LRE.L - Lancashire Holdings Ltd

[gary17]

Thanks ! I want to guess your favorite is Lancashire? I haven't been here long enough.

 

I really like Lancashire. But I can't get why the CEO doesn't own a significant part of the company... If it's such a wonderful dish, why doesn't he have more portion on his plate??

 

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.  :)

[giofranchi]

I really like Lancashire. But I can't get why the CEO doesn't own a significant part of the company... If it's such a wonderful dish, why doesn't he have more portion on his plate??

 

Gary,

here are a few lines from the Seeking Alpha article I posted some days ago:

Brindle owns 858k shares valued at $10m, other management members and directors own another 660k shares (or $7m). At the same time, management has a large holding of warrants, which were awarded back in 2005 with the listing of the company. Warrants have exercise price of $5 and accrue dividends. Richard Brindle owns 6.4m warrants (currently valued c. $50m). Thus his total holding in the company amounts to $60m or 3% of the company. Actually most of Brindle's wealth is in a form of Lancashire's stock, thus interests are very well aligned with common shareholders.

Though Mr. Brindle doesn’t own a large part of LRE, what matters most imo is that a lot of Mr. Brindle’s personal wealth is at stake in the company. :)

 

Gio

 

[giofranchi]

It's just I've struggled to "get" the arithmetic of an investment in their equity at 1.6x book.

 

Actually, in my comparison with BRK’s operating businesses I have made a mistake: LRE in 2013 paid out 88% of its comprehensive income to shareholders, and since inception it has paid out as much as 93% of its earnings. Therefore, it reinvested for growth only 7% - 12%. And let’s suppose in an hard market it could reinvest as much as 15%. Over a long period of time, through different insurance markets, I guess LRE should be able to reinvest 10% - 12% of its earnings for growth.

That’s to say:

 

LRE:

- 13% owner earnings yield (9.5% if bought at 2xBV);

- 88% - 90% free cash distributed in a very tax efficient way, that can be redeployed for growth somewhere else, 10% - 12% retained earnings to make LRE grow.

 

BRK’s operating businesses:

- 8.8% owner earnings yield;

- 60% free cash that can be redeployed for growth somewhere else, 20% retained earnings to make them grow.

 

I might be wrong, but it still seems to me LRE compares favorably with a collection of businesses put together by the smartest investor in the world. :)

 

Gio

 

[james22]

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.  :)

 

Do you cap your insurance industry position, tw?

 

I like BRK, MKL, FRFHF, LCSHF, GLRE, TPRE, L and Y. Even capped individually at 5% makes for potentially a 40% position in a single industry. (Or do you consider these [LCSHF the exception] essentially diversified?)

[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.  :)

 

Do you cap your insurance industry position, tw?

 

I like BRK, MKL, FRFHF, LCSHF, GLRE, TPRE, L and Y. Even capped individually at 5% makes for potentially a 40% position in a single industry. (Or do you consider these [LCSHF the exception] essentially diversified?)

 

Currently, LRE is our biggest holding followed by DVA with BRK a close third with the notional exposure goosed by owning a lot of leaps.  We exited the last of the F&F preferreds recently not because we don 't like their prospects, but because the risk/reward is very different now than when we bought them for pennies on the dollar.  Everything else is small potatoes except for LUK which is modestly sized.

[jay21]

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.

 

 

These two are my favorite (so far?) with LRE close behind.

 

Also, I don't think they are too far behind BRK in terms of levers they can pull:

 

- Alterra gives them a reinsurance business that they think they can scale quickly in a hard market as well as some reinsurance derivative products.

 

- Ventures is just starting to get going and is becoming a significant part of the MV of MKL.  This could be a huge opportunity as they should be able to find more "See's Candy" type businesses that are small and have a lot of room to grow, but won't need capital to do so.  Contrast this with BRK, who almost needs to buy businesses that use capital.  I wish there was more disclosure around Ventures so I can get a sense of the economics of their businesses.  A few do not seem that capital-lite.

