A very disappointing update but not unexpected - it's been on the cards with various catastrophes over the last year. No mention of a special divi (not surprising) and the interim & final don't add up to much. Never mind.
It's days like this I look back fondly at my Catlin, Amlin and Novae that paid good dividends but were all taken over. Not much chance of that happening any time soon with LRE but they'll bounce back in due course - as is the way with (re-)insurance companies.
I read that Neil Woodford sold out. So I've bought in. Hoping that Woodford's wrong calls last year extend to this stock. Also encouraged by the Chairman putting £250k into the company last November at a share price considerably higher than today. Hoping for a 2018 take over...
"Does someone know a special dividend is in the offing???"
I doubt it.......EPS has been falling for 4 years (this is likely to be the fifth). After Hurricanes HIM (which LRE helpfully said would cost net $100-200m - that's 50c-$1 per share) I can't imagine EPS will exceed 40c.
LRE will do it's usual thing and "hand back" shareholders' capital having sat on it for however many years and not done much with
I think the share price increase has been due to positive broker notes but (imho) they are just chasing somewhere to get you to put your dosh. But, what do I know, I was forecasting the share price to tank from 670p (post HIM).
Overall, LRE is far too frothy for me. It's a potential takeover target because of its syndicate status which is in demand. But the metrics are still poor; premiums STILL falling even after HIM, claims high, investment returns rubbish, too much capital in the system.
Good luck to holders - but I won't be jumping on board just yet (not at these prices anyway).
Should have put a "Sell" flag on that as well. If I was a holder (and I am not at present) I would think about getting out at these prices before the reality of the cost of Harvey/Irma kick in.
Also, if LRE's share price is being bolstered by a possible takeover, the storm events will have either put a buyer off, or severely reduced the price they are willing to pay now that these claims are either coming in, or are IBNR (incurred but not reported).
Quite so! It's nearly back to £7! Irma may not have been a complete wipe out (Katrina style) but speaking to loss adjusters in Miami I can tell you there is plenty of damage, plenty! Insured losses (that's what matters to LRE) are going to run into many billions and that will feed through to all reinsurers who are going to have a very bad year. The thing is, the mood seems to be that it wasn't "bad enough" to be a catalyst to change the market. Premium rates might hold but in reality they need to go up 20% or more.
This is a link to the Q4 2016 results. About a quarter of the way down is a table for the "RPI - Renewal Price Index" - basically an expression of this year's premium compared to last year for major classes (it can't be completely accurate as the asset being insured will change as well). EVERY measure is less than 100%. Same goes for the Lloyd's segment. Effectively, the premiums are heading down and down. Proof of the "soft" market.
Wait for these to start changing and then LRE's fortunes may improve.
Good stuff, Guitar. I think that today's price rise is just silly. The market is over reacting to news at the moment and the shares are now on an inflated valuation in my view.....
What amazes me is that none of the professional investors seems to have looked at the balance sheet, or made comment on the poor EPS record. I used to feel that Invesco/Perpetual/Woodford did penetrating research, but their grip seems to be fading......
Excellent post, especially if that was a "quick go"!
I would very much agree with you - although I am usually less specific about NAV/NTAVs! Thanks for your quick calculations.
After the takeovers of Amlin, Catlin, Novae, Canopius, and Endurance (last two privately owned), I think most owners of Lloyd's syndicates and companies have a rather inflated view of their companies' values. It's inevitable I suppose. So when LRE's share price was around £7 I too thought there was a lot of froth in that.
Looking at the basics (premium rates and direction, claims and claims ratios, operating costs, regulation, new capital in the market, EPS, divi/ divi cover) I too think LRE isn't yet anywhere near being attractive for me - especially after today's bounce (up 46p to 657) which is presumably on the back of Irma not being "too" bad and José veering away into the Atlantic.
I've owned LRE in the past (and have various holdings in CSN, DLG, AV. and LGEN) and would do so again - but we're nowhere near an attractive entry point whilst the soft market remains. As Grey points out, the divi payout is mostly made up of a special which is likely to keep dropping (and effectively means handing investors back their money!). Total divi this year might not exceed 20p (that's a guess by the way!).
I'll sit and wait for the market to harden - but I've been waiting for that for years! It may never happen with seemingly endless new capital flooding the market.
As Grey also points out, despite purchasing Cathedral, LRE has fewer strings to its bow than others like Beazley and Hiscox. It is not an operator in the "specialty" markets (where I work) and so can't diversify. Not that that guarantees better returns though.
