LRE.L - Lancashire Holdings Ltd

[Ian L]

Over a longer term, I find the warrants are a little worrying. Currently there are ~30m warrants outstanding vs shares of 180 million. Some warrants have been converted. The number of warrants issued might follow an exponential path as they may offer a % of the free float each time. If the shares can be diluted by this much over the short time lancashire has been in business, then over a Berkshire like time frame, the dilution could be substantial.

I am aware that if we get down to 1.1 * book, lancashire could buy its own shares, but this might not happen.

Does anyone know of any limits or restrictions that management could have over issuing ever more warrants?

[twacowfca]

Over a long term, the warrants are a little concerting. Currently there are ~30m warrants outstanding vs shares of 180 million. Some warrants have been converted. The number of warrants issued might follow an exponential path as they may offer a % of the free float each time. If the shares can be diluted by this much over the short time lancashire has been in business, then over a Berkshire like time frame, the dilution could be substantial.

I am aware that if we get down to 1.1 * book, lancashire could buy its own shares, but this might not happen.

Does anyone know of any limits or restrictions that management could have over issuing ever more warrants?

 

The warrants were issued as part of their IPO, including some authorized but not issued immediately subject to management performance.  Most went to founders who put together their IPO astonishingly quickly to exploit the spike in cat rates after Katrina et al. None have been issued since then. Merrill Lynch, the lead underwriter, over estimated how much capital they would raise, and warrants became a higher % of shares outstanding than anticipated. Interestingly, the 10% increase in shares outstanding related to acquisition of Cathedral, happily means that warrants as a % of shares outstanding will go down.  :)

[Ian L]

Thankyou twacowfca for the info. :)

[twacowfca]

Thankyou twacowfca for the info. :)

 

Glad to help.

[link01]

<<Lancashire's surprise £266mn takeover of Lloyd's-based rival Cathedral, unveiled on 7 August, has stirred speculation that the London-listed (re)insurer may be quietly abandoning the business model that has made it one of the sector's stock market stars since it launched in 2005.

 

In the eight years since it opened for business, Lancashire has differentiated itself from its Bermudian and London market peers by anticipating and aggressively exploiting changing market conditions, while distributing the lion's share of its profits to shareholders...>>

 

Lancashire at the crossroads:

http://www.insuranceinsider.com/-1244926/13

 

apparently need a subscription to read the whole article, but its as reasonable a guess as the next, as far as it goes

[twacowfca]

<<Lancashire's surprise £266mn takeover of Lloyd's-based rival Cathedral, unveiled on 7 August, has stirred speculation that the London-listed (re)insurer may be quietly abandoning the business model that has made it one of the sector's stock market stars since it launched in 2005.

 

In the eight years since it opened for business, Lancashire has differentiated itself from its Bermudian and London market peers by anticipating and aggressively exploiting changing market conditions, while distributing the lion's share of its profits to shareholders...>>

 

Lancashire at the crossroads:

http://www.insuranceinsider.com/-1244926/13

 

apparently need a subscription to read the whole article, but its as reasonable a guess as the next, as far as it goes

 

I disagree. Right now, the best opportunities are at Lloyd's. Opportunities are so good that BRK is writing more than one quota share of all Lloyd's underwriting, including the best and the worst. Look at the CR's at Lloyd's in recent years. They are better than any other market in the world.  No one knows Lloyd's better than Brindle does. :)

[link01]

<<Lancashire's surprise £266mn takeover of Lloyd's-based rival Cathedral, unveiled on 7 August, has stirred speculation that the London-listed (re)insurer may be quietly abandoning the business model that has made it one of the sector's stock market stars since it launched in 2005.

 

In the eight years since it opened for business, Lancashire has differentiated itself from its Bermudian and London market peers by anticipating and aggressively exploiting changing market conditions, while distributing the lion's share of its profits to shareholders...>>

 

Lancashire at the crossroads:

http://www.insuranceinsider.com/-1244926/13

 

apparently need a subscription to read the whole article, but its as reasonable a guess as the next, as far as it goes

 

I disagree. Right now, the best opportunities are at Lloyd's...

