Greenlight Re (GLRE): Poor man’s Berkshire or interesting bet on a David Einhorn Comeback ?

Management Summary:

Greenlight Re is an interesting special situation in my opinion combining 2 bets in one stock:

1. It is a bet that David Einhorn will come back after his worst year ever and 4 years of underperformance
2. Greenlight Re, the Reinsurance company whose investments he manages “mean reverts” at least closer to its historical price book ratio.

This “bet” should be relatively uncorrelated to the overall market and due to the construction of the investment mandate, Einhorn can charge only half of the performance fee for some time.

Disclaimer: This is not investment advise. DO YOUR OWN RESEARCH !!!

“Put your money to where your mouth is” is something I do preach indirectly since I started the blog 5 years ago. In my 5th anniversary post last week I said the following with regard to David Einhorn:

As I have said many times, I do think Einhorn is one of the very good HF investors. He really had a hard year. If I would be responsible for allocating money to hedge funds, I would actually increase my investment as good managers very often come back strongly after a bad streak.

As a private investor, I don’t think that I would be able to invest in one of his funds. But then I remembered that there is a possibility to do so even for “small guys” like me:

Greenlight Re is a Cayman based, US listed Reinsurance company with one specialty: The investment portfolio is managed by DME advisors which is basically David Einhorn and he is Chairman of the company.

The idea behind it is relatively easy: It is some kind of “Berkshire light” company. You have equity capital plus reinsurance. The reinsurance creates “float” which allows the company to leverage Einhorn’s investment results by a certain amount. Ideally, the leverage doesn’t cost anything but could even add to the overall result if the do good underwriting.

Reality check

So far the theory. If we look at Greenlight’s stock chart since its IPO in 2007, we can see that the strategy didn’t work that well, at least compared to the chart of the “real Berkshire”. Actually the stock price is now lower than the 19 USD IPO price back in 2007:

The drop in the current year clearly has to do with Einhorn having a horrible year. Interestingly, Greenlight Re discloses Einhorn’s Performance on a quarterly basis back to 2004. -20,2% for 11 months in 2015 is clearly a disaster.

Digging deeper: Insurance vs. Investments & structural value creation

In order to assess if Greenlight Re is a proxy for Einhorn’s performance, we need to check if the “structure” is value creating or not. “Value creating” means that the Greenlight Re shareholder actually gets at least the same return (Return on equity) as the return on the investments.

There is a simple way to do this: Greenlight Re reports Einhorn’s performance as well as the investment result separately. We can therefore pretty easily compare the investment result with the overall result in the table below:

2007 2008 2009 2010 2011 2012 2013 2014
Einhorn Performance 5,90% -17,60% 32,10% 11,00% 2,10% 7,10% 19,60% 8,70%
                 
Invest result 27,6 -126,1 199 104 23,1 78,9 218,1 122,6
Total result 35,3 -120,9 209,6 90,6 6,8 14,6 225,7 109,6
Equity 605,6 485 729,2 839,2 845,7 860,4 1086,3 1194
Comprehensive Income 36,5 -120,6 244,2 110 6,5 14,7 225,9 107,7
Greenlight ROE 7,95% -22,12% 40,22% 14,03% 0,77% 1,72% 23,21% 9,45%
vs. Stated perf, 2,05% -4,52% 8,12% 3,03% -1,33% -5,38% 3,61% 0,75%
“Leverage” 135% 126% 125% 128% 37% 24% 118% 109%
“Leakage” 7,7 5,2 10,6 -13,4 -16,3 -64,3 7,6 -13,0

This table does 2 things: It calculates the “leakage”, which is the overall result of the company minus the investment results. A positive result means they made extra money with the insurance business, a negative result means they lost money and had to “pay” for the float. In total, the “leakage” was around 76 mn USD or around 9,5 mn USD per year. So clearly the “float” and the structure do not come for free.

The “leverage” shows how much better or worse the actual ROE was compared to the underlying performance of the investment portfolio. In the beginning, this was around 1,25-1,3 but declined. In years with low returns the “leakage” of course has a bigger impact and in years with negative performance the leverage via the float of course works the other way.

