LRE.L - Lancashire Holdings Ltd

[giofranchi]

Good perspective.

 

Here's a scenario about the optionality of LRE's large special EOY dividends.  The timing of these on occasion will provide ammo for bagging a trophy at a bargain price.  For a contra factual example: suppose Hurricane Ike had not happened in late 2008.  In that nonevent, it is likely that LRE would have paid a huge special dividend that December.  They made 10% on their equity that year.  In the non event of hurricane Ike, they would have made a return of 20%+ on their equity.

 

Think about how valuable that cash  would have been to have available the first quarter of 2009.  WFC at 1/4 its current price. BRK at nearly 1/3 its price now. Garbage stocks at 1/10 their current prices.  With LRE, investors have a prolific generator of cash like the fountain of float from BRK's insurance businesses that Warren has used so effectively to buy stocks at great bargain prices every decade or so.

 

Yes! Or, if I might suggest the comparison, with LRE you have your own See’s Candies. I like the comparison for three reasons at least:

1) Mr. Buffett and Mr. Munger were wise enough to pay up for the stream of cash See’s Candies would provide in future years;

2) See’s Candies has never grown very rapidly, and remained a relatively small company;

3) Mr. Buffett and Mr. Munger have always said the stream of cash See’s Candies generated throughout the years has been the source of a fantastic competitive advantage to them.

So, buy LRE and get your own See’s Candies to work for you! :)

 

giofranchi

 

[tombgrt]

See's was bought for $25m en has generated almost $1,5b in 40 years. After 10 years of acquiring it, in 1982, it was already earning $13m after taxes and after taking a goodwill hit. How is that not fast growth? It's earnings grew by +-20%/year in those first 10 years and they kept growing at an insane pace after those initial years.

 

It was an unexpected grand slam and nothing like buying a very well-managed insurer at a price (likely) just under fair value that will give you slightly above long term average market returns IF history repeats itself.

 

Not to attack you Gio, but you are wearing rose-coloured glasses. It's very likely to be an ok investment at this point but unlikely to come even close to what See's did for Warren.

[giofranchi]

See's was bought for $25m en has generated almost $1,5b in 40 years. After 10 years of acquiring it, in 1982, it was already earning $13m after taxes and after taking a goodwill hit. How is that not fast growth? It's earnings grew by +-20%/year in those first 10 years and they kept growing at an insane pace after those initial years.

 

It was an unexpected grand slam and nothing like buying a very well-managed insurer at a price (likely) just under fair value that will give you slightly above long term average market returns IF history repeats itself.

 

Not to attack you Gio, but you are wearing rose-coloured glasses. It's very likely to be an ok investment at this point but unlikely to come even close to what See's did for Warren.

 

Well, you surely are quantitatively right, but my comparison was more a qualitative one.

 

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

 

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

WEB 2007 AL

 

Of course, LRE doesn’t earn 60% pre-tax on invested capital, it earns 20%. So the math is very much different! But qualitatively, imo, the two share the very important aspect of providing their owners with a very predictable and increasing stream of cash. Ok, I agree that See’s stream of cash increased at a pace much faster than what LRE might achieve in the future. But that is not the point! You better own the best cash machine you can find! This is the point! Who cares if it is not the next See’s Candies?! Because a cash generating machine gives you optionality, optionality makes you robust, and robustness gives you peace of mind and a clear vision. In other words, cash helps you to be rational! And, of course, in an intellectual game like investing actually is, rationality is a huge competitive advantage.

 

At least, this is how I see it! But I might be very well wrong!

 

giofranchi

 

[rjstc]

Another great discussion everyone. Some really good points & counterpoints. Thanks

[kilroy04]

We all would love to buy our own version of "See's Candy".  One thing to note in the 70's and 80's is the significant difference between nominal and real sales growth.  Inflation was substantial.  See's was definitely a fantastic investment but the adjusted numbers wouldn't look as grand e.g. gasoline was about 35 cents a gallon vs today's $3.5.  Some of that nominal vs real will also occur going forward - at least at some point in time.

[twacowfca]

We all would love to buy our own version of "See's Candy".  One thing to note in the 70's and 80's is the significant difference between nominal and real sales growth.  Inflation was substantial.  See's was definitely a fantastic investment but the adjusted numbers wouldn't look as grand e.g. gasoline was about 35 cents a gallon vs today's $3.5.  Some of that nominal vs real will also occur going forward - at least at some point in time.

