LRE.L - Lancashire Holdings Ltd

[WhoIsWarren]

Just bought more at 735 GBp.

If WhoIsWarren is right (he tends to be right very often! :) ).....

 

 

Ha -- don't bet on it

 

What's the saying?  Don't trust anyone under the age of 30.  And don't trust anyone over the age of  30. Do your own work.  ;)

[cr6196]

I was hoping someone here could answer a few questions I have about LRE, I don't have a full understanding of the industry

 

The first question is quite basic - how does LRE reserve? Are there formal rules for the industry or s it based solely on internal models? I understand LRE overreserves/has large releases...why?

 

Second, I understand LRE steps up the sidecars in response to changes in market opportunities, why doesn't it take this risk itself? My understanding is the risk alone would be too much for LRE but why not just take it alone in smaller slices. What is the net effect of third-party capital? It seems to have driven down rates but it has obviously opened up the possibility of fee income. Moreover, some of them LRE's lines seem to have higher barriers to entry, one suggestion I have seen a few times is that it has a core GWP book of some $300-400m.

 

What drives the relationship between combined ratios and ROE...my understanding is that lre's exposure to cat risk means that at low combined ratios it makes a lower roe then comps, I.e. hiscox which has a large "retail" book.

 

Finally, what can we read from Cathedral? I think this has been very badly received as the company seems to be running out of options for capital but is now investing rather than returning. Capital efficiencies aside, the big part of the deal appears to be access to lloyds (why? If this is such a big deal, why not before now?). It is also worrying the amount of D&F that Cathedral does, LRE obviously just finished winding its own exposure down and this comes at much higher costs, as I understand it, smaller contracts or not.

 

Given the softening market and cathedral acquisition I see no need to hurry this one. Despite the excellent past returns, it seems that the market is changing quite substantially and LRE has started doing some new things. For example, the company suggested last year it would stay flat in property cat due to declining rates, it now appears to be chasing the markets. Seeing what they return this year will be an interesting indication.

 

 

[giofranchi]

Just bought more at 735 GBp.

If WhoIsWarren is right (he tends to be right very often! :) ).....

 

 

Ha -- don't bet on it

 

What's the saying?  Don't trust anyone under the age of 30.  And don't trust anyone over the age of  30. Do your own work.  ;)

 

WhoIsWarren,

I am still at the beach (alas… the very last day!)… Cannot do my own work! But I am just fine with your work!! ;D ;D

 

giofranchi

 

[WhoIsWarren]

I've got to say that the most disappointing thing to come out of the Cathedral deal was this:

 

"The Acquisition has an attractive financial impact for the Enlarged Group as it is expected to be both book value and earnings accretive in the first year." (from the press release).

 

What???

 

Similarly, the company buys back stock up to 1.1x P/B, a level justified because such purchases are earnings accretive within 1 year.  Again - what???

 

Surely, the test of either an acquisition or a share buyback is whether you are buying an asset for less than it's worth.  Earnings accretion is a very, very poor approximation for such an assessment.  Sounds to me like the stock broking community has too much of a voice in the ear of the company.

 

Twacowfca, have you ever discussed this with them?

[link01]

I've got to say that the most disappointing thing to come out of the Cathedral deal was this:

 

"The Acquisition has an attractive financial impact for the Enlarged Group as it is expected to be both book value and earnings accretive in the first year." (from the press release).

 

What???

 

Similarly, the company buys back stock up to 1.1x P/B, a level justified because such purchases are earnings accretive within 1 year.  Again - what???

 

Surely, the test of either an acquisition or a share buyback is whether you are buying an asset for less than it's worth.  Earnings accretion is a very, very poor approximation for such an assessment.  Sounds to me like the stock broking community has too much of a voice in the ear of the company.

 

Twacowfca, have you ever discussed this with them?

