twacowfca

Barminov, The A&B pref redemptions appear to offset other preferred they recently issued at a lower rate. If this interpretation is correct, there would be little net change in their capital structure.

Good advice,but take it one step more if you have a signficant holding of a stock, Ask IR for a brief appt. to talk with the CEO, just to get to know him better--no hostile agenda. If it's a good Co with a good CEO, you will probably be pleasantly surprised to get to see him unless it's a mega cap. Being a relatively small stockholder may even be an advantage, less threatening to a CEO who may be subject to criticism. :)

We entered FFH first in 03 near its low. Then we cut our position in half in 05 just before and during the short attack when the stock traded above $150. At the AGM in 06, Prem was asked why he didn't sell parts of the business when the stock was trading around $100. His reply was ,''You wouldn't like the price we would get.'' I interpreted this to mean that the private market value of FFH then was no more than about $100 per share and that the short thesis was not entirely misguided. We held our position and then tripled down with short term calls and then leaps in late Aug and Sept when it appeared that the hurricane season was going to be benign. The rest is history! In 06 FFH' BV was way above the low price, but they had issues with chronic under reserving etc. IMHO FFH now,trading at a tad under BV, is much much more solid, a better buy than then, and without much potential for nasty surprises. :)

Is there a “black swan” lurking over Lancashire’a horizon, waiting to fly over and unload on their pristine headquarters at Mintflower Place, Hamilton, Bermuda? By definition, a black swan is an “unknown, unknown” a la Donald Rumsfeld. However, Lancashire has a pretty good handle on known areas of extreme risk. The president of their Bermuda operation, Neil McConachie, was CFO for Montpelier Re. He saw at first hand how MRH’s models broke down, resulting in unexpectedly large losses after Katrina et. al. in 2005. LRE’s BLAST model is vastly improved over the models used before 2005 and should be able to withstand a similar catastrophe without great loss. LRE’s exposure to extreme risk was severely tested in 2008 with Hurricane Ike. Ike had great energy content, comparable to Katrina, although it was only a Category 2 storm when it made landfall. Ike was vast in expanse. It headed toward the heart of the offshore oil rigs where Lancashire has its greatest exposure to loss. Ike lingered in the Gulf, reenergizing itself as it churned slowly through the offshore oil fields, pounding the oil platforms and pipelines, until it finally made landfall. Offshore damage was comparable to damage from Katrina. Surprisingly, Lancashire took only about a 10% immediate hit to its book value – better than its peers that also had exposure there. Lancashire ended the year with a combined ratio of 86%, a ratio that would be admirable even in a good year for most P&C insurers. This record indicates that LRE’s modeling for extreme events is robust.

Thanks WEB-CM for your kind remark. Kiltacular, Lancashire trades significant volume only on the LSE. Symbol : LRE-L. Here's more info about their outstanding underwrighting. They like categories that most insurance co's shun because they're scary. Hurricanes, earthquakes, terrorism and related risks could make a company miss its numbers for a quarter or even,heaven forbid, a whole year. Some INS co's will take a small number of these risks but only if the rate on the premium is higher in relation to the perceived risk than for other, less catastrophic risks. Therefore, such scary areas will produce abnormal profits even for mediocre cos. That have the intestinal fortitude to experience the occasional bad year. ROLL DRUM! ENTER LANCASHIRE (after a year so bad that half the competitors will never be more than a small fraction exposed as they were in 2005. This new actor on the stage is no novice. He's the best there is at finding the safe harbors in stormy seas! fraction

Here's more about LRE's capital management. Their bogie is ROE; it's the key factor in their incentive plan. The in the money long term warrants and options vest when they exceed the bogie. This keeps them focused on the upside. Happily, they are even more cognizant of the downside because the strike price is $5.00 while the market price is now $8.30+. :) They have apowerful incentive to regard all of LRE's earnings as owner's earnings because their warrants have an unusual feature: the right to receive the same dividends as the common. When I first noticed this feature, my reaction was: " What a sweetheart deal, obviously at the expense of the shareholders." But, the more I thought about it,the more I realized I was wrong. This is a perfect plan to make sure that "earnings" really are OWNERS' earnings. There is no temptation for managers to build marble palaces for their pleasure or to make acquisitions to enlarge their kingdoms! They are hyperfocused on returning all the earnings beyond capital that earns a high rate of return to the owners! Amazing!

Correction! In my previous post when elaborating on fractal patterns and the El Nino effect I referred to the year 2005. This was in error. 2006 was the correct year when the hurricane count plunged. My bad.

