Lancashire Share Discussion Threads

[effortless cool] 03/12/2014 17:49

ursus,

I don't see any value in the sector just now. At current multiples of NTA, they are all probably sells for me; LRE just looks to have bonus downside potential. This is not a conviction call, however - I don't have much riding on it (albeit three times more than yesterday).

Looking at jonwig's post 463, BEZ and HSX could also offer shorting potential.

[ursus] 03/12/2014 17:13

Coolie - why shd you rate LRE as worth no more than 115% of NTA - ie a much lower premium than other Lloyds businesses? Just because of the possibility of a Brindle start-up to hit LRE more than those others?

[hooley] 03/12/2014 13:31

So it's $2bn capital to start a similar business. Confirmation from the master that it's worthwhile duplicating, certainly not a business to abandon - flattery indeed. LRE, now well established and successful, will passively see its key staff lured away? Dream on, that's not what happens in the real world. Brindle has yet to get the financial backing and then the team together. Meanwhile, underwriting conditions tighten. A bird in the hand.....

[effortless cool] 03/12/2014 13:13

ursus,

At current levels of projected market profitability (profitable but, in my view, not by enough to price in the risk being run), and Brindle's starting point for his new enterprise (if it happens) likely to be LRE staff and LRE business, I don't see this being worth more than 115% of NTA, which I make to be about £4.46.

Any skeletons would be a bonus.

[ursus] 03/12/2014 10:24

Coolie - I can see why one might not buy at this level, but what reason to short? Just Brindle leaving a long time ago? No skeletons have emerged in that time that I can see.

[minerve] 03/12/2014 09:48

How boring, with all that money he wants to play the same boring game. Some people have no vision other than being a business penguin. What a waste of capital on him.

[effortless cool] 03/12/2014 09:31

I know - I've been biding my time.

[jonwig] 03/12/2014 09:29

EC - I see this was suggested as early as 7 October:

Lancashire founder Richard Brindle is in the early stages of work on a start-up that will see him return to the (re)insurance market next year, The Insurance Insider can reveal.

Broking sources said that Brindle has been approached by a number of private equity investors interested in backing any future venture that he puts together, with talks ongoing.

It is understood that Brindle has engaged a major Wall Street investment bank to advise on the project.

[effortless cool] 03/12/2014 09:19

Brindle said to be planning a $2bn start-up next year.



I have trebled my short this morning.

[hooley] 02/12/2014 16:30

QE saved the banks and stuffed the their depositors. Here in the UK and in the USA that programme has now come to an end? QE took gold up 6fold and now it's back a third. Residential property - especially buy-to-let - has been the asset of choice since the crash. Now, why not become an underwriter for good measure: never mind that capacity now exceeds supply. Underwriters who insist on making a profit are pulling out. Carney is itching to raise interest rates, an unlikely event before the GE next May. LRE can be expected to retain less and to see that business less profitable. Half its capacity may well be paid back to shareholders before the cycle turns positive. Why write bad business when you have that option - one of the benefits of short tail business?

[woodcutter] 02/12/2014 16:00

EC

i wouldn't disagree, and although my knowledge of other groups products in the sector is limited one of the attractions of LRE appears to be it's niche product mix hence my tongue in cheek suggestion regarding BRIT. Which also begs the question why poach, is the expertise available within other operators? i haven't sufficient knowledge to be able to answer that one.

Hooley with regards to mergers and takeovers be mindful that a number of institutions have heavy holdings across a number of players in the sector so i wouldn't rule it out. Typically invesco, blackrock and MFS to name a few.

In general i gave up trying to understand all the detail of the businesses i wish to invest years ago as i concluded it was impossible to be an expert in every sector. I now focus on financials and charts and surprisingly it seems to work most of the time.

aimho

Woody

[jonwig] 02/12/2014 14:48

Minerve - CAT bonds (an example of your insurance-linked securities) are priced at at least 3.5% spread over expected loss (up to 6% for riskier - but you got 20% spread ten years ago!!), so investors have been able to get just about this return on a short-dated bond for a couple of years.

It seems to me that a rise in interest rates won't in itself disturb the attraction. We need a few "biggies". And something else ...

The conclusion of this article (if true) is a bit disturbing:

[June 2014]

[minerve] 02/12/2014 14:21

Salpara111

Yes, I agree entirely. I want to purchase shares in this sector Amlin, Lancashire, Catlin, Hiscox & Beazley - for all the attractions this sector has - but at the moment the spectre of cheap money is holding me back.

Falling oil & commodity prices, QE in Europe is only going to push tightening of credit out further into the distance. My gut feeling is that I should be patient and wait for 12 months or so until the interest rate cycle inflection is much closer.

What do people think? Is this the wrong view or should I be looking at individual share price prices in order to judge buy in? I have noticed that although Lancashire has fallen off of late, others like Amlin have actually done better. The recent fall here seems more stock specific than anything else.

[effortless cool] 02/12/2014 14:06

Woodcutter,

Thanks for your expansive reply.

With regard to a takeover, to the extent that there is value in the business it is in the underwriters. IMO, much of any such value left with Brindle and, as Hooley says, poaching key players would now be a better bet than buying the company. Notwithstanding its excellent record, LRE is an idiosyncratic business and I struggle to see it as a good fit to others in the sector.

