LRE.L - Lancashire Holdings Ltd

[nwoodman]

Hadn't looked at their website for a while and came across this https://itunes.apple.com/ua/app/lancashire-insurance-group/id526357366?mt=8.  Pretty swishy ;)

[racemize]

Clever, but FDBV/SH is the best, conservative metric that they report each quarter on their website.  Realize that the last reported number is seen through the rear view mirror. Each Q their FDBV typically goes up about 5% to 7% when there is no large cat or other large loss event that impacts them.  :)

 

Oh, I wasn't clear--I am pulling the fdbv/sh from the website with that formula.

[giofranchi]

Q1 2013 Results

 

I’m delighted to report another strong quarter for Lancashire with solid ROE and a very healthy combined ratio. We’re still seeing adequate rating in much of our core business, and whilst there are competitive threats, the strength of our business model allows us to outperform in both hard and soft markets.

--Richard Brindle

 

After several years of notable losses in the first quarter, the first quarter of 2013 was refreshingly quiet. In strong equity markets, our fixed income portfolio eked a small positive return of 0.1%. We therefore produced a strong return on equity of 4.7% and a combined ratio of 51.2% for the quarter.

--Elaine Whelan

 

twacowfca, any comment? Thank you! :)

 

giofranchi

2013-05-02.pdf

q1-2013-fs.pdf

[nwoodman]

Another stunning set of results.  It looks like a a few other reinsurers had good quarters, Swiss Re for one.  Hopefully Odyssey shoots the lights out as well.

[twacowfca]

Q1 2013 Results

 

I’m delighted to report another strong quarter for Lancashire with solid ROE and a very healthy combined ratio. We’re still seeing adequate rating in much of our core business, and whilst there are competitive threats, the strength of our business model allows us to outperform in both hard and soft markets.

--Richard Brindle

 

After several years of notable losses in the first quarter, the first quarter of 2013 was refreshingly quiet. In strong equity markets, our fixed income portfolio eked a small positive return of 0.1%. We therefore produced a strong return on equity of 4.7% and a combined ratio of 51.2% for the quarter.

--Elaine Whelan

 

twacowfca, any comment? Thank you! :)

 

giofranchi

 

 

Ho hum.  Boring results again. 51.2 CR, 17.2 loss ratio and 29.7 accident year loss ratio.

 

The big news is how much they continue to de risk everything they are doing.  The duration of their portfolio is now an amazing 1.3 years. And even with this astonishingly low  duration, they are starting to do a little hedging of interest rate risk.  This is not a bad idea, given that residential real estate prices have rebounded strongly in the US.  In the same mode as  Markel, FFH and BRK, they should have most of their capital available to redeploy with insignificant losses should interest rates spike or the stock market have a big selloff.

 

They did something else I think is very smart that is kind of a hedge.  They settled their $40M ILW that covered Sandy losses for about 39% of its potential value.  The PCS claims estimate continues to be stuck at just below the payout threshold of $20B onshore insured losses as counted by PCS.  I think this move was astute, no matter how those losses develop finally. 

 

They  continue to offload a lot of risk into their Accordion sidecar.  And they off load cat risk in other ways.  It will be interesting to hear on their conference call later today if Darren Redhead has been able in the short time he has been with them to get anything  going with some sort of new sidecar.

[giofranchi]

 

Ho hum.  Boring results again. 51.2 CR, 17.2 loss ratio and 29.7 accident year loss ratio.

 

The big news is how much they continue to de risk everything they are doing.  The duration of their portfolio is now an amazing 1.3 years. And even with this astonishingly low  duration, they are starting to do a little hedging of interest rate risk.  This is not a bad idea, given that residential real estate prices have rebounded strongly in the US.  In the same mode as  Markel, FFH and BRK, they should have most of their capital available to redeploy with insignificant losses should interest rates spike or the stock market have a big selloff.

 

They did something else I think is very smart that is kind of a hedge.  They settled their $40M ILW that covered Sandy losses for about 39% of its potential value.  The PCS claims estimate continues to be stuck at just below the payout threshold of $20B onshore insured losses as counted by PCS.  I think this move was astute, no matter how those losses develop finally. 

