LRE.L - Lancashire Holdings Ltd

[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.

 

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

 

Excellent dissection.

 

Also looking at recent returns, BRK's return on tangible equity has been close to LRE's, but BRK's comparable returns were not so good during the downturn and early recovery as LRE's.  :)  Still not bad for a mega cap company.  :)

[giofranchi]

Excellent dissection.

 

Also looking at recent returns, BRK's return on tangible equity has been close to LRE's, but BRK's comparable returns were not so good during the downturn and early recovery as LRE's.  :)  Still not bad for a mega cap company.  :)

 

Thank you, twacowfca! :)

 

In 2013 return on tangible equity for BRK was very much aided by investment results: Net earnings were $19.5 billion, while Comprehensive income attributable to BRK shareholders was $36 billion.

My idea, of course, was not to compare LRE with BRK, but to compare LRE with BRK’s operating businesses, taken as a whole entity.

For all Mr. Buffett’s talk about “how wonderful a place to be” the stock market is right now, it seems to me BRK is investing less and less in the stock market… My dissection of its total assets wasn’t exactly right, because I haven’t considered the component of cash + bonds. In fact, BRK’s total assets at 2013 year end were allocated this way:

Operating business: $294 billion

Cash: $48 billion

Bonds: $28 billion

Stock market investments: $115 billion

Therefore, it seems to me that only $115 / $485 = 24% of BRK’s total assets are directly linked to the vicissitudes of the stock market.

 

If I can put 30% of my firm’s equity in something as insulated from the stock market as LRE, I would gladly do so. Thinking that BRK has as much as 76% of its assets allocated that way!

 

Of course, I probably won’t invest more than 30% of my firm’s equity in LRE, because of concentration risk. I have referred to BRK’s operating businesses as “taken as a whole entity”, but obviously a whole entity they are not! Instead, BRK is very much diversified. For reference only, its two largest operating businesses are BNSF and MidAmerican: at the end of 2013 BNSF had $60 billion of identifiable assets plus $15 billion of goodwill, or total assets worth $75 billion; MidAmerican had $62 billion of identifiable assets plus $8 billion of goodwill, or total assets worth $70 billion. BNSF was 15.5% of BRK’s total assets and 33.8% of BRK’s equity; MidAmerican was 14.4% of BRK’s total assets and 31.5% of BRK’s equity.

 

Gio

 

[twacowfca]

Excellent dissection.

 

Also looking at recent returns, BRK's return on tangible equity has been close to LRE's, but BRK's comparable returns were not so good during the downturn and early recovery as LRE's.  :)  Still not bad for a mega cap company.  :)

 

Thank you, twacowfca! :)

 

In 2013 return on tangible equity for BRK was very much aided by investment results: Net earnings were $19.5 billion, while Comprehensive income attributable to BRK shareholders was $36 billion.

My idea, of course, was not to compare LRE with BRK, but to compare LRE with BRK’s operating businesses, taken as a whole entity.

For all Mr. Buffett’s talk about “how wonderful a place to be” the stock market is right now, it seems to me BRK is investing less and less in the stock market… My dissection of its total assets wasn’t exactly right, because I haven’t considered the component of cash + bonds. In fact, BRK’s total assets at 2013 year end were allocated this way:

Operating business: $294 billion

Cash: $48 billion

Bonds: $28 billion

Stock market investments: $115 billion

Therefore, it seems to me that only $115 / $485 = 24% of BRK’s total assets are directly linked to the vicissitudes of the stock market.

 

If I can put 30% of my firm’s equity in something as insulated from the stock market as LRE, I would gladly do so. Thinking that BRK has as much as 76% of its assets allocated that way!

 

Of course, I probably won’t invest more than 30% of my firm’s equity in LRE, because of concentration risk. I have referred to BRK’s operating businesses as “taken as a whole entity”, but obviously a whole entity they are not! Instead, BRK is very much diversified. For reference only, its two largest operating businesses are BNSF and MidAmerican: at the end of 2013 BNSF had $60 billion of identifiable assets plus $15 billion of goodwill, or total assets worth $75 billion; MidAmerican had $62 billion of identifiable assets plus $8 billion of goodwill, or total assets worth $70 billion. BNSF was 15.5% of BRK’s total assets and 33.8% of BRK’s equity; MidAmerican was 14.4% of BRK’s total assets and 31.5% of BRK’s equity.