 

i'm sure you're right, twa. but if their acquisition of cathedral has stirred speculation that they are changing their biz model then that might explain why lre has slumped even more than the avg insurer since then, no?

[twacowfca]

<<Lancashire's surprise £266mn takeover of Lloyd's-based rival Cathedral, unveiled on 7 August, has stirred speculation that the London-listed (re)insurer may be quietly abandoning the business model that has made it one of the sector's stock market stars since it launched in 2005.

 

In the eight years since it opened for business, Lancashire has differentiated itself from its Bermudian and London market peers by anticipating and aggressively exploiting changing market conditions, while distributing the lion's share of its profits to shareholders...>>

 

Lancashire at the crossroads:

http://www.insuranceinsider.com/-1244926/13

 

apparently need a subscription to read the whole article, but its as reasonable a guess as the next, as far as it goes

 

I disagree. Right now, the best opportunities are at Lloyd's...

 

i'm sure you're right, twa. but if their acquisition of cathedral has stirred speculation that they are changing their biz model then that might explain why lre has slumped even more than the avg insurer since then, no?

 

Yup. Mr. Market has a way of putting companies in different style buckets.  This recent move may be interpreted by some as a change in style.  Objectively, it is a change in strategy, in my opinion consistent with their core value of being nimble and going where the best opportunities are.  :)

 

[original mungerville]

I am a Canadian and want to confirm that if I hold Lancashire in a non-registered account (ie say in a normal margin or cash account), that there will be no withholding tax applied to the dividend.

 

Are there other Canadians here holding Lancashire who can confirm that they are receiving the full dividend with no withholding tax applied?

 

[Uccmal]

I am a Canadian and want to confirm that if I hold Lancashire in a non-registered account (ie say in a normal margin or cash account), that there will be no withholding tax applied to the dividend.

 

Are there other Canadians here holding Lancashire who can confirm that they are receiving the full dividend with no withholding tax applied?

 

 

Hi mungerville,

 

I dont hold LRE but I do hold RBS.PR.P.  There is no with holding tax but it gets counted as straight income on your taxes. 

 

Al

[original mungerville]

Al,

 

Thanks for the tax confirmation.

 

I'd like to see the price come down a bit more before buying... (as I've purchased an insurer in the past just as they made an acquisition and that took some time to work itself out!)...but I am not sure it will.

 

I'd be interested if you have taken a closer look at Lancashire / have any views on it?

 

 

[giofranchi]

I'd like to see the price come down a bit more before buying... (as I've purchased an insurer in the past just as they made an acquisition and that took some time to work itself out!)...but I am not sure it will.

 

Hi original mungerville,

Don’t know if you care about it, but I will tell you how I see this anyhow! :)

 

First of all, let’s admit that I am a “man on a mission”… And my mission is to build a company with $1 billion in equity. How to achieve that? Easy enough: all I have to do is to grow the equity of my firm at a compound rate of 15% for the next 45 years…!! Ok, now this must surely sound like a joke to you, but, believe me, it is not… Instead, it is the goal I have in mind every morning as soon as I wake up. Every single year first of all the BV of my firm must grow by 15%, then I try to live as comfortably as I can with any “surplus” that remains at my disposal. If, for instance, in a difficult year I would be forced to cut even drastically my own salary, in order to achieve that 15% growth, I will do so without hesitation.

 

So, when I invest my firm’s capital, I basically ask myself two questions:

1) Is it a business that I really want to possess for a very long time?

2) Is it possible to achieve a 15% compound annual return for a very long time?

It might seem naïve to you, but 1) and 2) are really all that matters to me: if I have great conviction about both 1) and 2), I invest.

 

Now, with the only possible exception of FFH, Lancashire is the business that better satisfies 1) among all the businesses that I know. So the question is: does it satisfy 2)? With an 11% present earnings yield, Lancashire should grow BV at 4%-5% annual for many years into the future. Unfortunately, growth is always uncertain, right? In 1) I had already come to the conclusion that someone like Mr. Brindle won’t grow just for the sake of growing… Instead, he will seize any opportunity for growth, only if he expects the expanded business to post ROEs in line with Lancashire historical results. And this decreases much future opportunities for growth, right?