 

They  continue to offload a lot of risk into their Accordion sidecar.  And they off load cat risk in other ways.  It will be interesting to hear on their conference call later today if Darren Redhead has been able in the short time he has been with them to get anything  going with some sort of new sidecar.

 

Thank you! As always, very helpful! :)

 

giofranchi

[giofranchi]

twacowfca,

based on the file in attachment, I cannot easily understand Mr. Brindle’s interest in Lancashire… I was wondering if you could clarify that to the members of the board who follow Lancashire.

Thank you very much! :)

 

giofranchi

Director-PDMR_Shareholding.pdf

[giofranchi]

This return on equity justifies the corporation's premium to book value. If Lancashire were selling at book, the earnings yield would indeed be 4% higher (a P/E of 6.25) and the shares would be better protected on the downside. But even with the premium to book, the long-term average is still attractive. That is, if the corporation was at book value, it would have a P/E of 6.25 -- which, given the corporation's track record, would make it a screaming buy. At the current premium to book, the corporation still has an attractive long-term P/E of 7.6.

 

Exactly!! ;)

But I would also argue the average ROE the author of the article is considering (16.7%) is the average 5-year ROE, which is skewed to the downside because of a “poor” 2008. As twacowfca has repeated many times, Mr. Brindle’s long-term track record is closer to 19%.

 

This being said, I don’t really understand how the author gets to such a low P/E ratio. Right now LRE is selling for 1.7 x BVPS. If average ROE is 19%, and you buy at 1.7 x BVPS, your yield should be: 19 / 1.7 = 11.18%, which is the same as a P/E of 8.95. Still very good indeed, especially for such an high quality company, but higher than the author suggests…

 

twacowfca, am I missing something here?

 

Thank you! :)

 

giofranchi

 

lancashire-holdings-may222013.pdf

[twacowfca]

twacowfca,

based on the file in attachment, I cannot easily understand Mr. Brindle’s interest in Lancashire… I was wondering if you could clarify that to the members of the board who follow Lancashire.

Thank you very much! :)

 

giofranchi

 

Brindle owns 858,022 shares outright.  He also owns about eight and a half million deeply in the money warrants that are comparble to equity because these have both  large upside and large downside exposure.  He recently sold some shares he received in his restricted share scheme to pay taxes and to remodel hs house, I believe.  :)

[twacowfca]

This return on equity justifies the corporation's premium to book value. If Lancashire were selling at book, the earnings yield would indeed be 4% higher (a P/E of 6.25) and the shares would be better protected on the downside. But even with the premium to book, the long-term average is still attractive. That is, if the corporation was at book value, it would have a P/E of 6.25 -- which, given the corporation's track record, would make it a screaming buy. At the current premium to book, the corporation still has an attractive long-term P/E of 7.6.

 

Exactly!! ;)

But I would also argue the average ROE the author of the article is considering (16.7%) is the average 5-year ROE, which is skewed to the downside because of a “poor” 2008. As twacowfca has repeated many times, Mr. Brindle’s long-term track record is closer to 19%.

 

This being said, I don’t really understand how the author gets to such a low P/E ratio. Right now LRE is selling for 1.7 x BVPS. If average ROE is 19%, and you buy at 1.7 x BVPS, your yield should be: 19 / 1.7 = 11.18%, which is the same as a P/E of 8.95. Still very good indeed, especially for such an high quality company, but higher than the author suggests…

 

twacowfca, am I missing something here?

 

Thank you! :)

 

giofranchi

 

2008 was a below average year.  If 2007 is included, the average gets up a lot closer to their long term average.  06 was a very low CR year, but without earned premiums in the pipeline as a start up, they only made about 16% ROE.  Their current average growth in FDBV/SH plus dividends is within one or two tenths of a percent of Brindle's record at Lloyds that was about 19.4%. Part of that recent record includes opportunistic share repurchases at or below book. :)

 

They might be expected to produce an owners earnings return on the current share price averaging about 12%  per annum, roughly, give or take a percent or two, based on their long term record. There are few companies that have better long term prospects than this at today's stock prices. I think their prospects going forward may be to average slightly more than their long term record. They expect to return all their earnings and possibly even more  to owners as dividends when the shares sell above BV.  And they plan to reinvest capital in the business if rates spike up dramatically. Their goal is to increase FDBV/SH something like 13% better than the risk free rate. This they have accomplished -- and more.  :)