 

 

Good points.

 

Sees is a great business.  I think Sees pre tax earnings was about $4M when Blue Chip bought them. After tax earnings were about 9% of the purchase price then, if I'm not mistaken.  Sees had unrealized pricing power then, and they were able to raise prices significantly more than enough to stay even with inflation.

 

The risk free rate then was moving into high single digits, and a few years later was double digits in a very inflationary period.  Today's, risk free rate is much lower, and core inflation is about 1%.  A nominal return of 19.5% is very good today, especially for a business that makes money despite low interest rates compared to most other businesses that have high profit margins now because interest rates are low.

 

In this sense, the quality of LRE's earnings is high as is the quality of their assets.  Assets are almost all cash or very marketable, low duration and mostly high rated debt instruments. 80% of their earnings are from underwriting, unlike most other insurers who are generally happy to break even on underwriting and who make all their profits over the cycle from investing.  LRE is among the few who will start to have increased investment returns without facing the prospect of significant MTM portfolio losses from long dated securities when interest rates rise. They even have some swaptions to cover the very minimal losses they might experience with upticks in rates. Thus, they should be in position to quickly see  increased earnings with rising rates.

 

However, some authorities think that more than half the current profitability of S&P500 companies is a consequence of historically low interest rates, and that profits of most companies will be increasingly pinched when interest rates rise.

 

 

If LRE is a flash in the pan that will regress to the mean of the industry and barely earn its cost of capital, it's no bargain.  But if it really is a continuation of the superior leadership, processes, culture and exceptional returns that Brindle developed and demonstrated at Lloyd's, it's a very special business that should do well in different circumstances.

 

20% annual returns is about as good as it gets over a lifetime for the very best investors such as Buffett, Carnegie, Rockefeller and a few others.  :)

[WhoIsWarren]

Good perspective.

 

Here's a scenario about the optionality of LRE's large special EOY dividends.  The timing of these on occasion will provide ammo for bagging a trophy at a bargain price.  For a contra factual example: suppose Hurricane Ike had not happened in late 2008.  In that nonevent, it is likely that LRE would have paid a huge special dividend that December.  They made 10% on their equity that year.  In the non event of hurricane Ike, they would have made a return of 20%+ on their equity.

 

Think about how valuable that cash  would have been to have available the first quarter of 2009.  WFC at 1/4 its current price. BRK at nearly 1/3 its price now. Garbage stocks at 1/10 their current prices.  With LRE, investors have a prolific generator of cash like the fountain of float from BRK's insurance businesses that Warren has used so effectively to buy stocks at great bargain prices every decade or so.

 

Yes! Or, if I might suggest the comparison, with LRE you have your own See’s Candies. I like the comparison for three reasons at least:

1) Mr. Buffett and Mr. Munger were wise enough to pay up for the stream of cash See’s Candies would provide in future years;

2) See’s Candies has never grown very rapidly, and remained a relatively small company;

3) Mr. Buffett and Mr. Munger have always said the stream of cash See’s Candies generated throughout the years has been the source of a fantastic competitive advantage to them.

So, buy LRE and get your own See’s Candies to work for you! :)

 

giofranchi

 

Thanks for responding everyone, good thoughts.

 

Though I think my point on dividend tax is still valid for MOST of us (Italian construction companies excluded  ;D).

 

Sees' profits were taxed once -- corporate taxes -- and surplus capital was given tax free up to the parent, who could then go off and reinvest and compound.  For LRE, investors are taxed twice, corporate tax and then income tax.

 

And as I manage fund that are not subject to capital gains, I would prefer to take my 'special dividends' in the form of me selling some shares at opportune times, such as Q4:08.

 

But I shouldn't complain, each investor has their own specific preferences on tax.  Besides, LRE's corporate tax rate is amazing low.  If this point hasn't been addressed already, would someone mind telling me how the company manages this?  Is it sustainable?

 

And regarding LRE's ability to reinvest, does anyone have a good feel for whether or not the company may over time (5-10 years) be able to expand into new niches, while maintaining its high return on equity?  Perhaps this is not possible, I just thought I'd ask (and again this question may already have been addressed, apologies if it has).

 

Thanks in advance.

[Sunrider]

Depending on where you are - get a spreadbet account, in which case the tax issues falls away (you do pay higher fees indirectly on your trades though).

 

C.

Good perspective.

