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Just one data point, but interesting to see this... we keep talking about the investment portfolio but if this market turns fast... look about above!




Rates in general rising: projected average 20% across Lancashire portfolio during 2009

  • in Lancashire areas of competitive strength rates are rising faster

  • Some direct competitors impeded by new regulation or economic woes


On a related note, Lancashire is another one that folks here should put on their quality insurer watch list... they look pretty solid to me from what I've seen (no position though).



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Great presentation. Thanks Ben!


I hope FFH (ORH) has written a lot of GOM energy cat business.


Anyone care to take a guess at current FFH book value? They disclosed current (april 20th I think) book value on the Q1 call, so I assume they will be consistent and do it again (so as not to only report "current" book when it has risen).


FWIW I think BV is arounf $320 at this point.

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"On a related note, Lancashire is another one that folks here should put on their quality insurer watch list... they look pretty solid to me from what I've seen (no position though)."


Thank you for the hint, Ben. Indeed - very interesting company. Will continue with research about Lancashire.

As far as your information status is, how would you compare Lancashire with Markel?



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  • 2 months later...

Lancashire Holdings (listed on the London Stock Exchange) is indeed an interesting insurance company.


They are active in Property, Energy, Marine and Aviation. Book value at June 30th, 2009 is 7,57 USD/share and at actual price of 5,35 Br.Pound the P/B is about 1,05.


Total shareholders equity is at 1,418 Mio. USD.


On the investment side they are very conservative and uninteresting (mostly fixed income with maturities below 2 years). Very interesting and impressive are the extremly low CR's and loss ratios.


CR's are for

period           Property       Energy      Marine      Aviation      total

2006              24.8%         31.3%      54.7%       19.8%       44.3%

2007       25.9%         42.7%      76.7%        19.5%       46.3%

2008       49.6%       135.9%       81.5%        31.1%      86.3%

2009(Qu1)                                                                    81.2%

2009(Qu2)                                                                     35.4%


How is it possible for a short tail insurance company to achieve such low loss ratios?

Is it possible to have so little competition? Are losses so errativ that you can be ok for years and suddenly you get a loss that kills you (200% of premiums or more)?


Please can someone of the board members enlighten me a little bit!

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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.

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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. 

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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! 



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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!


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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.


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  • 2 months later...

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