[giofranchi]

2008 was a below average year.  If 2007 is included, the average gets up a lot closer to their long term average.  06 was a very low CR year, but without earned premiums in the pipeline as a start up, they only made about 16% ROE.  Their current average growth in FDBV/SH plus dividends is within one or two tenths of a percent of Brindle's record at Lloyds that was about 19.4%. Part of that recent record includes opportunistic share repurchases at or below book. :)

 

They might be expected to produce an owners earnings return on the current share price averaging about 12%  per annum, roughly, give or take a percent or two, based on their long term record. There are few companies that have better long term prospects than this at today's stock prices. I think their prospects going forward may be to average slightly more than their long term record. They expect to return all their earnings and possibly even more  to owners as dividends when the shares sell above BV.  And they plan to reinvest capital in the business if rates spike up dramatically. Their goal is to increase FDBV/SH something like 13% better than the risk free rate. This they have accomplished -- and more.  :)

 

Thank you twacowfca!

Lancashire is already my firm’s second largest position (after FFH), and tomorrow I will buy more! :)

 

giofranchi

 

[giofranchi]

twacowfca,

based on the file in attachment, I cannot easily understand Mr. Brindle’s interest in Lancashire… I was wondering if you could clarify that to the members of the board who follow Lancashire.

Thank you very much! :)

 

giofranchi

 

Brindle owns 858,022 shares outright.  He also owns about eight and a half million deeply in the money warrants that are comparble to equity because these have both  large upside and large downside exposure.  He recently sold some shares he received in his restricted share scheme to pay taxes and to remodel hs house, I believe.  :)

 

That means Mr. Brindle owns circa £11 million out of a £1,250 million capitalization company: only 0.9%…Is it right?

twacowfca, could you share with us how Mr. Brindle controls his company? I mean, until now everything was just fine (much better than fine!). But what happens, if one or two difficult years arrive? Couldn’t it be a threat the fact Mr. Brindle owns so little of LRE?

One thing I can think of is that he might be so crucial to LRE’s business, that he actually is irreplaceable… But I would like to hear you opinion on this subject, as always! :)

 

Thank you!

 

giofranchi

 

[twacowfca]

twacowfca,

based on the file in attachment, I cannot easily understand Mr. Brindle’s interest in Lancashire… I was wondering if you could clarify that to the members of the board who follow Lancashire.

Thank you very much! :)

 

giofranchi

 

Brindle owns 858,022 shares outright.  He also owns about eight and a half million deeply in the money warrants that are comparble to equity because these have both  large upside and large downside exposure.  He recently sold some shares he received in his restricted share scheme to pay taxes and to remodel hs house, I believe.  :)

 

That means Mr. Brindle owns circa £11 million out of a £1,250 million capitalization company: only 0.9%…Is it right?

twacowfca, could you share with us how Mr. Brindle controls his company? I mean, until now everything was just fine (much better than fine!). But what happens, if one or two difficult years arrive? Couldn’t it be a threat the fact Mr. Brindle owns so little of LRE?

One thing I can think of is that he might be so crucial to LRE’s business, that he actually is irreplaceable… But I would like to hear you opinion on this subject, as always! :)

 

Thank you!

 

giofranchi

 

Brindle's warrants expire Dec. 15, 2015. Cashless exercise before the expiration date would probably give him about 3% of the shares outstanding, based on current market prices.  The most important thing is that a huge amount of his wealth is in Lancashire.

 

Three of Lancashire's BOD seats are held by Brindle and two other corporate officers.  The Lloyd's - Bermuda insurance market is rather clubby. Most directors have a background in that insurance market.  They understand the market niches and the corporate wisdom of the major boards is broad and deep. The BOD's of the major companies know who the good managers are and who are the not so good managers. Brindle's reputation is second to none.

 

Brindle continually articulates LRE's philosophy.  Their  BOD understands that philosophy and respects Lancashire's accomplishments.

