Lancashire's Annual Report is Out

[Myth465]

Great read / introduction to the company. They have a bit of exposure to the Chile Earthquake so the Q1 commentary will be interesting.

 

http://www.investis.com/l/lancashire_insurance/2009/ar09.pdf

[calonego]

If you sign up with their IR you get emails on all their share buybacks - daily emails! (usually 100-200k shares/day, when they are permitted and the stock trades at/under BV)

 

This one is beautiful:

 

http://www.lancashiregroup.com/lre_group/media/releases/2010/2010-04-01/

[Myth465]

Thats lovely 4 million shares in one swoop. Lancashire simply mints money. Thanks for the tip.

[biaggio]

Is Lancashire stock sold here in north america (pink sheets?). If so what is the ticker?

[Sullivcd]

It is LCSHF for optionsfirst users, I would assume it is the same across brokers.  Appears to be very thinly traded though, might have trouble getting set up.

[Myth465]

Yes very thinly traded. I hold about 300 shares and will be buying more soon. I want to make sure the dividend paid hits my account. I am not sure how to add significantly more because it is very thinly traded, should be fine though for those of us with less than $100k in capital.

[rmitz]

Where can I find the ratio of shares between the pink sheets stock and the main one on the LSE?  Nothing came up under ADRs.

 

My personal guess about the company is that they're not a long-term compounding machine, but as an insurance company they smash all the common valuation metrics so should trade at a significant premium at some point. Will look into the numbers.

[rogermunibond]

Rmitz - It's not an ADR.  I believe it trades on the OTC.  Ratio is 1:1

[rmitz]

Rmitz - It's not an ADR.  I believe it trades on the OTC.  Ratio is 1:1

 

Oh, right, pence not pounds.  That explains it.

[kapilm]

How is their combined ratio so low ? Is it sustainable as they get bigger ?

[Myth465]

They pick the sweat spots of insurance. After the hurricanes they went into offshore when pricing went up and mainly insured the drillships and semi's these dont really get hurt by a hurricane. They dont plan on getting bigger. Hence the huge dividends and buybacks. They just want to make money, dont want to be the next AIG. If the pricing is good they write insurance if not they return capital.

 

[calonego]

It's very liquid in the UK.

[twacowfca]

Where can I find the ratio of shares between the pink sheets stock and the main one on the LSE?  Nothing came up under ADRs.

 

My personal guess about the company is that they're not a long-term compounding machine, but as an insurance company they smash all the common valuation metrics so should trade at a significant premium at some point. Will look into the numbers.

 

 

The numbers are far better than you could ever dream.  Look far back in time.  :)

[Myth465]

After flipping through the prior presentations I finally figured out what you mean by this. Good stuff.

[twacowfca]

After flipping through the prior presentations I finally figured out what you mean by this. Good stuff.

 

 

                    :). :)  :)  :)  :)  :)

[StubbleJumper]

Where can I find the ratio of shares between the pink sheets stock and the main one on the LSE?  Nothing came up under ADRs.

 

My personal guess about the company is that they're not a long-term compounding machine, but as an insurance company they smash all the common valuation metrics so should trade at a significant premium at some point. Will look into the numbers.

 

 

The numbers are far better than you could ever dream.  Look far back in time.  :)

 

 

Well, that's sorta the problem.  With Lancashire you cannot really look far back in time as this outfit was put together after the KRW storms of 2005.  Having been in business for only four accident years, it's really difficult to get a handle on what a normalized CR would look like or whether their reserving tends to be accurate (ie, it's short tail insurance, but with such a brief history there is no historical loss triangle for us to evaluate).

 

To date, this has been a wonderful little company, but we've also had four relatively light cat-years.  When you look at their financials at the table that shows the 1-in-100 and 1-in-250 year events, it becomes more clear that their CR could easily spike.....  Interestingly, they did not estimate what type of loss they might have incurred from the four horsemen of 2004 or KRW in 2005 (would that be 1-in-250?).  It is also interesting that terror insurance is one of their lines of business, and I do not recall seeing an estimate of what the WTC attack of September 2001 might have cost them (RenRe got lucky on this, but not all insurers were so fortunate). 

 

Anyway, the only purpose of this disjointed post is to urge caution in evaluating this company's long-term prospects.  I can pretty much guarantee that they will not be able to write a 40 CR every year!  If you do the arithmetic assuming a normalized CR of 80 and net written of about $500m, you might get normalized EPS of slightly less than $1.00....  At current prices that's not too bad, but you need to be adequately compensated for the risk of a permanent loss of capital (ie, KRW).

 

SJ

 

SJ

[Myth465]

The CEO has been in Insurance since 1986. Flip through some of the early presentations. The track record is there but with different companies.

 

http://www.lancashiregroup.com/lre_group/investor_relations/results_presentations/presentations/2006/

 

When you write at combined ratios of >60 and cats take you to >90 then you mint money in good and bad years. Most people write at 95% in good years and get praise.

