Transcript: The Budget’s Big Breaks For Investors

With ISAs made simpler and more generous and pensions more flexible and accessible, the 2014 Budget has been described as revolutionary, and even by a few as alarming. But what does it all mean for Foolish investors? Nate Weisshaar and Mark Rogers join Owain Bennallack to share their thoughts, and also look at whether shares in the life insurance sector deserve to be hit by the changes, as well as the Government’s latest Lloyds (LSE: LLOY) (NYSE: LYG.US) disposal. Plus, some companies to put on your Watch List!

This is a transcript of this podcast.

Owain Bennallack: Hello, and welcome to Money Talk, the investing roundtable from The Motley Fool. I’m Owain Bennallack, and with me in the studio today I have The Motley Fool’s equivalent of Apple’s Genius Bar.

I have Nate Weisshaar, who’s modest enough to laugh — oh, and Mark Rogers, who’s also laughing — that’s geniuses for you; they wear their genius lightly. When not answering questions on my whim, for your listening pleasure, Nate and Mark work on our Champion Shares Pro and Share Advisor services at The Motley Fool. Welcome back to the Money Talk studio, guys.

Nate Weisshaar: It’s been a long time.

Bennallack: It has been an extra week. We had an extra week of gap this time, so some of you out there maybe feared we’d never return, but here we are.

Mark Rogers: Here we are.

Bennallack: Nate. We’re into the final countdown now, before you head back to the States.

Weisshaar: The calendar is getting checked off, day by day.

Bennallack: Soon we’re going to have to get your input via … Mark’s going to go down to the Thames and throw messages into the bottle … messages in a bottle into the river, of course, is what he’ll be doing, because of course he’s not an idiot. He knows the bottle has to carry it to sea!

Rogers: Yes, thanks Owain.

Bennallack: Carrier pigeons, he’s also got chalked up, coming from the North … or possibly via the ISDN.

Weisshaar: That seems way too high-tech for me.

Bennallack: It does. I don’t know how we’ll cope.

Mark, are you ready to fill Nate’s shoes in the London office when he leaves?

Rogers: You know what, I am. I’m even taking over the Fool Fitness Program, which Nate has very kindly run for us, here in the U.K.

Bennallack: Will your first act as head of the Fitness Program be to abolish the Fitness Program?

Rogers: It will be, actually, yes! I’m replacing it. All salads are out, and Wispas and coffee is in.

Bennallack: Greggsnuts all round.

Weisshaar: We’ll be moving on to Zumba classes?

Rogers: Already bringing … it’s normally Owain that’s on that, Nate. I expect better from you!

Weisshaar: I couldn’t let it slide.

Bennallack: No, he’s off to America. He doesn’t have to maintain his thin veneer of politeness anymore!

Rogers: That’s true.

Bennallack: Today we’ll start with the budget, and the changes to ISAs and pensions. I know the budget was a few weeks ago, now, but most of our listeners, we think, are not as obsessed as Mark, Nate, and sometimes myself. You don’t read The Financial Press in your sleep, so we’ll be giving our Motley Foolish take on those changes.

Then we’ll talk about a sector that was pretty hard-hit by George Osborne’s changes, and that was the life insurers. Given that they’ve come down a big, is there value there — the obvious question.

Moving on, though sticking with the financial sector, we’ve seen the U.K. government sell another big chunk of Lloyds Banking Group, one of the two part-owned U.K. banks. Should we be buying shares that the government doesn’t seem to want? Worth asking.

Finally, we’ll run through three companies that have taken our fancy this week. Ready to go?

Rogers: Let’s do it.

Weisshaar: Yes, let’s get started.

Bennallack: Let’s start with the budget. With the country still mired in austerity, with economic growth barely daring to lift its head, with debt up to our eyeballs and a gummed-up coalition in power; as the budget approached, expectations for a big, generous gesture have not been so low since Mark Rogers’ last round in Motley Fool pub night!

Rogers: Owain. Just give it up, Owain!

Bennallack: I have given up on getting a pint out of you, Mark. That is quite correct.

