LRE.L - Lancashire Holdings Ltd

[giofranchi]

I have just bought more at 708 GBp. :)

 

 

Gio

[xtreeq]

Gio and all, thanks for the wonderful thread!

 

Do you know if anyone can join the LRE DRIP program? I am outside the US/UK/Canada .... Gio?

 

TIA

 

xtreeq

[giofranchi]

Gio and all, thanks for the wonderful thread!

 

Do you know if anyone can join the LRE DRIP program? I am outside the US/UK/Canada .... Gio?

 

TIA

 

xtreeq

 

xtreeq,

actually my bank asked me if I wanted to join the LRE DRIP program (so, just try and ask your brokerage firm...). And I answered: no, thank you! If a dividend or a special dividend is distributed, I assume that is the best way Mr. Brindle has come up with for the use of capital, always working with the best interest of all shareholders in mind.

Then, it is my turn to use the capital I receive the best way I can. :) And I have very precise target prices at which I will add more LRE to my firm’s portfolio. I simply don’t see why I should add more LRE, irrespective of how its share price behaves.

 

Gio

 

[original mungerville]

I have just bought more at 708 GBp. :)

 

 

Gio

 

Me too Gio, me too.

[fareastwarriors]

one buy

one sell

CitiBuy.pdf

NomuraSell.pdf

[fareastwarriors]

 

Insurer Lancashire to pay out smaller-than-expected dividend

 

http://www.ft.com/cms/s/0/f905bc1e-94a2-11e3-9146-00144feab7de.html#axzz2swfSkWo4

 

Lancashire, the insurer that last year surprised investors with its first ever acquisition, risked disappointing shareholders on Thursday when it disclosed plans for a smaller-than-expected dividend.

 

The group, which has had a long-running strategy of returning much of its earnings to shareholders, followed up a special payout in November with a second one-off dividend of $0.20.

 

However, this was short of the $0.31 some analysts had pencilled in, pushing shares in the FTSE 250 company down more than 6 per cent to 707½p by midday in London.

 

It follows Lancashire’s transformational £266m purchase of Cathedral, which has launched the Bermuda-based insurer on the Lloyd’s of London market.

 

“Investors have been sceptical ever since the acquisition,” said Oliver Steel, analyst at Deutsche Bank, who added of the dividend: “We think this will not go down too well.”

 

Some analysts also raised concerns that Lancashire was vulnerable to pressure on pricing across the industry. Gross premiums written fell from $724m in 2012 to $680m for the year ended December 31 2013.

 

However, Charles Mathias, chief risk officer, said: “When you put two businesses together, it’s right to take a cautious view. We’re delighted with Cathedral – we think it’s an excellent business.”

 

He added Lancashire was looking at expanding the Lloyd’s operation in lines including terrorism and energy. Richard Brindle, chief executive, said that while there was pressure on pricing across the market, “We don’t share the gloomy outlook.”

 

The company is to pay a total $0.80 in dividends, paid from diluted earnings per share of $1.17.

 

Despite the absence of natural catastrophes, full-year pre-tax profits dipped from $237m in 2012 to $218m last year, hit by costs related to the Cathedral acquisition as well as the bill from the Costa Concordia cruise ship disaster.

[original mungerville]

one buy

one sell

 

Nomura paper was a joke! Wow, they pay these people for this?

 

People concerned with the dividend means they are concerned about capital allocation essentially at Lancashire - which is more than a bit crazy given their track record and stated intent in this regard. I actually want them to find growth and send the dividend even lower. If the dividend got to zero and ROE stayed in the high teens, and we held for 10 years selling then at today's multiple to earnings, we would receive that high teens return for the next 10 years.

 

Instead, if they pay out all of their earnings as dividends every year, while not increasing the ROE, the return at today's share price is the inverse of the P/E plus some inflation.

 

The latter is much worse than the former, yet I guess some people want the latter despite every piece of evidence pointing to the fact that these guys at Lancashire are really focused on ROEs and capital allocation over the longterm.