 

But this is exactly why I think the market is wrong and why, instead, I look at the acquisition of Cathedral enthusiastically: because it clearly shows that Mr. Brindle thinks and cares about growth, and knows how to achieve it. I think it shows that for Mr. Brindle it clearly is not enough to carry on with business as usual and keep paying big dividends to his shareholders. It provides an answer to the biggest question mark regarding Lancashire: will it grow sufficiently? The market looks at the acquisition of Cathedral and sees more uncertainty, I, instead, look at that acquisition and see much less uncertainty, because it answer the most important question I was not able to answer by myself.

 

Now, will the share price keep trending down? My best guess is yes… at least until Lancashire declares its next special dividend. It might not be in Q3 2013, but who knows what might happen in Q4 2013? So, my best guess is Lancashire’s share price might keep decreasing until the beginning of next year (maybe longer, if also Q4 2013 Results are announced without declaring a special dividend).

Of course, I don’t invest based on such “guesses”. Instead, if the share price keeps trending down, what I intend to do follows:

- at 700 GBp I will invest in LRE another 1.5% of my firm’s capital,

- at 665 GBp another 1.5%,

- at 630 GBp another 1.5%,

- at 595 GBp another 1.5%,

- at 560 GBp another 1.5%,

- at 525 GBp another 1.5%,

- at 490 GBp a final 1.5%.

 

If this happens, I will have invested circa 30% of my firm’s capital in Lancashire at more or less 1.4 BVPS, or little more than a 13% present earnings yield. A company that I now think will be able to grow (opportunistically, always opportunistically!), and that I might keep for the next 20 years.

 

giofranchi

 

[WhoIsWarren]

Well summed up gio -- I wholeheartedly agree!

 

I've an unrelated question.  According to Bloomberg, Och-Ziff is short around 1m shares of LRE, dated 27th Aug 2013 (I don't know when they first went short).  Och-Ziff was one of the founding shareholders of Lancashire and, for example, owned 9.4% of shares in issue as at March 2007 (per the 2006 AR), a position they sold down over the following few years. 

 

Given their historic involvement, Och-Ziff should know Lancashire very well, though I see a web reference to the fact that a guy called Andrew Land, now at HG Capital, led the Lancashire capitalisation for Och-Ziff (so maybe a lot of knowledge left with him?).

 

So why is Och-Ziff short Lancashire?  Perhaps they're jut covering off some other long position?  Or perhaps they see something sinister that the longs are ignoring??

 

[Perhaps it's a different arm of Och-Ziff to the one that was involved in the original capitalisation, in which case there mightn't be anything to be suspicious about!!!]

 

Anyone know what's behind this or have any insights into Och-Ziff (their record, quality of people)?  Twacowfca, you might have some observations to add here, as your involvement with Lancashire will have overlapped with Och-Ziffs, right?

 

It's likely nothing we need to concern ourselves with, I just thought I'd ask.....

 

Thanks in advance.

[giofranchi]

So why is Och-Ziff short Lancashire?  Perhaps they're jut covering off some other long position?  Or perhaps they see something sinister that the longs are ignoring??

 

Very good question, WhoIsWarren! And, of course, I ignore the answer…! :)

Might it have something to do with original mungerville’s reticence to invest at today’s price?

 

as I've purchased an insurer in the past just as they made an acquisition and that took some time to work itself out

 

When you know something very well, maybe you are also able to “play” the ups and downs of its stock price effectively. For instance, a lot of people on the board say they make much more money trading in and out FFH, than staying invested in it. Might it be that Och-Ziff is doing something similar with Lancashire?

Just my two cents… And twacowfca might surely be able to answer your question with much deeper insight! ;)

 

giofranchi

 

[twacowfca]

Well summed up gio -- I wholeheartedly agree!

 

I've an unrelated question.  According to Bloomberg, Och-Ziff is short around 1m shares of LRE, dated 27th Aug 2013 (I don't know when they first went short).  Och-Ziff was one of the founding shareholders of Lancashire and, for example, owned 9.4% of shares in issue as at March 2007 (per the 2006 AR), a position they sold down over the following few years. 