But then George Osborne surprised us with a massive rejigging; not only ISAs and not only pensions, but ISAs and pensions. Mark, first of all, tell us about these new ISAs — NISAs.

Rogers: I think the most important thing that I took from it is that they’ve really simplified the whole system — and it’s about time. We sat here on this podcast, not too long ago, and I said, “ISA is quite simple, Owain,” and then proceeded to spend about 20 minutes explaining all the different ins and outs.

Bennallack: It’s even worse than that. I asked you to explain it to my Mum — and I was party to this terrible, complicated affair — I decided I couldn’t even point her to the podcast, because it was not …

Rogers: Still too complicated. Well, thankfully, Mrs Bennallack, things are even simpler now. Basically, where we previously had stocks and shares ISAs and cash ISAs, they’re being merged together into what we’re calling “NISAs.”

Bennallack: “Nice ISAs.”

Rogers: Nice ISAs. Even nicer than an ISA are NISAs. Starting on July first, you’re going to be able to shelter £15,000, which is up from the £11,520 overall limit in the past. You’re able to, like I say, merge together your previous cash ISAs and stocks and shares ISAs into what will now just be the new ISA, starting from July the first.

Bennallack: So effectively, there will be complete two-way switchability.

Rogers: Right, exactly. Not only will it be two-way switchability, but effectively they’ll be treated as the same type of account.

Bennallack: It will be interesting to see how that works, though. Do we think that you’ll have a stocks and shares account with cash in it, and it will generate a decent interest rate? Or do you think you’ll have to do some kind of transfer?

Rogers: I’ve been doing some looking into the different providers already — I’m getting things lined up, Owain, for July the first already. How it’s going to work is, because the new tax year starts, obviously, in April, you’re going to be able to invest up to just over £11,000, starting in April, just as you would normally.

But it’s as of July the first that the “switchover” happens, if you like. Supposedly, you’re going to be able to — let’s say it’s with a provider like Hargreaves, or with Selftrade, just to give two examples — my understanding of it is that any cash that’s held on deposit will have a rate attached to it, as if it was a cash ISA.

Bennallack: It is going to be interesting, just thinking about it, because I can’t imagine that those brokers are going to give the most competitive rates.

Weisshaar: No, I think they’re going to try to make as much money for themselves as possible! But with the increased transparency that we’re starting to see with the retail distribution reforms, I think that it’s going to be harder and harder for them not to offer competitive rates.

Bennallack: The other thing is, at the moment, obviously rates on cash are terrible. But you could imagine, in five years — people could put away £100,000, pretty much, over the next five to seven years — and then they could be getting 5% …

Rogers: It’s giving people options, which I think is all-important. Actually, taking about whether or not people are going to be getting a fair deal from those traditional stockbrokers who have been offering the stocks and shares ISAs, I’m more concerned on the other side, with the people who have had cash ISAs up until now with some of the traditional high street banks and building societies, because to my mind those are the people who have gotten a rotten deal recently.

I think the switching costs are going to be higher there, because a lot of people have been put into these accounts, and aren’t always fully, 100% aware of exactly what they’re into.

Bennallack: No, definitely not. I still get people saying to me, “Owain, I have an ISA. Should I …?” They don’t say, “I have a cash ISA paying 2.3%,” or “I have a stocks and shares ISA …”

Rogers: That’s why the simplification is, to me, even more important than the very generous increase in the limit.

Bennallack: Yes, I agree. That’s all useful to anyone who has existing assets to shelter, as well as people who are going to save a lot.

Rogers: Right.

Bennallack: This is something I think the press has missed. I saw a headline saying you have to earn £107,000, but anyone who has any assets — maybe a gift or an inheritance, maybe a lump sum; maybe they sell a property.

Rogers: I saw that as well. I think The Guardian said it’s going to be just a boon to people who are making more than £125,000 a year. Well, I think that’s nonsense. I don’t want to talk too personally here, but I would find that quite comfortable to be able to do that, and I’m not earning anything near £125,000 a year.

