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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 (OTCPK:LCSHF)

  • 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.

Source: Value Investing Congress: David Rabinowitz Likes Lancashire Holdings