LRE.L - Lancashire Holdings Ltd

[biaggio]

Annual Report released today with updated estimates in the back.

http://www.lancashiregroup.com/lre_group/investor_relations/results_presentations/reports/2010/2011-03-15/2011-03-15.pdf

 

Page 4 of presentation indicates that Probable maximum loss estimate or 1/250 quake=15% of capital. Would this quake + its complications qualify as a 1/250 event?

 

LRE.L may be a good equity to watch + add to your shopping list if you can believe their estimates.

[biaggio]

Annual Report released today with updated estimates in the back.

http://www.lancashiregroup.com/lre_group/investor_relations/results_presentations/reports/2010/2011-03-15/2011-03-15.pdf

 

Page 4 of presentation indicates that Probable maximum loss estimate or 1/250 quake=15% of capital. Would this quake + its complications qualify as a 1/250 event?

 

LRE.L may be a good equity to watch + add to your shopping list if you can believe their estimates.

 

Plus only 5% of their business (gross premiums written) is coverage for Far east.

 

It seems that LRE is being sold for no good reason.

[turar]

To put things in perspective, it's still up 12% TTM, after paying a bunch in dividends, vs. FFH which is down 7%.

[sdev]

Annual Report released today with updated estimates in the back.

http://www.lancashiregroup.com/lre_group/investor_relations/results_presentations/reports/2010/2011-03-15/2011-03-15.pdf

 

Page 4 of presentation indicates that Probable maximum loss estimate or 1/250 quake=15% of capital. Would this quake + its complications qualify as a 1/250 event?

 

LRE.L may be a good equity to watch + add to your shopping list if you can believe their estimates.

 

Plus only 5% of their business (gross premiums written) is coverage for Far east.

 

It seems that LRE is being sold for no good reason.

 

The company themselves estimates a 9-16% loss of shareholder equity (100-250 yr catastrophe) for a Japanese earthquake and 6-11% loss for a typhoon. I doubt that it is being sold for no good reason.

[twacowfca]

Thanks.

 

Whats great is they also have an investors day tomorrow. I am sure this will be on everyones mind. They will likely have to make a comment.

 

It may be difficult for LRE to estimate a credible, tight range of losses until they have much more information.   Realize, the attachment levels of their policies have generally been higher than the trigger points for the policies of most other insurers.  

 

Some of their competitors know that the range of possible losses in the first attempts at estimates will trigger payments up to the relatively low attachment points for their policies, and they have already projected their losses.  Nevertheless, despite the likely high attachment points of the policies they have underwritten, LRE may experience a 100 year PML if their losses play out to be at the top of the range currently being projected for total insured losses.  This would result in a loss of about $130M for LRE.

 

I would be very surprised to see losses much higher than that because most property losses appear to be from the Tsunami, or to nuclear plants and infrastructure which, I believe, are not covered.  LRE is a property insurer; few if any of their policies cover casualty losses.  LRE's loss should be less than $130M if the magnitude of the losses due to the earthquake do not reach the estimated total losses from a 100 year PML. Time will tell.

[biaggio]

I also saw that CEO Brindle owns almost half as many shares as he did 1 year ago. Is there any concerns with this?

[tombgrt]

Can we just substract $130 million from BV to come to a possible new BV?

 

If so, a raw estimation gives me that a $130 million loss would give me a shareprice of 1,26x BV and a $100 million loss would result in a shareprice of 1,225x BV. But that is with some guessing and not trying to be exact. Either way, this is far from a bargain (unless I can't just substract the total loss from BV of course).

 

 

[biaggio]

what would  rough IV be as a multiple of BV

 

would 2 x book be fair for this performer? if so 1.25 x BV has some MOS.

 

I have no position. Not an expert by any means but am trying to learn off the folks here. Would be interesting at a discount to BV but will it get here?

[Myth465]

For me I will buy at 1x or below, hold till 1.5 - 2 depending on my thoughts on the market, and will sell at 2x book value.

 

I am sitting on an 8% gain still with 20% in dividends. I am waiting for book, we are up to $55 million pre Japan based on NZ and energy cats.

[twacowfca]

A few answers:  Brindle's LRE holdings have a larger market value now than last year because he has sold very few of the very large number of warrants he holds.  These are way in the money.  His sales are a modest extraction of value, compared to his holdings.

 

When estimating LRE's forward BV, I generally estimate about a 6% to 7%  quarterly growth in FDBV/SH less cat losses.  LRE estimated 2011 cat losses on March 15,2011 of $45 to $55M, including NZ earthquake, Australian storms and floods, an accident claim on a North Sea deepwater oil rig, and a small Mid East terrorism claim, not including yet to be determined Japan earthquake losses. Losses to date from these major events have been substantially less than their competitors. Therefore, with a 100 year PML Japan earthquake loss of $130M, they should almost be back to breakeven by the end of June if there are no more large cat losses through Q2.

 

I will be surprised if their losses from the recent Japan earthquake reach the level of the 100 year PML.