 

I noticed that phrase too, plus the fact they didn't mention book val or earnings per share. but if they can put more capital to work at attractive rates with less risk given their presumably bigger opportunity set, then i'm sure its a worth while trade off, especially if the prospective returns are greater than those from the return of excess capital special dividends net of tax to shareholders that they do when the underwriting opportunities just aren't there for them

[giofranchi]

WhoIsWarren,

I look at your objection this way: the long term & the short term. As far as the long term is concerned, I have no doubt Mr. Brindle paid less than what he thinks Cathedral is really worth. I think he is an extremely shrewd allocator of capital and I don’t question too much the judgment of “extremely shrewd” businessmen, especially when I don’t really know what we are talking about (to say I know Cathedral very well would be simply ridiculous!). But what if, after assuring satisfactory long term results, you have also the opportunity to achieve a good short term result? Will you say: no, thanks, I don’t care about the short term?! Of course not! Am I wrong? If they succeed in making this acquisition pay off starting from year 1, well I won’t be the one to complain about it!

 

I would also answer to some of cr6196’s questions: about how LRE reserves, and why they decided to use sidecars, and the relationship between combined ratios and ROEs, twacowfca will answer much better than I could. Sincerely, I partner with Mr. Brindle, because I have no doubt he will always do whatever he can to maximize shareholders value, and because he has an almost 30 years history of being “extremely shrewd” at doing so. I don’t know every detail of the business like twacowfca, and he will answer your questions with great accuracy (like he always does! Thank you again!).

But I see you are somehow worried about the Cathedral acquisition… So, first of all: why now? Well, I guess simply because purchasing whole businesses is not like investing in the stock market… you simply cannot buy and sell whenever you want or feel like… instead, you must seize the opportunity when it appears. Who really knows the motives of Cathedral management and owners? Therefore, I don’t think it is easy to judge their timing either.

Of course D&F is a line of business Lancashire is winding down… But Mr. Brindle & Company haven’t purchased a business they were running themselves, right? You cannot expect to buy a business only if it already mirrors exactly your own, right? Otherwise, you will never buy a new business! I think you will never find anything that is perfect… instead, it should be a compelling opportunity from the start, like Mr. Brindle has defined Cathedral, and then you will have to work hard to make it ever better and better.

 

Finally, you point out that things are changing… But things are always changing! That’s why I like to partner with “extremely shrewd” capital allocator, because this is the only thing that never changes: their ability to make money for themselves and for their shareholders. Look at it this way: I am in business since 2004, and I have already been forced to adapt my firm to changes 3 or 4 times… Mr. Brindle, instead, has been in business for almost 30 years: how many times do you think he faced the necessity to do something differently? Something new? I guess already many times! And the only thing that never changed is the average ROE he achieved… or, as I have just said, the money he has made for himself and his shareholders.

 

I invest in Lancashire, assuming that Mr. Brindle’s financial acumen will continue to benefit Lancashire’s shareholders for many years to come.

And of course, I might be wrong. :)

 

giofranchi

 

[cr6196]

 

 

I invest in Lancashire, assuming that Mr. Brindle’s financial acumen will continue to benefit Lancashire’s shareholders for many years to come.

And of course, I might be wrong. :)

 

giofranchi

 

Thanks for the reply. My point about D&F was that they exited because they said it was a bad business, now they are going back into it with Cathedral. Their justification is that Cathedral is just smaller contracts so the two businesses don't overlap, on the face of it this argument seems weak.

 

I understand an acquisition is the quickest way to get Lloyds so they must take what opportunity they can get but there would have been other opportunities over the past years. Again, the question is why now? Given they are having trouble finding opportunities, it looks bad. Moreover, the idea that they must "seize the opportunity" contrasts slightly (although not a lot) with a shrewd investment. Capital efficiencies make it cheaper than the headline but an acquisition appears to be a dramatic change in strategy.

 

I get the idea of "partnering" with Brindle and his record is good but I don't think this enough. It makes sense to try and understand the changes in the business. LRE seems to have this core book of business and then grows and shrinks around the margins...has this changed? what are the effects of the current environment on this strategy? For example, I see the company going into energy liability and satellite and making hires in political/terrorism but this seems small compared to the shrinkage elsewhere.

[twacowfca]

Re some recent questions:

 

LRE's cashless exercise plan is optional for warrant holders. Here's an example:

 

The average price of LRE for the five trading days before the warrant holder presents a warrant to LRE for cashless exercise is $10.00/SH.  With regular exercise, the warrant holder would pay LRE the strike or exercise price of $5.00 and receive one share of LRE from LRE's treasury stock.  With cashless exercise, the warrant holder would pay nothing and receive 1/2 share of LRE from LRE's treasury stock.

