LRE.L - Lancashire Holdings Ltd

[giofranchi]

twacowfca,

is the second half of the year usually better for LRE than the first half? For instance, in first half 2012 LRE reported $0.57 in diluted earnings per share, while during the second half 2012 it reported $0.72.

It could be just a silly question, but, given your experience, might there be some “seasonal effect”, which tends to favor LRE’s business results during the second half of the year over the first half? Is it something we could expect with a certain regularity year after year (if and when mini black swans don’t happen, of course), or will it be just random?

 

Thank you! :)

 

giofranchi

 

[twacowfca]

twacowfca,

is the second half of the year usually better for LRE than the first half? For instance, in first half 2012 LRE reported $0.57 in diluted earnings per share, while during the second half 2012 it reported $0.72.

It could be just a silly question, but, given your experience, might there be some “seasonal effect”, which tends to favor LRE’s business results during the second half of the year over the first half? Is it something we could expect with a certain regularity year after year (if and when mini black swans don’t happen, of course), or will it be just random?

 

Thank you! :)

 

giofranchi

 

It used to be that Lancashire's results generally would be feast or famine in Q3 depending on what happened in the Gulf of Mexico where they have lots of energy exposure from hurricanes in the peak of the season.  Now, they only have about 60% as much hurricane exposure as they did a few years ago.  Their greatest hurricane exposure is in the Gulf.  The risk of hurricanes making landfall in the Texas/Louisiana oil patch mostly is over by early Sept, although the risk in the Atlantic States typically lingers through October. Remember, hurricane risk is fractal with autocorrelation with recent experience the best predictor of near term results.  The current season is a dud. :)

 

This quarter, the only significant loss they have had that I am aware of is about $18.5M on an oil rig that went down off the coast of Africa.  :)

 

[wachtwoord]

I think the Bloomberg page for the LRE’s quote is very well done:

 

http://www.bloomberg.com/quote/LRE:LN

 

You see a Price/Book of 1.5726… and LRE is an insurance company, right? So, it cannot be cheap… And that’s exactly Mr. Market mistake: to price LRE as if it were just a well-run insurance company… Look instead at the TTM P/E: it is just 7.4533…!!

As soon as you stop thinking about LRE as an insurance company, you start seeing a TTM earnings yield of 1 / 7.4533 = 13.4%. :)

 

giofranchi

 

But LRE is a insurance company? I have zero experience with buying or valuing insurance companies (or banks for that matter). Could you clarify your statement?

[giofranchi]

But LRE is a insurance company? I have zero experience with buying or valuing insurance companies (or banks for that matter). Could you clarify your statement?

 

Generally, an insurance company, to be considered “cheap”, should sell below BV. Therefore, at 1.58 x BV LRE might look fairly priced or even expensive. My idea is that it is not. Instead, I think it could turn out to be one of the best investment available in today’s relatively expensive markets for the next 10 to 15 years. :)

 

giofranchi

 

[twacowfca]

But LRE is a insurance company? I have zero experience with buying or valuing insurance companies (or banks for that matter). Could you clarify your statement?

 

Generally, an insurance company, to be considered “cheap”, should sell below BV. Therefore, at 1.58 x BV LRE might look fairly priced or even expensive. My idea is that it is not. Instead, I think it could turn out to be one of the best investment available in today’s relatively expensive markets for the next 10 to 15 years. :)

 

giofranchi

 

Insurance stocks aren't always so cheap. Good P&C insurers such as FFH and the syndicates managed by Charman and Brindle sold at multiples about 3 times around Y2K.  :)

[skanjete]

If I remember well, I think that FFH sold at 6-7x book value around 1999, just before some of their terrible takeovers.

[twacowfca]

Interestingly, Lloyd's recently held the first auction of capacity in 2013 whereby investors sell the right to contribute capital to particular syndicates and participate proportionally in their profits.  The average auction price increased 14% over the average auction price paid in the last auction of 2012.

 

I imagine that the outline of Lancashire's deal to buy Cathedral was settled early this year.  If so, it may be that the fair value of their investment is higher now than when the terms of the acquisition were agreed.  Perhaps the fair market value is now 14% higher or perhaps more as Cathedral is having a good year and a significant catastrophe loss the remainder of the year appears remote with the US hurricane season shaping up as a zero loss year as the near term fractal trend points that way.

 

Or perhaps not.  Time will tell. ???