 

The major funds investing  in the London insurance market have a value investing mindset. Brindle is old school, ultra focused on returning value to shareholders in the tradition of Lloyd's returning value to their "names" in the old days. :)

[biaggio]

http://seekingalpha.com/article/1454101-lancashire-holdings-high-roes-maintained-by-high-dividends

 

 

[giofranchi]

Brindle's warrants expire Dec. 15, 2015. Cashless exercise before the expiration date would probably give him about 3% of the shares outstanding, based on current market prices.  The most important thing is that a huge amount of his wealth is in Lancashire.

 

Three of Lancashire's BOD seats are held by Brindle and two other corporate officers.  The Lloyd's - Bermuda insurance market is rather clubby. Most directors have a background in that insurance market.  They understand the market niches and the corporate wisdom of the major boards is broad and deep. The BOD's of the major companies know who the good managers are and who are the not so good managers. Brindle's reputation is second to none.

 

Brindle continually articulates LRE's philosophy.  Their  BOD understands that philosophy and respects Lancashire's accomplishments.

 

The major funds investing  in the London insurance market have a value investing mindset. Brindle is old school, ultra focused on returning value to shareholders in the tradition of Lloyd's returning value to their "names" in the old days. :)

 

twacowfca,

I am not worried at all about Mr. Brindle! I am positive he will do all he can for LRE and its shareholders! He has already proven himself over and over again!

What I am a bit worried about (if I have to worry about something… I really like to always find something to worry about!! ;D) is some sort of hedge fund manager, with more money than brains, who buys a big stake in LRE and, after 2 "mediocre" years of 10% ROE instead of the high teens (if they ever should come to pass!), starts nourishing the asinine idea (like Mr. Munger would surely define it!) that he knows how to run LRE better than Mr. Brindle…

 

But you don’t seem to be worried about this remote eventuality, so I must confess to be a little bit paranoid, and leave it at that! ;)

 

giofranchi

 

[twacowfca]

Brindle's warrants expire Dec. 15, 2015. Cashless exercise before the expiration date would probably give him about 3% of the shares outstanding, based on current market prices.  The most important thing is that a huge amount of his wealth is in Lancashire.

 

Three of Lancashire's BOD seats are held by Brindle and two other corporate officers.  The Lloyd's - Bermuda insurance market is rather clubby. Most directors have a background in that insurance market.  They understand the market niches and the corporate wisdom of the major boards is broad and deep. The BOD's of the major companies know who the good managers are and who are the not so good managers. Brindle's reputation is second to none.

 

Brindle continually articulates LRE's philosophy.  Their  BOD understands that philosophy and respects Lancashire's accomplishments.

 

The major funds investing  in the London insurance market have a value investing mindset. Brindle is old school, ultra focused on returning value to shareholders in the tradition of Lloyd's returning value to their "names" in the old days. :)

 

twacowfca,

I am not worried at all about Mr. Brindle! I am positive he will do all he can for LRE and its shareholders! He has already proven himself over and over again!

What I am a bit worried about (if I have to worry about something… I really like to always find something to worry about!! ;D) is some sort of hedge fund manager, with more money than brains, who buys a big stake in LRE and, after 2 "mediocre" years of 10% ROE instead of the high teens (if they ever should come to pass!), starts nourishing the asinine idea (like Mr. Munger would surely define it!) that he knows how to run LRE better than Mr. Brindle…

 

But you don’t seem to be worried about this remote eventuality, so I must confess to be a little bit paranoid, and leave it at that! ;)

 

giofranchi

 

 

Anything is possible, but I think the probability of that is near zero, although we saw that attempt to happen not long ago in the US market via the postings on this board.  Here's why:

 

The London insurance market is clubby.  Not only do most of the directors know the industry and know each other or at least know someone with no more than one degree of separation from another major person in that market, but the same old school tie mentality applies to the major funds that invest there.

 

Brindle was tapped to run Lancashire in 2005 because he was well known and respected in the orbit of Lloyd's when he was an underwriter for Charman and later as the risk manager for AIG's London operations when he became very involved in leading the rewriting of the Lloyd's/Bermuda (re)insurance contracts to eliminate open ended risk after 9/11.