For holders of LRE, you've still got a reasonably well company here and a chance of a takeover. LRE's access to the market makes it attractive no matter what classes of business it writes. A weak pound drives up £-denominated earnings and makes it cheaper for an overseas takeover. But it isn't attractively priced enough yet to tempt me back.
Guitarsolo - watching for a change of premium rates direction
I'm away for most of this week, in Yorkshire, so I may not be able to post for a bit. But I will have a quick go.
Long term posters will know that I've been a big fan of this sector, despite bumps along the way. However I sold out of LRE some time back, because of what I viewed as an excessive valuation and suspect strategy. I particularly disliked buying shares out of post tax income and then being taxed when my capital was handed back as a supposed dividend.
This share needs careful analysis, more than most, but here is my take on it:
The revenue has declined over a number of years, despite a serious acquisition (of Cathedral). Net profit, EPS et al have also declined sharply.
The P/E ratio has been rising steadily. This is counter intuitive, and probably being driven by the large 'dividends'.
The core dividend is about 11.4p, giving a yield of about 1.86%. There are 'specials' on top, which are giving you back your own money.
I believe that an absolutely key number is the fully converted net tangible asset value. This doesn't lie. It shows that the asset backing of the company gone from £5.87 to £4.14 over four years, if my sums are right.
Experts will immediately argue that the company has paid out £2.15 in 'special' dividends over this period. This is true, but by my calculations the company should have generated more than that out of retained profits.
What the above says to me is that the acquisition, plus huge payouts to founders of the company, has severely damaged shareholder value. Not good.
So how to value the company going forward?
Giving the company the benefit of the doubt, let's assume that this is now a settled business.
I would expect a serious hit to short term profits from the catastrophes. But then the burning of market capital should lead to modest rate rises, and to potential growth. This is fine with me, but not necessarily with everyone else. As of today 4.2% of Lancashire is in the hands of happy 'shorters'.
There may not be a large special dividend this year.
I think that you can value the company in two ways:
Based on NTA, fair value is a bit below todays price, maybe somewhere around £5.75.
Based upon projected earnings, I think that the company is substantially overvalued. Let's be optimistic and pitch for $100m this year ie £75m (well below analyst forecasts). This puts fair value at about £4.50.
During the 2008 crisis, these company sold for around NTA. So in this case £4.14.
I have LRE on my watch list. I have a very large holding in BEZ, and I'm holding. They have gone up four or five times during my holding period. The difference is that, like HSX, they have speciality businesses. LRE doesn't, or not to the same degree.
A weak Sell in my view, at this price.
Sorry Games, this is just my view. I'm often wrong.
Yes, there was only a short time between 1987 and Michael Fish and his magnetic wind symbols!
Market crash? Well, like any (re)insurer, LRE probably holds lots of bonds and gilts to cover its liabilities. There's a lot of talk about the overheated bond market (stoked by low interest rates and low returns elsewhere, everyone chasing the yield). So if those prices crashed you would expect LRE's assets to fall but not necessarily its operating profit as investment returns are piddly anyway.
If Harvey, Irma (and Jose) cause some substantial losses then operating profit will be hit hard as the claims ratio rises. But then premiums will rise in subsequent years so it might help.
If you look under the chart tab at the share price since 2005 (sorry I tried to copy and past but it didn't work) you'll see that 2005-2008/9 the price bounced around 250p but only fell to just under 200p during the crash (as far as I can see).....so not too bad at all, very good compared to other financials. After that, it had a stellar rise to 900p before falling away to 650p now.
I'd like to know what others (and Greyinvestor in particular) attributes this to, but I think there is a strong correlation with the dividend. 2009-2014 (ish) there were some very juicy divis - especially the specials. But since then they have dropped off a bit and hence the share price drop.
If the above is correct, then the share price performance correlates strongly to the dividend - which in turn correlates to EPS (since the special dividends mean that much of the EPS is paid out as a dividend) and EPS correlates to net profits.
If this year's net profits get hammered by the cat losses then the share price could be dragged lower when shareholders hoping for a juicy divi realise that in the short term it will be disappointing. Hence my comment that the time to really pile in is when the market hardens.
Short term opportunities still exist though.....but I would wait to see what happens in the next few days and then what happens with Jose!
The market has been waiting for (aka hoping for) a large catastrophe to burn some of the capital away and harden the market.
That's fine, as long as it's not my capital being burned away!
Hard to know how long it will take before all this feeds through into higher rates and profitability, markets are forward looking so I guess the SP may anticipate that but I guess it will take some time for the bottom to be reached (presumably when market feels it knows how big a liability LRE are sitting on.