[tripleoptician]

Question for the Canadian holders:

 

My broker says LRE/LCSHF both can't be held in a registered account. With the foreign dividend profile this would obviously be ideal compared to margin account. Has anyone been able to purchase inside a Canadian registered account with a different broker?

Can any Americans hold in your Roth or other registered vehicles?

 

TIA

[gary17]

you should be able to buy Lancashire under your registered RRSP or TSFA account

 

the rule is that the shares are listed in a major exchange - in this case London Stock Exchange

 

but the rule doesn't say the shares you actually buy has to come from there -  i.e., if you buy OTC, but the shares do also exist in London, you technically comply with the letter of the tax law.

 

but I'm not a tax lawyer -  but see this story

 

http://business.financialpost.com/2013/06/17/how-about-a-big-bet-on-the-u-s-housing-market-for-your-tfsa/?__lsa=ea26-d13f

[WhoIsWarren]

Interestingly, Lloyd's recently held the first auction of capacity in 2013 whereby investors sell the right to contribute capital to particular syndicates and participate proportionally in their profits.  The average auction price increased 14% over the average auction price paid in the last auction of 2012.

 

Thanks Twacowfca.  I had no idea such an auction took place.  Where can I read more about it?  Is there a time series of this auction price that you know of?  Do you know of any interesting long-term trends worth talking about, such as pricing in the larger versus smaller syndicates, or high-quality versus lower quality syndicates?

 

Cheers.

[original mungerville]

My understanding is the same as garychen's. You can hold in your RRSP because it trades on London.

[tripleoptician]

My understanding is the same as garychen's. You can hold in your RRSP because it trades on London.

 

This was my understanding too but 2 agents at Questrade said they it pops up as can't be held in RRSP, but can in a margin.

Are you holding LRE in a registered vehicle original mungerville?

[gary17]

I don't own LRE but I bought some Tesco recently - the OTC shares -  RBC Direct Investing has a warning that 'it may not qualify....'  but after you click OK it still let me buy it.  I figure if the tax guy come I'll just have to explain the rules to them :) 

 

My understanding is the same as garychen's. You can hold in your RRSP because it trades on London.

 

This was my understanding too but 2 agents at Questrade said they it pops up as can't be held in RRSP, but can in a margin.

Are you holding LRE in a registered vehicle original mungerville?

[twacowfca]

Interestingly, Lloyd's recently held the first auction of capacity in 2013 whereby investors sell the right to contribute capital to particular syndicates and participate proportionally in their profits.  The average auction price increased 14% over the average auction price paid in the last auction of 2012.

 

Thanks Twacowfca.  I had no idea such an auction took place.  Where can I read more about it?  Is there a time series of this auction price that you know of?  Do you know of any interesting long-term trends worth talking about, such as pricing in the larger versus smaller syndicates, or high-quality versus lower quality syndicates?

 

Cheers.

 

Naturally, investors will pay a premium for the right to contribute capital to syndicates that have the prospect of decent returns.  ( It's sort of like paying more than tangible BV when buying common stock ). Only a small amount of total Lloyds capacity is offered in these auctions. Even so, auction prices give an idea about how valuable investors think certain syndicates are and the trend in these prices.  :)

[warrior]

My understanding is the same as garychen's. You can hold in your RRSP because it trades on London.

 

This was my understanding too but 2 agents at Questrade said they it pops up as can't be held in RRSP, but can in a margin.

Are you holding LRE in a registered vehicle original mungerville?

Confirmed with tax lawyer, who confirmed with CRA, that LRI is eligible for register accounts.And ,I do hold LRE.L in  my reg. accounts

[Pauly]

Yes, RBC confirmed with me as well that an OTC stock can be held in a registered account if it also trades on a designated exchange.

 

Still, LCSHF is traded so thinly...it looks like many days have no volume at all.  Has this been a problem for anyone here?  Maybe I need to open an account with TD or HSBC just to get the London issue...

 

[Guest ajc]

Recent write-up about LRE over on ValueVista:

 

Lancashire Holdings has built an excellent reputation amongst investors and analysts. Since floating the company has focused on shareholder returns over growth and has returned 190% of capital raised in its 2005 IPO. Cumulative ROE since that point is an impressive ~250%.

 

In the past six months, Lancashire seems to have fallen out of favour with the market. Taking into account the substantial distribution to shareholders – the company paid out 69p in March, 7.6% of its price at that point – the share price has lagged the market by around 13%.

