LRE.L - Lancashire Holdings Ltd

[WhoIsWarren]

Thanks for sharing, the information on potential motivations was interesting.  I hope he won't start poaching too heavily from Lancashire.

 

Lancashire management is confident that they'll keep their key people (they would say that, wouldn't they).  They say the whole underwriting team was hired by either Alex Maloney or Paul Gregory and is loyal to them rather than Richard.  But money talks right.  In the current environment Lancashire has key advantages over a Brindle start-up: one, they have RSUs that are valuable and depend on continued employment; two, a start up in this market is likely to be loss making and so won't be able to out-spend established players.

 

That's the theory anyway......

[CorpRaider]

For the casual followers, I thought I would post a link to the quarterly press release.  They seem to be muddling through a tough environment.  Returning capital.

 

http://www.lancashiregroup.com/media/releases/2014/05-11-2014.aspx

[rishig]

Why is LRE down 12% today. Did I miss some news?

[Sunrider]

Why is LRE down 12% today. Did I miss some news?

 

I think it's an issue with google finance - if you look at bloomberg you can see they closed roughly where they were

http://www.bloomberg.com/quote/LRE:LN

[WhoIsWarren]

I'm not seeing that  ???

Not on the London / European tapes at any rate.

 

(It's not the effect of the special divi either......that's on the 27th of the month.)

 

There's not been too much written on LRE of late on the board.  There's not much change to be honest.  Tough markets, and the company is responding as expected - cutting back on premiums written, returning what's not needed to shareholders, sitting tight and waiting for better times.

 

Some are questioning whether its relationships - the core book - is as strong as we thought.....and that this is the reason why the special dividend is so large (Lancashire doesn't need the capital because customers don't need them!).  This can't be proved conclusively, but there's nothing at this stage that suggests to me a change.  Worth pondering though.......

 

[CorpRaider]

Thanks for the perspective.  I am encouraged to see that they are "walking the walk" given the cycle and returning so much capital.

[bargainman]

Why is LRE down 11%?  Did I miss some news?  I just see this...

 

http://www.lancashiregroup.com/media/releases/2014/26-11-2014.aspx

[CanadianMunger]

I believe that if you include settlement time, it is now trading ex-div  ;)

 

-CM

[Sunrider]

Correct --- it dropped by almost exactly the $1.20 or 0.75GBP/share of the dividend (if you hold a spread bet/CFD account, you would've gotten the dividend on the 27th).

 

.... I was about to post anyway with the question of whether we should expect this patter to continue ... drop by the special dividend and the regular dividend on the ex-dates and then a slow upward climb between those periods... Kinda depressing. Oh well, I guess we'd have to wait for sentiment to change to see a smoother approximation to X times BV = Market Price.

 

C.

 

I believe that if you include settlement time, it is now trading ex-div  ;)

 

-CM

[LongTerm]

The share price should actually drop by more than the dividend. Shares were trading at 1.25-1.3x book value over the past month, and I would expect post dividend that shares would maintain this same BV multiple. Thus I anticipate the shares will drop some $1.50 (1.25 or so times the dividend) to around $8.50 or below, that is, unless you believe that by reducing their capital base Lancashire will somehow magically increase their productivity (something I have a hard time believing). Until the market hardens it looks like holders will have to bite the bullet and hope that when we finally get to a harder market they will build back their capital to previous levels.

[writser]

If that were the case I'd short a boatload of shares beforehand and buy them back after the ex-date. Unfortunately the market is a bit too efficient for that.

[Sunrider]

Hello everyone

 

I'm interested to hear whether some of the more learned members here have a view on Q4 results. It's nice to see the additional capital return but I'm slowly starting to wonder whether we're getting to a mode in which the stock price drops with every dividend payment and they slowly shrink their capital base in the absence of good underwriting opportunities ... until such time that the insurance pricing cycle turns?

 

Thank you - C.

[WhoIsWarren]

Hi Sunrider,

 

In the circumstances, I think the Q4 and 2014 full year results were excellent -- a 14% full year RoE, albeit aided by a $34m prior year reserve release.  This really speaks to how clients / brokers perceive Lancashire's importance, all the while the rest of the international insurance sector desperately formulates acquisition / merger plans. Of course it was a light period / year in terms of losses, so we really aren't yet able to judge its true "soft market earnings power".  My own guess is that the company does 8-10% in a soft market and 20-25%....perhaps even 30%....in a hard market.

