LRE.L - Lancashire Holdings Ltd

[giofranchi]

Result of SGM

 

The acquisition of Cathedral represents an exciting and welcome addition to the Lancashire Group. Cathedral is an ideal partner for Lancashire, being a well-respected and well-run business within the Lloyd's market that will complement Lancashire's existing underwriting base. I am very much looking forward to working with the Cathedral team to enhance the enlarged group's business and performance for the long term.

--Richard Brindle

 

 

giofranchi

Result-of-SGM-5September2013.pdf

[original mungerville]

Thanks Giofranchi,

 

I agree completely with your post and am of a similar mind on trust. And your reasons for investing further in both FFH and LRE.L due to continued deleveraging are the same as mine (although I am currently precluded from investing in FFH due to conflict of interest issues unfortunately).

 

I'll read up on LRE, it certainly sounds like what I am looking for. I need to 1) review Brindle's history and the 2) asset side of the balance sheet more closely in order to confirm for myself that LRE.L will not suffer material losses relative to book if asset prices begin deflating. #2 is mechanical and for #1 I thank you and others for pointing me in the right direction.

[returnonmycapital]

A couple of questions about Cathedral, post acquisition:

 

1) What is to be done about the MLN/ILN/Preference shares?

 

2) What is to be done about the practice of paying out a high percentage of underwriting profits in the form of profit share?

[Guest valueInv]

Are US investors limited to buying the pink sheet stock only?

[twacowfca]

A couple of questions about Cathedral, post acquisition:

 

1) What is to be done about the MLN/ILN/Preference shares?

 

2) What is to be done about the practice of paying out a high percentage of underwriting profits in the form of profit share?

 

The preference shares are to be extinguished.  The reason that Cathedral is worth a premium to BV is their nice market niches and the excellent underwriters and managers that maintain and extend their relationships with brokers and clients.  It would be penny wise and pound foolish to try to economize on performance bonuses.  Brindle has pledged that bonuses will continue for their key staff.

[returnonmycapital]

A couple of questions about Cathedral, post acquisition:

 

1) What is to be done about the MLN/ILN/Preference shares?

 

2) What is to be done about the practice of paying out a high percentage of underwriting profits in the form of profit share?

 

The preference shares are to be extinguished.  The reason that Cathedral is worth a premium to BV is their nice market niches and the excellent underwriters and managers that maintain and extend their relationships with brokers and clients.  It would be penny wise and pound foolish to try to economize on performance bonuses.  Brindle has pledged that bonuses will continue for their key staff.

 

I am all for the efficient use of capital as well as pay for performance. However, as copied below from Cathedral's 2012 annual report, one can see that Cathedral is either too highly leveraged and/or too generous to employees. in the example below, it is clear to me that underwriting is not nearly as profitable as reported. Cathedral claims a combined ratio of 74%. But after deducting financing costs associated with underwriting and profit related pay associated with underwriting, their combined ratio rises to 95%.

 

Net Earned Premium    145,071

Underwriting results      37,884

Other expenses **      (29,877)

 

** includes Profit Related Pay and financing charges which have been allocated to underwriting according to profitability of

the profit centre.

 

My point being that unless Lancashire changes Cathedral's capital structure (beyond the preference shares) and its profit share policies, the acquisition will offer little to owners. If changes are made, this purchase could be a economic win for owners. For example, use holding company cash & investments to reduce or even eliminate ILN/MLN outstanding on the next coupon date. Replace annual profit share payments for long-dated employee warrants. The improvement in owner profits from these two operations would change the acquisition from mediocre to remarkable. I would just like to know what they have in mind.

[twacowfca]

A couple of questions about Cathedral, post acquisition:

 

1) What is to be done about the MLN/ILN/Preference shares?

 

2) What is to be done about the practice of paying out a high percentage of underwriting profits in the form of profit share?

 

The preference shares are to be extinguished.  The reason that Cathedral is worth a premium to BV is their nice market niches and the excellent underwriters and managers that maintain and extend their relationships with brokers and clients.  It would be penny wise and pound foolish to try to economize on performance bonuses.  Brindle has pledged that bonuses will continue for their key staff.

 

I am all for the efficient use of capital as well as pay for performance. However, as copied below from Cathedral's 2012 annual report, one can see that Cathedral is either too highly leveraged and/or too generous to employees. in the example below, it is clear to me that underwriting is not nearly as profitable as reported. Cathedral claims a combined ratio of 74%. But after deducting financing costs associated with underwriting and profit related pay associated with underwriting, their combined ratio rises to 95%.