 

Here's a scenario about the optionality of LRE's large special EOY dividends.  The timing of these on occasion will provide ammo for bagging a trophy at a bargain price.  For a contra factual example: suppose Hurricane Ike had not happened in late 2008.  In that nonevent, it is likely that LRE would have paid a huge special dividend that December.  They made 10% on their equity that year.  In the non event of hurricane Ike, they would have made a return of 20%+ on their equity.

 

Think about how valuable that cash  would have been to have available the first quarter of 2009.  WFC at 1/4 its current price. BRK at nearly 1/3 its price now. Garbage stocks at 1/10 their current prices.  With LRE, investors have a prolific generator of cash like the fountain of float from BRK's insurance businesses that Warren has used so effectively to buy stocks at great bargain prices every decade or so.

 

Yes! Or, if I might suggest the comparison, with LRE you have your own See’s Candies. I like the comparison for three reasons at least:

1) Mr. Buffett and Mr. Munger were wise enough to pay up for the stream of cash See’s Candies would provide in future years;

2) See’s Candies has never grown very rapidly, and remained a relatively small company;

3) Mr. Buffett and Mr. Munger have always said the stream of cash See’s Candies generated throughout the years has been the source of a fantastic competitive advantage to them.

So, buy LRE and get your own See’s Candies to work for you! :)

 

giofranchi

 

Thanks for responding everyone, good thoughts.

 

Though I think my point on dividend tax is still valid for MOST of us (Italian construction companies excluded  ;D).

 

Sees' profits were taxed once -- corporate taxes -- and surplus capital was given tax free up to the parent, who could then go off and reinvest and compound.  For LRE, investors are taxed twice, corporate tax and then income tax.

 

And as I manage fund that are not subject to capital gains, I would prefer to take my 'special dividends' in the form of me selling some shares at opportune times, such as Q4:08.

 

But I shouldn't complain, each investor has their own specific preferences on tax.  Besides, LRE's corporate tax rate is amazing low.  If this point hasn't been addressed already, would someone mind telling me how the company manages this?  Is it sustainable?

 

And regarding LRE's ability to reinvest, does anyone have a good feel for whether or not the company may over time (5-10 years) be able to expand into new niches, while maintaining its high return on equity?  Perhaps this is not possible, I just thought I'd ask (and again this question may already have been addressed, apologies if it has).

 

Thanks in advance.

[plato1976]

I wish the price would go down a bit from the current level of 1.5pb to somewhere close to 1.25pb...

 

Good perspective.

 

Here's a scenario about the optionality of LRE's large special EOY dividends.  The timing of these on occasion will provide ammo for bagging a trophy at a bargain price.  For a contra factual example: suppose Hurricane Ike had not happened in late 2008.  In that nonevent, it is likely that LRE would have paid a huge special dividend that December.  They made 10% on their equity that year.  In the non event of hurricane Ike, they would have made a return of 20%+ on their equity.

 

Think about how valuable that cash  would have been to have available the first quarter of 2009.  WFC at 1/4 its current price. BRK at nearly 1/3 its price now. Garbage stocks at 1/10 their current prices.  With LRE, investors have a prolific generator of cash like the fountain of float from BRK's insurance businesses that Warren has used so effectively to buy stocks at great bargain prices every decade or so.

 

Yes! Or, if I might suggest the comparison, with LRE you have your own See’s Candies. I like the comparison for three reasons at least:

1) Mr. Buffett and Mr. Munger were wise enough to pay up for the stream of cash See’s Candies would provide in future years;

2) See’s Candies has never grown very rapidly, and remained a relatively small company;

3) Mr. Buffett and Mr. Munger have always said the stream of cash See’s Candies generated throughout the years has been the source of a fantastic competitive advantage to them.

So, buy LRE and get your own See’s Candies to work for you! :)

 

giofranchi

 

Thanks for responding everyone, good thoughts.

 

Though I think my point on dividend tax is still valid for MOST of us (Italian construction companies excluded  ;D).

 

Sees' profits were taxed once -- corporate taxes -- and surplus capital was given tax free up to the parent, who could then go off and reinvest and compound.  For LRE, investors are taxed twice, corporate tax and then income tax.

 

And as I manage fund that are not subject to capital gains, I would prefer to take my 'special dividends' in the form of me selling some shares at opportune times, such as Q4:08.

 

But I shouldn't complain, each investor has their own specific preferences on tax.  Besides, LRE's corporate tax rate is amazing low.  If this point hasn't been addressed already, would someone mind telling me how the company manages this?  Is it sustainable?

