting premiums is important. Because it affects the overall results of the company (rate of growth in BV per share). But that doesn’t mean the underwriting part of GLRE shouldn’t learn from LRE, and even try to emulate what Mr. Brindle & Co. achieved in the past and will go on achieving in future years. In fact, I really hope that Mr. Hedges and Mr. Barry might study Mr. Brindle with the utmost attention and respect, and follow in his steps!

 

giofranchi

 

[Ross812]

Does anyone know when lre.l paid it's dividend? I think it may have been distributed but is in withholding at IB. Has anyone experienced this? The dividend no longer shows in dividends receivable but has not been credited to the account yet...

[giofranchi]

Does anyone know when lre.l paid it's dividend? I think it may have been distributed but is in withholding at IB. Has anyone experienced this? The dividend no longer shows in dividends receivable but has not been credited to the account yet...

 

Mine was credited last December 27, 2012... But I guess international settlements differ much from country to country...

 

giofranchi

[rjstc]

Ross; Mine was credited 12/19/12. Chas Schwab Global Account

[Ross812]

Thank you! For some reason the dividend did not post to my account until after the new year. When I ran my performance summary for 2012 it showed I had lost 4.5% in LRE.L  which obviously did not account for the dividend. When I went through the dividend report it was no where to be found and only showed as a 'open dividend accrual'. I ran a full report from Jan 2 13 - Jan 7 13 and found the dividend there. I'll just add a footnote to the performance summary explaining the missing dividend.

[twacowfca]

Hi twacowfca

 

I appreciate such a considered reply.  Do you have any idea who LRE would turn to for industry loss warranties?  Is there more or less counterparty risk than just reinsuring?  One last one are ILW's more likely to suffer mispricing? 

 

Thanks in advance

 

nwoodman

 

AIG is reportedly the big elephant that has been writing a lot of ILW's, mostly at the $20B level.  AIG projects their Sandy loss at $2B, far more than other insurers.  I don't know if that estimate includes any ILW's they wrote.

 

AIG has a history of picking up pennies in front of steamrollers as when they wrote a lot of cheap  CDS a few years ago that destroyed 90% of shareholder value.  Writing these recent cheap ILW's is small potatoes compared to writing the Notorious CDS.

 

The ILWs that AIG wrote were reportedly very cheap with a rate on line of about 5% of the coverage amount at the $20 B industry loss level.  Whether these were miss priced or not remains to be determined.  The great majority that they reportedly wrote at the $20B level may or may not be triggered.  Depending on loss development, AIG could fall on their face or dodge a bullet.  Time will tell.  :)

 

Since I'm invested in AIG, (not to side track this thread), but do you have any idea how the losses would grow for them if it is greater than the $20B level?  (Feel free to respond in AIG thread, if you like)

 

I don't think their losses will grow dramatically or disproportionately as the industry loss might creep above the $20B loss level, except for perhaps a bump up at the $20B industry loss level if they haven't included the ILWs they wrote in their estimate.  In my opinion, it is more likely than not that these won't be triggered because of the way their basis is calculated.  Their basis for calculation is lower than the basis used for some of the other industry loss estimates.  It's possible that AIG 's estimate will turn out to be a little on the high side, but nobody knows with any firm assurance exactly how these losses will develop because the impact of Sandy was so widespread and diverse.

 

 

PCS claims (the basis for most ILWs) estimates for Sandy most recently have doubled beyond their first estimates to $18.75B. Such loss creep (more like loss leap) has never happened before with their estimates after a big hurricane.  It won't take much more creep to trigger Lancashire's $40M ILW at the $20B PCS claims level.  Time will tell if that will happen.

 

 

[nwoodman]

Thanks twacowfa. Any whispers on how the January renewals are progressing in terms of pricing or is it still too early to say?

 

Cheers

Nwoodman

[twacowfca]

Thanks twacowfa. Any whispers on how the January renewals are progressing in terms of pricing or is it still too early to say?

 

Cheers

Nwoodman

 

 

Most Sandy claims will be born by major primary insurers.  There is relatively little reinsurance that is projected to be triggered by Sandy.  The second NZ earthquake with the astonishing Loss creep experienced there is estimated to be about twice as much for reinsurance claims as Sandy's impact. 

 

D&F claims offloaded by some of the smaller NE US insurers will be substantial.  A lot of these will be born by many of the same international specialty insurers that also write reinsurance.  These D&F rates may go up as much as 50%, but they had been underprice before Sandy, which is why LRE dropped D&F coverage a few months ago.  Primary insurance rates, especially in the NE should firm up a bit, but only a little.  Primary insurers had retained more coverage during the last year as reinsurance rates had firmed.  This is still projected to be more of an earnings event ( meaning perhaps what might otherwise be one or two quarters of normalized earnings for most affected insurers or reinsurers, rather than a capital event ( meaning much bigger losses).

 

[wknecht]

Hello twacowfca,

A little off topic, and sorry if you've been asked many times before, but are there any industry websites/forums that you recommend as being particularly useful in tracking developments in the insurance industry? Or are there certain companies whose management you feel do a particularly good job in their quarterlies/annuals/CCs/publications? Just added ISO to my RSS feed based on your earlier comment!

 

Thanks!

[Green King]

what is ISO ?

[wknecht]

what is ISO ?

A Verisk company, one of whose units is the PCS claims twacowfca mentioned (http://www.iso.com).

 

Probably most of their useful information is available by subscription only, but figured I'd give their news release feed a trial run. Ditto AM Best.

[twacowfca]

Hello twacowfca,

A little off topic, and sorry if you've been asked many times before, but are there any industry websites/forums that you recommend as being particularly useful in tracking developments in the insurance industry? Or are there certain companies whose management you feel do a particularly good job in their quarterlies/annuals/CCs/publications? Just added ISO to my RSS feed based on your earlier comment!

 

Thanks!

 

You might get a copy of Montpelier Re's annual report.  I think their report for year 2010? and perhaps other years, had a great section on reinsurance terms for the beginner.  Insurance Insider is the best scuttlebutt publication for the London and Bermuda markets that are concerned with most worldwide insurance and reinsurance.  They are expensive and subscribers must pledge not to copy and distribute their articles.  :)

[wknecht]

Hello twacowfca,

A little off topic, and sorry if you've been asked many times before, but are there any industry websites/forums that you recommend as being particularly useful in tracking developments in the insurance industry? Or are there certain companies whose management you feel do a particularly good job in their quarterlies/annuals/CCs/publications? Just added ISO to my RSS feed based on your earlier comment!

 

Thanks!

You might get a copy of Montpelier Re's annual report.  I think their report for year 2010? and perhaps other years, had a great section on reinsurance terms for the beginner.  Insurance Insider is the best scuttlebutt publication for the London and Bermuda markets that are concerned with most worldwide insurance and reinsurance.  They are expensive and subscribers must pledge not to copy and distribute their articles.  :)

Great, thanks for the info twacowfca.