Any thoughts on the resilience to market crash ? Presumably crashes don't generally coincide with catastrophes. Ah but then I seem to remember in 1987....
A couple of noteworthy comments in the Alex Maloney (Group CEO) section, to paraphrase:
1) There has been a lower level of catastrophe losses in the first half of 2017 compared to 2016. - Oh dear, said before the recent events but that was unfortunate and he obviously hadn't consulted http://www.nhc.noaa.gov to see what was brewing in the Atlantic in the form of Harvey and Irma......but that's life in reinsurance.
2) LRE purchased more protection against hurricane risk than in previous years.....Well done, prophetic almost! That might soften the blow of Irma losses if it causes substantial damage to Florida.
There are many reasons to buy LRE, particularly post an expensive catastrophe when the share price should have fallen to take into account forthcoming losses. As you have noted, "cats" are good news perversely as they lead to higher rates.
However, take a good look at the July press release and you'll see that almost across the board rates (i.e. premiums) have been falling - but the risk hasn't changed! That eats away at profit margins (although LRE's have been good albeit in low-claim years). Like any reinsurer, LRE will struggle to make a substantial profit until the market hardens (rates rise).
I work in reinsurance (but no connection with LRE or property insurance) and can tell you that the whole market needs to harden to return to profitability. The problem is that there is massive over-capitalisation in the market. Too much money looking for a home. QE is largely to blame along with terrible returns on other types of investment. The market has been waiting for (aka hoping for) a large catastrophe to burn some of the capital away and harden the market. Irma might be it (in conjunction with Harvey) if it the "right sort of losses" (right amount, right cause etc).
Overall, in the short term Irma does provide an opportunity to dip into LRE and other reinsurers with the cost of a cat of two already baked in to the share price. But the best time to invest will be when the market hardens properly. It might need a cat or two more for that!
Oh, and you asked what might be next.....José!!!! It's forming in the Atlantic. It's early days but it could form another big windstorm. Hurricane season doesn't end until 30th November so there's still time.
Clearly the sector is taking a pounding with Harvey and Irma in focus and who knows what to follow. These events seem to run in spates followed by periods with few big events, we have had the latter and could well be in for a prolonged period of the former.
As is well noted here, insurer's benefit in the mid term following such events as premiums are driven up so I guess many will be looking to time an entry, It may seem callous in the aftermath of tragic events, but that is the business of insurance and many people with foresight to insure will be pleased to receive the funds to rebuild, so I have no qualms there.
One aspect I notice looking at historic SP's of LRE and peers HSC, BEZ and dearly departed AML and GGL is how well they performed during the financial crisis, most ending well up over 2008. I (sadly) did not hold any during that period so it was a bit of a revelation.
I guess it was due to the strong balance sheets which the insurance business model provides with premiums invested, typically in fixed interest assets but can anyone shed any further light on why they were so resilient? Was is related to the nature of the crisis or would it likely apply in a typical crash. AIG who insured sub-prime nonsense nearly went under so the type of business is no doubt important.
If the 2008 response to a crash is typical it would seem to be another great reason to hold, along with the great dividends and good capital gains available in the right part of the insurance cycle.
Appreciate any comment from those who understand the business better than me (which probably means most people reading this),
""On their (Cathedral's) treaty account, it's difficult to say if there will be any claims at all because there isn't a big wind exposure here, it's more of flood," Creagh-Coen said."
So LRE is exposed to the flood claims via Cathedral? That's where the real losses are in Texas and Louisiana.
And LRE might have $200m of exposure for windstorm damages in TX/LS according to an analyst but this is rejected by Creagh-Coen........I suppose we should put more faith in CC than an analyst but still.......
HERE COMES IRMA! Category 5 (windstorm) with Florida in its sights. Still a long way to go on its tracking but if it hits the eastern seaboard low down in Florida (Miami, Fort Lauderdale etc) that could be a big problem.
It seems wrong to sniff an entry point when people are/will suffer but, if there is to be a good entry point, it will be after a big hit from Irma. People here in the insurance market are nervous that's for certain.
Aug 30 (Reuters) - Property and casualty insurer and reinsurer Lancashire Holdings is not exposed to the first $40 million of windstorm reinsurance claims and does not expect to pay out huge amounts from Tropical Storm Harvey, its head of investor relations said.
The most powerful hurricane to hit Texas in more than 50 years has caused deaths, forced tens of thousands of people to leave deluged homes and caused damage estimated at tens of billions of dollars, making it one of the costliest U.S. natural disasters.