 

And regarding LRE's ability to reinvest, does anyone have a good feel for whether or not the company may over time (5-10 years) be able to expand into new niches, while maintaining its high return on equity?  Perhaps this is not possible, I just thought I'd ask (and again this question may already have been addressed, apologies if it has).

 

Thanks in advance.

[giofranchi]

Good points.

 

Sees is a great business.  I think Sees pre tax earnings was about $4M when Blue Chip bought them. After tax earnings were about 9% of the purchase price then, if I'm not mistaken.  Sees had unrealized pricing power then, and they were able to raise prices significantly more than enough to stay even with inflation.

 

The risk free rate then was moving into high single digits, and a few years later was double digits in a very inflationary period.  Today's, risk free rate is much lower, and core inflation is about 1%.  A nominal return of 19.5% is very good today, especially for a business that makes money despite low interest rates compared to most other businesses that have high profit margins now because interest rates are low.

 

In this sense, the quality of LRE's earnings is high as is the quality of their assets.  Assets are almost all cash or very marketable, low duration and mostly high rated debt instruments. 80% of their earnings are from underwriting, unlike most other insurers who are generally happy to break even on underwriting and who make all their profits over the cycle from investing.  LRE is among the few who will start to have increased investment returns without facing the prospect of significant MTM portfolio losses from long dated securities when interest rates rise. They even have some swaptions to cover the very minimal losses they might experience with upticks in rates. Thus, they should be in position to quickly see  increased earnings with rising rates.

 

However, some authorities think that more than half the current profitability of S&P500 companies is a consequence of historically low interest rates, and that profits of most companies will be increasingly pinched when interest rates rise.

 

 

If LRE is a flash in the pan that will regress to the mean of the industry and barely earn its cost of capital, it's no bargain.  But if it really is a continuation of the superior leadership, processes, culture and exceptional returns that Brindle developed and demonstrated at Lloyd's, it's a very special business that should do well in different circumstances.

 

20% annual returns is about as good as it gets over a lifetime for the very best investors such as Buffett, Carnegie, Rockefeller and a few others.  :)

 

This is what I mean by “circle of competence”: please, read all twacowfca has written about LRE and ask yourself “does exist a company about which I can honestly claim to know as much as twacowfca knows about LRE?”. If I had to answer, it would be clearly NO! Though I am a bit ashamed to admit it… Then, ask yourself “why did twacowfca took the trouble to study and understand LRE so intimately?”. If I might, let me suggest the following answer: “Because that is the only way to invest.” Because that is the way Buffett, Carnegie, Rockfeller and a few others got their 20% annual returns. Let’s make it very clear once again: I am not talking about trading in and out of stocks! To buy a basket of statistically cheap stocks and to sell them when they are no longer statistically cheap works and will make you rich, but has not much to do with how twacowfca invested his capital so successfully in LRE. Now that I think of it, if measured by twacowfca’s standards, the problem I have is not that my “circle of competence” is very small, the problem actually is my “circle of competence” is non-existent!!  :-[

 

Of course, I let twacowfca answer WhoIsWarren’s very good questions about the sustainability of LRE’s low corporate tax rate, and about LRE’s ability to expand into new niches. Why? … Simply because I ignore the answers…  :(

 

giofranchi

 

[twacowfca]

Good points.

 

Sees is a great business.  I think Sees pre tax earnings was about $4M when Blue Chip bought them. After tax earnings were about 9% of the purchase price then, if I'm not mistaken.  Sees had unrealized pricing power then, and they were able to raise prices significantly more than enough to stay even with inflation.

 

The risk free rate then was moving into high single digits, and a few years later was double digits in a very inflationary period.  Today's, risk free rate is much lower, and core inflation is about 1%.  A nominal return of 19.5% is very good today, especially for a business that makes money despite low interest rates compared to most other businesses that have high profit margins now because interest rates are low.

 

In this sense, the quality of LRE's earnings is high as is the quality of their assets.  Assets are almost all cash or very marketable, low duration and mostly high rated debt instruments. 80% of their earnings are from underwriting, unlike most other insurers who are generally happy to break even on underwriting and who make all their profits over the cycle from investing.  LRE is among the few who will start to have increased investment returns without facing the prospect of significant MTM portfolio losses from long dated securities when interest rates rise. They even have some swaptions to cover the very minimal losses they might experience with upticks in rates. Thus, they should be in position to quickly see  increased earnings with rising rates.