 

Given their historic involvement, Och-Ziff should know Lancashire very well, though I see a web reference to the fact that a guy called Andrew Land, now at HG Capital, led the Lancashire capitalisation for Och-Ziff (so maybe a lot of knowledge left with him?).

 

So why is Och-Ziff short Lancashire?  Perhaps they're jut covering off some other long position?  Or perhaps they see something sinister that the longs are ignoring??

 

[Perhaps it's a different arm of Och-Ziff to the one that was involved in the original capitalisation, in which case there mightn't be anything to be suspicious about!!!]

 

Anyone know what's behind this or have any insights into Och-Ziff (their record, quality of people)?  Twacowfca, you might have some observations to add here, as your involvement with Lancashire will have overlapped with Och-Ziffs, right?

 

It's likely nothing we need to concern ourselves with, I just thought I'd ask.....

 

Thanks in advance.

 

Interesting. :)

 

They are one of the founders who sold down their shares after they got a double a few years ago.  Some of those funds also invested in some of the other Bermuda Re start ups in 05 06 that didn't do particularly well.  The founders know what a high quality organization Lancashire is; I would be surprised if they had a negative long term view on the company.  They may be delta hedging or something similar related to Lancashire's recent private placement of shares.

[WhoIsWarren]

Interesting. :)

 

They are one of the founders who sold down their shares after they got a double a few years ago.  Some of those funds also invested in some of the other Bermuda Re start ups in 05 06 that didn't do particularly well.  All the founders know what a quality operation Lancashire is so I would be surprised if they had a negative long term view.  It's possible that they may be doing delta hedging or something similar related to Lancashire's recent private placement of shares.

 

Thanks Twa / gio.  I figured it wasn't much...it would seem to be the case.  Glad I asked!  8)

[twacowfca]

Interesting. :)

 

They are one of the founders who sold down their shares after they got a double a few years ago.  Some of those funds also invested in some of the other Bermuda Re start ups in 05 06 that didn't do particularly well.  All the founders know what a quality operation Lancashire is so I would be surprised if they had a negative long term view.  It's possible that they may be doing delta hedging or something similar related to Lancashire's recent private placement of shares.

 

Thanks Twa / gio.  I figured it wasn't much...it would seem to be the case.  Glad I asked!  8)

 

 

Many of the funds  who sold their shares around the time of the financial crisis did so for reasons other than valuation or their appraisal of Lancashire's prospects.  One fund manager that I know (not Och Ziff) sold his appreciated shares that were fairly liquid and were still a great value to meet margin calls resulting from stocks in his portfolio that had tanked.

 

That was a great opportunity for someone else to buy shares at a very attractive price.  :)

[original mungerville]

Thanks Giofranchi for your reply. It seems you have quite a lot of faith in Brindle.

 

Is there a good summary of his past results somewhere (from his pre Lancashire endeavours) - ie, maybe bullet points here on this board, or links to key articles, or something similar?

 

I'd like to understand his history more and am just wondering what the best articles/reports/etc are which I should review to get further up to speed.

[WhoIsWarren]

Thanks Giofranchi for your reply. It seems you have quite a lot of faith in Brindle.

 

Is there a good summary of his past results somewhere (from his pre Lancashire endeavours) - ie, maybe bullet points here on this board, or links to key articles, or something similar?

 

I'd like to understand his history more and am just wondering what the best articles/reports/etc are which I should review to get further up to speed.

 

Hi original mungerville, perhaps I can help.

 

The following is a link to the company's admission documents, both AIM andon the FTSE.  The AIM document has a paragraph on Brindle's record (page 18)

 

http://www.lancashiregroup.com/corporate-governance/admission-documents.aspx

 

Twacowfca previously mentioned that Brindle's record was shown in presentations given by the company to investors.  I couldn't find them on the website, but came across one that showed that Brindle's syndicates never

made a loss between 1986-1998, while made an estimated 20.6%  return overall.  Meanwhile Lloyd's syndicates on average had 6 years of losses and a decidedly poor performance (close to zero!) over the same period.

 

One thing to mention is that Brindle's record is not exactly transposable into today's environment.  Twacowfca, correct me if I'm wrong here, but the 'science' behind loss modelling and risk management techniques, not to mention different capital requirements, means that today's insurance industry is very different to the one that existed 20-30 years ago. 