[tombgrt]

Lol 7% jump so far today.  :o

 

Anyone know why?

 

I'd say including medium Japan claims they are at around 1,30x BV, I am far from buying at this price.

[Myth465]

Lol 7% jump so far today.  :o

 

Anyone know why?

 

I'd say including medium Japan claims they are at around 1,30x BV, I am far from buying at this price.

 

I kinda feel like I should be selling, but its tough, i really like the company. Probably rallying due to lower estimates and the investor day. I think it will be a big windfall for them. Energy rates should go up due to claims and mid east risk, and we will likely see increases in Asia due to Japan, and NZ.

[tombgrt]

Lol 7% jump so far today.  :o

 

Anyone know why?

 

I'd say including medium Japan claims they are at around 1,30x BV, I am far from buying at this price.

 

I kinda feel like I should be selling, but its tough, i really like the company. Probably rallying due to lower estimates and the investor day. I think it will be a big windfall for them. Energy rates should go up due to claims and mid east risk, and we will likely see increases in Asia due to Japan, and NZ.

 

Ah yes Investor day...

 

I am also convinced it will be a windfall for the market in general, and especially for those that are positioned strong for a hardening market. If I was an owner I wouldn't sell at this price tho. It isn't expensive in any way, it is just that I find others cheaper atm when you look at the premium you are paying for management and the discount you get with others for "oke management".

[sdev]

For me I will buy at 1x or below, hold till 1.5 - 2 depending on my thoughts on the market, and will sell at 2x book value.

 

I am sitting on an 8% gain still with 20% in dividends. I am waiting for book, we are up to $55 million pre Japan based on NZ and energy cats.

 

Was waiting for the same. Feels so far away...

[twacowfca]

A few answers:  Brindle's LRE holdings have a larger market value now than last year because he has sold very few of the very large number of warrants he holds.  These are way in the money.  His sales are a modest extraction of value, compared to his holdings.

 

When estimating LRE's forward BV, I generally estimate about a 6% to 7%  quarterly growth in FDBV/SH less cat losses.  LRE estimated 2011 cat losses on March 15,2011 of $45 to $55M, including NZ earthquake, Australian storms and floods, an accident claim on a North Sea deepwater oil rig, and a small Mid East terrorism claim, not including yet to be determined Japan earthquake losses. Losses to date from these major events have been substantially less than their competitors. Therefore, with a 100 year PML Japan earthquake loss of $130M, they should almost be back to breakeven by the end of June if there are no more large cat losses through Q2.

 

I will be surprised if their losses from the recent Japan earthquake reach the level of the 100 year PML.

 

 

Listened to LRE's webcast twice today.  They were sober and considerate of the people in Japan and were not upbeat on that account.  However, there was no hint of anxiety about large losses.  Charles stated in answer to a question about a 250 year event that losses would be far less than a 250 year event.  He went into much detail about how zone 3, where the earthquake and Tsunami hit, had far less insured commercial property than zone 5, the Tokyo area, which is the basis for estimating their 100 and 250 year PML's.

 

Richard talked about the great stress some of their competitors were under, particularly those that had pro rata share agreements.  He said that they never write pro rata share policies, that their policies in Japan were top of the food chain with the highest attachment points.  He mentioned that some Bermuda Re's, probably the few that don't have a clue about what they are doing, are even being required to post collateral to be able to write policies.

 

Their confidence was so high that they stepped in and wrote a lot of coverage, when no one else would, for Future NZ earthquake damage that would not pay off unless there were not one but two mega catastrophes there in the next twelve months.  The rates on those polcies were many times higher than they would have been a few months ago.  They also clarified that the $45 to $55M losses they previously stated they have had to date, include only $15 to $25M of cat losses.  The rest are expected routine losses.  

 

Elaine, formerly Neil's assistant, now their new CFO, said that they had been very over reserved since their 2005 IPO because they had no history and had to use industry loss experience.  Towers Watson is conducting a study, and this will lead to a proper assessment for their appropriate reserves.  This should give them more capacity to increase underwriting as cat rates and hopefully all property rates harden.      :)

[Myth465]

Mathias flat out said in answer to a question about a 250 year event that losses would be far lower than a 250 year event.  They went into a lot of detail about how zone 3 where the earthquake and Tsunami hit had far less insured commercial property than zone 5, the Tokyo area, which is their basis for estimating their 100 and 250 year PML's.

 

Their confidence was so high that they stepped in and wrote a lot of coverage, when no one else would, for Future NZ earthquake damage that would not pay off unless there were not one but two mega catastrophes there in the next twelve months.  The rates on those polcies were many times higher than they would have been a few months ago.  The also clarified that the $45 to $55M losses they have had to date, include only $15 to $25M of cat losses.  The rest are expected routine losses.  :)

 

Thanks for the Update TWA you saved me a few hours during a slightly stressful work week. This explains the rally. As I suspected the numbers were based on Tokyo and they will be big winners based on these cats as they were big winners based on DWH dispute having insured a chunk of the rig which exploded.