[giofranchi]

Q4 2013 Conference Call

 

 

Gio

lancashires-ceo-discusses-Q42013results.pdf

[giofranchi]

original mungerville,

of course you are right.

Let me tell you, though, how I personally view LRE: it is not my Berkshire, instead it is my See’s Candy.

The two kinds of business I love are:

1) Great compounding machines, that grow through cost cutting and acquisitions;

2) Great niche businesses, that throw off a lot of cash (and put that cash in my hands :) ).

For me LRE is the second kind of business. And I am grateful for that! Because it is very difficult to possess such a business through a stock market exchange. Usually, businesses, which are very efficient cash machines from a fiscal point of view, are also privately held. Lancashire, instead, is clearly the exception to the rule. And I want it to go on posting ROEs around 19% and sending me its very low taxed earnings, on which my firm pays no further taxation, for a very long time. ;)

 

Gio

 

[giofranchi]

Of course, I must add that I consider the acquisition of Cathedral, and consequently a lower special dividend paid out for 2013, the right move to make the wish I expressed in my previous post ever more sustainable. :)

 

Gio

 

[twacowfca]

original mungerville,

of course you are right.

Let me tell you, though, how I personally view LRE: it is not my Berkshire, instead it is my See’s Candy.

The two kinds of business I love are:

1) Great compounding machines, that grow through cost cutting and acquisitions;

2) Great niche businesses, that throw off a lot of cash (and put that cash in my hands :) ).

For me LRE is the second kind of business. And I am grateful for that! Because it is very difficult to possess such a business through a stock market exchange. Usually, businesses, which are very efficient cash machines from a fiscal point of view, are also privately held. Lancashire, instead, is clearly the exception to the rule. And I want it to go on posting ROEs around 19% and sending me its very low taxed earnings, on which my firm pays no further taxation, for a very long time. ;)

 

Gio

 

 

Spot on.

[original mungerville]

Gio,

 

I agree. And nor do I expect LRE to send the dividend to zero, quite the opposite.

 

However, my exaggerated theoretical point was more about market concern with this year's lower dividend in the face of business expansion - which at the margin, is positive for future returns (in the form of higher dividends).

 

I view Lancashire an OK investment long-term (not a home run / 10 bagger or anything). What I like about it is it doing well regardless of the economy and asset values. If we categorize along the lines of Nassim Taleb terminology in terms of how affected the following insurers would be relative to significant deterioration in stock and bond values (both of which I am very concerned about):

 

- Markel is "fragile"

- Lancashire is "robust" and

- Fairfax is "anti-fragile"

 

 

 

 

 

 

 

 

 

[giofranchi]

However, my exaggerated theoretical point was more about market concern with this year's lower dividend in the face of business expansion - which at the margin, is positive for future returns (in the form of higher dividends).

 

I view Lancashire an OK investment long-term

 

Yes! Of course, I know what you meant, but I just wanted to clarify how I personally view my investment in Lancashire…

 

Though, I wouldn’t define an investment in Lancashire an “OK investment”. Think of this for a moment: let’s suppose next year the price of iron ore plummets, and Altius share price follows suite, amid concerns Kami and Julienne Lake might be canned… Instead, Lancashire will resume a special dividend in line with 2012 ($1.95)… And I will be able to use all those new funds averaging down aggressively in Altius… It is difficult to put a precise value on such an opportunity, but at least qualitatively we all understand how important an investment in Lancashire could turn out to be. ;)

 

Altius, of course, is only an example… Just another business in which we are partners! :) But the dynamic I have now described could happen many times, with many different investment opportunities.

 

Gio

 

[twacowfca]

There are quite a few aspects of LRE's 2013 results that suggest their normalized results should be improved.  It's helpful to view Lancashire and its peers through two windows:

 

The window to low cat years.

 

The window to large cat years, including a supercat year like 2005 occasionally).

