David Rabinowitz, who runs Kirkwood Capital, spoke at the Value Investing Congress today. The following are our notes from his presentation, entitled Stock-picking for the Scared and the Ignorant: Notes from an Expert.
Investment Idea: LONG Lancashire Holdings (LCSHF.PK)
- Four year old Bermuda based insurance company (specialty insurer) trading at book value.
- Trades on the LSE under the ticker LRE. $1.27 billion market cap. Founded in late 2005.
- Not like a normal insurer. Only 14% of book is reinsurance, 86% of current business is primary.
- LRE is not “part hedge fund” 85% of investment book is “risk-free.” LRE has a very conservatively run investment portfolio
- CEO Richard Brindle has a very successful track record. The CEO cares more about underwriting, maintaining a strong balance sheet, managing capital through the cycle, and staying nimble. They’re not trying to rule the insurance world.
- Investment portfolio returned 3.1% in 2008, duration consistently below 2.0, $300 million in corporate bonds (none below investment grade) in $2 billion portfolio.
- Management has stated that they’re willing to walk away from premiums.
- Operating expense less than 10% of premiums and has about 91 employees.
- Gross written premium down 16% in 2008, Q109 GWP down 20-25%. Returned about $397 million of capital in 2007 and 2008. CAGR of book value since inception has been ~18%.
- Management ROE goal = 13% plus risk free rate.
- Valuation: Believes it could trade between 1.5x-2x book value (profits made in the mean time are being returned to shareholders). Bases this multiple on: 1) reserve additions being highly unlikely, 2) investment book is not at risk, 3) Bermuda taxation, 4) Conservative management.
Investment Approach
- David focuses on the downside of an idea more than the upside.
- He takes a very long time to understand an idea before taking a position.
- He often holds large amounts of cash—often for extended periods of time. Also, it takes him a very long time to find ideas.
- He believes in specializing in a few industries—he specializes in restaurants and retailers.
- He conducts extensive research, including reading 10-Ks, industry publications, even bankruptcy filings of former companies—which he says can be more helpful in understanding an industry or the competitive landscape than reading current annual reports.
- Understanding an industry very well will help an investor capitalize on an idea when it presents itself. It helps him act quickly when he sees opportunity.
View of Restaurant Industry
- David does not own any restaurants or retailers right now.
- From his experience at looking at retail over the past 10-15 years, he does not feel that individual opportunities are currently as exciting as they’ve been in prior years (i.e. 1994-1995).
- Retail valuations are currently much higher than in the recession of 1994-1995.
About David Rabinowitz
Dave Rabinowitz runs Kirkwood Capital, the Atlanta-based investment fund he founded with Gotham Capital in 2002. Prior to founding Kirkwood, he worked as an attorney with the Special Matters department of King & Spalding in Atlanta. Mr. Rabinowitz has also been an adjunct professor at Columbia Business School's Value Investing program. He is a graduate of Binghamton University and Emory Law School.
Disclosure: No positions.