Bennallack: I can quite believe that you are saving — because we’ve seen you at the bar!

Rogers: Yes, exactly.

Bennallack: Comedy call-back.

Rogers: Right.

Bennallack: New ISAs — “Nice ISAs,” as no one’s calling them. “New ISAs” is technically where the NISA term comes from. Do we think that term is going to go away?

Rogers: I hope so, because I don’t like it.

Bennallack: It’s rubbish, isn’t it?

Weisshaar: Well, eventually it won’t be new anymore.

Bennallack: Isn’t there a supermarket called Nisa?

Rogers: Netto. You’re thinking of Netto.

Weisshaar: No, there is a Nisa.

Bennallack: There is a Nisa, yes.

Weisshaar: Maybe just one.

Bennallack: Anyway, they were just a warm up for new pensions. Sorry?

Weisshaar: Maybe just one.

Bennallack: Maybe just one.

They were a warm up for new pensions. Nensions? Npensions? No one is calling them that.

Rogers: Just drop it, Owain!

I’m going to try my best here to explain the new pension situation. Some have called it the biggest overhaul to pensions in 50 years. Starting in April 2015, you’re going to be given much more freedom over how you withdraw from your pension.

You’ll no longer be forced — which is quite important — to buy an annuity on retirement which, in recent years, in such a low rate environment, and in what has been a very uncompetitive market, there’s been a lot of complaints about that.

People have been getting pretty poor deals out of being forced to go out into the market and buy an annuity — usually just with whoever their pension provider was; for simplicity they would get them onto their annuity. It wouldn’t necessarily be the best rate. Some quoted figures were suggesting that some were 30% worse deals, in terms of the value you’re getting.

Bennallack: The incredible thing is, you buy that in your first year, and then — for the next 20 years — 30% less income for the rest of your life.

Rogers: The rest of your life, exactly. That’s a huge financial decision to make, and a lot of people were just not aware of what they were getting themselves into.

Bennallack: Supposedly there are going to be changes so that they get some kind of advice as well, isn’t there?

Rogers: Right, yes. There are other changes as well, about the pensioner bond, that I thought was interesting in terms of trying to make sure people can get a better deal if they don’t want to be investing all of their pension in stocks, personally.

Bennallack: Yes, well you’ll be able to keep your pensioner bond in a NISA, presumably.

Rogers: Right.

Bennallack: If they do start giving people advice at points of delivery, then people will presumably have to be made aware of the fact that there will be options, because banks surely have learnt now that if they mis-sell it’s going to come back to bite them — or insurers, in this case — but as we’ve seen from the banks. I think that will be a big change.

It’s worth noting that, as Mark says, these big nuclear changes come in — if the consultation gets them through — from April next year. In between, if you’re looking at the situation currently, there are some changes.

You’re going to be allowed to draw more money in what’s called draw-down. Those came in about four days ago, from the point of this recording, so from the 27th of March you’ll be able to draw a bit more.

If you’ve got small pots — like you’ve only got, say £20,000 to £30,000 — you can do more with that. You can pretty much just get the money out, with the tax provisos if you are just at the top limit.

But just in general, go to the HMRC’s website and look at your specific situation, because you don’t want to be thinking that this is only starting in 2015 and missing out, potentially, on getting a better deal now.

Nate, there are fears that hordes of newly-minted silver foxes will be racing down to the local Porsche or Lamborghini dealership, cashing out their pensions, and driving home in a sports car. Do you share those fears?

Weisshaar: Well, I’ve seen some silver-haired people driving Porsches and it does scare me, but I don’t think that’s the issue we need to be concerned about here.

I think you will have some people who cash out their ISA and go on a spending spree, but I think in general we can have a little bit of faith in the British public, and also note that anyone who’s saved up enough in their pension in order to afford a Lamborghini is probably going to maintain their head, upon retirement.

Bennallack: The key at the moment is maybe government ministers and highly-paid opinion column writers could change their pensions for Lamborghinis, but the average person’s pension is not going to buy even a wheel of a Lamborghini, is it?