 

Re the acquisition of Cathedral:

 

If the deal had closed at the end of Q2 it would be perhaps a small dilution in BV/SH for LRE, not a lot because LRE is funding about half the transaction with the proceeds of stock that they are selling at about the same premium to BV that they are paying for Cathedral. On the basis of FDBV/SH it looks even better because of the many warrants outstanding with LRE, compared to none coming over from cathedral.  Also, when this closes EOY, I expect that Cathedral's earnings and BV will be substantially higher under most scenarios, excepting a big catastrophe.  Allowing for possible reserve redundancies, I suspect that their BS may be conservatively stated. 

 

LRE and most other companies have struggled with D&F business recently.  However, Cathedral's reports show that their D&F niches are astonishingly sticky and very profitable. This is an example of the potential strength of the Lloyds platform.  Lloyds is famous for being the place to go to place the odd or bizarre risk that no other market will touch.  Apparently, as with Cathedral, some of this business is "lovely".

 

All in all, on the surface, it looks like LRE is getting about the value they paid.  Under the surface, however, Lancashire now can go to Lloyd's if they see opportunities there.  No one has a better nose for opportunities than Brindle, and he may develop quite a following there as he and Charman had in the 80's and 90's. :)

[giofranchi]

I get the idea of "partnering" with Brindle and his record is good but I don't think this enough. It makes sense to try and understand the changes in the business.

 

cr6196,

here I cannot fully agree with you.

 

You see, I think that some men seem to be born prepared to assess risks much better than all other people, and then to take those risks. If you find such a man (a very rare find!), the most important thing is to stick with him.

 

Then, you could question their strategic decisions as much as you like. You could decide to pass everything they do under the microscope! But those will only be details… Only details? Many of you might ask. Aren’t details important? Many of you might even think details are what counts the most! I don’t agree. Because details are very often misleading… You end up missing the forest for the tree… No one, not a single person, on this board knows Cathedral as well as Mr. Brindle does… no one, not a single person (at least that I know of!), on this board has a track-record that even comes close to Mr. Brindle’s… and yet we think we could know better than Mr. Brindle and doubt his judgment… Result: we let the opportunity to invest with a great businessman go…

 

So, as I see it, if now you are not interested in Lancashire, because you think its share price will keep getting lower, then I might agree with you… I don’t know how to predict share price movements… but I might agree with you. Vice versa, if you are not interested in Lancashire for what you think you know about Cathedral or about how Lancashire’s business is going to change and will look like in the future… then, I beg your pardon, but I don’t agree.

Same with Fairfax… when everybody is questioning their judgment regarding CPI linked derivatives and equity hedges…

 

My idea: find a great businessman/investor, and let him do what he does best. :)

 

giofranchi

 

[constructive]

Similarly, the company buys back stock up to 1.1x P/B, a level justified because such purchases are earnings accretive within 1 year.  Again - what???

 

What's your problem with this? 1.1x book would be a great price for the stock (especially since their reserving errs on the conservative side). There's no guarantee they can write new business that provides a better return than buying back stock at 1.1x book.

 

On the other hand, I definitely see the problem with "accretive" vs "per share accretive".

[JBird]

Has Mr. Brindle discussed his valuation method for the company?

[link01]

The average price of LRE for the five trading days before the warrant holder presents a warrant to LRE for cashless exercise is $10.00/SH.  With regular exercise, the warrant holder would pay LRE the strike or exercise price of $5.00 and receive one share of LRE from LRE's treasury stock.  With cashless exercise, the warrant holder would pay nothing and receive 1/2 share of LRE from LRE's treasury stock.

 

oh, that's much different than the several definitions I googled up, thanks. and many thx for the generosity you've shown on this great lre thread too!

[twacowfca]

I've got to say that the most disappointing thing to come out of the Cathedral deal was this:

 

"The Acquisition has an attractive financial impact for the Enlarged Group as it is expected to be both book value and earnings accretive in the first year." (from the press release).

 

What???

 

Similarly, the company buys back stock up to 1.1x P/B, a level justified because such purchases are earnings accretive within 1 year.  Again - what???