 

That probably mean we shouldn't get too hung up on Brindle's 20% "Profit before personal expenses as a percentage of capacity".  Rather, I suggest focusing more on his fantastic relative performance over a near 30-year period.

[racemize]

The following is a link to the company's admission documents, both AIM andon the FTSE.  The AIM document has a paragraph on Brindle's record (page 18)

 

http://www.lancashiregroup.com/corporate-governance/admission-documents.aspx

 

Twacowfca previously mentioned that Brindle's record was shown in presentations given by the company to investors.  I couldn't find them on the website, but came across one that showed that Brindle's syndicates never

made a loss between 1986-1998, while made an estimated 20.6%  return overall.  Meanwhile Lloyd's syndicates on average had 6 years of losses and a decidedly poor performance (close to zero!) over the same period.

 

Is the presentation you are referring to the AIM document or a separate one?  If it is separate, would you mind posting?  (Or anyone who has the early presentations)

[WhoIsWarren]

The following is a link to the company's admission documents, both AIM andon the FTSE.  The AIM document has a paragraph on Brindle's record (page 18)

 

http://www.lancashiregroup.com/corporate-governance/admission-documents.aspx

 

Twacowfca previously mentioned that Brindle's record was shown in presentations given by the company to investors.  I couldn't find them on the website, but came across one that showed that Brindle's syndicates never

made a loss between 1986-1998, while made an estimated 20.6%  return overall.  Meanwhile Lloyd's syndicates on average had 6 years of losses and a decidedly poor performance (close to zero!) over the same period.

 

Is the presentation you are referring to the AIM document or a separate one?  If it is separate, would you mind posting?  (Or anyone who has the early presentations)

 

It's a separate one.  However, given the company seems to have removed all references from their own website, I feel a bit unsure of whether I'm permitted to post it up..... :-\

 

[twacowfca]

Thanks Giofranchi for your reply. It seems you have quite a lot of faith in Brindle.

 

Is there a good summary of his past results somewhere (from his pre Lancashire endeavours) - ie, maybe bullet points here on this board, or links to key articles, or something similar?

 

I'd like to understand his history more and am just wondering what the best articles/reports/etc are which I should review to get further up to speed.

 

Hi original mungerville, perhaps I can help.

 

The following is a link to the company's admission documents, both AIM andon the FTSE.  The AIM document has a paragraph on Brindle's record (page 18)

 

http://www.lancashiregroup.com/corporate-governance/admission-documents.aspx

 

Twacowfca previously mentioned that Brindle's record was shown in presentations given by the company to investors.  I couldn't find them on the website, but came across one that showed that Brindle's syndicates never

made a loss between 1986-1998, while made an estimated 20.6%  return overall.  Meanwhile Lloyd's syndicates on average had 6 years of losses and a decidedly poor performance (close to zero!) over the same period.

 

One thing to mention is that Brindle's record is not exactly transposable into today's environment.  Twacowfca, correct me if I'm wrong here, but the 'science' behind loss modelling and risk management techniques, not to mention different capital requirements, means that today's insurance industry is very different to the one that existed 20-30 years ago. 

 

That probably mean we shouldn't get too hung up on Brindle's 20% "Profit before personal expenses as a percentage of capacity".  Rather, I suggest focusing more on his fantastic relative performance over a near 30-year period.

 

Yes. Brindle's underwriting record at Lloyd's is only roughly comparable to Lancashire's record.  Lloyd's members typically use more leverage than Lancashire uses.  Thus, positive results overall above the cost of capital should be accentuated.  On the other hand, the Lloyd's record shows improvement after the first few years as Brindle moved from junior underwriter to chief underwriter.  There also appears to have been a dramatic improvement in risk adjusted returns for Lancashire in recent years as they have carved out very profitable lines of business that are mainly exposed to attritional losses rather than lots of exposure to cat losses.  :)

 

All things considered, I think the Lancashire record, risk adjusted, is better than the Lloyds record.

[original mungerville]

Thanks to all for the replies. Very much appreciated - I'll do some reading!

[giofranchi]

Thanks Giofranchi for your reply. It seems you have quite a lot of faith in Brindle.