Weisshaar: No, no. The average being quoted is £30,000, which is a hefty chunk of change, but it’s not going to be the most exotic spending spree you’ve ever seen.

Rogers: It’s not enough to live on, really. You think about that, even assuming it grows at a decent clip, it’s certainly under-funded.

Bennallack: Yes. Well, of course they have the single-tier state pension, which will kick in from 2016, isn’t it, which is currently being pegged — It will depend slightly on inflation over the next couple of years; it might go up and down — but they’re thinking about £155 a week.

I think that’s one of the reasons why they’ve been comfortable bringing this in, because they know that even if people go on a spending spree, theoretically that will be a backstop.

I think that what’s great about this is because people know that they can get access to their money, hopefully they’ll put more money in, because it will seem less at the whims of government. People maybe have not considered their pensions to be real money.

Rogers: Right, it was interesting. I was on The Naked Trader’s website — I know Robbie is a fan of the podcast.

Bennallack: He’s been on the podcast.

Rogers: He has been on the podcast as a welcome guest.

Bennallack: He scarred me, and that’s why I take it all out on you, Mark!

Rogers: Exactly.

I was reading Robbie’s website and he said something very interesting, which I thought was quite telling. He said that he’s been building up a SIPP, a pension pot, for some time now and he didn’t even consider it to be, in his words, “real money,” up until recently — up until these changes.

Bennallack: Up until Budget Day.

Rogers: Right, exactly, because if you’re forced to buy an annuity at the end of it, that very much changes the value of that pot to you, as an individual. Just giving people the choice, and opening up that market, I think is tremendously important and empowering for savers.

Bennallack: I totally agree. This is our money, and there are people who choose to spend all their money and not save for their retirement — so they never saved into a pension, so they were buying Lamborghinis all the way — and people who had actually saved were being “punished”.

Rogers: It’s self-qualifying, I think, that if you’re an individual who has managed to save up that much money — and let’s face it, regardless of prudence, if you have a £1.5 million pension pot, you probably have other assets as well, on top of that, that would keep you quite safe, presumably.

Bennallack: The key I think, even before that, is just, if I go to a nightclub on Friday night and decide to have seven triple whiskeys, and then go to some saucy topless bar, the government doesn’t stop me spending my money and say, “Oh, in 30 years you’re going to be living on toast.”

But if I choose to put my money into a pension, then hitherto the government has then made a whole load of claims on that money, in the future. I understand that was considered partly a quid pro quo thing, with the tax perk, but the tax perk is obviously notional in some cases.

I think that, if you want people to put lots of money in and provide for their retirement, you should not punish them for doing so — it’s as simple as that — so I’m all for it. I think it’s great.

So, Nate, the stock market has already voted — or it’s thrown its toys out of the pram which is, some would argue, how the stock market tends to vote — with life insurers. They saw their shares plunge on Budget Day, didn’t they?

Weisshaar: Yes, and some much more than others. We saw, essentially across the board, the life insurers got hit, but the ones that got particularly hurt were those focused specifically on annuities; Just Retirement and Partnership each saw their shares fall over 40% on the day.

But even the bigger insurers — from Prudential to Legal & General, Aviva — they saw their shares fall anywhere between 2 and 8% on the day.

Bennallack: I think this is an interesting fall. I know that their businesses have been based on selling cushy annuities, so that’s obviously true. But interest rates have been very low, which has not given them exactly a lot of slack to be generous. Those rates surely won’t last forever; if they do, arguably we’ve got other problems.

Secondly, it’s not like these guys can’t compete to provide alternative products, if they want to produce equity-based income funds for their customers, or maybe things backed by infrastructure or whatnot, they can come up with different kinds of vehicles.

So, if they’re still capturing a large amount of the market in the savings stage — and in fact if the savings even go up, because more people are prepared to save, because it’s real money, as Robbie has said — potentially there’s some value here, because these companies are not no longer in the savings business.

Rogers: It’s like opening it up to reality, allowing the market to have a greater say, and people to have a greater say, in the products that get provided and, I think importantly, it should match the times as well.