[salpara111] 02/12/2014 13:44

That is one of the main factors that has been driving the market down over the last couple of years!
"Free QE Cash" for want of a better way to describe it has been flooding into every nook and cranny of the global economy, from central London properties to insurance markets. This is why LRE is shrinking its business as it has said repeatedly that there is indiscriminate capital chasing business at unsustainable premiums which is why they are no longer taking the business.
A few good disasters and easing of QE will see that excess capital leave the market in the same way that the high end of the London housing market will also decline.
We can all take a view on when we expect that to happen....I for one never expected QE and negative real interest rates to prevail for so long but the unwinding will have to happen eventually.

[minerve] 02/12/2014 13:14

What about the huge injection of capital into this sector via Insurance Linked Securities? Is that going to weight heavily on this sector going forward?

[hooley] 02/12/2014 11:36

Woodcutter: 487 & 488 In a business like this there will be a few key players. Half the shares are owned by 9 serious and successful institutions. Who would pay a large premium over book? Better to poach the principals. If LRE has an achilles heel it's defection to the competition.

[woodcutter] 02/12/2014 10:09

On the subject of interest rates i don't see any chance of them going up anytime soon. The talk of a rise is all political smoke and mirrors designed to keep a lid on the housing market and it seems to have had some effect. imv.

Unless the oil price reduction has a profound effect on global growth, and i very much doubt that as there'll be winners and losers, then interest rates will remain low.

winners plastics like VCT
losers oil services like HTG

Front end oil exploration companies like THAL are already feeling the pinch, it will take time for that to feed through to the back end service suppliers as oil E&P capex budgets get slashed, to some extent it's happening already in anticipation of capex reductions.

Market growth after the near global financial collapse was, i guess, expected from such a low. Now the cycle has changed but some investors are still seeking growth. We are beginning to see more and more profit warnings and eventually investors will begin to seek income as the cycle firms up, that may take another year. To that extent i expect investors in companies like LRE will see improvement in share price as well as the income yield. Now is the time to be building imho.

Woody

[woodcutter] 02/12/2014 09:47

EC

regards a takeout or merger i think it depends how long the soft cycle lasts. The longer it goes on the more likely some form of consolidation in the sector imv. LRE has solid balance sheet and excellent cashflow coupled with one of the best combined ratios and operating margins in the sector. The lower the share price drops towards book value the more attractive it will look.

Who would buy it? that's a difficult one i would suspect at the right price any of the other players could be interested, uk or overseas.

In terms of scale it's one quarter to half the size of most of the other uk players with the exception of BRIT, a nice fit? that would bring them to a comparable level. Who knows.

Finding a match with similar product lines to gain some rationalisation cost reduction would be the best solution, not sure if BRIT fills that hole.

Perhaps someone who feels they could make better use of the special annual divi to grow the business.

I haven't researched all the other companies in the sector in detail and invested here manily for the yield and the fact that the market cycle and volatility had changed around march this year. I've sat on cash pretty much all year and started buying a few months ago on dips. It depends on your investment horizons. It's in my income portfolio so i guess i'll just keep adding when the chart gives me the right signal.

One thing that does puzzle me is how sentiment seems to have changed with the departure of Brindle. It was perceived as a sound well run business when he was at the helm and now he's retired it seems to be viewed differently, with questions raised around the business model, financials etc. imv nothing has changed, maybe the business growth got to big for him to manage as the dominant player. He built the business i guess he's entitled to retire and enjoy the fruits of his labour.

It's happened before, guy builds a business and it outgrows him, it will happen again. I would be very surprised if he started up again.

aimho woody

[hooley] 02/12/2014 09:33

Never is a long time. If the business can continue generating at least £100m of operational cash flow a year and shrinks its equity base in parallel by £50m, then the specials will be financed adequately. At 75p the implied yield is currently a phenomenal 14%. Based on 5% the share price would triple!

[jonwig] 02/12/2014 09:28

If you mean the interest rate cycle, that's of less relevance than the underwriting cycle (or cycles).

A couple of quiet US windstorm seasons doesn't make a new normal!

[salpara111] 02/12/2014 09:13

I have a friend who is a fund manager and he tells me that the overwhelming volume of trades in any FTSE 350 stock happen via the dark pool matching service so they will not appear on the "TRADES" button on a site like this.
I am just more confused by the share price and yield.
The company has said that next year should be similar to this year which means that they should be able to pay out at least 75p which would give you a yield of around 15%.
I guess the fundamental question is.....when will the rate cycle turn, currently the share price seems to be taking a view that the current environment is "the new normal" and we wont ever return to previous margin levels.
I have decided to buy back today rather than wait for a possible 500p as I see deep value for the next 2 years.

[jonwig] 02/12/2014 06:54

Hooley - OK, thanks. The point is that AT trades are directly between buyer and seller.

So why has the share price dropped so far post-dividend?

One explanation might be that the market sees a 15% ROE as being out of the question this year: 8.1% for the nine months annualises to around 11.5% allowing for smaller equity base in Q4. So the premium rating becomes less deserved.

Takeover? In this climate, consolidation is a strong possibility, and when things happen, you tend to be labelled predator or prey.

[ianood] 01/12/2014 23:25

You also have no idea of the volumes that are traded in Dark Pools either.