 

The idea of a hedge fund leading a coup against LRE is far fetched from the perspective above. When a company in the Lloyd's market falls on hard times, it is always put on the block to see if it can be sold for more than it's market value or (if bids are inadequate) offered to runoff companies.  Most insurance companies in the London market have a stake in one or more Lloyds syndicates.  This means that Lloyds' approval is necessary for a change in control. That would not be given lightly to a hedge fund activist.

 

I appreciate the fact that you are merely running through a mental check list of possible black swans. However, the idea of a real black swan flying from Australia to London and dropping a load on Buckingham Palace is only slightly more far fetched than a Bill Ackerman type taking over a London insurer against the wishes of the powers that be.  :)

[giofranchi]

Anything is possible, but I think the probability of that is near zero, although we saw that happen not long ago in the US market via the postings on this board.  Here's why:

 

The London insurance market is clubby.  Not only do most of the directors know the industry and know each other or at least know someone with no more than one degree of separation from another major person in that market, but the same old school tie mentality applies to the major funds that invest there.

 

Brindle was tapped to run Lancashire in 2005 because he was well known and respected in the orbit of Lloyd's when he was an underwriter for Charman and later as the risk manager for AIG's London operations when he became very involved in leading the rewriting of the Lloyd's/Bermuda (re)insurance contracts to eliminate open ended risk after 9/11.

 

The idea of a hedge fund leading a coup against LRE is far fetched from the perspective above. When a company in the Lloyd's market falls on hard times, it is always put on the block to see if it can be sold for more than it's market value or (if bids are inadequate) offered to runoff companies.  Most insurance companies in the London market have a stake in one or more Lloyds syndicates.  This means that Lloyds' approval is necessary for a change in control. That would not be given lightly to a hedge fund activist.

 

I appreciate the fact that you are merely running through a mental check list of possible black swans. However, the idea of a real black swan flying from Australia to London and dropping a load on Buckingham Palace is only slightly more far fetched than a Bill Ackerman type taking over a London insurer against the wishes of the powers that be.  :)

 

Great! And funny!! ;D

I generally like to see the manager I trust keeping full control over his/her company: self-command and the ability to proceed undisturbed in the moment of crisis are imo fundamental prerequisites to turn difficulty into an even greater success. Self-command is completely up to you, the ability to proceed undisturbed depends on a few things more… unless you have full control over your company!

But in this case it clearly is different, for the reasons you have so clearly explained. Or better: full control is guaranteed not by ownership, but by other dynamics. :)

Thank you,

 

giofranchi

 

[twacowfca]

Anything is possible, but I think the probability of that is near zero, although we saw that happen not long ago in the US market via the postings on this board.  Here's why:

 

The London insurance market is clubby.  Not only do most of the directors know the industry and know each other or at least know someone with no more than one degree of separation from another major person in that market, but the same old school tie mentality applies to the major funds that invest there.

 

Brindle was tapped to run Lancashire in 2005 because he was well known and respected in the orbit of Lloyd's when he was an underwriter for Charman and later as the risk manager for AIG's London operations when he became very involved in leading the rewriting of the Lloyd's/Bermuda (re)insurance contracts to eliminate open ended risk after 9/11.

 

The idea of a hedge fund leading a coup against LRE is far fetched from the perspective above. When a company in the Lloyd's market falls on hard times, it is always put on the block to see if it can be sold for more than it's market value or (if bids are inadequate) offered to runoff companies.  Most insurance companies in the London market have a stake in one or more Lloyds syndicates.  This means that Lloyds' approval is necessary for a change in control. That would not be given lightly to a hedge fund activist.

 

I appreciate the fact that you are merely running through a mental check list of possible black swans. However, the idea of a real black swan flying from Australia to London and dropping a load on Buckingham Palace is only slightly more far fetched than a Bill Ackerman type taking over a London insurer against the wishes of the powers that be.  :)

 

Great! And funny!! ;D

I generally like to see the manager I trust keeping full control over his/her company: self-command and the ability to proceed undisturbed in the moment of crisis are imo fundamental prerequisites to turn difficulty into an even greater success. Self-command is completely up to you, the ability to proceed undisturbed depends on a few things more… unless you have full control over your company!