People naturally wouldn’t want to go and lock themselves in to a terrible annuity rate during a period like this, so you would think in a natural market environment that other products would spring up to be an alternative to that.

Bennallack: Yes, I think that’s true, but the point I would make is that these insurers haven’t been able to do that, because of the legislation.

Inasmuch as I guess the share fall is irrational, in that the market — it’s sometimes derisorily said that it hates uncertainty — but it’s right to hate uncertainty, because we don’t know how the chips are going to fall.

Rogers: Right.

Bennallack: But I think that these guys are still in the game. Perhaps some of the specialists might suffer a little bit more.

Weisshaar: Well, yes. I think when you’ve got companies like Just Retirement and Partnership, who get between 66 and 75% of their profit from annuities, this is going to be a big blow. As you say, they can come up with new products, but everyone can now come up with new products.

You’ve taken away an artificial structure which propped these companies up, and you’ve opened up the field to everyone, which means competition is going to be there. As you said, the cushy profit margins from annuities are going to go away.

Bennallack: If you were looking at these companies for opportunities, I guess you’d want to dig in and see how much of their business comes from the annuity business. I mean, someone like Prudential, much of its business is in Asia anyway, isn’t it?

Weisshaar: Yes. Prudential only gets about 2% of its profits from annuities. Only 40% of its revenue is even from the U.K., so you’re looking at a much wider, more diversified company like Prudential — which is why we saw the shares only fall 2% on Budget Day — although obviously all the other insurance companies got hit a week or so later, when the FCA decided to put its foot in its mouth, and they haven’t quite recovered from that.

Bennallack: Yes, that was another interesting event. That was — for those who didn’t know — just that at one point it looked like they were going to retrospectively look at 30 million so-called “zombie annuities,” and suggest that some of those hadn’t been fairly doled out. Then later on they said, “Oh, actually, we can’t do that. Those have been done.”

Rogers: Wow.

Bennallack: Yes, it was six and a half hours later. I think some of the insurance companies have actually accused them of creating a false market in the shares, so it will be interesting to see how that pans out.

Well, long before the market hated the insurers, the market hated the banks. Yet we’ve seen a stunning recovery in the past year, for at least one of the banks. Lloyds Banking Group, a share that I own, I should declare — and it’s also one that you guys own, because you’re taxpayers — it is part owned by the government.

In fact, it’s done so well, Nate, that the government has managed to flog off another bunch of shares in our bank, hasn’t it?

Weisshaar: Yes, yes. “Our” share of the bank has been shrinking from the 43% that we bailed them out in 2008. Last September we saw the government sell a 6% stake in Lloyds, and then just a few weeks ago they sold another 7.5% stake, raising just over £4 billion.

Bennallack: Leaving them with …?

Weisshaar: It’s just under 25% right now.

Bennallack: Mark, as a long-term, buy and hold investor, does it make you squirm to see the government selling off these shares before, perhaps, they’ve fully recovered? Or, as an ardent capitalist, are you just happy to see the bank moving increasingly into private hands?

Rogers: You’re right, I am always an advocate of long-term, buy and hold, rational and sensible investing. But I don’t think the normal rules exactly apply when we’re talking about a government taking an intervention stake in a bank during a time of crisis, to try and shore up the financial system during a period of panic like we saw in 2009 — so I don’t think the normal rules apply, exactly.

Bennallack: Yes, it wasn’t the Treasury dusting down Benjamin Graham and plunging into the market to snag a bargain.

Rogers: Right. It was a necessity — at least, that’s what the argument would be. I don’t think Lloyds is on life support anymore. I think they’ve made real strides in improving and getting that business back on track, and for that reason I think the government should be looking to exit.

I think that there’s an important degree to which it’s not about getting the best price. I mean, George Osborne is not a stock trader here. It’s a case of getting the bank back into private hands where, I think some would argue, it should be.

Bennallack: Nate, you have argued — I was going to say “both sides,” which makes you sound a bit two-faced.