 

Is there a good summary of his past results somewhere (from his pre Lancashire endeavours) - ie, maybe bullet points here on this board, or links to key articles, or something similar?

 

I'd like to understand his history more and am just wondering what the best articles/reports/etc are which I should review to get further up to speed.

 

Hi original mungerville,

 

My idea is very simple: you have to trust some people in business (as in life).

 

You might certainly devote your whole daytime to run a portfolio of 100+ securities, like Kraven is so capable of doing, and therefore trust might not be a fundamental part of your business… But, if you are not able to do that (and I know I am not), imo there is no way to get around trust. In any other business endeavour that I can think of trust is paramount. So, if you are not able to manage a portfolio of 100+ securities, at least you should become very good at judging people… of course, it is a continuous work in progress, and I hope to get better and better at it, but I already have a clear enough idea of who I think might turn out to be a good and reliable business partner in the long-run. And today Mr. Prem Watsa and Mr. Richard Brindle are at the top of my list.

Btw, if you know someone better deserving of trust than those two, please let me know! I am all ears! :)

For that reason FFH and LRE would be a large part of my firm’s portfolio in any situation. This is further accentuated today by the fact we are still in the midst of a global deleveraging process, and stock market prices are historically high. Those two facts won’t stop me from doing business, but make me gravitate even more towards FFH and LRE (basically decreasing positions which have handsomely appreciated in the last months, and redeploying those funds in LRE, which instead has trended down).

 

My primary sources of information about Mr. Brindle and LRE are this thread and LRE’s website. I think this thread is “blessed” by the presence of someone like twacowfca, who not only has been following LRE since its very beginnings, but also, if I remember well, has still something like 50% of his portfolio in LRE: I really think he is constantly watching LRE like an hawk, and will be among the very first to realize and warn, if a change for the worst should unfortunately come to pass.

On the other hand, I think LRE’s website is full of useful information, including periodic interviews with Mr. Brindle that I find insightful and revealing about his thoughts and modus operandi.

 

giofranchi

 

[rjstc]

Thanks Giofranchi for your reply. It seems you have quite a lot of faith in Brindle.

 

Is there a good summary of his past results somewhere (from his pre Lancashire endeavours) - ie, maybe bullet points here on this board, or links to key articles, or something similar?

 

I'd like to understand his history more and am just wondering what the best articles/reports/etc are which I should review to get further up to speed.

 

Hi original mungerville,

 

My idea is very simple: you have to trust some people in business (as in life).

 

You might certainly devote your whole daytime to run a portfolio of 100+ securities, like Kraven is so capable of doing, and therefore trust might not be a fundamental part of your business… But, if you are not able to do that (and I know I am not), imo there is no way to get around trust. In any other business endeavour that I can think of trust is paramount. So, if you are not able to manage a portfolio of 100+ securities, at least you should become very good at judging people… of course, it is a continuous work in progress, and I hope to get better and better at it, but I already have a clear enough idea of who I think might turn out to be a good and reliable business partner in the long-run. And today Mr. Prem Watsa and Mr. Richard Brindle are at the top of my list.

Btw, if you know someone better deserving of trust than those two, please let me know! I am all ears! :)

For that reason FFH and LRE would be a large part of my firm’s portfolio in any situation. This is further accentuated today by the fact we are still in the midst of a global deleveraging process, and stock market prices are historically high. Those two facts won’t stop me from doing business, but make me gravitate even more towards FFH and LRE (basically decreasing positions which have handsomely appreciated in the last months, and redeploying those funds in LRE, which instead has trended down).

 

My primary sources of information about Mr. Brindle and LRE are this thread and LRE’s website. I think this thread is “blessed” by the presence of someone like twacowfca, who not only has been following LRE since its very beginnings, but also, if I remember well, has still something like 50% of his portfolio in LRE: I really think he is constantly watching LRE like an hawk, and will be among the very first to realize and warn, if a change for the worst should unfortunately come to pass.

On the other hand, I think LRE’s website is full of useful information, including periodic interviews with Mr. Brindle that I find insightful and revealing about his thoughts and modus operandi.

 

giofranchi

 

+1 completely agree