 

I do see your point, Insurers are one bad storm / attack away from Bankrupt, but I think the same can be said about BRK and FFH. Didnt BRK exit the terrorism business after 9/11.

[StubbleJumper]

Yeah, I saw that slide too.  I guess I like my money too much to hang my hat on the CEO's record alone! 

[Myth465]

In some way or another your money is always going to hang fairly close to his hands.

 

Lol.

[Partner24]

As far as I know, they are very conservative with their investing. I like someone who is conservative, but to add a word to it: opportunistic.

 

When there is blood on the street, it's great to be opportunistic enough to be greedy without losing conservativeness because you get great assets with a great margin of safety.

 

Again, as far as I know, that's what's missing with Lancashire to me. Conservative/opportunistic value investing as well as conservative/opportunistic insurance underwriting.

 

I'm really open and willing to get proven wrong on that point.

 

Cheers!

 

 

[calonego]

I don't own this - but my retired mother does.

 

- I was looking at lines of business that have historical abnormally low loss ratios (very long histories). Someone mentioned Lancashire on here and when I looked at it, for some reason (maybe because they "get it"!) Lancashire mainly writes in these small lines that have historically run 20-50% loss ratios.

- It's a small office, few employees and underwriters - shareholder money is very close to the CEO's hands.

- Employees have proper incentives (compt'd to underwriting profit).

- Their actions (buy backs and divies) demonstrate management's understanding of their competencies and a humility of their success, probably clearer than any public company I've seen recently. It's unselfish for a CEO to dividend and buy back with the gusto these guys have. (no Kingdom building here!) Oh ya, it also bumps up the IV.

- The buy backs have only been done efficiently and at proper discounts, very wise.

- The majority of public insurance/investment Co's tend to suffer from either being poor at part 1, or part 2. Berkshire and FFH are good examples. Berkshire corrected the problem some time ago though.

- Building an insurance company to invest float is generally not a good idea. Done well it can be phenomenally successful, but it's rather rare. FFH has been a success, but the share issuances at low BV multiples were extremely painful for shareholders.

- The market will give a 2x BV to a P&C insurer that is very good at underwriting, a company like FFH can only attain a high multiple due to CEO lust/euphoria, which is much less certain and usually leads to some poor years following. I think a healthy BV multiple is warranted with FFH, but much less likely. (this isn't paramount to the thesis, but it can be interesting). Basically a company that does 20% ROEs due to underwriting will get a higher multiple than a company that gets 20% ROEs from investments  (both should be worth about 2x BV if the risk of underwriting blow ups at Co1 matches the risk of an investment blow up at Co2).

 

I'd personally rather own a great insurance/investment company, but there aren't many out there.

 

[sdev]

I'm of the opinion that their business model of being only opportunistic on the underwriting side is sufficient. It's what they know and what they are comfortable with. They write insurance knowing that the cash will be there when they need it, and the ultra conservative portfolio allows them to confidently redirect excess funds to shareholders (via buybacks at around book value or dividends).

[calonego]

The underwriting as a public company has been wonderful, but the long history of LRE's CEO in Lloyd's is much more impressive.

[twacowfca]

The underwriting as a public company has been wonderful, but the long history of LRE's CEO in Lloyd's is much more impressive.

 

 

My compliments, calonego, myth465 and the others who are now coming to understand Lancashire.  The Lloyds record is the key to full understanding of their prospects in the years ahead. Confidence builds  in the same way that Buffett gains understanding of future cash flows of companies and the superiority of exceptional managers by looking for consistent, exceptional returns over many years.  

 

Brindle's  combined record encompasses twenty years without a single loss.  He outperformed his peers, using very little leverage, in all but two of these years, 1986 & 2006 -- and these were start up years when it's very difficult to outperform without having the advantage that established competitors enjoy with earned premiums in the pipeline.  Brindle outperformed his Lloyds peers by 17% per annum, one half percent less than his absolute annual returns during that  very difficult time for most Lloyds syndicates.  If we take away his first two years when he was merely a junior underwriter, his later annual returns were about 20%.

 

 

Brindle's percentage outperformance and most importantly his consistently high absolute returns,   outstanding underwriting, and capital management with an owners' orientation compare favorably with Warren's early record in a different sphere, investing.  :)

[calonego]

I originally was disgusted by the board comp and the salaries. But it is a big company and not everyone gets by on the money I do... They are Brits afterall ; )

 

As for the warrants, not too mad... It's interesting you said what you said Twacowfca - I think this is his own hedge fund... hear me out.

The guy does an ipo at 3.6p or so... and issues warrants to himself and other managers for ~15% (if I recall correctly) of the common - with the bonus of receiving any divies that accrue to the common. So in effect any value created beyond the ipo goes 15% to management! It's brilliant really.

 

And from what I recall there is no additional warrants or options issued every year... so it's just a Corp operating in P&C, that has a (tax efficient!) HF pay structure.