 

Given the reputation that the company and its leader, Richard Brindle, have built up over the past eight years it is worth looking more closely at what factors have driven this under-performance and whether an opportunity has been created for investors...

 

http://www.valuevista.co.uk/lancashire-holdings/

[TwoCitiesCapital]

Yes, RBC confirmed with me as well that an OTC stock can be held in a registered account if it also trades on a designated exchange.

 

Still, LCSHF is traded so thinly...it looks like many days have no volume at all.  Has this been a problem for anyone here?  Maybe I need to open an account with TD or HSBC just to get the London issue...

 

It took me a week to enter into my small position. Just use limit orders 1-2% above the current price or LRE in USD. Be patient and it will fill. Don't be the guy who forgot to use limit orders and sell at a 50% discount to market value....poor soul.

[giofranchi]

Notice of Investor Day

 

 

giofranchi

Notice_of_Investor_Day_20131010.pdf

[twacowfca]

Recent write-up about LRE over on ValueVista:

 

Lancashire Holdings has built an excellent reputation amongst investors and analysts. Since floating the company has focused on shareholder returns over growth and has returned 190% of capital raised in its 2005 IPO. Cumulative ROE since that point is an impressive ~250%.

 

In the past six months, Lancashire seems to have fallen out of favour with the market. Taking into account the substantial distribution to shareholders – the company paid out 69p in March, 7.6% of its price at that point – the share price has lagged the market by around 13%.

 

Given the reputation that the company and its leader, Richard Brindle, have built up over the past eight years it is worth looking more closely at what factors have driven this under-performance and whether an opportunity has been created for investors...

 

http://www.valuevista.co.uk/lancashire-holdings/

 

 

That's a very good summary.  Only a couple of quibbles:  I think their prospective normalized ROE should still be 19%+ rather than 17%+.  They recently increased their shares to buy Cathedral and they still are likely over capitalized and should be paying another nice special dividend next month or December barring a large catastrophe in the next four weeks.

 

The writer is mildly positive about their recent adjustments to changing market conditions.  I'm cautiously excited about them.  However, the most important thing as the writer acknowledges is that they are being insightfully proactive to changing conditions, repositioning to take advantage of the best opportunities available even if that means greatly downsizing one LOB and completely exiting another as they acquire a nice Lloyds business and all the opportunities that come with access to that inner sanctum.  :)

 

There's not another insurance company that comes close to their astute nimbleness, with the possible exception of NICO.  :)

[giofranchi]

That's a very good summary.  Only a couple of quibbles:  I think their prospective normalized ROE should still be 19%+ rather than 17%+.  They recently increased their shares to buy Cathedral and they still are likely over capitalized and should be paying another nice special dividend next month or December barring a large catastrophe in the next four weeks.

 

The writer is mildly positive about their recent adjustments to changing market conditions.  I'm cautiously excited about them.  However, the most important thing as the writer acknowledges is that they are being insightfully proactive to changing conditions, repositioning to take advantage of the best opportunities available even if that means greatly downsizing one LOB and completely exiting another as they acquire a nice Lloyds business and all the opportunities that come with access to that inner sanctum.  :)

 

Truth be told, I was missing you, twacowfca!! ;D ;D

 

giofranchi

[cr6196]

Recent write-up about LRE over on ValueVista:

 

Lancashire Holdings has built an excellent reputation amongst investors and analysts. Since floating the company has focused on shareholder returns over growth and has returned 190% of capital raised in its 2005 IPO. Cumulative ROE since that point is an impressive ~250%.

 

In the past six months, Lancashire seems to have fallen out of favour with the market. Taking into account the substantial distribution to shareholders – the company paid out 69p in March, 7.6% of its price at that point – the share price has lagged the market by around 13%.

 

Given the reputation that the company and its leader, Richard Brindle, have built up over the past eight years it is worth looking more closely at what factors have driven this under-performance and whether an opportunity has been created for investors...

 

http://www.valuevista.co.uk/lancashire-holdings/

 

 

That's a very good summary.  Only a couple of quibbles:  I think their prospective normalized ROE should still be 19%+ rather than 17%+.  They recently increased their shares to buy Cathedral and they still are likely over capitalized and should be paying another nice special dividend next month or December barring a large catastrophe in the next four weeks.

