LRE.L - Lancashire Holdings Ltd

[james22]

In the U.S., five digit tickets ending in Y are ADRs (MURGY, OGZPY, LUKOY, etc). Five digit tickers ending in F are the actual foreign shares changing hand over pink sheets (LCSHF, FRFHF,  etc).

 

Thanks, z. Good to know.

 

It was because VG doesn't charge me the foreign transaction fee for FRFHF (they must settle their transactions in some way differently) that made me surprised they would for LCSHF.

 

[james22]

Yeah, and the transaction w/r/t to the pinkys is conducted in the us and settled in US Dollars, so how is their an applicable foreign transaction fee.  You might need to fire Vanguard for that kind of stuff.

 

I'll be asking them just how LCSHF settles their transactions so differently than FRFHF that it justifies the fee.

[Kiltacular]

Why would the UK not withhold tax on dividends for Italy and Canada, and withhold for the US?...maybe the rules are different for registered accounts?... or maybe something else... I looked into this at one point in detail but now forget all the subtleties.

 

I hold LRE.L shares in an Interactive Brokers IRA account and I have had no taxes withheld on the dividends. FWIW...

 

Ditto for Fidelity IRA

[giofranchi]

Yesterday I bought more LRE.

 

Gio

[jouni1]

great minds think alike! i bought half yesterday and thinking i should've just done a full position. maybe i'll buy the rest today  :P

[giofranchi]

great minds think alike!

 

;D ;D

 

;)

 

Gio

[thefatbaboon]

Been studying this one a bit recently.

 

In the end decided I need a lower price.  Last year return was closer to 12% excluding the Cathedral currency trade. You could make an adjustment for the Concordia and take it up from 12% to 14%.  Either way - not 19%.  It looks like this soft market is continuing and more likely than not this years returns will be closer to 14% than 19%.

 

Even after the share price declines LRE is around 1.6x bv.  Not that attractive if returns are 14% instead of 19%.  LRE much more interesting at a bv multiple where there's more margin of safety.  Somewhere under 1.3x, so that even if they don't hit the ball out the park with 19%, I'd still be getting a solid equity return.

 

For the LRE experts out there, am I miss reading the returns last year?

[giofranchi]

Last year return was closer to 12% excluding the Cathedral currency trade.

 

Like I have told you before, I think you are judging LRE future potential on the basis of a 1 year results. Instead of its long term track record. If you look at Mr. Brindle’s track record at the Lloyds, it was very good on average, but it certainly was lumpy! When will the lean years materialize? When will the good years instead? Who knows? You might argue we are in for some lean years, because of the soft market… I answer I don’t know the insurance market that well to be confident in such a prediction. But, of course, if you can buy LRE at 1.3xBVPS in the future, well then good for you!

What I can tell you is that I don’t invest in high quality companies that way. Instead, I establish a meaningful position, though not a full position, at a “fair price”, and then I average down as the price goes from fair to great. Until I reach what I consider to be a full position. Be sure at 1.3xBVPS we both will be buying! ;)

 

Gio

 

[thefatbaboon]

No, I'm judging them on the results of the last few years (to the best of my ability! which isn't very much):

2011: 13.4%

2012: 16.7%

2013: 12% (ex currency) (you could normalize Concordia between '13 and '12…average over the three years is around 14%)

 

The market keeps softening and their RPI in most areas has weakened steadily over these years.

 

Of course you are right that the market will turn at some point and LRE will make better returns.  But surely that can only happen after capital destruction in the industry? You're hope is that the capital loss affects everyone other than LRE so LRE can transition to the hard market seamlessly ;)

 

 

[giofranchi]

Well, on page 4 of Q4 2013 Investor Presentation you can read:

Fully converted book value per share plus accumulated dividends has grown at a compounded annual rate of 19.2% since inception in December 2005.

And Mr. Brindle’s long term track record is even better.

Therefore, you are estimating future performance, if not based on last year results, at least based on the last three years when a soft market developed.

You say:

Of course you are right that the market will turn at some point and LRE will make better returns.  But surely that can only happen after capital destruction in the industry? You're hope is that the capital loss affects everyone other than LRE so LRE can transition to the hard market seamlessly ;)

It is not my hope... It is just that, to be honest, I don't know! Instead, what I do know is I like to keep company with great entrepreneurs. Through thick and thin. Because I am sure results will be satisfactory enough. And, if I get the chance to average down in the future, I will seize it! ;)

 

Gio

 

[twacowfca]

twacowfca,

the author of the article I posted yesterday sees 2014 after-tax earnings from Cathedral at around $90 million... LRE purchased Cathedral for $425 million... That would translate into an unbelievably low multiple of just 4.72... for a company that has a long track-record of 26% ROE annual... How is this possible? ???