I don’t mean it like that, but sometimes when we’ve had our discussions of banks over the years — where you’ve been living here, before going back to America — you have said that banks should be in the private sector from the point of view of the shareholders, but equally if there’s going to be a massive implicit state guarantee, then fully nationalised. You’ve seen both sides of this argument, haven’t you?

Weisshaar: Yes, and I don’t think there is a clear answer. There’s no way you can eliminate risk. We’ve seen the private banks blow themselves up because, honestly, shareholders weren’t holding management to task.

It’s hard to believe that that will change, going forward, but we’ve also seen national banks, state-owned banks, that have created some very serious problems. China’s five largest banks are state-owned, and right now the world is concerned about a possible debt bubble in that country.

Bennallack: You get different distortions, don’t you? In the state-owned banks, you get politicians maybe giving a few billion here and there where it helps them out, but not the bank’s balance sheet.

Weisshaar: Exactly. You’ve got distorted incentives on both sides. Is it a trader who’s incented with a massive bonus for some short-term gains, or is it a politician who’s looking for short-term gains by handing out credit to pump up the economy?

Bennallack: Well, the government might be getting rid of its Lloyds shares, but we needn’t worry that it’s selling all of the national family silver because, at the back of the cupboard there’s a battered old, tarnished, slightly odd-shaped — is it a butter churn? Maybe it’s some sort of sieve, the way it loses money — silver, that is RBS. That’s certainly some family silver that we don’t see going away. That’s hugely owned by the state; over 80%, I think.

Weisshaar: Yes.

Bennallack: Nate, why aren’t we selling RBS?

Weisshaar: Well, whereas Lloyds has demonstrated that it’s regained its feet, I don’t think we could say the same — even if we’re being charitable — I don’t think we could say the same thing about RBS.

It’s just a laundry list of items that are not showing any improvement; continued fines, continued lawsuits from investors, we’re now wrapped up in a foreign exchange scandal, are they or aren’t they going to make an internal bad bank, the ousting of their turnaround CEO … this is just not the base for what you would call a recovered bank.

And now we see them — one of their assets that was going to help was the selling of their U.S. subsidiary, Citizens Bank. It has just failed the U.S. Federal Reserve stress test and that’s going to, at a minimum, delay the selling of that bank, and probably lower the price.

Bennallack: Hey, don’t hold back. Tell us what you think of RBS!

Weisshaar: Well, you know, I’ve got to get ready to re-join the American …

Bennallack: I guess there could be some recovery potential there, but it’s looked like that for a long time, hasn’t it?

Weisshaar: Yes. This is just one that I think will be on the government’s books for a long time.

Bennallack: Okay, it’s now on to the most popular part of the show, where I reveal a company that I think looks interesting, only to have egg on my face in six months when it goes down like cement-filled wellies.

But before we get onto my top pick, Mark, what’s caught your eye?

Rogers: Sure. We spent a lot of time earlier talking about the life insurers, so I wanted to prove that there is a different breed of U.K.-listed insurer out there, that isn’t necessarily a complete dog, like we’ve seen from those life insurers.

We’ve all heard — I think we’ve mostly heard — of Berkshire Hathaway, but there’s actually another company out there with an English county in its name that, rather like Berkshire, insures against catastrophes.

The company is called Lancashire Holdings, and it insures against major natural disasters and that sort of thing. Unlike Berkshire, though, it doesn’t retain all its earnings. It’s not a giant conglomerate — in fact it’s a much smaller company. It’s about £1.5 billion.

Lancashire tends to kick out any excess capital that it gets, in the form of a special dividend. I think it’s an interesting candidate for people looking to fill their ISAs or their NISAs this year. It’s offering a prospective yield of about 7.5%, which I think is quite high.

Bennallack: Which normally, for a lot of companies, that would be a warning sign, but specifically with Lancashire this is what it does.

Rogers: Exactly. They kick out quite a lot of — purposely — the excess profit that they make, in the form of a special dividend, which is quite attractive. It’s a well-run company as well, which I think is important, especially in an insurer that’s taking a lot of risks.