 

Net Earned Premium    145,071

Underwriting results      37,884

Other expenses **      (29,877)

 

** includes Profit Related Pay and financing charges which have been allocated to underwriting according to profitability of

the profit centre.

 

My point being that unless Lancashire changes Cathedral's capital structure (beyond the preference shares) and its profit share policies, the acquisition will offer little to owners. If changes are made, this purchase could be a economic win for owners. For example, use holding company cash & investments to reduce or even eliminate ILN/MLN outstanding on the next coupon date. Replace annual profit share payments for long-dated employee warrants. The improvement in owner profits from these two operations would change the acquisition from mediocre to remarkable. I would just like to know what they have in mind.

 

Are some of the financing charges you list associated with the high yield management held notes that are also scheduled to be extinguished?  It's not GAAP, but preferred dividends may be listed above the line with Lloyd's companies, as if they were interest charges, if I'm not mistaken.

[returnonmycapital]

A couple of questions about Cathedral, post acquisition:

 

1) What is to be done about the MLN/ILN/Preference shares?

 

2) What is to be done about the practice of paying out a high percentage of underwriting profits in the form of profit share?

 

The preference shares are to be extinguished.  The reason that Cathedral is worth a premium to BV is their nice market niches and the excellent underwriters and managers that maintain and extend their relationships with brokers and clients.  It would be penny wise and pound foolish to try to economize on performance bonuses.  Brindle has pledged that bonuses will continue for their key staff.

 

I am all for the efficient use of capital as well as pay for performance. However, as copied below from Cathedral's 2012 annual report, one can see that Cathedral is either too highly leveraged and/or too generous to employees. in the example below, it is clear to me that underwriting is not nearly as profitable as reported. Cathedral claims a combined ratio of 74%. But after deducting financing costs associated with underwriting and profit related pay associated with underwriting, their combined ratio rises to 95%.

 

Net Earned Premium    145,071

Underwriting results      37,884

Other expenses **      (29,877)

 

** includes Profit Related Pay and financing charges which have been allocated to underwriting according to profitability of

the profit centre.

 

My point being that unless Lancashire changes Cathedral's capital structure (beyond the preference shares) and its profit share policies, the acquisition will offer little to owners. If changes are made, this purchase could be a economic win for owners. For example, use holding company cash & investments to reduce or even eliminate ILN/MLN outstanding on the next coupon date. Replace annual profit share payments for long-dated employee warrants. The improvement in owner profits from these two operations would change the acquisition from mediocre to remarkable. I would just like to know what they have in mind.

 

Are some of the financing charges you list associated with the high yield management held notes that are also scheduled to be extinguished?  It's not GAAP, but preferred dividends may be listed above the line as if they were interest charges with Lloyd's companies, if I'm not mistaken.

 

I suspect so. It was likely all arranged by Alchemy so as to extract earnings prior to taxation. In 2011, GBP 20 milllion was charged against underwriting profits of only GBP 5 million, so likely most of the charges are related to mgmt notes/pref shares. I think the earnings numbers will look pretty good under Lancashire. I'd just like to avoid making assumptions that later look silly.

[giofranchi]

Now, will the share price keep trending down? My best guess is yes… at least until Lancashire declares its next special dividend.

 

Talk about market timing… since I wrote that, LRE is up almost 10%... It seems I enjoy this particular gift: whenever I foresee something in the short term, the exact opposite invariably comes to pass!! ;D ;D

 

Btw, twacowfca, a dumb question: why the run up in share price? Maybe someone big is buying? ;)

 

giofranchi

 

[WhoIsWarren]

Maybe someone big is buying? ;)

 

giofranchi

 

Well they've had ample opportunity to buy in!  In the last month, 66m LRE shares have been traded (both on and off exchange).  In other words, one-third of the company has changed hands.

 

And I thought this company attracted long-term investors......  ::)

[twacowfca]

Maybe someone big is buying? ;)

 

giofranchi

 

Well they've had ample opportunity to buy in!  In the last month, 66m LRE shares have been traded (both on and off exchange).  In other words, one-third of the company has changed hands.

 

And I thought this company attracted long-term investors......  ::)

 

Whenever companies sell shares, people think the price will go down because of the increased supply.  Therefore, shorting is automatic among certain traders.  Most share flotations are for not so good reasons; the short thesis is reinforced as business prospects may be less than stellar.

 

In this case, the private placement of shares met strong demand among potentially long term investors who realize what an extraordinary business Lancashire has. Counterbalancing this is perhaps some lightening up and rebalancing among funds who think they see a change in Lancashire's style rather than a different strategy tack.