 

Historically, the former has out numbered the latter by more than 3:1 measured by impact on international (re)insurers, but large cat years during the last decade have been much more frequent. This is not a bad thing for Lancashire compared to its peers because Lancashire is nimble to increase or decrease premiums written as rates spike or drop and to exploit opportunities. But the many catastrophes have drug down the returns and the price multiples of the whole industry, including Lancashire.  2013 was a low year for cats and the industry laggards stock prices surged while Lancashire, price has been flattish, allowing for the large dividends paid.

 

Oops, got to go. Later, I will explain why I think Lancashire's normalized earnings should be much higher than 2013's results.

 

 

[original mungerville]

There are quite a few aspects of LRE's 2013 results that suggest their normalized results should be improved.  It's helpful to view Lancashire and its peers through two windows:

 

The window to low cat years.

 

The window to large cat years, including a supercat year like 2005 occasionally).

 

Historically, the former has out numbered the latter by more than 3:1 measured by impact on international (re)insurers, but large cat years during the last decade have been much more frequent. This is not a bad thing for Lancashire compared to its peers because Lancashire is nimble to increase or decrease premiums written as rates spike or drop and to exploit opportunities. But the many catastrophes have drug down the returns and the price multiples of the whole industry, including Lancashire.  2013 was a low year for cats and the industry laggards stock prices surged while Lancashire, price has been flattish, allowing for the large dividends paid.

 

Oops, got to go. Later, I will explain why I think Lancashire's normalized earnings should be much higher than 2013's results.

 

Please do explain. Gio and I will be awaiting anxiously!

[original mungerville]

However, my exaggerated theoretical point was more about market concern with this year's lower dividend in the face of business expansion - which at the margin, is positive for future returns (in the form of higher dividends).

 

I view Lancashire an OK investment long-term

 

Yes! Of course, I know what you meant, but I just wanted to clarify how I personally view my investment in Lancashire…

 

Though, I wouldn’t define an investment in Lancashire an “OK investment”. Think of this for a moment: let’s suppose next year the price of iron ore plummets, and Altius share price follows suite, amid concerns Kami and Julienne Lake might be canned… Instead, Lancashire will resume a special dividend in line with 2012 ($1.95)… And I will be able to use all those new funds averaging down aggressively in Altius… It is difficult to put a precise value on such an opportunity, but at least qualitatively we all understand how important an investment in Lancashire could turn out to be. ;)

 

Altius, of course, is only an example… Just another business in which we are partners! :) But the dynamic I have now described could happen many times, with many different investment opportunities.

 

Gio

 

I agree Gio.

[giofranchi]

Please do explain. Gio and I will be awaiting anxiously!

 

+1!!  ;)

 

Gio

[twacowfca]

There are quite a few aspects of LRE's 2013 results that suggest their normalized results should be improved.  It's helpful to view Lancashire and its peers through two windows:

 

The window to low cat years.

 

The window to large cat years, including a supercat year like 2005 occasionally).

 

Historically, the former has out numbered the latter by more than 3:1 measured by impact on international (re)insurers, but large cat years during the last decade have been much more frequent. This is not a bad thing for Lancashire compared to its peers because Lancashire is nimble to increase or decrease premiums written as rates spike or drop and to exploit opportunities. But the many catastrophes have drug down the returns and the price multiples of the whole industry, including Lancashire.  2013 was a low year for cats and the industry laggards stock prices surged while Lancashire, price has been flattish, allowing for the large dividends paid.

 

Oops, got to go. Later, I will explain why I think Lancashire's normalized earnings should be much higher than 2013's results.

 

 

First, the high cat years:

 

Lancashire has demonstrated less fragility to these than peers with similar exposure.  They sailed through the financial crisis and NZ earthquakes without a blip. Thai Floods Deepwater Horizon and Hurricane Sandy losses were a tiny fraction of the losses experienced by others.  Hurricane Ike, Chillean earthquake and Japanese Tsunami losses were substantially lower than their peers in that space.  Brindle's record for 13 years at Lloyd's didn't have a single loss year. 