Weisshaar: I can’t argue with the idea of giving back to shareholders. The reinsurance and catastrophe insurance industry right now — there’s a lot of competition. You’ve got hedge funds moving in because they see this as a place to put money that’s uncorrelated to markets.

Rogers: Right.

Weisshaar: Lancashire had a bit of a tough go in growing its premium writing, or its insurance policies. Do we think that these generous cash pay-outs can be continued, going forward?

Rogers: It’s certainly a good point — in terms of the competitive environment, how much yield-chasing, if you like, has impacted Lancashire’s business — because obviously anyone who’s got very large piles of cash on their balance sheet, especially the big hedge funds, are looking for a way of putting that to work in a sensible way. They’re looking for new avenues, and this has been one of those avenues.

But I think, looking longer term — I think you have to look longer term with a situation like this — I think we will eventually start to see that recede. The insurance market, and catastrophe insurance specifically, tends to work in cycles where you see big money coming into it, money coming out of it, and I think longer term, Lancashire is there to stay in that market.

I think, even though there’s competitive pressure now, that, I believe, will alleviate in a more normalised environment.

Bennallack: As these guys know, I own quite a few of Lancashire’s shares. I like the company a lot. I don’t necessarily know that it’s a huge bargain at the moment, because it made this big acquisition of a company called Cathedral last year, but if Cathedral kicks out a lot of profits, then it might be cheap. On a P/E basis, it’s very cheap looking, anyway.

The interesting thing about the company, and it plays exactly to what Mark is saying, is that the guy in charge of it, Mr Brindle, he is obviously completely aware of what you’re talking about, Nate, and you can see the purchase of Cathedral as him putting cash to work in a different way, rather than writing all those policies. He said, “Here’s where I’m going to allocate my cash now.”

I think he’s actually on record as saying — pride comes before a fall and all that — but he says they create their own hard market; i.e., they look for places where they can still write profitable business, even if it means going to slightly different sectors, as they’ve done with Cathedral.

I think the other interesting thing with the parallel with Berkshire is — obviously you need a top asset allocator with a business like that. With Brindle, you’ve got someone who’s got a really good record, but he’s only 55.

Rogers: Yes, and someone who’s willing to say no, if the rate isn’t attractive. It makes no sense at all, in insurance, to write bad business, especially in catastrophe insurance.

Bennallack: Yes, the other thing I’d say is if you are like us, and you think you’re a dab hand at investing, it’s quite nice to have a company like Lancashire, which throws out cash, that you can invest. With Berkshire — I want to say “Berkshire”; it’s the county thing — with Berkshire, Buffett has his insurance arm, which is profitable, but then he invests the money for you.

With Lancashire, it’s like you’ve got Buffett’s insurance arm, sort of. Not exactly the same, but you have your own one, but it’s up to you to then do what he does, and invest.

Rogers: Right, exactly. I just think that the company, in a normalised environment, is going to be paying out — like I say, 7.5% this year — they kick out a lot in special dividends, and I think it’s certainly interesting from both an income and a general investment standpoint.

Bennallack: Nate, what’s caught your eye?

Weisshaar: I’m going to bring back one that we’ve talked about, a month or so ago. Atlas Mara — this is Bob Diamond’s former cash shell vehicle to start an African-focused financial business. Now we’ve found out how he’s going to go about doing that.

He’s putting his cash to work. He’s acquiring ABC Holdings and ADC, African Development Corporation. He’ll be buying these for about $265 million, and using his remaining cash to start growing their banking businesses throughout Africa.

Bennallack: He presumably has had to issue some shares to do this as well, has he?

Weisshaar: Yes. I think he’s issuing about 44% of the outstanding shares, so there’s quite a bit of dilution taking place, but in reality this was kind of expected because in order to achieve what he wanted, the cash was only going to go so far.

Bennallack: I guess now he’s got these two banks, he’ll consolidate them and rename the bank AC/DC!

Weisshaar: That is probably on the table, but we’ll see. He does like the name “Atlas Mara.”