 

- They also have a much better chance of growing float at a significant rate compared to BRK

 

That being said, I like BRK's core capital allocating team better than MKL's.  BRK can also get some sweetheart deals done, whereas MKL is less likely to get some of those deals.

 

I agree that BRK is probably a better relative value than MKL assuming equal P/B's.  Disclosure: I own both and together they make up ~20% of my portfolio.   

[DCG]

I'm just starting to look into this company, so to save me from reading the 100 pages of this thread, what was teh catalyst for the stock dropping from

867.00 to it's current price?

[gary17]

I believe the acquisition last year.

 

The same happened to AWH few years ago when they announced they want to buy transatlantic.

 

And I guess they also didn't issue as much special dividend as expected.

[giofranchi]

I'm just starting to look into this company, so to save me from reading the 100 pages of this thread, what was teh catalyst for the stock dropping from

867.00 to it's current price?

 

I think 2 were the major catalysts:

1) The acquisition of Cathedral.

Mr. Market thesis: Mr. Brindle is an outstanding underwriter, but has no track record in acquiring companies. He has paid 2xBV for Cathedral in a transaction worth $425 million, almost a third of LRE market cap: he has overpaid and diluted shareholders.

My thesis: Mr. Brindle has stayed very much inside his circle of competence. Probably few people know Cathedral as well as he does. He has paid $425 million for a company that had earnings last year of approximately $50 million, and which could earn as much as $90 million, if its underwriting reaches the profitability levels of Lancashire. Mr. Brindle has bought external growth cheaply.

 

2) Lancashire disappointed the market declaring a lower special dividend than was expected.

Mr. Market thesis: I want a special dividend in line with last year!

My thesis: nonsense!

 

Overall, Mr. Market is thinking LRE is embarking in a new and unproven business strategy. Vice versa, I believe LRE is going to be as good and reliable a capital allocator as it has been in the past, and its business strategy has not really changed: if anything, the acquisition of Cathedral only serves to make that business strategy safer and more predictable for a long time to come.

 

Basically what Gary has just said. :)

 

Gio

 

[gary17]

I had a small position but had to let go because I want to buy something else, but am seriously thinking about this. Thanks to Gio and twacowfca, I don't need to look, I just need to think! :)

 

My only thing is the ownership - if the CEO owns 20% I'd be pulling the trigger now. It's just something I need to get comfortable myself.

 

On a separate note it is interesting the pricing action might be what Soros describes in his theory of reflexivity .... that the lower pricing trend "confirms" the market participants belief that the business has changed... and so it's gone into a feedback loop... I haven't read where Soros states how this cycle is broken up in a down trend. perhaps over the next few quarters as the results come in. Should an intelligent investor put the money on the table now or wait for data that confirms Lancashire is indeed a great business -

 

 

 

I'm just starting to look into this company, so to save me from reading the 100 pages of this thread, what was teh catalyst for the stock dropping from

867.00 to it's current price?

 

I think 2 were the major catalysts:

1) The acquisition of Cathedral.

Mr. Market thesis: Mr. Brindle is an outstanding underwriter, but has no track record in acquiring companies. He has paid 2xBV for Cathedral in a transaction worth $425 million, almost a third of LRE market cap: he has overpaid and diluted shareholders.

My thesis: Mr. Brindle has stayed very much inside his circle of competence. Probably few people know Cathedral as well as he does. He has paid $425 million for a company that had earnings last year of approximately $50 million, and which could earn as much as $90 million, if its underwriting reaches the profitability levels of Lancashire. Mr. Brindle has bought external growth cheaply.

 

2) Lancashire disappointed the market declaring a lower special dividend than was expected.

Mr. Market thesis: I want a special dividend in line with last year!

My thesis: nonsense!

 

Overall, Mr. Market is thinking LRE is embarking in a new and unproven business strategy. Vice versa, I believe LRE is going to be as good and reliable a capital allocator as it has been in the past, and its business strategy has not really changed: if anything, the acquisition of Cathedral only serves to make that business strategy safer and more predictable for a long time to come.