 

Surely, the test of either an acquisition or a share buyback is whether you are buying an asset for less than it's worth.  Earnings accretion is a very, very poor approximation for such an assessment.  Sounds to me like the stock broking community has too much of a voice in the ear of the company.

 

Twacowfca, have you ever discussed this with them?

 

I noticed that phrase too, plus the fact they didn't mention book val or earnings per share. but if they can put more capital to work at attractive rates with less risk given their presumably bigger opportunity set, then i'm sure its a worth while trade off, especially if the prospective returns are greater than those from the return of excess capital special dividends net of tax to shareholders that they do when the underwriting opportunities just aren't there for them

 

On the face of it, that statement looks misleading, but being misleading is out of character for them.  For example, Brindle's key metric that is published regularly is not merely earnings or BV or even BV/SH, but FDBV/SH plus dividends, the truest measure of increase in shareholder's value.

 

The choice of words is poor, but what I think they were trying to do is address a recent criticism from the analysts that they have been returning so much value to shareholders and paring back their business to their least volatile and most profitable core, that they were in danger of becoming too small to attract attention as their competitors grew.

 

There is some justification to that criticism.  Brindle had felt that their size was, like Goldilocks third attempt, "just right". But recently, they dumped their most risky business into a sidecar and cut out their D&F business.  Now, with the planned return of even more capital to shareholders if there are no big losses by the end of the year, they have in fact become no longer "just right" in size. 

 

I think that Cathedral is a great opportunity even though they paid a fair price, not a bargain price, because it opens the door to a place where: "We're not in Kansas anymore, Toto."  :)

[twacowfca]

Has Mr. Brindle discussed his valuation method for the company?

 

No, but he is in complete agreement in words and alignment in deeds with Buffett's view on how CEO's build or destroy value for their companies.  I think that's remarkable because Brindle says he hasn't studied Buffett or Graham.  He seems to have come to these same conclusions entirely on his own after working at Lloyds for many years and seeking to maximize owners' earnings for his names (partners).  :)

 

The only point of difference is that Brindle's capital management is more like Graham's than Buffett's.  He keeps Lancashire in its sweet spot and isn't tempted to grow into business that doesn't have a realistic prospect of achieving at least their stated goal of making a return on shareholders funds of the risk free rate plus 13%.  Like Graham, he pays out surplus funds in dividends when there aren't compelling opportunities for reinvestment.

 

Brindle had a front row seat when Charman sold their managing group at Lloyds for three times book value in the late 90's. Interestingly, Brindle, like Graham, took some time off in the transition and produced a play he had written.  Both plays flopped. Graham and Brindle got that out of their system and soon got back to the business they were so good at, managing funds and looking for valuable, rare birds they could bag.

 

Brindle knows that a small company of LRE's quality should  sell for about the same ratio that Charman got at the top of the market for acquiring P&C companies.  :)

[WhoIsWarren]

Similarly, the company buys back stock up to 1.1x P/B, a level justified because such purchases are earnings accretive within 1 year.  Again - what???

 

What's your problem with this? 1.1x book would be a great price for the stock (especially since their reserving errs on the conservative side). There's no guarantee they can write new business that provides a better return than buying back stock at 1.1x book.

 

On the other hand, I definitely see the problem with "accretive" vs "per share accretive".

 

Constructive,

 

I agree 1.1x book would be a great price for the stock.  And if management appraised the business and concluded it was not worth paying more than that multiple, then fine.  What irks me is the suggestion that the 1.1x buyback limit is arrived at by reference to "accretive".

 

And yes, that it's not "per share accretive" just rubs the salt in  >:(

 

Lancashire's capital management policy is a breath of fresh air, but I think they might do well to think a bit outside the box.  Dividends are great, don't get me wrong, but the vast majority of investors are subject to at least a 10% withholding tax.  Ideally management should be aiming to grow the after-tax wealth of investors, perhaps at the same time being cognisant of alternative investment opportunities.  So if their own stock is trading at 1x, but the overall market is trading at 0.5x book, it might make sense to pay dividends (despite the tax consequences).  Other times, buying stock at 1.5x might be a great investment.  Indeed, they bought Cathedral for 1.6x NAV -- a business they surely know less well than their own.  I know this is not a fair comparison because there are likely synergy benefits at play, but you catch what I'm getting at.