 

Hopefully they have enough extra capital to really benefit I got one hell of a dividend last year. Wise I had this update a few days ago. Would have bought on Tues or so.

[accutronman]

MS out yesterday reiterating OW and raising PT from 683p to 720p. BV forecasted to grow average of 15% over next four years. Yield for FY12 expected to be approximately 13%.

 

Significant change in tone from the large reinsurers

over the last week on rating environment: One of the

key takeaways from our financials conference was the

increased confidence from the large reinsurers on

property catastrophe pricing. We think Lancashire is one

of the largest beneficiaries of this – it is a specialist

catastrophe insurer with 31% of total premiums (FY10)

in property catastrophe lines (direct & facultative,

retrocession and catastrophe excess of loss).

 

In our view, it is still unclear whether the loss will be

sufficient to turn pricing: While the large reinsurers

have been generally optimistic about pricing, we are still

unsure whether this will be sufficient to turn the market –

we believe that the cumulative impact of the New

Zealand earthquake in February and the Japanese

earthquake is likely to stabilise pricing for property

catastrophe risk for now. More importantly, we think we

are at the tipping point of going into a hardening market.

 

Cutting FY11 earnings for Japanese loss: We expect

a loss of ~$110m (8.5% of FY10 TBV) for Lancashire

from the Japanese earthquake – we have used

Lancashire’s disclosed estimated exposures to peak

zone elemental losses for the Japanese earthquake for

a 1 in 100 year return in our earnings forecast. We also

assume that Lancashire does not pay a special dividend

this year, with the capital used instead to take advantage

of rate opportunities in the property catastrophe market.

 

Lancashire well placed to benefit from any changes

in the rating environment: Given the nimbleness of its

portfolio, we believe Lancashire is well positioned to

benefit from any changes in the market. The stock is

trading at an attractive valuation of 1.06x FY11e TBV

with a 17.7% FY12e RoTBV (vs peers at 1x with a lower

RoTBV of ~14%)

[twacowfca]

Thanks for posting the analysis of LRE.  Is this your firm's report?  Are details of the report available?  

 

Projecting losses based on a 100 year loss event as stated would be conservative, but still problematic because it's not clear that this is a 100 year PML for insured commercial property earthquake damage, although tragic in the lives lost and the hazard from the nuclear accident.

 

It's not clear where LRE's policy attachment points are for something less than 100 year earthquake damage.   It's possible that their losses will be about what you project.  It's also possible that losses will be less.  Most of their competitors, including those that take the lead on the policies LRE underwrites, have posted their loss estimates, but LRE have not.  This suggests that the attachment points for some of LRE's policies may or may not be triggered, as more information develops about losses.

[accutronman]

Thanks for posting the analysis of LRE.  Is this your firm's report?  Are details of the report available?  

 

 

The report is from Morgan Stanley and is available if you have an account with them.

[twacowfca]

Lancashire's loss estimate for the Tohoku Japan earthquake is out.  As suspected, LRE's loss estimate, $75M, is quite a bit less than Morgan Stanley's estimate of their losses that was based on the assumption that the earthquake was a one in a hundred year event for earthquake property damage.

 

Lancashire's catastrophe losses for Q1, including Australian floods and the second NZ earthquake, have been, in proportion to book value, about one third to one half the losses reported by other Bermuda and Lloyds insurers that write considerable cat coverage.  It appears that Q1 will be about a break even quarter for LRE as a number of other insurers in the same lines of business have reported large hits to their book value.

[Myth465]

This is the gift that keeps on giving. Not bad.

[sdev]

This is the gift that keeps on giving.

[nwoodman]

Pretty handy set of results for Q1 given the number of disasters.

 

http://www.lancashiregroup.com/lre_group/media/releases/2011/2011-05-06/

 

Just hope they manage the move into equities as well as they manage underwriting.

 

Cheers

nwoodman

[twacowfca]

Pretty handy set of results for Q1 given the number of disasters.

 

http://www.lancashiregroup.com/lre_group/media/releases/2011/2011-05-06/

 

Just hope they manage the move into equities as well as they manage underwriting.

 

Cheers

nwoodman

 

 

Their return to equities will be modest, probably no more than 5% of their assets, based on their policy before they got out of equities in mid 2008.  The equity advisor they have used in the past is a value investor with an awesome record, about a decade and a half without a losing year or something close to that.  That record was before 2008.  Lancashire pulled out of equities in mid 2008 before the crash because they didn't like the feel of the market.  Their experience with equities is about as good as the very best, but their focus has been almost entirely on making underwriting profit.

[sdev]

Pretty handy set of results for Q1 given the number of disasters.

 

http://www.lancashiregroup.com/lre_group/media/releases/2011/2011-05-06/

 

Just hope they manage the move into equities as well as they manage underwriting.

 

Cheers

nwoodman

 

I sure hope they don't move big into equities...underwriting is their specialty.