Bennallack: Well, that’s certainly one to watch. Obviously Mr Diamond didn’t cover himself in glory, but he knew about Africa and African banking with Barclays.

Weisshaar: And I think his partnership — he’s partnered with a very interesting entrepreneur from Africa, and the networks that the two of them have I think offer great opportunities.

Bennallack: For my share today I’ll be quite quick, because we’ve talked about pensions — you remember that; you all fell asleep — at quite some length, so quickly.

It’s another company that I hold — I think it’s three this week — which is Tasty, which is a restaurant company. It is run by a family who are well-versed in the restaurant business. It basically does what all their businesses in the family have done previously, which is sell pizza and pasta and that kind of thing; a little bit more than just pizza. They have restaurants called Wildwood.

It’s just come out with new results for the year. Revenue is up 20%, gross profit up 34%. Interestingly, if you look at it, the operating cash flow is really surging — all being reinvested. They’ve opened five more restaurants in the last financial year.

They’ve already opened another one this year, and they’ve said that now the rate of expansion is going to increase, which is interesting, because obviously we’re seeing real incomes and whatnot pick up this year, so they seem to have potentially timed that quite nicely.

I think what’s interesting about the company is — I stress, I don’t think they’re particularly cheap — but I think it’s a thesis coming true. The idea that you buy a small company run by proficient operators, and then you let them roll out their business for you; that seems to be what happening.

Rogers: Yes, that’s what I was going to ask, is a question on the valuation. We know that the company is expanding quite quickly, and what’s really interesting about it is that it’s a very clear path as to how they expand.

When you have a successful restaurant chain, you just pitch up more restaurants in places where people are going to want to buy pizza. How big do you think Tasty can be, with this Wildwood brand?

Bennallack: I was saying to Nate before the podcast, the one thing which does make me sigh a little bit with them, is I don’t think the brand is particularly exciting. It’s not like in the Fool U.S. — everyone goes crazy over companies like Chipotle, which is theoretically reinventing Mexican food.

There’s no reinvention going on here, but these guys have previously rolled out other restaurants with an Italian theme.

Rogers: Right. There’s Ask and Zizzi, I believe, and those are really popular restaurants.

Bennallack: You can go back before that. You can go to … I want to say Garfunkel’s they did, and possibly even Deep Pan Pizza.

Rogers: Right.

Bennallack: My point is, they’ve taken a fairly vanilla-ish …

Rogers: Is it formulaic, do you think?

Bennallack: Yes — I think in the best sense of the word, it is. I mean, McDonald’s is formulaic. I don’t think they’re McDonald’s. They’re at the affordable end of the spectrum, but yes. I think you could use a metaphor which is that they put a kitchen somewhere, they put a certain amount of food into the kitchen, and they make their margin off of it.

Rogers: That’s a great, straightforward path for expansion, I think. I guess the only question would be, you can’t just put anything out there. Even though they are expanding quite quickly, they’re enjoying that revenue growth; whether or not this Wildwood brand is going to be as successful as the previous ones.

Bennallack: Definitely more competition at the moment, yes. But I think they’re all right at the current price, on the valuation point. I don’t think they’re cheap, but I think they’re doing what they need to do.

Weisshaar: It’s an interesting one. As you say, they’ve had success in the past, and in reality their past successes are still there, competing with them now, so the question of how big can they get?

We’re also seeing, much to my pleasure, a bit of a hamburger revolution here in London, so you’ve got a whole new crop of restaurants that are offering a different type of cuisine — really quite appealing to me and, I assume, many other diners.

Bennallack: It’s true. I would say that the margins are a bit more forgiving in the pizza business than the meat business.

Weisshaar: So they say.

Bennallack: Yes. Flour isn’t so expensive as half a cow!

Okay, I think we shall wrap it up there, chaps. Thanks very much for coming in.

Rogers: Thanks, Owain.

Weisshaar: Yes, thank you.

Bennallack: We’ll speak to you all — we will literally speak to you all — in two weeks’ time when you can hear us. Until then, Fool on!

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