 

On the face of it, that statement looks misleading, but being misleading is out of character for them.  For example, Brindle's key metric that is published regularly is not merely earnings or BV or even BV/SH, but FDBV/SH plus dividends, the truest measure of increase in shareholder's value.

 

The choice of words is poor......

 

Twacowfca, I took up your book recommendation "Investing Between the Lines" from a month or so ago and, well, according to the author Rittenhouse such loose use of language is a tell-tale warning, right? FDBV/SH plus dividends - music to my ears; accretive on the other hand.....

 

Overall, the Cathedral deal makes sense to me, for reasons that yourself and giofranchi have outlined -- despite management's choice of words.  To me it just smacks of throwing the investment broker community a bone, for them to have something "tangibly positive" to say about the deal in their client notes.  What will they tell the brokers if they do some cheap but nonetheless "dilutive" future deal?

 

 

[link01]

 

On the face of it, that statement looks misleading, but being misleading is out of character for them.  For example, Brindle's key metric that is published regularly is not merely earnings or BV or even BV/SH, but FDBV/SH plus dividends, the truest measure of increase in shareholder's value.

 

The choice of words is poor......

 

Twacowfca, I took up your book recommendation "Investing Between the Lines" from a month or so ago and, well, according to the author Rittenhouse such loose use of language is a tell-tale warning, right? FDBV/SH plus dividends - music to my ears; accretive on the other hand.....

 

Overall, the Cathedral deal makes sense to me, for reasons that yourself and giofranchi have outlined -- despite management's choice of words.  To me it just smacks of throwing the investment broker community a bone, for them to have something "tangibly positive" to say about the deal in their client notes.  What will they tell the brokers if they do some cheap but nonetheless "dilutive" future deal?

 

I was disappointed too at their "accretive to book value & earnings" this year sans the per share part they every value investor wants to see. unlike you, tho, I don't see it as necessarily being misleading. my own take is that that they probably dont have enough confidence that the acquisition would be accretive on a per share basis this year for any no. of reasons, given that this is an insurance co that they are buying, insurance is an inherently volatile biz, we are heading into the atlantic hurricane season, insurance co's have investment portfolios, not all portfolios are as low risk & low duration as lre's, all of which is to say there could be some negative surprises in the last half of the year. there's much less margin of safety with which you can confidently say accretive to book val & earns this yr vs the same on a per share basis.

[Carvel46]

Twacowfca,

Would you suggest articles/books on Lloyd's history? I'd like to understand the market structure and dynamics. Thx!

[twacowfca]

 

On the face of it, that statement looks misleading, but being misleading is out of character for them.  For example, Brindle's key metric that is published regularly is not merely earnings or BV or even BV/SH, but FDBV/SH plus dividends, the truest measure of increase in shareholder's value.

 

The choice of words is poor......

 

Twacowfca, I took up your book recommendation "Investing Between the Lines" from a month or so ago and, well, according to the author Rittenhouse such loose use of language is a tell-tale warning, right? FDBV/SH plus dividends - music to my ears; accretive on the other hand.....

 

Overall, the Cathedral deal makes sense to me, for reasons that yourself and giofranchi have outlined -- despite management's choice of words.  To me it just smacks of throwing the investment broker community a bone, for them to have something "tangibly positive" to say about the deal in their client notes.  What will they tell the brokers if they do some cheap but nonetheless "dilutive" future deal?

 

I was disappointed too at their "accretive to book value & earnings" this year sans the per share part they every value investor wants to see. unlike you, tho, I don't see it as necessarily being misleading. my own take is that that they probably dont have enough confidence that the acquisition would be accretive on a per share basis this year for any no. of reasons, given that this is an insurance co that they are buying, insurance is an inherently volatile biz, we are heading into the atlantic hurricane season, insurance co's have investment portfolios, not all portfolios are as low risk & low duration as lre's, all of which is to say there could be some negative surprises in the last half of the year. there's much less margin of safety with which you can confidently say accretive to book val & earns this yr vs the same on a per share basis.