 

To your point about the stock dropping with every dividend payment, I'm not sure I understand where you're coming from.  Theoretically speaking, a company's share price will rise through the year as profits are "accrued", and then fall by the amount of capital that is paid out to shareholders. Given the market environment, Lancashire does not feel it needs additional capital.  But in a hard market expect it to use all the capital tools at its disposal -- share issuance (ability to do a quick 20% placing) as well as bulking up Cathedral to $1-2-3bn.  You probably know all this, so if I'm missing your point let me know.

 

The Lancashire story requires patience for the really good times to come -- the eventual turn in the pricing cycle.  But with dividends the like that we've seen in the last year, how bad a wait??

[Sunrider]

Hi WhoIsWarren

 

I think it's more frustration speaking. I agree with your assessment re soft/hard market returns. The question of course is whether it is worthwhile buying now in anticipation of a harder market. I would think that this will only happen once the cheap money isn't in the system anymore chasing returns down ... so quite a while. I am also wondering whether it is perhaps prudent to wait for another couple of quarters to see if the Brindle departure has any meaningful effect on attitudes and qualities of decision. I am a little nervous about the reserve release ... but then again they've been generally conservative in these things in the past, if I recall correctly. (Though the one table in the release seems to indicate that they had a fair few additional prior year loss additions ... unless I am misunderstanding and these are already reserved for?)

 

Thanks - C.

 

 

 

Hi Sunrider,

 

In the circumstances, I think the Q4 and 2014 full year results were excellent -- a 14% full year RoE, albeit aided by a $34m prior year reserve release.  This really speaks to how clients / brokers perceive Lancashire's importance, all the while the rest of the international insurance sector desperately formulates acquisition / merger plans. Of course it was a light period / year in terms of losses, so we really aren't yet able to judge its true "soft market earnings power".  My own guess is that the company does 8-10% in a soft market and 20-25%....perhaps even 30%....in a hard market.

 

To your point about the stock dropping with every dividend payment, I'm not sure I understand where you're coming from.  Theoretically speaking, a company's share price will rise through the year as profits are "accrued", and then fall by the amount of capital that is paid out to shareholders. Given the market environment, Lancashire does not feel it needs additional capital.  But in a hard market expect it to use all the capital tools at its disposal -- share issuance (ability to do a quick 20% placing) as well as bulking up Cathedral to $1-2-3bn.  You probably know all this, so if I'm missing your point let me know.

 

The Lancashire story requires patience for the really good times to come -- the eventual turn in the pricing cycle.  But with dividends the like that we've seen in the last year, how bad a wait??

[WhoIsWarren]

Sunrider - frustration understood, but if it was that easy to spot the turn in the market surely everyone would be at it -- for example, the "cheap money" in the insurance markets would withdraw just in time too - right?  Most likely, it will be an unanticipated event -- or series of events -- that leads to a truly hard market.

 

As for Alex versus Brindle, my market info would indicate that Alex is risk-averse, a people person that treats staff with respect.  It would seem that all was not rosy in the garden, if you catch my drift.....

 

And reserve releases, yes they've pretty consistently released reserves over time ($34m in 2014, $16m in 2013), although there was a change in their reserving methodology in 2011 (I think) that took account of the good quality business written, meaning less substantial reserve releases post-2011.  But overall, they reserve conservatively.

 

I can't answer whether you should sell now and buy later, but I'm looking at what I expect them to do over a cycle - say 15-18% RoE and a bit of growth.  In that context, the stock is cheap!  What would change the story dramatically is a major loss.  That's certainly possible, but looking back at history, they've consistently outperformed peers on losses from major events.  And look how they're reducing their PMLs over the last year, a combination of worsening inwards insurance, favourable outwards reinsurance and Alex putting his stamp on things.

[sys]

i'm happy to see the release of reserves.  i take it as some evidence that there is no mission drift towards chasing volume.

[Sunrider]

Fair point. Thank you both for your comments.

[bookie71]

Dumb question;

Are the dividends paid by LRE qualifying under US taxation?

Thanks

[abyli]

LRE  is based in Bermuda, broker should not withhold dividend tax for US investors.

[bookie71]

No, I mean does it qualify for the 15% tax rate?

[twacowfca]

No, I mean does it qualify for the 15% tax rate?

 

It's an insurance company, trading on a major exchange in a country that has a tax treaty with the USA; therefore, it qualifies for the current US rate for qualifying dividends. That top rate is now 23.8%, up from 15% a few years ago.

 

:)

[bookie71]

Thanks, that's the way I was reading it, but wanted a second opinion before I approached Schwab.