 

Ultimately, Lancashire's results will speak for themselves.

[rjstc]

Now, will the share price keep trending down? My best guess is yes… at least until Lancashire declares its next special dividend.

 

Talk about market timing… since I wrote that, LRE is up almost 10%... It seems I enjoy this particular gift: whenever I foresee something in the short term, the exact opposite invariably comes to pass!! ;D ;D

 

Btw, twacowfca, a dumb question: why the run up in share price? Maybe someone big is buying? ;)

 

giofranchi

 

I thought that was you buying gio ;) ;)

[twacowfca]

Now, will the share price keep trending down? My best guess is yes… at least until Lancashire declares its next special dividend.

 

Talk about market timing… since I wrote that, LRE is up almost 10%... It seems I enjoy this particular gift: whenever I foresee something in the short term, the exact opposite invariably comes to pass!! ;D ;D

 

Btw, twacowfca, a dumb question: why the run up in share price? Maybe someone big is buying? ;)

 

giofranchi

 

I thought that was you buying gio ;) ;)

 

Here's a caveat about orders placed on the London exchange.  Today a relatively small number of LRE shares traded around £789 at the opening.  Then, the trading range settled down in the low £770's.  This is a frequent pattern of trading there with trades at the open often clearing about 3% above or below the price range a few minutes later.  The sensible explanation is that the brokers and market makers there rip off overseas buyers who place their orders without limits the night before the market opens the next day.

[Kiltacular]

Here's a caveat about orders placed on the London exchange.  Today a relatively small number of LRE shares traded around £789 at the opening.  Then, the trading range settled down in the low £770's.  This is a frequent pattern of trading there with trades at the open often clearing about 3% above or below the price range a few minutes later.  The sensible explanation is that the brokers and market makers there rip off overseas buyers who place their orders without limits the night before the market opens the next day.

 

Interesting.

 

In another thread, the other day, I mentioned that I thought Fidelity (brokerage) was excellent.  When I talked with Fidelity's international desk about buying Lancashire, they gave me very straight-up and thorough answers about how to execute trades for Lancashire while London was open.  Costs were laid out, etc.  No attempt to fleece me (though I know I'd be paying up).

 

When I talked to Schwab's international desk about accomplishing the same thing, I got much more muddled information.  At the end of the conversation, the person I was speaking with asked whether I wanted to put in the trade.  London was closed at the time.

 

I asked what he meant?  He said, "You can place an order now and we'll execute it 'tomorrow'".

 

I had explained at the outset that I was just gathering information so that I could act with speed if I made up my mind to buy.

 

I had also already explained the stock was both in a period of volatility and that in any case it didn't trade in extremely large volume in London.  I wouldn't know what limit to put on it with any confidence and it would just be easier to do while London was open.  I wanted to see what he would say.

 

He said: "Just give me a market order and we'll get it done."

 

A troubling -- very troubling -- response given the conversation I had thought we were having.

 

All possibility for trust out the window.

 

But, it looks like the bait is taken every day.

[twacowfca]

Here's a caveat about orders placed on the London exchange.  Today a relatively small number of LRE shares traded around £789 at the opening.  Then, the trading range settled down in the low £770's.  This is a frequent pattern of trading there with trades at the open often clearing about 3% above or below the price range a few minutes later.  The sensible explanation is that the brokers and market makers there rip off overseas buyers who place their orders without limits the night before the market opens the next day.

 

Interesting.

 

In another thread, the other day, I mentioned that I thought Fidelity (brokerage) was excellent.  When I talked with Fidelity's international desk about buying Lancashire, they gave me very straight-up and thorough answers about how to execute trades for Lancashire while London was open.  Costs were laid out, etc.  No attempt to fleece me (though I know I'd be paying up).

 

When I talked to Schwab's international desk about accomplishing the same thing, I got much more muddled information.  At the end of the conversation, the person I was speaking with asked whether I wanted to put in the trade.  London was closed at the time.

 

I asked what he meant?  He said, "You can place an order now and we'll execute it 'tomorrow'".

 

I had explained at the outset that I was just gathering information so that I could act with speed if I made up my mind to buy.

 

I had also already explained the stock was both in a period of volatility and that in any case it didn't trade in extremely large volume in London.  I wouldn't know what limit to put on it with any confidence and it would just be easier to do while London was open.  I wanted to see what he would say.

 

He said: "Just give me a market order and we'll get it done."

 

A troubling -- very troubling -- response given the conversation I had thought we were having.

 

All possibility for trust out the window.

 

But, it looks like the bait is taken every day.