 

The sensible conclusion is that Lancashire's record and Brindle's record support the idea that their normalized losses from catastrophes may be about half the average losses of other (re)insurers who reinsure those types of risks. Lancashire was able to produce double digit ROE in the years those catastrophes happened, a record no other similar company came close to matching.

 

But. . . Something's missing: Costa Concordia. Technically, that's a property claim, not a catastrophe as defined by the insurance industry, although it's certainly a catastrophe for those who lost love ones. The the amount of that claim is about three times the projected maximum loss from any ship loss for reasons that can be described as politics.  It has been a big loss for Lancashire, and deserves to be counted in assessing their long term ROE. However that long term ROE is still about 19% even with Costa Concordia. Putting Costa Concordia and other one offs in perspective is important for understanding whether 2013 results should be considered normal going forward for a low cat year.

 

To be continued. . .

 

In 2013, Lancashire added $37M to their loss reserves for Costa Concordia to cover the final political demands of the Italian government. That's a one off, the last claim topping off $97M total for Lancashire. Lancashire is not likely to see anything approaching that amount  from any non catastrophe claim in the future.  I think it's sensible to add this back most of this, say $32M, to their bottom line when normalizing results for 2013.

 

Lancashire and Cathedral appear to have had about $10M+ extra administrative costs in Q4 associated with the acquisition and LRE's launch of Kinesis. Lets add back most of this, $8M, because LRE is not a serial acquirer.  By the way dropping those expenses may bring their Q4 CR down from 71% to the low 60's.  :)

 

Now here's the gem. :) It's Cathedral. The financial supplement shows they made $38M last year, and that's with the extra administrative expense of the acquisition.  Yet Lancashire only consolidated their last two months results in Q4 income.

 

Going forward, it would seem that Normalized income for Lancashire in a low cat year may be considerably higher than 2013 results suggest.  :)

 

 

[CorpRaider]

Gio, 

 

Quick: LRE, TPRE or AIG-WT?  hehe.

[bargainman]

- Markel is "fragile"

 

Why do you mark Markel as fragile?  I would think that given that it is a specialty insurance shop, it would be at least robust no?  Or is it because of the recent purchase of a reinsurance company?

[original mungerville]

- Markel is "fragile"

 

Why do you mark Markel as fragile?  I would think that given that it is a specialty insurance shop, it would be at least robust no?  Or is it because of the recent purchase of a reinsurance company?

 

I mean it is fragile only in relation to a market crash in equities (ie relative to Lancashire and to Fairfax in that regard only).

[original mungerville]

Twacowfca,

 

Thanks for your perspective, much appreciated as always.

 

"By the way dropping those expenses may bring their Q4 CR down from 71% to the low 60's."

 

Yes, I noticed that: their loss ratios did not go up that much, it was their expense ratios that really went up.  Makes sense most of this would be related to the acquisition.

 

 

[giofranchi]

Twacowfca,

 

Thanks for your perspective, much appreciated as always.

 

+1

 

Gio

[giofranchi]

Gio, 

 

Quick: LRE, TPRE or AIG-WT?  hehe.

 

I think LRE is a unique proposition inside my firm’s portfolio. As my firm’s capital grows, the cash my operating businesses provide will become less and less relevant… I look at LRE as my first strategic choice to try and keep new cash generated each year relevant as a percentage of my firm’s equity. I won’t be able to do that by purchasing a new operating business, because my firm’s capital is not large enough yet… Therefore, my only choice is still the stock market. And I simply don’t know of any other public company, which could carry out that task as egregiously as LRE. This is the reason I wouldn’t change LRE for practically anything else. :)

 

Right now I have no investment in TPRE. But I would never bet against Mr. Loeb in the long run. On the contrary, I would gladly partner with him. And I probably will do in the not too distant future. :)

 

No comment on AIG. If I don’t see an entrepreneur I can respect and admire at the helm of a business, I immediately lose interest… even if it represents an outstanding investment opportunity… But that’s me and only me! ;)

 

Gio

 

[thefatbaboon]

Slightly off topic!

 

Can anyone recommend a good book/s that would help me understand the re-insurance business?

 

Thanks!