[twacowfca]

Sunrider - frustration understood, but if it was that easy to spot the turn in the market surely everyone would be at it -- for example, the "cheap money" in the insurance markets would withdraw just in time too - right?  Most likely, it will be an unanticipated event -- or series of events -- that leads to a truly hard market.

 

As for Alex versus Brindle, my market info would indicate that Alex is risk-averse, a people person that treats staff with respect.  It would seem that all was not rosy in the garden, if you catch my drift.....

 

And reserve releases, yes they've pretty consistently released reserves over time ($34m in 2014, $16m in 2013), although there was a change in their reserving methodology in 2011 (I think) that took account of the good quality business written, meaning less substantial reserve releases post-2011.  But overall, they reserve conservatively.

 

I can't answer whether you should sell now and buy later, but I'm looking at what I expect them to do over a cycle - say 15-18% RoE and a bit of growth.  In that context, the stock is cheap!  What would change the story dramatically is a major loss.  That's certainly possible, but looking back at history, they've consistently outperformed peers on losses from major events.  And look how they're reducing their PMLs over the last year, a combination of worsening inwards insurance, favourable outwards reinsurance and Alex putting his stamp on things.

 

 

Good perspective. Richard deserves credit for building the company. And while he is widely respected for his knowledge, Uh, how can I say this kindly? . . . He is not widely liked.

 

Lancashire is a better company now than before Richard left. They have not lost a single staff member, and they have picked up some of the best underwriters at Lloyd's, without extraordinary inducements.

 

The outstanding Cathedral team has movrd into the Lancashire office and fit into the routine like a hand in a comfortable glove. All day long, they think and collegially discuss how they can save or make money for shareholders.

 

When Richard departed, my biggest concern was what would happen to the outstanding team he so suddenly left? Would they pull together or fall apart?  I thought the former, but had a little, nagging fear of the latter.  After two expeditions, and extensive talks with those close to the London market, I am certain that my fear was misplaced. Lancashire and its Leadership is more united and esteemed in The orbit of Lloyds than ever.  They have pulled together .

 

Is't that what Taleb's definition of antifragility is?  Something that gets stronger under major stress?

 

The pesky analysts on their conference cells have nearsighted vision, and miss the salient fact that Lancashire is doing everything right in a soft market.  they also miss the equally important fact that Lancashire has positioned the company so that they are far less affected by soft rates than most other P&C companies.

 

They continue to be nimble; they have moved out of commoditized areas like retro where broker relationships mean little and continued to develop their higher profit specialty niches. When they see rates topping out in very profitable lines, they may write multiyear contracts.  When they buy now cheap retro to protect their balance sheet from the impact of large  catastrophes , they typically will have reinstatement rights and often favorable terms in how single or multiple catastrophes are defined.

 

This focus on reducing the volatility of their returns produces a virtuous cycle that almost every observer has missed:  It frees up capital that they can and do return to shareholders in buybacks when their shares have traded down to within 10 to 20% of book value as they did last year, or dividends when the share price is higher.

 

Some on this board have missed an important point about their outstanding capital management. They have potentially doubled their capital  available to take advantage of spiking rates after the next "big one" even as they have returned excess capital to shareholders.  How can this be?  They seem to have a captive in a tower spinning flax into gold.

 

Question: is there anyone on this board who can describe how they have done this?

 

 

[giofranchi]

Twacowfca,

Great post as always! :)

 

I think I will start gradually rebuilding a new position in Lancashire: in my quest of finding businesses that would do well in a recession and stock market crash, Lancashire surely has a place. And now that I have watched it without the lead of Brindle for some time, I am convinced that its management is doing a great job. And could go on hopefully for a long time!

 

Cheers,

 

Gio

[CorpRaider]

Benedict Arnold?  Perhaps harsh, although I wonder if the implication is negative when we are talking about a UK based company.  haha.  W/R/T freeing up capital...OPM?  It seems they have moved much more toward almost a specialty asset manager model with the third party asset management and even the Lloyd's business, I believe.  Also, perhaps most immediate, is they've really freed up capital by taking down cheap retro/reinsurance, (with advantageous terms).  Although, Elaine did mention on the call before this last one, that they felt as though they could raise "first party" capital if you will, without much problem when the market hardens given all of the money they have made and returned to their investors (they first pointed to their ability to quickly access third party capital now).  I sort of planned to wait until they need/want to raise additional capital as a signal of a market turn to give this a hard look for reentry.

 

P.S. Did you ask the last question on the quarterly conference call?  haha!