 

However, some authorities think that more than half the current profitability of S&P500 companies is a consequence of historically low interest rates, and that profits of most companies will be increasingly pinched when interest rates rise.

 

 

If LRE is a flash in the pan that will regress to the mean of the industry and barely earn its cost of capital, it's no bargain.  But if it really is a continuation of the superior leadership, processes, culture and exceptional returns that Brindle developed and demonstrated at Lloyd's, it's a very special business that should do well in different circumstances.

 

20% annual returns is about as good as it gets over a lifetime for the very best investors such as Buffett, Carnegie, Rockefeller and a few others.  :)

 

This is what I mean by “circle of competence”: please, read all twacowfca has written about LRE and ask yourself “does exist a company about which I can honestly claim to know as much as twacowfca knows about LRE?”. If I had to answer, it would be clearly NO! Though I am a bit ashamed to admit it… Then, ask yourself “why did twacowfca took the trouble to study and understand LRE so intimately?”. If I might, let me suggest the following answer: “Because that is the only way to invest.” Because that is the way Buffett, Carnegie, Rockfeller and a few others got their 20% annual returns. Let’s make it very clear once again: I am not talking about trading in and out of stocks! To buy a basket of statistically cheap stocks and to sell them when they are no longer statistically cheap works and will make you rich, but has not much to do with how twacowfca invested his capital so successfully in LRE. Now that I think of it, if measured by twacowfca’s standards, the problem I have is not that my “circle of competence” is very small, the problem actually is my “circle of competence” is non-existent!!  :-[

 

Of course, I let twacowfca answer WhoIsWarren’s very good questions about the sustainability of LRE’s low corporate tax rate, and about LRE’s ability to expand into new niches. Why? … Simply because I ignore the answers…  :(

 

giofranchi

 

Thanks again for your kind remarks, Giofranchi.  I think you sell yourself short, though.  You certainly know more about engineering businesses in Italy and internet higher education there than I know about Lancashire.

 

I think Lancashire's virtually zero corporate tax rate is sustainable.  The Bermuda and London market insurance companies have a go anywhere mentality to keep taxes ultra low to zero.  Brindle and LRE's Officers would literally hop on a plane and fly to Ireland merely to have a board meeting ( flying coach by the way)  to make sure that they complied with the letter of the law to maintain their Bermuda tax domicile until they got the current exemption to get a pass to have London as their tax free domicile.  If political winds should blow the wrong way, they have stated that they will move to a different domicile if necessary to  continue to serve the international market from a low to no tax domicile.  :$

 

One of Lancashire's core values is to stay nimble.  They started in Dec, 2005 by being mainly in retro when rates went up six times higher than they were before KRW.  Brindle almost entirely passed on Marine during their first year even though he knew Marine as well as  any  class after his experience at Lloyds.  He jumped on various types of terrorism and related lines that he had come to know so well as risk manager for AIG's London operations after 911 when he became intimately familiar with all the nuances of that business as he led the group that rewrote those contracts' terms and conditions.  They built up a market leading core competency in Energy from scratch. 

 

. . . And the list goes on and on as they have established themselves as lead underwriters in good but ever changing niches.  LRE is the most nimble company by far in adding or subtracting lines of business or starting up entirely new things such as third party  capital management as markets change or rates go up or down.  :)

[WhoIsWarren]

twacowfca / gio, thanks very much for putting the time into replying.  It's always great to get the perspectives of people who have followed a company for a while, as both of you clearly have.

 

I'll be looking at the company in a lot more detail over the coming weeks and I'm sure I'll have a lot more questions, so any help you can give will be gratefully accepted.

 

Thanks

[rmitz]

For those of you holding LRE (as opposed to LCSHF) in a tax-protected account such as a Roth in the US, which brokerage are you using? Or do you hold LCSHF?

 

IB says that you cannot purchase LRE in a Roth (I have a Roth 401k as well as a Roth IRA) and ETRADE (my current broker since they bought Brown & Co.) said that they would only perform the trade for LRE in one of the Roth's on my behalf for a 15% commission!! (and another 15% on sale!).

 

I could use ETRADE's 'global trading platform' to buy it in a cash account and pay about $10 in commission, but I prefer to hold it in a Roth.

 

Any suggestions welcome.