But in this case it clearly is different, for the reasons you have so clearly explained. Or better: full control is guaranteed not by ownership, but by other dynamics. :)

Thank you,

 

giofranchi

 

Brindle is highly respected.  He would be the least likely manager to be shown the door because a company had a couple of bad years.  Lancashire is  his creation, and their BOD has much industry experience that adds to the strength of the company.  :)

[giofranchi]

Brindle is highly respected.  He would be the least likely manager to be shown the door because a company had a couple of bad years.  Lancashire is  his creation, and their BOD has much industry experience that adds to the strength of the company.  :)

 

Thank you again! … I wasn’t aware that today is holiday in the UK and the US … I will have to wait until tomorrow to buy more! :)

 

giofranchi

[twacowfca]

Brindle is highly respected.  He would be the least likely manager to be shown the door because a company had a couple of bad years.  Lancashire is  his creation, and their BOD has much industry experience that adds to the strength of the company.  :)

 

Thank you again! … I wasn’t aware that today is holiday in the UK and the US … I will have to wait until tomorrow to buy more! :)

 

giofranchi

 

Here's how Brindle ranks in the London market pecking order: people have not so tongue in cheek started suggesting that he is/should be a candidate for knighthood, an honour normally reserved on occasion for a highly respected senior ciitizen of The City in his twilight years.  "Sir Richard" is a term of endearment that a junior analyst evidently overheard and took to be factual.  That analyst addressed Richard by that improper title in a recent conference call, and Richard had to set him straight.  :)

[giofranchi]

Here's how Brindle ranks in the London market pecking order: people have not so tongue in cheek started suggesting that he is/should be a candidate for knighthood, an honour normally reserved on occasion for a highly respected senior ciitizen of The City in his twilight years.  "Sir Richard" is a term of endearment that a junior analyst evidently overheard and took to be factual.  That analyst addressed Richard by that improper title in a recent conference call, and Richard had to set him straight.  :)

 

Wonderful stuff!! :)

 

giofranchi

[twacowfca]

Here's how Brindle ranks in the London market pecking order: people have not so tongue in cheek started suggesting that he is/should be a candidate for knighthood, an honour normally reserved on occasion for a highly respected senior ciitizen of The City in his twilight years.  "Sir Richard" is a term of endearment that a junior analyst evidently overheard and took to be factual.  That analyst addressed Richard by that improper title in a recent conference call, and Richard had to set him straight.  :)

 

Wonderful stuff!! :)

 

giofranchi

 

Regarding market valuation, Beazley, the best performing insurer recently in the London market and probably worldwide got downgraded recently on valuation when its BV/SH got up to Lancashire's level.  It 's good to finally see some of the better insurers selling at significant premiums to book.

[augustabound]

Richard Brindle in Reactions magazine.

 

A free subscription is required to read the whole article.

[WhoIsWarren]

Thanks for the link to the interview.

 

Of note, Brindle said:

"I don’t think I’ve seen such a rapid intrusion of new capital into the business in all my twenty-nine years in the re/insurance business. It’s been driven by the low interest rate environment and lots of pools of money looking for ways to make a return."

 

Gulp!!  :o

 

Maybe Lancashire Re will be okay, but that's got to be a general warning sign, right?  And for more than the (re)insurance industry too -- low interest rates could have all sorts of consequences across all sorts of industries.

[giofranchi]

Thanks for the link to the interview.

 

Of note, Brindle said:

"I don’t think I’ve seen such a rapid intrusion of new capital into the business in all my twenty-nine years in the re/insurance business. It’s been driven by the low interest rate environment and lots of pools of money looking for ways to make a return."

 

Gulp!!  :o

 

Maybe Lancashire Re will be okay, but that's a general warning sign!  And for more than the (re)insurance industry too -- low interest rates could have all sorts of consequences across all sorts of industries.

 

Hi WhoIsWarren!

Just before your quote, Mr. Brindle also said:

In this marketplace you adapt or you die. I think with our leadership position, with large lines and close relationships, I think we are well placed to adapt.

Do you see a world without insurance? Well, me neither! ;)

And, imo, if there is an insurance company that will do fine, that company is Lancashire!

Of course, I agree with you that low interest rates could have all sorts of consequences across all sorts of industries.

 

giofranchi