 

The writer is mildly positive about their recent adjustments to changing market conditions.  I'm cautiously excited about them.  However, the most important thing as the writer acknowledges is that they are being insightfully proactive to changing conditions, repositioning to take advantage of the best opportunities available even if that means greatly downsizing one LOB and completely exiting another as they acquire a nice Lloyds business and all the opportunities that come with access to that inner sanctum.  :)

 

There's not another insurance company that comes close to their astute nimbleness, with the possible exception of NICO.  :)

 

Thank you, I wrote that. I should add that I spoke to a friend who manages a uk focused HF, he is generally very attuned to the market and he suggested the problem for investors has been more the cathedral acquisition than broader industry softening. Management has been going round explaining the deal to a lot of UK fund managers so it will be interesting to see if this has any effect. Not really fundamental info but explains how the company is viewed atm.

[twacowfca]

Recent write-up about LRE over on ValueVista:

 

Lancashire Holdings has built an excellent reputation amongst investors and analysts. Since floating the company has focused on shareholder returns over growth and has returned 190% of capital raised in its 2005 IPO. Cumulative ROE since that point is an impressive ~250%.

 

In the past six months, Lancashire seems to have fallen out of favour with the market. Taking into account the substantial distribution to shareholders – the company paid out 69p in March, 7.6% of its price at that point – the share price has lagged the market by around 13%.

 

Given the reputation that the company and its leader, Richard Brindle, have built up over the past eight years it is worth looking more closely at what factors have driven this under-performance and whether an opportunity has been created for investors...

 

http://www.valuevista.co.uk/lancashire-holdings/

 

 

That's a very good summary.  Only a couple of quibbles:  I think their prospective normalized ROE should still be 19%+ rather than 17%+.  They recently increased their shares to buy Cathedral and they still are likely over capitalized and should be paying another nice special dividend next month or December barring a large catastrophe in the next four weeks.

 

The writer is mildly positive about their recent adjustments to changing market conditions.  I'm cautiously excited about them.  However, the most important thing as the writer acknowledges is that they are being insightfully proactive to changing conditions, repositioning to take advantage of the best opportunities available even if that means greatly downsizing one LOB and completely exiting another as they acquire a nice Lloyds business and all the opportunities that come with access to that inner sanctum.  :)

 

There's not another insurance company that comes close to their astute nimbleness, with the possible exception of NICO.  :)

 

Thank you, I wrote that. I should add that I spoke to a friend who manages a uk focused HF, he is generally very attuned to the market and he suggested the problem for investors has been more the cathedral acquisition than broader industry softening. Management has been going round explaining the deal to a lot of UK fund managers so it will be interesting to see if this has any effect. Not really fundamental info but explains how the company is viewed atm.

 

Thank you for sharing your insights.  I'm on the other side of the big pond. That gives a certain perspective, perhaps a good view of the forest, but what's happening among the trees is also interesting. 

 

When Lancashire got started, the people in the Bermuda and the London markets seemed to view Brindle as capable, but not necessarily In a league of his own. Some thought he was perhaps more than a little lucky with his outstanding track record at Lloyd's before he became risk manager for AIG's London operation.

 

The consensus seemed to be that the business Lancashire sought was risky because it was often at the top levels with a lot of tail risk.  Then, hurricane Ike hit the heart of the oil patch where Lancashire had lots of exposure, a perfect storm, so to speak, where tail risk would bite very hard on their rump. Big surprise, they had losses, but quite a bit less than their peers who were thought to have less exposure to an extreme event there.  Then Lancashire rode out the financial crisis with hardly a bump in their portfolio value as most insurers had very large losses, some fatal. And so it goes: New Zealand earthquakes, hardly any losses, monster Japanese earthquake, lower losses than almost all their peers. Ditto for Thai floods, and of course hurricane Sandy with hardly any loss after allowance for the return on the ILW they bought simply because it was bargain priced.

 

Was there perhaps a little schadenfreude when the wreck of Costa Concordia finally bit  Lancashire harder than others.  Now that Brindle has shown that he doesn't walk on water, is there more open admiration among insurance investors for his hard work and extraordinary record?

 

[WhoIsWarren]

They recently increased their shares to buy Cathedral and they still are likely over capitalized and should be paying another nice special dividend next month or December barring a large catastrophe in the next four weeks.

 

 

Twacowfca,

 

Assuming we get through hurricane season unscathed, what level of special dividend do you expect? 

Also, can you shed some light on how management thinks about capitalisation and what is deemed excessive?

 

Thanks

[giofranchi]

Also, can you shed some light on how management thinks about capitalisation and what is deemed excessive?

 

Very good question! I am much curious to read the answer as well! :)

 

giofranchi