 

Gio

 

Yes. I expect better returns from LRE than BRK over the intermediate term, 10+ years or so, especially as long as Mr Brindle is at the helm.  But, BRK seems more likely to pass the Rip van Winkle test of expecting a happy outcome after waking up from a "nap" of fifty years.

 

Some academic studies suggest that BRK's edge is nothing more than having access to low cost float used to buy low beta stocks.  However, that overlooks the fact that BRK keeps cash or near cash that amounts to about two thirds the value of the float. 

 

BNSF, for example, backs up their major insurance operations.  Therefore, this may drag down the perceived ROE of their operating subs, depending on how they consolidate it.  Is that the case?

 

Warren has made three huge mistakes in the last decade and a half:

 

1) buying Gen Re that led to most of the $20B in reserve strengthening that BRK had to make in following years

 

2) not selling stocks of good companies when they reached bubble prices approaching Y2K

 

3) selling puts on the indexes that caused BRK to lose its AAA rating and greatly constrained BRK's ability to load up on common stocks at the low point of the market as Charlie did with his small publishing company

 

Despite these large mistakes, BRK has crept ahead of the market averages by market value and BV/SH growth by nice margins since before Y2K, and Warren's understudies fit like a hand in the glove into BRK's culture.  :)

 

[giofranchi]

Yes. I expect better returns from LRE than BRK over the intermediate term, 10+ years or so, especially as long as Mr Brindle is at the helm. 

 

Mr. Brindle is still very young. If he doesn’t suffer from bad health, and let’s hope he never will, he might stay at the helm for 20+ years! :)

 

Gio

 

[twacowfca]

Yes. I expect better returns from LRE than BRK over the intermediate term, 10+ years or so, especially as long as Mr Brindle is at the helm. 

 

Mr. Brindle is still very young. If he doesn’t suffer from bad health, and let’s hope he never will, he might stay at the helm for 20+ years! :)

 

Gio

 

Agreed.  However, there is always the possibility that a larger insurer or financial group could make an offer to acquire LRE at a substantial premium to the current BV multiple.  :)  In that event the market would likely be elevated, and it might be difficult to find another good company at an attractive price going forward.  :(

[giofranchi]

Agreed.  However, there is always the possibility that a larger insurer or financial group could make an offer to acquire LRE at a substantial premium to the current BV multiple.  :)  In that event the market would likely be elevated, and it might be difficult to find another good company at an attractive price going forward.  :(

 

Yes! I agree… Actually, I was wondering: Mr. Brindle has stated “pay us 2xBV and let us do our job”… Given the above comparison with BRK’s operating businesses, even at 2xBV LRE would compare favorably… And Mr. Buffett would bring into the Berkshire family another insurance wizard at least as capable as Mr. Ajit… What is Mr. Buffett waiting for before making an offer?! ;)

 

Gio

 

[rjstc]

Great discussion guys!! Thanks

[james22]

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

 

Vanguard: Typically the United Kingdom does not withhold taxes on dividend income paid to US investors. This is the case in most circumstances but not necessarily every circumstance.

[vinod1]

Over the last one week I have taken a significant position in Lancashire. Reallocated some of the gains from LEAPS on financials.

 

twacowfca - A great big, THANK YOU! As if sharing a great idea was not enough, you had patiently explained all the intricacies and liberally shared your knowledge with fellow board members. I cannot thank you enough.

 

I started following Lancashire when you first brought up but it looked too good to be true. I just cannot get over my skepticism for a long time and was expecting them to blow up. Come on, their combined ratio's look like expense ratios of other insurers. Only last year after seeing them come through with flying colors for nearly 7 years, had I been able to change my mind about them.

 

Gio - Thanks for your probing questions and explaining your thought process. You are a fast learner. It took me a while.

 

Vinod

[jay21]

 

twacowfca - A great big, THANK YOU! As if sharing a great idea was not enough, you had patiently explained all the intricacies and liberally shared your knowledge with fellow board members. I cannot thank you enough.

 

 

Second the thank you.

 

twacowfca has given the board plenty of great ideas over the year or so that I have been posting on this forum.  LRE, BRK calls, GSEs, etc. have all been fantastic calls. Terrific work. 