Lancashire, which writes policies for heavy-duty assets such as oil rigs, ships and aircrafts, said its exposure in Texas was that of a windstorm account, which excludes floods - the biggest cause of damage in the state.
The company's insurance customers also have to bear losses of up to $40 million before their reinsurance policies kick in.
"It has to be a very big loss before we even start paying losses. Very difficult to say if that potential is there or not," Jonny Creagh-Coen told Reuters. "For Lancashire, we don't see a big thing here."
He added that the Lloyd's of London insurer and reinsurer had a retrocession cover - when a reinsurance company has other reinsurers underwrite part of its reinsurance risk - of about $200 million.
Air Worldwide, a provider of catastrophe risk modelling software and consulting services, estimates insured losses from Harvey's wind and storm surge at between $1.2 billion and $2.3 billion. That figure does not include flooding.
Wall Street analysts have estimated insured losses as high as $20 billion.
Barrie Cornes, insurance analyst at Panmure Gordon estimates a 200 million pounds net loss for Lancashire from the storm. Creagh-Coen rejected the figure.
"Most of the area is still in blackout (so) there are a couple of things we need to clarify. But we are pretty comfortable on where we sit in this claim," he said.
Lancashire, the third-biggest Lloyd's of London listed insurer by market capitalisation, also writes business via its Cathedral unit, which gives it access to the Lloyd's market.
"On their (Cathedral's) treaty account, it's difficult to say if there will be any claims at all because there isn't a big wind exposure here, it's more of flood," Creagh-Coen said.
Lancashire's shares, which have fallen 2.7 percent since the last day of market activity before the storm, were up 0.9 percent at 665 pence at 1146 GMT. (http://bit.ly/2x3REzK)
I'm puzzled by today's meteoric rise. Results OK but fall in profits, dividend held but no special dividend announced. ROE good. The only thing I can see is yield is excellent and dividend cover is also excellent.
Can anyone enlighten me as to why the price has risen by nearly 10%?
"The hunt for yield remains in full flow. There are few asset classes which return anything like equities right now. But it's getting harder and more expensive, and investors are rightly beginning to question the sustainability of many income ..."
Berkshire's zero dividends suits me at the moment as I am in full time employment and pay tax at the highest marginal rate. So I get punished for receiving dividends - especially with the tax credit now shrinking. Anyhow Buffett said last year that dividends will commence sometime within the next 20 years so that suits my likely retirement schedule!! Lucky me!! (Hopefully)!
I topped up on Beazley following recent price weakness. Also found an interesting company in Australia called Wesfarmers who are a very old diversified conglomerate of excellent businesses a bit like Berkshire, although they DO pay a dividend. They recently bought the Homebase stores here in UK which they plan on converting into Bunnings which have been particularly successful in Oz. Have bought lots of stuff there myself over the years - pricey but good product range, layout and customer service by ex-tradies. See if they can replicate in Blighty.
Still a bit confused by LRE and won't be adding. Thanks for your insightful comments. I'll try to return the favour with my own analysis contributions on these boards.
The stake owned by Woodford and Invesco (where Woodford worked before) equates to just under £350 million. Not to be sneezed at, Woodford and Barnett (both great managers) pretty much control the company.......
After a period of contemplation, I have decided that £5.50 represents fair value for LRE. I want to maintain the value of my holding, post the special dividends, so I have made a decent sized top up of my stake @ £5.50. This represents 1.5*NTA and 12* possible future earnings.
I hate to bet against Odey, who are shorting the stock heavily. I'm with Invesco and Woodford, plus the directors.
I note that NVA declared good results and the share price rushed up accordingly.
If Woodford, Invesco and CEO Maloney are taking advantage of LRE's low value then maybe they're onto something.
LRE has always looked pretty good under my calcs, although I am slightly out of date now and need to spend more time on it.
I do recall Greyinvestor you were conservative in your value calcs on Amlin at a time when I thought Amlin represented excellent value. I ended up adding and adding to my Amlin shares until it became my second largest holding. Then along comes Mitsui and forced me to sell up albeit at an excellent premium.
Thinking to myself I need to get my calcs updated on LRE as now might be a superb time to top up, as others are evidently doing.
As to other ideas, my largest holding is Berkshire Hathaway B shares where I remain happy to top up on the dips. Berkshire is so big these days it is virtually an index fund of the world's best companies. Being still in full-time employment with limited time available for research I'm not after spectacular gains so Berkshire suits me fine.
Also happy to continue holding Lloyds Bank, Reckitt Benckiser and Persimmon.