 

I've had more time to think about the apparent spin in management's statement, and I've changed my mind.  I now don't think they have spinned it at all.  Their statement is entirely consistent with the way they have thought about their share buybacks in the past, although with a slightly longer timeframe. 

 

When they were in share repurchase mode a few years ago, they always thought about being accretive to book value per share not at the time of purchase, but at a point in time in the future. That point in time was their EOY results. 

 

Thus. some of their share repurchases were made at a point in time that was instantaneously accretive to BV/SH as measured by the BV at the end of the previous quarter.  Other share repurchases were made at a slightly higher multiple, slightly above the previous quarter's BV/SH, anticipating that that repurchase would be accretive to BV/SH by the end of the year.  That's the way it worked out, but that involved making a prediction that did not necessarily have to come true. 

 

Those predictions actually did come true, so they said at their EOY report that they were very pleased to report that share repurchases were for less than BV/SH , measured by EOY BV.  However, their bogie, like Warren's first bogie,  was that they instantaneously would not make a share repurchase that was for more than 110% of BV, measured by BV the quarter before the repurchase.

 

I feel certain that that's the way they are thinking about this acquisition, but with a longer time frame. The terminus for their bogie is not the end of the year, but within one year of the acquisition. I think this deal may close in December, while the BV figures reported in the news release are for Q2, 2013.  If I'm not mistaken, I think they anticipate making enough earnings off Cathedral for it to be accretive to EPS by December,2014.  That isn't guaranteed, but is reasonable. 

 

Cathedral made £20M in earnings last year with adjustment for what the owners received on their loans and notes.  This year, they may make more as they seem to be doing well.  We could guess that they may make £25M in 2013 and perhaps as much or more next year, especially if there are significant reserve releases in the pipeline.  Lancashire's average annual earnings for the last five years have been about $250M/annum. 10% of that is about $25M.  The deal increases their share count by 10%. That means that all they have to do is earn more than $25M from Cathedral (note: Cathedral reports earnings in £)  plus a little more to allow for the fraction of a percent they are earning on the cash to fund the deal, and it will be accretive not only to earnings, but EPS within a year of the deal's closing.  :)

[twacowfca]

Twacowfca,

Would you suggest articles/books on Lloyd's history? I'd like to understand the market structure and dynamics. Thx!

 

Keynes Essay on probability in the early 20th Century describes how the syndicates at Lloyds then (and now) "make book" just like a bookmaker still does in England on a horse race. 

 

Lloyds and most Lloyds syndicate managing partners lost their moral compass and most of their reputation in the 80's and 90's as they at first with wishful thinking and increasingly with fraudulent intent swept increasing long tailed liabilities under the rug with phony insurance to close estimates until all that corruption spewed out during the LMX Spiral in the 1980's. It has only been in the last decade that Lloyd's has (mostly) rehabilitated their reputation.

 

If you know of a good history of Lloyd's that doesn't gloss over their moral lapse in the 80's and 90's, let me know.  I would like to read it.  Thanks

 

One reason that Brindle didn't want to be part of Lloyds after LRE's IPO was that Lloyd's members were still being required to pay for the sins of the past. Now, that appears to be behind Lloyd's, and there appears to be little drag on current profitability of Lloyds members.  :)

[argonaut]

I am finding this thread quite interesting. I purchased Munich Re a couple of years ago at what turned out to be a low and plan to hold for years to come..Lancashire though in a similar yet different area of insurance looks very well run like Munich Re...pricewise, Lancashire has been dropping the past few months...share dilution, perhaps less future dividends (if they deploy more capital through Cathedral)?

 

Any ideas other than those as to why it is dropping (close to a one year low!) and what may the reasonable interim low range be before it continues up as it seems likely to?

[twacowfca]

I am finding this thread quite interesting. I purchased Munich Re a couple of years ago at what turned out to be a low and plan to hold for years to come..Lancashire though in a similar yet different area of insurance looks very well run like Munich Re...pricewise, Lancashire has been dropping the past few months...share dilution, perhaps less future dividends (if they deploy more capital through Cathedral)?

 

Any ideas other than those as to why it is dropping (close to a one year low!) and what may the reasonable interim low range be before it continues up as it seems likely to?