 

If I actually followed him in one of these trades, my praise would be even be higher.

[twacowfca]

Agreed.  However, there is always the possibility that a larger insurer or financial group could make an offer to acquire LRE at a substantial premium to the current BV multiple.  :)  In that event the market would likely be elevated, and it might be difficult to find another good company at an attractive price going forward.  :(

 

Yes! I agree… Actually, I was wondering: Mr. Brindle has stated “pay us 2xBV and let us do our job”… Given the above comparison with BRK’s operating businesses, even at 2xBV LRE would compare favorably… And Mr. Buffett would bring into the Berkshire family another insurance wizard at least as capable as Mr. Ajit… What is Mr. Buffett waiting for before making an offer?! ;)

 

Gio

 

There was actually a very brief conversation with Ajit a few years ago that touched on that question.  Ajit was standing in the middle of a bunch of groupies around the time of the BRK AGM and someone asked him if he knew about Lancashire and what did he think about their record?  Ajit's reply was something to the effect that he was skeptical of companies that had great results for a brief period being anything more than lucky.

That remark was made only about three years after Lancashire's IPO when it was still selling for about BV.  Therefore, I was not keen to bring to Ajit's attention Brindle's extraordinary twelve year  record at Lloyds before being tapped to become Lancashire's CEO.

 

BRK was willing to pay 3 times BV for Geico, but Geico's edge is structural in their business model and culture.  Would BRK be willing to pay up for Brindle who, although three decades younger than Warren and a little more than one decade younger than Ajit, arguably is as good as Warren and Ajit in underwriting, capital management, integrity and building a similar corporate culture as BRK and NICO on a smaller scale? I don't know?

[giofranchi]

Would BRK be willing to pay up for Brindle who, although three decades younger than Warren and a little more than one decade younger than Ajit, arguably is as good as Warren and Ajit in underwriting, capital management, integrity and building a similar corporate culture as BRK and NICO on a smaller scale? I don't know?

 

Well, I just don’t see how the answer to your question could be anything but a resounding YES! After all, Mr. Buffett praises Mr. Ajit's achievements at least as much as he praises GEICO structural advantages, doesn’t he? “If you see Ajit at our AM, bow to him deeply!” ;)

 

Gio

 

[giofranchi]

twacowfca - A great big, THANK YOU! As if sharing a great idea was not enough, you had patiently explained all the intricacies and liberally shared your knowledge with fellow board members. I cannot thank you enough.

 

+1

And, Vinod, I am very pleased we are partners in this one! :)

 

Cheers,

 

Gio

[watsa_is_a_randian_hero]

You guys are talking about Buffett buying...I don't understand why FFH doesn't buy it. 

[giofranchi]

You guys are talking about Buffett buying...I don't understand why FFH doesn't buy it.

 

Actually, if you go back a few pages on this thread, twacowfca mentioned that he proposed such an acquisition to Mr. Watsa. Mr. Watsa, though, didn’t seem interested. Maybe now things would be different. :)

 

Gio

 

[thefatbaboon]

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

 

[giofranchi]

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

I think this is a bit too simplistic. Please, read how I compared LRE to BRK’s operating business taken as a whole entity. If I am right, bought at 2xBV LRE still compares favorably. :)

 

Gio

 

[dummoney]

Big thanks for the work in this thread, very interesting and helpful to get me up to speed and give a better understanding of the business and management by some very smart people.

 

Does anyone know the result of holding LRE.L in a Canadian registered account, i assume dividends would be in gbx and I would get nailed on exchange fees? ( i guess i could set up a drip to avoid this if it would occur?)

Would the main benefit of purchasing OTCMKTS:LCSHF in a u.s. account be that i'm not dealing with any exchange fees? Volume is just so low.

 

Thanks again

[rjstc]

You guys are talking about Buffett buying...I don't understand why FFH doesn't buy it.

 

Actually, if you go back a few pages on this thread, twacowfca mentioned that he proposed such an acquisition to Mr. Watsa. Mr. Watsa, though, didn’t seem interested. Maybe now things would be different. :)

 

Gio

 

Would it make a good fit with the new goings on at Pabrai/Speier?

