LRE.L - Lancashire Holdings Ltd

[BroKon]

It is also probably worth mentioning that Odey have reduced their short by just over half since June. They "only" have a 3.19% short position now, but it does help explain some of the run ups to 1.8X book we have had recently.

[BroKon]

Lancashire is starting to look like value again, although you could say that about quite a few names I suppose. Does anyone have a sense of what their exposure is to "major event cancellation" insurance, I remember a few years ago they talked about having exposure, but I can't find any reference to it now in their annual report. Reason I ask is that the price action got materially worse after the Euro 2020s were cancelled, and as they tend to be exposed to the higher layers, this one worried me a bit.

[Cigarbutt]

^LRE is indeed looking good on an absolute and relative basis but the opportunity set has shown signs of life and may (who knows?) enter a non-linear phase. LRE is on a secondary watchlist and don't hesitate to feed this thread.

 

In part because of the above, the following impression is based on an incomplete evaluation of various disclosures and the business interruption clauses in various contracts may be subject to interpretation and exposure could, in theory, be triggered by a 'force majeure'. If that's important in your decision making, you could ask the company directly. My understanding is that LRE's exposure to business interruption is limited and may be linked to the energy segment. I think the business interruption clauses are conditionally tied to property damage and not simply tied to supply chain disruption and there is possibly even specific exclusion of pandemics-related coverage.

 

LRE's ROE has been and will be significantly tied to underwriting profitability (investment results are less important and negative results in that part are likely to be mitigating and not firm threatening, if applicable). LRE is very well positioned to grow market share in a profitable environment and they even have the possibility to use their pre-emptive right to issue 15% of shares if the price is right.

[BroKon]

For those that are interested I did some more digging, LRE discontinued their contingency book in 2016, so while they may still write some occasional contracts, its probably safe to assume that the current spate of concert and sporting cancellations won't be a loss event for them.

 

So in terms of downside risks, we are left with their Energy book, where they have historically suffered when oil prices were depressed due to reduced demand for insurance, and their Marine book, where you have to think that their Cruise ship business will be materially down at the next renewal.

 

If you can live with these risks then any price close to tangible book looks very attractive, but as Cigarbutt points out, it depends on your opportunity set, as while the price is cheap, its not distressed, which may be where the selling pressure is coming from.

[BroKon]

https://www.lancashiregroup.com/content/dam/lancashire/corporate2020/Investors/gated/20_Placing_Announcement_9_June_2020.pdf

 

Capital raise by Lancashire. If you wanted to know how hard the insurance market was becoming this should tell you all you need to know. They are among the best underwriters in the business, so this is a pretty strong signal.

 

Unfortunately, the shares have had a very strong run into this placement so its hard argue these are cheap anymore.

[Cigarbutt]

^If you look at their long term return results, ROE tends to be high and quite steady. The main driver of the return has been consistent underwriting profitability but the main drivers behind consistency has been also their active capital management.