 

Thank you,

 

Gio

 

Back from China.  The SA article seems to misunderstand a point I made on the board a few weeks ago.  It's possible that LRE's normalized earnings will be 35%+ above last year's earnings, but most of the prospective increase in normalized earnings should be from one off issues as explained earlier, and Catheral's normalized earnings should be one third to one half of the prospective increase.

 

 

 

[giofranchi]

Back from China.  The SA article seems to misunderstand a point I made on the board a few weeks ago.  It's possible that LRE's normalized earnings will be 35%+ above last year's earnings, but most of the prospective increase in normalized earnings should be from one off issues as explained earlier, and Catheral's normalized earnings should be one third to one half of the prospective increase.

 

Welcome back! And thank you! :)

 

Gio

[roughlyright]

Last year return was closer to 12% excluding the Cathedral currency trade.

 

Like I have told you before, I think you are judging LRE future potential on the basis of a 1 year results. Instead of its long term track record. If you look at Mr. Brindle’s track record at the Lloyds, it was very good on average, but it certainly was lumpy! When will the lean years materialize? When will the good years instead? Who knows? You might argue we are in for some lean years, because of the soft market… I answer I don’t know the insurance market that well to be confident in such a prediction. But, of course, if you can buy LRE at 1.3xBVPS in the future, well then good for you!

What I can tell you is that I don’t invest in high quality companies that way. Instead, I establish a meaningful position, though not a full position, at a “fair price”, and then I average down as the price goes from fair to great. Until I reach what I consider to be a full position. Be sure at 1.3xBVPS we both will be buying! ;)

 

Gio

 

Want to add a comment to your post, Gio.

 

If Lancashire continues to have the same record in future similar to that of Berkshire ( that is with ROE over 20%), it does not matter if the P/B ratio is 1.3 or 1.5 or even 2 for that matter. It will still work out great in the end. Does it matter if you bought Berkshire in 1970's at 1.3 times P/B or 2 you would have still made lot of money. That difference becomes negligibly small in the long-term. What is important is that you bought the stock (Berkshire) in 1970s that continued with a steady performance of ROE of close to 20%. Over the long term, I mean in 10 years, you would have made more even if you were to buy at 2 times price to book.

[giofranchi]

If Lancashire continues to have the same record in future similar to that of Berkshire ( that is with ROE over 20%), it does not matter if the P/B ratio is 1.3 or 1.5 or even 2 for that matter. It will still work out great in the end. Does it matter if you bought Berkshire in 1970's at 1.3 times P/B or 2 you would have still made lot of money. That difference becomes negligibly small in the long-term. What is important is that you bought the stock (Berkshire) in 1970s that continued with a steady performance of ROE of close to 20%. Over the long term, I mean in 10 years, you would have made more even if you were to buy at 2 times price to book.

 

Well, this is classic Charles Munger! ;)

 

Gio

[thefatbaboon]

Last year return was closer to 12% excluding the Cathedral currency trade.

 

Like I have told you before, I think you are judging LRE future potential on the basis of a 1 year results. Instead of its long term track record. If you look at Mr. Brindle’s track record at the Lloyds, it was very good on average, but it certainly was lumpy! When will the lean years materialize? When will the good years instead? Who knows? You might argue we are in for some lean years, because of the soft market… I answer I don’t know the insurance market that well to be confident in such a prediction. But, of course, if you can buy LRE at 1.3xBVPS in the future, well then good for you!

What I can tell you is that I don’t invest in high quality companies that way. Instead, I establish a meaningful position, though not a full position, at a “fair price”, and then I average down as the price goes from fair to great. Until I reach what I consider to be a full position. Be sure at 1.3xBVPS we both will be buying! ;)

 

Gio

 

Want to add a comment to your post, Gio.

 

If Lancashire continues to have the same record in future similar to that of Berkshire ( that is with ROE over 20%), it does not matter if the P/B ratio is 1.3 or 1.5 or even 2 for that matter. It will still work out great in the end. Does it matter if you bought Berkshire in 1970's at 1.3 times P/B or 2 you would have still made lot of money. That difference becomes negligibly small in the long-term. What is important is that you bought the stock (Berkshire) in 1970s that continued with a steady performance of ROE of close to 20%. Over the long term, I mean in 10 years, you would have made more even if you were to buy at 2 times price to book.