[twacowfca]

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

It's not as if they cannot reinvest at good returns.  About 2/3 of the time since their IPO they have had that opportunity.  But that would bring unwanted volatility.  That could mean having to strengthen their BS after a 100 year cat instead of picking up "lovely business" right away after the big one.  Instead, they have offloaded volatile business to their sidecars, settling for perhaps a couple of percent boost in their ROE in exchange for less volatile results.  However their skill should be worth quite a bit to a large company that could easily absorb some extra volatility that might not be great percentage wise with a larger BS.

[thefatbaboon]

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

It's not as if they cannot reinvest at good returns.  About 2/3 of the time since their IPO they have had that opportunity.  But that would bring unwanted volatility.  That could mean having to strengthen their BS after a 100 year cat instead of picking up "lovely business" right away after the big one.  Instead, they have offloaded volatile business to their sidecars, settling for perhaps a couple of percent boost in their ROE in exchange for less volatile results.  However their skill should be worth quite a bit to a large company that could easily absorb some extra volatility that might not be great percentage wise with a larger BS.

 

You understand this industry far far better than me!  All I see is the static premiums and the rotbv drifting down.  But I don't understand the intricacies, the trade offs that they are making.  The Kinesis potential, the Cathedral/Lloyds potential etc.  And as I think you pointed out before - they've further protected their BS with a fair amount of purchased reinsurance.  Thing is that I don't understand enough - and ignorance makes me cheap!  I'd like a price where even if they get returns similar to recent history I'm going to get a market return (+10%).  And by my rudimentary calculations that would be a price around GBP6.

 

You seem to imply above that they've been avoiding some profitable opportunities that would introduce a volatility to their bs that would make it harder for them to pounce after a 100yr cat event.  Did I understand you right?  Because that seems a bit strange to me.  I mean, 100 years might be a long time to wait.  Surely their just writing what they getting suitably paid to write and the reason they've not written more is because the pricing has not been there?  Something like Kinesis effectively get's them a certain amount of asymmetric leverage that turns what would have been unsuitably priced risk into suitably priced risk.  Is it reasonable to say they're not growing premiums because they're "preparing" for a 100 year cat?  To me it just looks like they're not growing because they can't do it at the right price and just staying still and maintaining zero growth has required them to branch out in sidecars and Lloyds.

 

I don't mean to imply in any of my comments that I don't think very highly of LRE.  And I have huge respect for the discipline and ingenuity they've shown in this market.  It's just I've struggled to "get" the arithmetic of an investment in their equity at 1.6x book.

 

 

[muscleman]

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

It's not as if they cannot reinvest at good returns.  About 2/3 of the time since their IPO they have had that opportunity.  But that would bring unwanted volatility.  That could mean having to strengthen their BS after a 100 year cat instead of picking up "lovely business" right away after the big one.  Instead, they have offloaded volatile business to their sidecars, settling for perhaps a couple of percent boost in their ROE in exchange for less volatile results.  However their skill should be worth quite a bit to a large company that could easily absorb some extra volatility that might not be great percentage wise with a larger BS.

 

You understand this industry far far better than me!  All I see is the static premiums and the rotbv drifting down.  But I don't understand the intricacies, the trade offs that they are making.  The Kinesis potential, the Cathedral/Lloyds potential etc.  And as I think you pointed out before - they've further protected their BS with a fair amount of purchased reinsurance.  Thing is that I don't understand enough - and ignorance makes me cheap!  I'd like a price where even if they get returns similar to recent history I'm going to get a market return (+10%).  And by my rudimentary calculations that would be a price around GBP6.

 

You seem to imply above that they've been avoiding some profitable opportunities that would introduce a volatility to their bs that would make it harder for them to pounce after a 100yr cat event.  Did I understand you right?  Because that seems a bit strange to me.  I mean, 100 years might be a long time to wait.  Surely their just writing what they getting suitably paid to write and the reason they've not written more is because the pricing has not been there?  Something like Kinesis effectively get's them a certain amount of asymmetric leverage that turns what would have been unsuitably priced risk into suitably priced risk.  Is it reasonable to say they're not growing premiums because they're "preparing" for a 100 year cat?  To me it just looks like they're not growing because they can't do it at the right price and just staying still and maintaining zero growth has required them to branch out in sidecars and Lloyds.