 

Paul

 

I have definitely held LRE in Roth accounts at IB in the past.  The only annoyance at the time was that I needed to manually buy the pounds I needed (as a separate step) to buy LRE, but I don't know if there's a better way to do that now.

[mankap]

Does IB withhold any tax on dividend for LRE

[tombgrt]

See's was bought for $25m en has generated almost $1,5b in 40 years. After 10 years of acquiring it, in 1982, it was already earning $13m after taxes and after taking a goodwill hit. How is that not fast growth? It's earnings grew by +-20%/year in those first 10 years and they kept growing at an insane pace after those initial years.

 

It was an unexpected grand slam and nothing like buying a very well-managed insurer at a price (likely) just under fair value that will give you slightly above long term average market returns IF history repeats itself.

 

Not to attack you Gio, but you are wearing rose-coloured glasses. It's very likely to be an ok investment at this point but unlikely to come even close to what See's did for Warren.

 

Well, you surely are quantitatively right, but my comparison was more a qualitative one.

 

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

 

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

WEB 2007 AL

 

Of course, LRE doesn’t earn 60% pre-tax on invested capital, it earns 20%. So the math is very much different! But qualitatively, imo, the two share the very important aspect of providing their owners with a very predictable and increasing stream of cash. Ok, I agree that See’s stream of cash increased at a pace much faster than what LRE might achieve in the future. But that is not the point! You better own the best cash machine you can find! This is the point! Who cares if it is not the next See’s Candies?! Because a cash generating machine gives you optionality, optionality makes you robust, and robustness gives you peace of mind and a clear vision. In other words, cash helps you to be rational! And, of course, in an intellectual game like investing actually is, rationality is a huge competitive advantage.

 

At least, this is how I see it! But I might be very well wrong!

 

giofranchi

 

Oh, I should have figured out you meant it more on a qualitative level. You have a point of course and I really agree. I would just like that cash machine to give me a slightly better return. The current share price is getting very close tho. The thing about stocks like LRE, BRK, FFH, .. is that a 10-20% decline often can make a huge difference in perspective on valuation because of the safety these investments offer and their compounding ability. Not sure if I make sense with this last comment...

 

We all would love to buy our own version of "See's Candy".  One thing to note in the 70's and 80's is the significant difference between nominal and real sales growth.  Inflation was substantial.  See's was definitely a fantastic investment but the adjusted numbers wouldn't look as grand e.g. gasoline was about 35 cents a gallon vs today's $3.5.  Some of that nominal vs real will also occur going forward - at least at some point in time.

 

The risk free rate then was moving into high single digits, and a few years later was double digits in a very inflationary period.  Today's, risk free rate is much lower, and core inflation is about 1%.  A nominal return of 19.5% is very good today, especially for a business that makes money despite low interest rates compared to most other businesses that have high profit margins now because interest rates are low.

 

In this sense, the quality of LRE's earnings is high as is the quality of their assets.  Assets are almost all cash or very marketable, low duration and mostly high rated debt instruments. 80% of their earnings are from underwriting, unlike most other insurers who are generally happy to break even on underwriting and who make all their profits over the cycle from investing.  LRE is among the few who will start to have increased investment returns without facing the prospect of significant MTM portfolio losses from long dated securities when interest rates rise. They even have some swaptions to cover the very minimal losses they might experience with upticks in rates. Thus, they should be in position to quickly see  increased earnings with rising rates.

 

However, some authorities think that more than half the current profitability of S&P500 companies is a consequence of historically low interest rates, and that profits of most companies will be increasingly pinched when interest rates rise.

 

This is one of the best bullish points for LRE. Their earnings are much more reliable when accounting for the current environment compared to most other companies. In almost all cases LRE will do great. Thank you twacowfca for pointing this out.

[kmukul]

IB says that you cannot purchase LRE in a Roth

 

Is the UK market turned on in your IB Roth account? Go to Account Management -> Manage Account -> Trading Permissions to confirm.

 

I've never had any trouble accessing foreign markets in mine.

 

Why not just buy LCSHF, its the same without the hassle isnt it?

[alpha231616967560]

IB says that you cannot purchase LRE in a Roth

 

Is the UK market turned on in your IB Roth account? Go to Account Management -> Manage Account -> Trading Permissions to confirm.

 

I've never had any trouble accessing foreign markets in mine.

 

Why not just buy LCSHF, its the same without the hassle isnt it?