Grey -- Good response -- I'm only observing the pain fortunately and not suffering it as I sold some time ago. I guess I'm not going to be a buyer here unless it falls pretty radically.
I see you're into Braemar - I've been watching it but not sunk any cash into at this point.
You might want to read John Lee (Lord Lee) in the FT.
He covers AIM/Small Cap and has recently invested in Braemar.
My only concern is that Braemar is benefiting heavily from the offshore storage of oil during this glut. What would be the impact if the oil industry turns -- which it could well do at some point, since oil consumption continues to grow at just around 1% a year. Braemar is small and flexible so it may not be a problem.
""""why is it always me that volunteers my ideas?)"""
Good point mate -- galling as it may be, you can at least console yourself in that some eejits (like moi) are paying some attention.
Just to alleviate the stress of responsibility and let you sleep off the jet lag better, here are a few suggestions from another hopeful investor :-
1. Advanced Medical Solutions (AMS) -- great products in health - wound care - massive potential for growth. Strong balance sheet, well managed.
2. Augean (AUG) - Waste management - solid company - slight risk to landfill taxes but this company handles lots of the more tricky hazardous waste and is run by a really smart CEO. I have a buddy as the Chairman.
3. Christie Group (CTG) -- One of John Lee's picks. Good long term business well managed and a strong long serving CEO - no debt, low P/E - good divi and well covered.
So these three are all AIM stocks, an area I have historically excluded because of governance, but in this case I've made an exception. Collectively the three are 2.6% of my portfolio, but I expect to take that to 5%, probably split unevenly and biased towards AMS.
There you go mate, pressure is off.
Games -- sleep well now out there in the U S of A.
Hi Games, i'm away on hols just now so apologies for a basic reply.
First of all I don't disagree with your sentiments, or the many hedge funds betting against this stock. But.......
By my calculations, at an average exchange rate of 1.45, shareholders have had £3.00 from the company over the last three years. How you split it is up to you, say 30p dividends and 270p capital. I think this is about right, but i may be wrong. As a recent investor you may be doing ok, which i am, more or less, but longer term investors will have done less well.
Then you have to do another valuation today.
The founder shares have now gone, so future numbers will be clean
The Eps forecast is 47p, giving a multiple of 11.76, not extreme.
The NTA multiple is 1.5, again not extreme.
Now you have to think about the market. Appalling competition, floods of new money, no usp, no investment profit. I agree it's not good. Even Warren Buffet says so.
Beazley are doing fine in their niche, Hiscox slightly less well and they are on a huge multiple, Novae report tomorrow, and what of Lancashire. Hmmm...Lancashire are chosing or being forced to shrink. Their argument is; come the next catastrophe we will be fine, prices will rise and we will grow. It's taking a lot on trust.
I probably should have sold, but I'm not sure that I have suffered the appalling pain that you describe. I feel as if someone keeps handing me large wodges of cash to keep quiet. I'm in the black on a decent portion of my portfolio, and i've been well rewarded, sorry.
Am I a buyer or a seller? Neither actually. I am looking and looking and looking for other stuff to buy. Recent purchases have been Apax, Braemar, Novae (why is it always me that volunteers my ideas?). Anyway, all the best, i'm off to sleep in the USA and will wake to read the Novae results and head to an airport.
If anyone at LRE reads this, you will understand that you need to do two things; copy bez and hsx and specialise in a few areas, and communicate better with your long suffering investors.
Am i right in thinking that Invesco, whom i respect very much, are adding?
Grey - I see your point about the handing back of capital, but surely that is a complete waste of time, as it's simply giving you back the money (value) you already own.
It's like saying I'm floating a company and I want you to invest £4 a share. When floated the company handed back a £1 to each shareholder on the basis it only needed 3. In effect the company after the handback is worth 75% of what you invested in initially.
The same is true for paying an unfunded dividend, the company is simply bribing you with your own money.
If you forget about these two potentially useless mechanisms above the only thing that matters is the growth in the GAAP earnings -- all else is fantasy land, as is "adjusted earnings".
Looking at Pre-tax profit, in 2011 made $218M. Today it's about $140M -- projected 2016. That's a decline over 5 years.The revenue has gone the same way.
Valuing the rest of the aspects of the company is very opaque. It's generally going backwards, unless you think it's a bid target or something, the stock looks like it should be sold.
Then look at the dividend -- in 2011 it yielded 1.3% and was probably covered 10 times. Today the yield is fantasy at 9% and just covered by earnings but possibly uncovered by cash.
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