Friday, 20 February 2015

Lancashire Holding (LRE.L) – A Hot Pot Yield!

Who’s next in the Lloyds insurance serial takeover saga? First Catlin Insurance (CGL.L) is acquired by US reinsurer XL for over 700p per share, then last week Brit Insurance (BRIT.L) accepts a bid from Canadian insurer Fairfax Financial for over 300p per share (post dividend payment), both handsome premia to the pre-bid share price! 

Clearly the global catastrophe insurance market is consolidating fast, as besides these two acquisitions, there have already been two other deals in the US reinsurance sector (RenaissanceRe buying Platinum Underwriters, and Axis Holding merging with PartnerRe).

1. Catlin and BRIT have been kind to their shareholders


Of the big five listed Lloyds insurers, that leaves only Beazley (BEZ.L), Novae (NVA.L) and Lancashire Holdings (LRE.L). According to Bloomberg, bid speculation is already swirling around both Lancashire and Novae. Of these three, I am focusing on Lancashire as an attractive investment for a number of reasons, including its status as a potential takeover target.

What exactly does Lancashire do?

But first, a little background on this stock: Lancashire Holding is a Lloyds insurer that offers global specialty insurance and reinsurance products, principally in the fields of Property, Energy, Marine and Aviation. Its two main property reinsurance products include retrocession written on either a single territory or worldwide basis, and catastrophe excess of loss. 

3 Reasons to Like Lancashire: Takeover Target, Pumped-Up Profitability, Dishy Dividend

First of all, catastrophe reinsurance (where insurance companies like Aviva pay specialist reinsurance companies like Lancashire) is very profitable - after all, this is why the world’s greatest investor, Warren Buffett, operates in this insurance segment with the General Re subsidiary of his company Berkshire Hathaway. 

The four merger & acquisition deals listed above highlight that this industry is becoming all about economies of scale – i.e. the bigger you are, the more profitable you are as you can demand higher insurance premiums for the risk you take on. In the UK Lloyd’s insurance market, Lancashire, Novae and Beazley all appear to be viable takeover targets.

Impressive Growth Record

Lancashire has posted impressive growth since 2006, underlined by the impressive long-term growth in book value that the company has achieved, a cumulative 375% growth rate over the last 9 years (Figure 2).

2. Impressive Long-Term Growth in Book Value + Dividends Paid

Source: Lancashire Group

Delicious Dividends

At a time when high income investments are becoming increasingly difficult to find, £LRE stands out in the FTSE 350 index with its outstanding 9.1% dividend yield, far ahead of any other UK insurer and indeed, the second-highest dividend yielder out of the entire FTSE 350 index (Figure3).

3. One of the Highest Dividend Yields in the FTSE 350

Source: Stockopedia

You might think that such a high dividend yield is unsustainable – but I would argue otherwise, given that it has paid a bumper special dividend in 6 of the last 7 years (2011 the only exception) in addition to the regular dividend.

Recent Results Rate Highly

February 12’s Q4 results were solid, with broker Numis highlighting the $92m pre-tax profit in the quarter beating the consensus $58m expectation by some distance, and Lancashire announcing a 50c special dividend (ex-dividend date: 19 March). This should boost confidence in 2015 forecasts, particularly the 90.6c dividend forecast and the forecast of modest growth in book value.

Cheapest of the Lloyds’ Reinsurers

Finally, Lancashire remains the cheapest of the five listed Lloyds’ insurers, as can be seen from the table below (Figure 4):

4. Lancashire is the cheapest of the Lloyds Insurers

Source: Stockopedia

Don’t Just Take My Word For It, Check Out These other Articles on LRE

I am not the only one to believe that Lancashire is a compelling income story; both noted blogger @chrisoil and also Steve Evans of have highlighted the many investment attractions of Lancashire, here, here and here. So by all means check out their well-informed views on Lancashire too!

If you can find a more interesting 9% yielding income stock than Lancashire in the UK market today, then please do let me know! In the meantime, I think that 9% is simply too good to pass up. Get it while you still can!


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