 

Don't know about Schwab, but Fidelity doesn't execute trades directly on the London Stock Exchange.  Instead, they assign their orders to one of three local brokers they use, or so it is said.  I think it's the local brokers and market makers that are seemingly executing orders without limits in a manner that is not in the best interest of (someone else's) clients. Instead of waiting for a market clearing price to be established, those local brokers evidently put the orders in at the opening when the bid/ask spread is very wide.

 

The sensible way to work around the situation is to put the overnight buy order in with a limit that is a percent or so lower than the closing price, and then raise the limit if necessary the next AM in N AM depending on the well established trading range in London then.

[Sunrider]

In fairness - if you're a broker and you get a market order you're supposed to put it to the market as soon as you receive it/market opens. It's not a "oh, let's judge when to put it to the market order". That's what limit orders are for ... or, if you really think your order should go to the market at a certain time then a conditional order (think IB can do that, but not sure).

 

I don't think you can reproach a broker for putting a market order to the market immediately ... but surely you would/could if he delayed it in his judgement.

 

Another note - LRE.L (and most shares in London AFAIK) trade in pence so it's 7.89GBP not 789GBP as per another poster.

 

Cheers - C.

 

Here's a caveat about orders placed on the London exchange.  Today a relatively small number of LRE shares traded around £789 at the opening.  Then, the trading range settled down in the low £770's.  This is a frequent pattern of trading there with trades at the open often clearing about 3% above or below the price range a few minutes later.  The sensible explanation is that the brokers and market makers there rip off overseas buyers who place their orders without limits the night before the market opens the next day.

 

Interesting.

 

In another thread, the other day, I mentioned that I thought Fidelity (brokerage) was excellent.  When I talked with Fidelity's international desk about buying Lancashire, they gave me very straight-up and thorough answers about how to execute trades for Lancashire while London was open.  Costs were laid out, etc.  No attempt to fleece me (though I know I'd be paying up).

 

When I talked to Schwab's international desk about accomplishing the same thing, I got much more muddled information.  At the end of the conversation, the person I was speaking with asked whether I wanted to put in the trade.  London was closed at the time.

 

I asked what he meant?  He said, "You can place an order now and we'll execute it 'tomorrow'".

 

I had explained at the outset that I was just gathering information so that I could act with speed if I made up my mind to buy.

 

I had also already explained the stock was both in a period of volatility and that in any case it didn't trade in extremely large volume in London.  I wouldn't know what limit to put on it with any confidence and it would just be easier to do while London was open.  I wanted to see what he would say.

 

He said: "Just give me a market order and we'll get it done."

 

A troubling -- very troubling -- response given the conversation I had thought we were having.

 

All possibility for trust out the window.

 

But, it looks like the bait is taken every day.

 

Don't know about Schwab, but Fidelity doesn't execute trades directly on the London Stock Exchange.  Instead, they assign their orders to one of three local brokers they use, or so it is said.  I think it's the local brokers and market makers that are seemingly executing orders without limits in a manner that is not in the best interest of (someone else's) clients. Instead of waiting for a market clearing price to be established, those local brokers evidently put the orders in at the opening when the bid/ask spread is very wide.

[fareastwarriors]

Is the LCSHF not the ADR for Lancashire?

[rjstc]

Here's a caveat about orders placed on the London exchange.  Today a relatively small number of LRE shares traded around £789 at the opening.  Then, the trading range settled down in the low £770's.  This is a frequent pattern of trading there with trades at the open often clearing about 3% above or below the price range a few minutes later.  The sensible explanation is that the brokers and market makers there rip off overseas buyers who place their orders without limits the night before the market opens the next day.

 

Interesting.

 

In another thread, the other day, I mentioned that I thought Fidelity (brokerage) was excellent.  When I talked with Fidelity's international desk about buying Lancashire, they gave me very straight-up and thorough answers about how to execute trades for Lancashire while London was open.  Costs were laid out, etc.  No attempt to fleece me (though I know I'd be paying up).

 

When I talked to Schwab's international desk about accomplishing the same thing, I got much more muddled information.  At the end of the conversation, the person I was speaking with asked whether I wanted to put in the trade.  London was closed at the time.

 

I asked what he meant?  He said, "You can place an order now and we'll execute it 'tomorrow'".

 

I had explained at the outset that I was just gathering information so that I could act with speed if I made up my mind to buy.

 

I had also already explained the stock was both in a period of volatility and that in any case it didn't trade in extremely large volume in London.  I wouldn't know what limit to put on it with any confidence and it would just be easier to do while London was open.  I wanted to see what he would say.

 

He said: "Just give me a market order and we'll get it done."