What accounts for their low CR's? Good underwriting. No. That's an understatement. It's actually really, really good underwriting times 7 times 7. Their underwriters are very sharp and average 20+ years experience. Their lead underwriter was the CEO's classmate at Oxford University. Both are very sharp as are the other members of their team. They start each day in a conference call with their CEO who gives thums up or thums down on the latest underwriting. This is like the daily call that WEB has with AJ. Brokers like and respect them even though they are very picky about what risks they will take because they'll get a quick answer in 24 hours. Much of their business is short tail property direct. They like this because they can stick to the sweet spots they know rather than following the herd. They don't do casualty so there is no risk that something will blow up years later. Their officers are incentivized with lots of in the money long term warrants this creates good alignment with equity holders. Debt is only@8% of capital. They have an owner's orientation and manage capital well through the cycle, returning capital to shareholders when it builds up, particularly when the market softens.

Lancashire is a gem! It's more than half our total portfolio with our recent purchases. Either LRE or FFH have been our number one or two holdings since late summer of 2006. LRE was IPO'd quickly after hurricane exposed property rates shot up after the bad 2005 season. We bought it because their CEO had the best record at Lloyds of London as head underwriter of two syndicates that had avg annual returns of @26% with only @ 15% leverage. Remarkably, this was during the 80's and90's when most Lloyds syndicates lost money! Their CR is no fluke. Last year's 86% CR was during a bad year for them when Ike tore through the oil well platforms in the Gulf, where they have the most exposure. In a more typical year, like this year, they will have an underwriting profit of @ 25% of BV. Their risk profile now is that a repeat of Ike would only produce about half to two thirds of the losses that Ike did. Their maximum 100 year event loss (eg a Katrina or a Northridge sized earthquake plus an Ike sized storm in the oil patch during the same year would cause @ a 20% hit to their BV but they should recoup that loss in about three quarters assuming that rates spike afterwards.

Yes and no. It can't be predicted with very high probability that a regime change has occurred until you can look back in time and see the demarcations between the regimes. However, it makes sense to recalibrate probabilities when a regime change MAY have happened. With hurricanes in the Gulf & W Atlantic, a sudden shift from high incidence in one season to zero or ultra low incidence in the first half of the next season is the hallmark of a dramatic event, an El Nino effect. Therefore, in 2005, by mid season, there were two possibilities that were becoming increasingly probable with each passing day with no hurricanes threatening US shores : a regime change to a more benign period of several years ( typically 12 to 17 years) and or an El Nino effect that may last for no more than one year. When the 2005 season was almost over, the forcasters finally lowered their probabilities after they had firm evidence that there had been an early arrival of an El Nino.

Here's more about how this idea of the fractal pattern of hurricane distribution in the Gulf of Mexico and western Atlantic has worked very profitably. 2005 was the worst hurricane season ever: 6 major hurricanes making landfall, including Katrina. Property rates in exposed areas and natural disaster retro rates increased by a factor of 6. We wanted a piece of this but we didn't want to get burned,so we waited to see how the 2006 season developed. By late August, the season was a zero, nothing! Every storm that started to develop or come close to the US had it's top blown off or was blown away from the US by contrary winds. This was the type of pattern of low risk associated with an El Nino but the hurricane forcasters had not detected an El Nino and were still predicting a very bad season in ignorance of the implication that a fractal regime change had likely occurred. We decided to act. We bought large amounts of Lancashire Holdings because their new CEO, Richard Brindle, had had by far the best record at Lloyds of London returning @ 26 percent per annum to the Names who invested in the syndicates for which he was chief underwriter in the 80's and 90's. His forte is assessing catastrophe risk/reward. We also bought FFH calls as detailed in the last post. These were dirt cheap because of the short attack against them. The shorts thought that another bad hurricane season was likely and that this would finish them. We thought this unlikely. The rest is history! PS: We did the same thing this year too,for the same reason, adding even more to these two great companies that now amount to about two thirds of our portfolio. :) a bad hurricane would finish .

Hurricanes and stock markets have a distribution that isn't normal or bell shaped. There are periods of low incidence or volatility punctuated by shorter periods when everything goes bonkers. It's hard to predict when these "regime changes" will occur, but the important thing to keep in mind is that whatever phase you're in is likely to continue. There isn't a smooth transition and regression to the mean is jerky. In fact the very idea of a mean is flawed. It's better to think of each phase as having it's own mean. The most important observation is to realize that whawever phase you're in is likely to continue for a time that may often be estimated by reference to historicle records. Therefore, the volatility or severity of that period is highly correlated with recent events and very little with the events of the previous regime immediately before it.

In Aug 2006, we bought FFH Oct 2006 calls on the theory that the hurricane season would continue to be benign because hurricanes follow a fractal pattern rather than the normal distribution that guru forcasters assume. When the stock ran up, we cashed out and used the profits to buy leaps. Result: a 30 bagger :) We are not tempted to try this with SHLD. Unlike FFH, SHLD appears to be stuck in a toaster. Walmart put them into Cpt. 11. Next episode: Cpt 22

In today's WSJ http://online.wsj.com/article/SB124113732066375503.html#mod=article-outset-box