 

This is only roughly right.  The book value multiple is largely irrelevant if a company can reinvest at high incremental returns. 

 

If the equity returns 19% but cannot be retained and reinvested at 19% then your long term return will be 19% divided by the bv multiple you paid.  In such a case bv multiple paid is very important.  LRE is a perfect example of a business that struggles to get incremental returns, hence for the last 5 years they've written a static amount of premiums and dividended out all their gains.   

[roughlyright]

Last year return was closer to 12% excluding the Cathedral currency trade.

 

Like I have told you before, I think you are judging LRE future potential on the basis of a 1 year results. Instead of its long term track record. If you look at Mr. Brindle’s track record at the Lloyds, it was very good on average, but it certainly was lumpy! When will the lean years materialize? When will the good years instead? Who knows? You might argue we are in for some lean years, because of the soft market… I answer I don’t know the insurance market that well to be confident in such a prediction. But, of course, if you can buy LRE at 1.3xBVPS in the future, well then good for you!

What I can tell you is that I don’t invest in high quality companies that way. Instead, I establish a meaningful position, though not a full position, at a “fair price”, and then I average down as the price goes from fair to great. Until I reach what I consider to be a full position. Be sure at 1.3xBVPS we both will be buying! ;)

 

Gio

 

Want to add a comment to your post, Gio.

 

If Lancashire continues to have the same record in future similar to that of Berkshire ( that is with ROE over 20%), it does not matter if the P/B ratio is 1.3 or 1.5 or even 2 for that matter. It will still work out great in the end. Does it matter if you bought Berkshire in 1970's at 1.3 times P/B or 2 you would have still made lot of money. That difference becomes negligibly small in the long-term. What is important is that you bought the stock (Berkshire) in 1970s that continued with a steady performance of ROE of close to 20%. Over the long term, I mean in 10 years, you would have made more even if you were to buy at 2 times price to book.

 

This is only roughly right.  The book value multiple is largely irrelevant if a company can reinvest at high incremental returns. 

 

If the equity returns 19% but cannot be retained and reinvested at 19% then your long term return will be 19% divided by the bv multiple you paid.  In such a case bv multiple paid is very important.  LRE is a perfect example of a business that struggles to get incremental returns, hence for the last 5 years they've written a static amount of premiums and dividended out all their gains. 

 

But If I constantly take their dividends and reinvest in the same company all along, I will continue to get the 19% compounded annually. Right? As long as the business makes 19%, my stock returns should be same as 19%. Can you clarify what is wrong in my thinking?

[giofranchi]

But If I constantly take their dividends and reinvest in the same company all along, I will continue to get the 19% compounded annually. Right? As long as the business makes 19%, my stock returns should be same as 19%. Can you clarify what is wrong in my thinking?

 

No, this is not right. 19 / 1.5 = 12.5%. This is what you will get, unless there is some growth.

The other way returns might increase is reinvesting dividends while the stock price is declining. If you reinvest dividends at 1.3 x BVPS, your annual return will be higher than 12.5%.

That’s why I leave room to average down. :)

 

Gio

 

[roughlyright]

But If I constantly take their dividends and reinvest in the same company all along, I will continue to get the 19% compounded annually. Right? As long as the business makes 19%, my stock returns should be same as 19%. Can you clarify what is wrong in my thinking?

 

No, this is not right. 19 / 1.5 = 12.5%. This is what you will get, unless there is some growth.

The other way returns might increase is reinvesting dividends while the stock price is declining. If you reinvest dividends at 1.3 x BVPS, your annual return will be higher than 12.5%.

That’s why I leave room to average down. :)

 

Gio

 

Thank you Gio for that explanation. That is helpful  :)

[giofranchi]

But If I constantly take their dividends and reinvest in the same company all along, I will continue to get the 19% compounded annually. Right? As long as the business makes 19%, my stock returns should be same as 19%. Can you clarify what is wrong in my thinking?

 

No, this is not right. 19 / 1.5 = 12.5%. This is what you will get, unless there is some growth.

The other way returns might increase is reinvesting dividends while the stock price is declining. If you reinvest dividends at 1.3 x BVPS, your annual return will be higher than 12.5%.