 

A troubling -- very troubling -- response given the conversation I had thought we were having.

 

All possibility for trust out the window.

 

But, it looks like the bait is taken every day.

 

Don't know why they didn't mention this but I've been using Schwab's Global investing service since they opened it. As an example I recently bought 2930 shares of LRE. Commission & fees was £23.46. Price was £7.6650. 345 shares commission was £2.71 as examples.  I did it myself online with a limit order and it went right through. I never use market orders. I've bought 35000 shares doing this over the last few years.

  I also can get most any decent sized stock on Frankfort, Paris,Milan,Norwegian,Tokyo,Osaka,Australian,& Hong Kong, exchanges usually using my computer through them. Smaller stocks usually have to be bought through their trading desk and that is higher priced.

 

Like I said I never use market orders.

[giofranchi]

I thought that was you buying gio ;) ;)

 

Hi Ron! Funny!! ;D ;D

 

No, unfortunately LRE almost got to my new target price for adding more shares (700 GBp), but never quite got there… And, as I have said in another post, I won’t add on the way up…

 

To have great conviction in a business and its management gives you a great advantage: we all now that to average down, and to refrain from buying when share price is increasing, is the way to go… yet, at least for me, it is much easier said than done with a business you have no conviction about, instead it just comes natural with a business you have great conviction about. Imo, whatever helps you behave more rationally and do the right thing is a huge advantage!

 

Cheers!

 

giofranchi

 

[Kiltacular]

Thanks for comments guys.

 

I didn't get my point across well.  Without belaboring it, I'd already explained to Schwab that I'd never give a market order for a market that wasn't open.  That statement was ignored.

 

Personally, I don't think I'd even put a limit order in that was just a percent below the previous day's close into a market that opened when I was likely to be asleep.  In the case of an insurance company, I know I'd never do this -- anything can happen in a few hours (earthquake, terror attack, etc...perhaps I'm too cautious).

 

I don't think Fidelity directly executes the trade in London so I agree on that.  But, they could give me a price only while London was open.  I'm no expert here.  Both Fidelity and Schwab knew that but only one tried to fleece me.

 

Thanks for the comments on Schwab Global -- very helpful for the future.

 

 

[rjstc]

Thanks for comments guys.

 

I didn't get my point across well.  Without belaboring it, I'd already explained to Schwab that I'd never give a market order for a market that wasn't open.  That statement was ignored.

 

Personally, I don't think I'd even put a limit order in that was just a percent below the previous day's close into a market that opened when I was likely to be asleep.  In the case of an insurance company, I know I'd never do this -- anything can happen in a few hours (earthquake, terror attack, etc...perhaps I'm too cautious).

 

I don't think Fidelity directly executes the trade in London so I agree on that.  But, they could give me a price only while London was open.  I'm no expert here.  Both Fidelity and Schwab knew that but only one tried to fleece me.

 

Thanks for the comments on Schwab Global -- very helpful for the future.

 

I live on the west coast. London opens about midnight west coast time and is open till about 8am. I never leave an open order to buy. I always see what the stock is doing then place my limit order.

 

[rjstc]

I thought that was you buying gio ;) ;)

 

Hi Ron! Funny!! ;D ;D

 

No, unfortunately LRE almost got to my new target price for adding more shares (700 GBp), but never quite got there… And, as I have said in another post, I won’t add on the way up…

 

To have great conviction in a business and its management gives you a great advantage: we all now that to average down, and to refrain from buying when share price is increasing, is the way to go… yet, at least for me, it is much easier said than done with a business you have no conviction about, instead it just comes natural with a business you have great conviction about. Imo, whatever helps you behave more rationally and do the right thing is a huge advantage!

 

Cheers!

 

giofranchi

 

Gio, You already know I completely agree with you. You do have better discipline on your buys than I do I'll tell you. Ron

[gary17]

Hello

I am wondering if someone knows how much of Lancashire does Mr. Brindle personally own.  I've been searching for half an hour and thought it might be easier to just ask the question on the board  ;D

 

Thanks!

[fareastwarriors]

Hello

I am wondering if someone knows how much of Lancashire does Mr. Brindle personally own.  I've been searching for half an hour and thought it might be easier to just ask the question on the board  ;D

 

Thanks!

 

It looks like 858,022 shares, according to Bloomberg.

(see 2nd attachment)

[JBird]

Hello

I am wondering if someone knows how much of Lancashire does Mr. Brindle personally own.  I've been searching for half an hour and thought it might be easier to just ask the question on the board  ;D

 

Thanks!

 

As of 2012 year-end he held 858,022 common shares.