 

I don't mean to imply in any of my comments that I don't think very highly of LRE.  And I have huge respect for the discipline and ingenuity they've shown in this market.  It's just I've struggled to "get" the arithmetic of an investment in their equity at 1.6x book.

 

I have the same concern as you do. I read through Buffet's comments on buying the remaining stakes of GEICO. He paid 2x book value. He said he paid book value + float, which he believed to be cheap, because the float itself grows pretty fast, and the CR is below 100.

If LRE cannot grow like GEICO then I don't see the point of paying the 2x premium. I like TPRE better because I think it is much easier to grow the float if the CR is, say, 95% instead of 80%.

LRE people don't have investment skills, so they completely rely on underwrite to generate substantial profits. Please let me know if I am wrong.

 

[twacowfca]

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

It's not as if they cannot reinvest at good returns.  About 2/3 of the time since their IPO they have had that opportunity.  But that would bring unwanted volatility.  That could mean having to strengthen their BS after a 100 year cat instead of picking up "lovely business" right away after the big one.  Instead, they have offloaded volatile business to their sidecars, settling for perhaps a couple of percent boost in their ROE in exchange for less volatile results.  However their skill should be worth quite a bit to a large company that could easily absorb some extra volatility that might not be great percentage wise with a larger BS.

 

You understand this industry far far better than me!  All I see is the static premiums and the rotbv drifting down.  But I don't understand the intricacies, the trade offs that they are making.  The Kinesis potential, the Cathedral/Lloyds potential etc.  And as I think you pointed out before - they've further protected their BS with a fair amount of purchased reinsurance.  Thing is that I don't understand enough - and ignorance makes me cheap!  I'd like a price where even if they get returns similar to recent history I'm going to get a market return (+10%).  And by my rudimentary calculations that would be a price around GBP6.

 

You seem to imply above that they've been avoiding some profitable opportunities that would introduce a volatility to their bs that would make it harder for them to pounce after a 100yr cat event.  Did I understand you right?  Because that seems a bit strange to me.  I mean, 100 years might be a long time to wait.  Surely their just writing what they getting suitably paid to write and the reason they've not written more is because the pricing has not been there?  Something like Kinesis effectively get's them a certain amount of asymmetric leverage that turns what would have been unsuitably priced risk into suitably priced risk.  Is it reasonable to say they're not growing premiums because they're "preparing" for a 100 year cat?  To me it just looks like they're not growing because they can't do it at the right price and just staying still and maintaining zero growth has required them to branch out in sidecars and Lloyds.

 

I don't mean to imply in any of my comments that I don't think very highly of LRE.  And I have huge respect for the discipline and ingenuity they've shown in this market.  It's just I've struggled to "get" the arithmetic of an investment in their equity at 1.6x book.

 

I have the same concern as you do. I read through Buffet's comments on buying the remaining stakes of GEICO. He paid 2x book value. He said he paid book value + float, which he believed to be cheap, because the float itself grows pretty fast, and the CR is below 100.

If LRE cannot grow like GEICO then I don't see the point of paying the 2x premium. I like TPRE better because I think it is much easier to grow the float if the CR is, say, 95% instead of 80%.

LRE people don't have investment skills, so they completely rely on underwrite to generate substantial profits. Please let me know if I am wrong.

 

You're wrong. 

 

Someone at the highest level at the company told me in 2007 that the equity investment manager  that "we have been using for 16 years" had an almost unequaled record of excellent returns with no down years. I did not ask for a clarification for what was meant by "we".  In 2008 they chose to exit equities entirely because Lancashire had sniffed out the increasing risk of a crash before it happened.

 

A shallow analysis might suggest that they missed the boat by not getting back into equities after the market bottomed, but they actually did something better, buying back their own stock for about BV and then recently buying Cathedral.  :) Equities appropriately had never been allowed to be more than about 7% of their portfolio because of rating agencies' constraints and the necessity to have plenty of cash available to pay claims quickly after a big event.

[gary17]

twacowfca

i am wondering of the insurers that's been discussed on this board -- markel , lancashire, fairfax - which do you see the earnings to be most predictable in 10 years time?  myself i think the former two.  but markel is more like an investment business using the insurance float as leverage whereas lancashire is a true P&C insurer that's done reasonably well in its investment portfolio.  i wonder if you own all three or just one or two and how you decide the position in them - price / management / business prospect - ?

thanks

Gary

 

As LRE seems unable to retain earnings and reinvest them at good incremental returns I can't say I'm surprised that they haven't been bought out.  What's the good of buying a 19% ROE for 2 times book if it can't grow?  You'll just get 9.5% forever.