 

Well...the ask for LCSHF is $1.20 over the quote right now, but more importantly (to me), I'd prefer to sell a put option to enter a position in LRE. The Nov13 15's are paying $1.60, which is a good premium for 4 months, and options aren't available for the ADR.

[bargainman]

 

Well...the ask for LCSHF is $1.20 over the quote right now, but more importantly (to me), I'd prefer to sell a put option to enter a position in LRE. The Nov13 15's are paying $1.60, which is a good premium for 4 months, and options aren't available for the ADR.

 

where do you see these quoted?  I don't see any options on yahoo.

 

http://finance.yahoo.com/q?s=LRE.L&ql=1

[alpha231616967560]

 

Well...the ask for LCSHF is $1.20 over the quote right now, but more importantly (to me), I'd prefer to sell a put option to enter a position in LRE. The Nov13 15's are paying $1.60, which is a good premium for 4 months, and options aren't available for the ADR.

 

where do you see these quoted?  I don't see any options on yahoo.

 

http://finance.yahoo.com/q?s=LRE.L&ql=1

 

My apologies. Very sloppy on my part. I was relying on Morningstar for the options quote (attached) and I didn't pay attention to the fact that the price of the underlying listed here is about a world away from the quote for LRE on the London exchange. Morningstar has the page labeled as Lancashire Holdings, but it is incorrectly associated as such. They apparently got it mixed up with LRE Energy. I only noticed this on reviewing your question. Maybe someone else on this thread knows where to obtain a quote on LRE options? I would still much prefer to sell puts to enter this position.

LRE_Options_-_Morningstar.pdf

[twacowfca]

LRE's Issuer Credit Rating was upgraded yesterday from stable to positive by AM Best, meaning that they like their risk management and risk adjusted capitalization.  :)

[twacowfca]

LRE's Issuer Credit Rating was upgraded yesterday from stable to positive by AM Best, meaning that they like their risk management and risk adjusted capitalization.  :)

 

It will be interesting to see what LRE's investment returns vs other insurers will be at the end of Q2.  Their low duration portfolio and their swaptions may help them make their usual, small quarterly investing return, despite the potential for MTM portfolio losses that some insurers may experience as interest rates have risen recently, and equity markets have given up most of the Q2 gains. :)

[giofranchi]

LRE's Issuer Credit Rating was upgraded yesterday from stable to positive by AM Best, meaning that they like their risk management and risk adjusted capitalization.  :)

 

It will be interesting to see what LRE's investment returns vs other insurers will be at the end of Q2.  Their low duration portfolio and their swaptions may help them make their usual, small quarterly investing return, despite the potential for MTM portfolio losses that some insurers may experience as interest rates have risen recently, and equity markets have given up most of the Q2 gains. :)

 

Both positive news! I had increased my firm’s investment in LRE to 15% of total assets just the day before AM Best upgraded LRE’s Issuer Credit Rating. :)

 

giofranchi

[twacowfca]

LRE's Issuer Credit Rating was upgraded yesterday from stable to positive by AM Best, meaning that they like their risk management and risk adjusted capitalization.  :)

 

It will be interesting to see what LRE's investment returns vs other insurers will be at the end of Q2.  Their low duration portfolio and their swaptions may help them make their usual, small quarterly investing return, despite the potential for MTM portfolio losses that some insurers may experience as interest rates have risen recently, and equity markets have given up most of the Q2 gains. :)

 

Both positive news! I had increased my firm’s investment in LRE to 15% of total assets just the day before AM Best upgraded LRE’s Issuer Credit Rating. :)

 

giofranchi

 

Markets can do strange things.  However, I have continued to look through Mr. Market's fog to see Lancashire as an investment worthy of being a long term holding, even as we have lightened up on our other equity holdings and more or less hedged our entire portfolio in the last two weeks.  :)

[giofranchi]

Markets can do strange things.  However, I have continued to look through Mr. Market's fog to see Lancashire as an investment worthy of being a long term holding, even as we have lightened up on our other equity holdings and more or less hedged our entire portfolio in the last two weeks.  :)

 

I have done almost the same: got out completely of Third Point, and reduced all other holdings. I have kept my basket of shorts and increased cash. FFH remains at 30%, while LRE is up to 15%, and I will gladly take it to 20% on further price weakness. FFH + LRE = 64.5% of my long portfolio. :)

 

giofranchi

 

[twacowfca]

Lancashire received the Reinsurer of the Year award this week at Reactions London market banquet. :)