 

Realize that most of the "reason" for Lancashire's occasionally dropping over the years has been their payment of dividends, especially their large special dividends in years when they haven't experienced a large catastrophe loss.  They have paid about $2.00/ share in the last few months.  This fall they will probably pay another special if the hurricane season continues to be benign with no very large losses especially in the Gulf of Mexico.  If that happens, they will have returned to their shareholders through dividends and share repurchases almost two times the equity capital raised in their IPO in December 2005.

 

What's happened with the stock price has been remarkable: a huge benefit to buyers who have held their stock and a very good but smaller benefit for those who have bought and sold their shares. The latter includes the sponsors of their IPO who mostly sold out when they had doubled their money during the financial crisis as Lancashire was making a new high about the time the market hit bottom in 09.

 

Mr. Market does strange things. The prices of almost all stocks became highly positively correlated during the financial crisis. There were a handful of exceptions, in particular, FFH and LRE, that went up as the market was taking a dive because Mr Market finally noticed that they were making extraordinary profits when profits were disappearing for almost every other company.  During that time, FFH and LRE were still selling for about book value. Since then, FFH has languished after becoming completely hedged, but LRE has increased greatly, especially when dividends are included.

 

In the last three years LRE has continued to do better than their peers, especially considering how they have lowered their risk as indicated by drastically lowered PML's. This means that they will very likely continue to be a leader in profits when the industry takes the next big hit.

 

Their relative underperformance recently in the stock market is merely part of the recent market phenomenon of  laggards and lower quality stocks somewhat catching up and outperforming in a favorable market.  Mr. Market knows that most insurers that buy a Lloyds company are grasping at a straw.  This gives Mr. Market an excuse to do what he wants to do anyway, ignore a company that diluted their shares a little to make an acquisition, and pile on the Laggards.  Time will tell if Lancashire made a good move to buy Cathedral. In the meantime, Mr. Market will continue to do his thing.  :)

 

As with most value stocks that are also good businesses, Lancashire will very likely shine more brightly when business conditions are less favorable in general.  To paraphrase Ben and Warren, if you want Mr. Market to be your guide instead of your servant . . . well . . . There's always Tesla.  :)

[giofranchi]

As with most value stocks that are also good businesses, Lancashire will very likely shine more brightly when business conditions are less favorable in general.  To paraphrase Ben and Warren, if you want Mr. Market to be your guide instead of your servant . . . well . . . There's always Tesla.  :)

 

twacowfca,

does it really seem too much that I don’t have a brain of my own, if I continue to say that I couldn’t agree with you more?!?! ;D

 

Anyway, let me add that I don’t think you can time a bottom in share price correctly. When I like a business very much, and its share is priced so that I can lock in at least a 10% owner earnings yield in year 1, with a track-record of past growth that could lead me to enjoy an average 15% annual return for many years into the future, I invest. Period.

 

I also always leave some dry powder to average down. I am a great believer in averaging down with a great business! And while I am averaging down, I constantly plan when I will be buying next (at what price) and how much I will be buying.

 

That’s why, like original mungerville rightly pointed out, I hadn’t my math on the reinvestment of dividends correctly thought out: because I will never reinvest any dividend just to reinvest it… instead, I will buy more Lancashire when the share goes down in price, even if no dividend is distributed; and I will refrain from buying more when the share goes up in price, even if I have just received a dividend (or a special dividend!).

 

giofranchi

 

[argonaut]

Thanks Twacowfca,

 

It seems most of your shares were purchased around 1.1-1.2 bk and now it is closer to 1.6 albeit if we add back in the div we are at 1.3ish ...it gets a little fuzzy :) with the payouts..

[CanadianMunger]

Great thread.

 

Doesn't the nature of the industry that Lancashire operates in guarantee a cheaper entry point relative to book at some future point in time? 

 

-CM

[argonaut]

I see what looks like a bank/funds has purchased 4-5% of LRE ..not as easy to read exactly what the transaction is vs the form 13's here in the states.. Perhaps someone more familiar  with UK filings can interpret ?

 

http://www.iii.co.uk/investment/detail/?display=news&code=cotn:LRE.L&action=article&articleid=9072673