That’s why I leave room to average down. :)

 

Gio

 

Thank you Gio for that explanation. That is helpful  :)

 

But imo it is not the thing that truly matters… What truly matters, instead, is that chances, you will receive on average 12% annual in cash for many years to come, are very high. And that will go a long way to always keep your cash reserve meaningful through thick and thin. And that in the long run is a big advantage and a wonderful thing to have. :)

 

Gio

 

[twacowfca]

But If I constantly take their dividends and reinvest in the same company all along, I will continue to get the 19% compounded annually. Right? As long as the business makes 19%, my stock returns should be same as 19%. Can you clarify what is wrong in my thinking?

 

No, this is not right. 19 / 1.5 = 12.5%. This is what you will get, unless there is some growth.

The other way returns might increase is reinvesting dividends while the stock price is declining. If you reinvest dividends at 1.3 x BVPS, your annual return will be higher than 12.5%.

That’s why I leave room to average down. :)

 

Gio

 

Thank you Gio for that explanation. That is helpful  :)

 

But imo it is not the thing that truly matters… What truly matters, instead, is that chances, you will receive on average 12% annual in cash for many years to come, are very high. And that will go a long way to always keep your cash reserve meaningful through thick and thin. And that in the long run is a big advantage and a wonderful thing to have. :)

 

Gio

 

Here's my perspective. During the first four or five years of Lancashire's existence it could have Ben bought most of that time for BV+- 10%. That includes 2009 and 2010. When lots of other good companies were bargains.  Since the rally from the market bottom, the total return of the S&P 500 has been about 200% and the P/B has expanded to something like 2.5 times. 

 

With LRE selling at a forward P/BV of perhaps 1.6 or less, it's not the screaming bargain that it was then, but it's a much better relative value compared to the market now than then.  Coming off a slightly subpar year with an average long term ROE that's still about 19% and a book of business that is about half as risky as it was in the early years, I see no reason to like their prospects any less now than when the stock was available as an amazing bargain.

 

Having said that, investors should keep in mind that not so good companies have been the out performers recently and that may continue to be the case until the market stops floating on a sea of liquidity.

[alertmeipp]

>>Having said that, investors should keep in mind that not so good companies have been the out performers recently and that may continue to be the case until the market stops floating on a sea of liquidity

 

 

Money is cheaper when liquidity is abundance?

 

[writser]

Here's my perspective. During the first four or five years of Lancashire's existence it could have Ben bought most of that time for BV+- 10%. That includes 2009 and 2010. When lots of other good companies were bargains.  Since the rally from the market bottom, the total return of the S&P 500 has been about 200% and the P/B has expanded to something like 2.5 times. 

 

With LRE selling at a forward P/BV of perhaps 1.6 or less, it's not the screaming bargain that it was then, but it's a much better relative value compared to the market now than then.  Coming off a slightly subpar year with an average long term ROE that's still about 19% and a book of business that is about half as risky as it was in the early years, I see no reason to like their prospects any less now than when the stock was available as an amazing bargain.

 

On the other hand, is being 'relatively cheap' compared to the market a reason to buy a stock?

[twacowfca]

Here's my perspective. During the first four or five years of Lancashire's existence it could have Ben bought most of that time for BV+- 10%. That includes 2009 and 2010. When lots of other good companies were bargains.  Since the rally from the market bottom, the total return of the S&P 500 has been about 200% and the P/B has expanded to something like 2.5 times. 

 

With LRE selling at a forward P/BV of perhaps 1.6 or less, it's not the screaming bargain that it was then, but it's a much better relative value compared to the market now than then.  Coming off a slightly subpar year with an average long term ROE that's still about 19% and a book of business that is about half as risky as it was in the early years, I see no reason to like their prospects any less now than when the stock was available as an amazing bargain.

 

On the other hand, is being 'relatively cheap' compared to the market a reason to buy a stock?

 

Not at all.  If you can find another great company with past and prospective 19% ROE and current owner's earnings yield of about 10% and prospective,  normalized owner's earnings yield at the current price of about 13%, let me know. Perhaps that should be at the head of the value list.

 

Lancashire looks like a good value to me regardless of relative valuation. But other stocks may do better in the current market.

 

 

[original mungerville]

But If I constantly take their dividends and reinvest in the same company all along, I will continue to get the 19% compounded annually. Right? As long as the business makes 19%, my stock returns should be same as 19%. Can you clarify what is wrong in my thinking?

 

No, this is not right. 19 / 1.5 = 12.5%. This is what you will get, unless there is some growth.

The other way returns might increase is reinvesting dividends while the stock price is declining. If you reinvest dividends at 1.3 x BVPS, your annual return will be higher than 12.5%.