 

It's not as if they cannot reinvest at good returns.  About 2/3 of the time since their IPO they have had that opportunity.  But that would bring unwanted volatility.  That could mean having to strengthen their BS after a 100 year cat instead of picking up "lovely business" right away after the big one.  Instead, they have offloaded volatile business to their sidecars, settling for perhaps a couple of percent boost in their ROE in exchange for less volatile results.  However their skill should be worth quite a bit to a large company that could easily absorb some extra volatility that might not be great percentage wise with a larger BS.

 

You understand this industry far far better than me!  All I see is the static premiums and the rotbv drifting down.  But I don't understand the intricacies, the trade offs that they are making.  The Kinesis potential, the Cathedral/Lloyds potential etc.  And as I think you pointed out before - they've further protected their BS with a fair amount of purchased reinsurance.  Thing is that I don't understand enough - and ignorance makes me cheap!  I'd like a price where even if they get returns similar to recent history I'm going to get a market return (+10%).  And by my rudimentary calculations that would be a price around GBP6.

 

You seem to imply above that they've been avoiding some profitable opportunities that would introduce a volatility to their bs that would make it harder for them to pounce after a 100yr cat event.  Did I understand you right?  Because that seems a bit strange to me.  I mean, 100 years might be a long time to wait.  Surely their just writing what they getting suitably paid to write and the reason they've not written more is because the pricing has not been there?  Something like Kinesis effectively get's them a certain amount of asymmetric leverage that turns what would have been unsuitably priced risk into suitably priced risk.  Is it reasonable to say they're not growing premiums because they're "preparing" for a 100 year cat?  To me it just looks like they're not growing because they can't do it at the right price and just staying still and maintaining zero growth has required them to branch out in sidecars and Lloyds.

 

I don't mean to imply in any of my comments that I don't think very highly of LRE.  And I have huge respect for the discipline and ingenuity they've shown in this market.  It's just I've struggled to "get" the arithmetic of an investment in their equity at 1.6x book.

 

I have the same concern as you do. I read through Buffet's comments on buying the remaining stakes of GEICO. He paid 2x book value. He said he paid book value + float, which he believed to be cheap, because the float itself grows pretty fast, and the CR is below 100.

If LRE cannot grow like GEICO then I don't see the point of paying the 2x premium. I like TPRE better because I think it is much easier to grow the float if the CR is, say, 95% instead of 80%.

LRE people don't have investment skills, so they completely rely on underwrite to generate substantial profits. Please let me know if I am wrong.

 

You're wrong. 

 

Someone at the highest level at the company told me in 2007 that the equity investment manager  that "we have been using for 16 years" had an almost unequaled record of excellent returns with no down years. I did not ask for a clarification for what was meant by "we".  In 2008 they chose to exit equities entirely because Lancashire had sniffed out the increasing risk of a crash before it happened.

 

A shallow analysis might suggest that they missed the boat by not getting back into equities after the market bottomed, but they actually did something better, buying back their own stock for about BV and then recently buying Cathedral.  :) Equities appropriately had never been allowed to be more than about 7% of their portfolio because of rating constraints and the necessity to have plenty of cash available to pay claims quickly after a big event.

[twacowfca]

Garychen,

 

I see Markel as being Berkshire light.  They don't have the strength to make money in nearly as many ways as BRK, but they do a pretty good job at basic blocking and tackling, running insurance companies and investing and reinvesting.  I always try to stay an extra day in Omaha to attend their investors presentation after BRK's AGM.  I think they are a very good relative value when they aren't selling at P/BV > BRK's P/BV, and we have owned them then.

 

FFH is where to be when the market finally starts to deflate.

 

Lancashire could be subject to a major cat or to market volatility, but maybe not. They went north when the market went south in late 2008 and early 2009.  :)

 

Between those three, Lancashire may be the best all weather horse, but FFH may be the best mudder.

For long term as an investment, I think most board members know which is my favorite.  :)