 

Basically what Gary has just said. :)

 

Gio

[giofranchi]

Should an intelligent investor put the money on the table now or wait for data that confirms Lancashire is indeed a great business -

 

I think we already have plenty of data that confirm this business is superbly run.

I never wait for catalyst.

I buy a business I like if the price is right.

I buy more if the price goes down.

 

Gio

 

[muscleman]

I'm just starting to look into this company, so to save me from reading the 100 pages of this thread, what was teh catalyst for the stock dropping from

867.00 to it's current price?

 

I think 2 were the major catalysts:

1) The acquisition of Cathedral.

Mr. Market thesis: Mr. Brindle is an outstanding underwriter, but has no track record in acquiring companies. He has paid 2xBV for Cathedral in a transaction worth $425 million, almost a third of LRE market cap: he has overpaid and diluted shareholders.

My thesis: Mr. Brindle has stayed very much inside his circle of competence. Probably few people know Cathedral as well as he does. He has paid $425 million for a company that had earnings last year of approximately $50 million, and which could earn as much as $90 million, if its underwriting reaches the profitability levels of Lancashire. Mr. Brindle has bought external growth cheaply.

 

2) Lancashire disappointed the market declaring a lower special dividend than was expected.

Mr. Market thesis: I want a special dividend in line with last year!

My thesis: nonsense!

 

Overall, Mr. Market is thinking LRE is embarking in a new and unproven business strategy. Vice versa, I believe LRE is going to be as good and reliable a capital allocator as it has been in the past, and its business strategy has not really changed: if anything, the acquisition of Cathedral only serves to make that business strategy safer and more predictable for a long time to come.

 

Basically what Gary has just said. :)

 

Gio

 

Hi Gio, sorry for asking newbie questions. I looked at the Cathedral acquisition related announcements. Could you tell me what it means by "Lloyd's insurance market"? I know Lloyd is a really big insurance company in London. What has Lloyd to do with Cathedral?

What is sidecars?

Why did they pay cash plus issuance of shares for the acquisition instead of pure cash? Can't they acquire Cathedral with their insurance float, just like what BRK usually does?

[giofranchi]

I looked at the Cathedral acquisition related announcements. Could you tell me what it means by "Lloyd's insurance market"? I know Lloyd is a really big insurance company in London. What has Lloyd to do with Cathedral?

What is sidecars?

Why did they pay cash plus issuance of shares for the acquisition instead of pure cash? Can't they acquire Cathedral with their insurance float, just like what BRK usually does?

 

Hi MM,

 

1) Take a look at Cathedral website: http://www.cathedralcapital.com/

They run Syndicate 2010 and Syndicate 3010 at Lloyd’s.

 

2) Kinesis is their new vehicle for managing third party capital. Essentially, they write insurance contracts backed by third party capital, and share the profits with their clients.

 

3) They mostly write short tails and don’t need to accumulate much float, because the great majority of their earnings come from underwriting. On the other hand, like twacowfca has often explained, they must always keep great liquidity to avoid regulation restrictions and to be able to write business quickly and opportunistically when the right opportunities come.

 

Gio

 

[muscleman]

I looked at the Cathedral acquisition related announcements. Could you tell me what it means by "Lloyd's insurance market"? I know Lloyd is a really big insurance company in London. What has Lloyd to do with Cathedral?

What is sidecars?

Why did they pay cash plus issuance of shares for the acquisition instead of pure cash? Can't they acquire Cathedral with their insurance float, just like what BRK usually does?

 

Hi MM,

 

1) Take a look at Cathedral website: http://www.cathedralcapital.com/

They run Syndicate 2010 and Syndicate 3010 at Lloyd’s.

 

2) Kinesis is their new vehicle for managing third party capital. Essentially, they write insurance contracts backed by third party capital, and share the profits with their clients.

 

3) They mostly write short tails and don’t need to accumulate much float, because the great majority of their earnings come from underwriting. On the other hand, like twacowfca has often explained, they must always keep great liquidity to avoid regulation restrictions and to be able to write business quickly and opportunistically when the right opportunity comes.