That’s why I leave room to average down. :)

 

Gio

 

Thank you Gio for that explanation. That is helpful  :)

 

But imo it is not the thing that truly matters… What truly matters, instead, is that chances, you will receive on average 12% annual in cash for many years to come, are very high. And that will go a long way to always keep your cash reserve meaningful through thick and thin. And that in the long run is a big advantage and a wonderful thing to have. :)

 

Gio

 

Here's my perspective. During the first four or five years of Lancashire's existence it could have Ben bought most of that time for BV+- 10%. That includes 2009 and 2010. When lots of other good companies were bargains.  Since the rally from the market bottom, the total return of the S&P 500 has been about 200% and the P/B has expanded to something like 2.5 times. 

 

With LRE selling at a forward P/BV of perhaps 1.6 or less, it's not the screaming bargain that it was then, but it's a much better relative value compared to the market now than then.  Coming off a slightly subpar year with an average long term ROE that's still about 19% and a book of business that is about half as risky as it was in the early years, I see no reason to like their prospects any less now than when the stock was available as an amazing bargain.

 

Having said that, investors should keep in mind that not so good companies have been the out performers recently and that may continue to be the case until the market stops floating on a sea of liquidity.

 

I agree with that assessment. Also, LRE is quite insulated from asset price gyrations given their very conservative investment stance. Further a 13% or so real yield, probably 15% nominal at these prices is nothing to sneeze at. Its a nice solid insulated return.

[giofranchi]

Here's my perspective. During the first four or five years of Lancashire's existence it could have Ben bought most of that time for BV+- 10%. That includes 2009 and 2010. When lots of other good companies were bargains.  Since the rally from the market bottom, the total return of the S&P 500 has been about 200% and the P/B has expanded to something like 2.5 times. 

 

With LRE selling at a forward P/BV of perhaps 1.6 or less, it's not the screaming bargain that it was then, but it's a much better relative value compared to the market now than then.  Coming off a slightly subpar year with an average long term ROE that's still about 19% and a book of business that is about half as risky as it was in the early years, I see no reason to like their prospects any less now than when the stock was available as an amazing bargain.

 

On the other hand, is being 'relatively cheap' compared to the market a reason to buy a stock?

 

Not at all.  If you can find another great company with past and prospective 19% ROE and current owner's earnings yield of about 10% and prospective,  normalized owner's earnings yield at the current price of about 13%, let me know. Perhaps that should be at the head of the value list.

 

Lancashire looks like a good value to me regardless of relative valuation. But other stocks may do better in the current market.

 

Here is my perspective on LRE:

 

Berkshire capital structure is probably the best in the world. I guess we all agree on this, don’t we? Well, at the end of 2013, BRK had Total Assets worth $485 billion. And, if we split them into Investments and Operating Businesses, we get what follows:

 

Investments: $170 billion

 

Operating Businesses (Insurance Group, BNSF, Finance and financial products, Marmon, McLane Company, MidAmerican, Other businesses, see page 66 2013AR): $315 billion

 

65% of BRK Total Assets were Operating Businesses.

 

Now, let’s compare what those Operating Businesses do for BRK, and what LRE might do for you:

 

In 2013 Cash From Operations at BRK was $27.7 billion, while Capital Expenditures were $11.1 billion. Depreciation was $5.4 billion. Therefore, we might say the Maintenance Capex were $5.4 billion, while Growth Capex were $11.1 – $5.4 = $5.7 billion.

 

Operating Businesses yielded $27.7 / $315 = 8.8%, of which $5.4 / $27.7 = 19.5% were necessarily reinvested in those Operating Businesses (Maintenance Capex), $5.7 / $27.7 = 20.5% were reinvested in those Operating Businesses for growth (Growth Capex), and $16.6 / $27.7 = 60% were free cash to be invested elsewhere.

 

What we have in LRE, instead, is something that yields 13%, of which roughly 20%-25% is reinvested in the business for growth, and the remaining 75%-80% is free cash distributed to shareholders, being Maintenance Capex almost non-existent.

 

Given the fact BRK assets are 65% invested in Operating Businesses which, taken as a whole entity, exhibit that kind of performance and return profile, why shouldn’t anyone seriously consider the idea of devoting a large portion of his/her portfolio to something with LRE’s return profile?

 

This being said, we must also be aware of the fact that BRK has leverage to work in its favor: $485 billion in Total Assets are backed by $222 billion of Equity, pushing return on equity much higher than return on assets.

 

Gio