 

Gio

 

I see. Thank you! Is there a way to estimate the new growth potential gained from Cathedral? It sounds like they wanted Cathedral's licenses so they can expand their market into Lloyds.

[muscleman]

Gio, do you have any insights into the reinsurance cycle?

In 2012, it sounds like the market hardens like a concrete, but a lot of capital flooded into this sector last year, and the market is pretty soft. What do you think will happen next?

[giofranchi]

Is there a way to estimate the new growth potential gained from Cathedral? It sounds like they wanted Cathedral's licenses so they can expand their market into Lloyds.

 

Not easy, if you are not an insider… Though, the simple fact of pushing profitability at Cathedral towards the levels achieved at Lancashire might add as much as $40 million after-tax… Not bad!

And this has nothing to do with the advantages the Lloyd’s market might bring to Lancashire. ;)

 

Gio

 

[giofranchi]

Gio, do you have any insights into the reinsurance cycle?

In 2012, it sounds like the market hardens like a concrete, but a lot of capital flooded into this sector last year, and the market is pretty soft. What do you think will happen next?

 

Sincerely, I have no idea… It has been some years now with a soft market… But I guess a sort of catalyst must happen, before it reverses course and a true hard market develops. I mean a “scare event” that forces a lot of capital to leave the business right away… then other capital will follow, and the market will consequently harden… But this you already know! And I cannot be of more help.

Maybe twacowfca might answer your question with much more insight into the dynamics of the insurance cycle.

 

What I think of is Mr. Brindle who has often said: “We create our own hard market”. And so they have done during the last few years! Therefore, even if results stay somewhat compressed for a couple more years, that doesn’t trouble me too much. ;)

 

Gio

 

[moody202]

What ticker symbol do I buy it under in US? I see LCSHF as the symbol with my broker...is that right? The price of this security is 11.44 and average volume of only 15K. Thoughts? Don't want to end up buying the wrong one.

[fareastwarriors]

What ticker symbol do I buy it under in US? I see LCSHF as the symbol with my broker...is that right? The price of this security is 11.44 and average volume of only 15K. Thoughts? Don't want to end up buying the wrong one.

 

That's the correct one and yes there is not much volume...

[jouni1]

Gio, do you have any insights into the reinsurance cycle?

In 2012, it sounds like the market hardens like a concrete, but a lot of capital flooded into this sector last year, and the market is pretty soft. What do you think will happen next?

 

after reading all they've put out in the last few years, i have a feeling that the low special dividend implicates they're expecting good opportunities to put capital to work. i'm sure it's also because of the aquisition etc, but i see a low dividend every now and then as a positive sign. means they see possibilities for profitable growth somewhere.

 

i'm no expert in insurance by no means, but i know the business model is mathematically viable. also if you run the company like brindle, not chasing growth at any price, it should be pretty lucrative over the long term.

 

p.s. i hope the market hardens. the big scary capital destroying event might make me add to my already full position (if the stock falls).

[TwoCitiesCapital]

Keep buying Gio. I'm trying to fill at 1x book ;)

[giofranchi]

Keep buying Gio. I'm trying to fill at 1x book ;)

 

I surely won’t let you down! And I will keep buying all the way down to 1xBV! :)

 

Cheers,

 

Gio

 

[thefatbaboon]

hahaha

 

gio, I'm not so greedy as zach!  Give me something under 1.3

[Cevian]

Ok, I've just pulled the trigger and have officially joined the ranks of Lancashire Shareholders (...groupies).

 

Gio, hope to see you at the Fairfax meeting.

[giofranchi]

Ok, I've just pulled the trigger and have officially joined the ranks of Lancashire Shareholders (...groupies).

 

Gio, hope to see you at the Fairfax meeting.

 

I also have bought more today... and, if the price keeps declining, I will buy more tomorrow... and more the day after tomorrow... but I am not a groupie!! ;D ;D ;D

 

Yes! Of course we will meet at the Fairfax meeting! ;)

 

Cheers,

 

Gio