Now we can calculate in a second step the compounded effect of leverage and leakage and see if the overall structure adds value or destroys value. Those are the results for 2007-2014:

2007 2008 2009 2010 2011 2012 2013 2014 CAGR 2007-2014
Einhorn Perf 105,90% 87,26% 115,27% 127,95% 130,64% 139,91% 167,34% 181,90% 7,77%
GL ROE 107,95% 84,08% 117,90% 134,44% 135,47% 137,81% 169,79% 185,83% 8,05%

So the good news is: The Return for shareholders is slightly better than the underlying investment return but not by much. So the leverage of the structure adds a little bit to Einhorn’s underlying returns.

How does this compare to S&P and the “real” Berkshire ?

This is a table comparing the stated ROE of Berkshire in the 2014 annual report and the S&P 500 against Greenlight:

2007 2008 2009 2010 2011 2012 2013 2014 CAGR 2007-2014
S&P 105,50% 66,47% 84,08% 95,01% 97,00% 112,52% 148,98% 169,39% 6,81%
Berkie 111,00% 100,34% 120,21% 137,16% 143,47% 164,13% 194,00% 210,11% 9,72%
GL ROE 107,95% 84,08% 117,90% 134,44% 135,47% 137,81% 169,79% 185,83% 8,05%

So it is easy to see that the “real” Berkshire was better than Greenlight Re, but the still did beat the S&P 500 by a good margin. One has to take into account, that Einhorn charges “1,5% plus 20%” on his services. Without those fees, Greenlight’s performance would have been most likely pretty much similar to Berkshire.

2015: Annus Horiblis

If we look at at Einhorn’s relative track record to the S&P 500, we can see that the last 4 years were tough for him, but 2015 is clearly the worst ever:

2007 2008 2009 2010 2011 2012 2013 2014 11/2015
Einhorn Performance 5,90% -17,60% 32,10% 11,00% 2,10% 7,10% 19,60% 8,70% -20,20%
S&P 500 5,50% -37,00% 26,50% 13,00% 2,10% 16,00% 32,40% 13,70% 1,22%
Delta 0,40% 19,40% 5,60% -2,00% 0,00% -8,90% -12,80% -5,00% -21,42%

Being -20% behind the benchmark is really tough, even for a start manager like Einhorn. The reasons are quite obvious: He runs a relative “market neutral” strategy at the moment. His longs (Sunedison, Consol) are not doing well and being short was no fun over the past few years.

According to Bloomberg, his biggest long positions are:

Security Ticker Source Position Pos Chg % Out Mkt Val
APPLE INC AAPL US 13F 11,227,274 +3.84MLN .20 1.19BLN
GENERAL MOTORS CO GM US 13F 16,298,818 +1.65MLN 1.05 548.78MLN
ISS A/S ISS DC EXCH 9,262,706 0 4.99 325.49MLN
AERCAP HOLDINGS NV AER US 13F 7,344,500 +1.76MLN 3.72 294.81MLN
CHICAGO BRIDGE & IRON CO N CBI US 13F 7,481,471 +758,014 7.13 287.59MLN
MICHAEL KORS HOLDINGS LTD KORS US 13F 7,043,700 +3.42MLN 3.83 279.63MLN
TIME WARNER INC TWX US 13F 3,814,700 +36,300 .48 242.27MLN
CONSOL ENERGY INC CNX US Form 4 29,609,565 0 12.93 218.52MLN
ARKEMA AKE FP Research 3,137,005 -212,997 4.21 218.37MLN
AECOM ACM US 13F 6,469,412 -44,092 4.27 189.10MLN
GREEN BRICK PARTNERS INC GRBK US 13F 24,118,668 0 49.41 179.44MLN
MICRON TECHNOLOGY INC MU US 13F 12,371,980 -25.58MLN 1.20 177.66MLN
ON SEMICONDUCTOR CORP ON US 13F 17,305,600 0 4.19 173.23MLN
BANK OF NEW YORK MELLON CO BK US 13F 4,000,000 0 .37 160.88MLN
TAKE-TWO INTERACTIVE SOFTW TTWO US 13F 4,158,306 0 4.91 144.54MLN
VOYA FINANCIAL INC VOYA US 13F 3,649,381 -2.23MLN 1.69 131.52MLN
SUNEDISON INC SUNE US 13F 18,605,373 -6.24MLN 5.87 121.12MLN

The portfolio is clearly a pretty “contrarian” portfolio, no “FANG” stocks to be found. I wouldn’t invest in most of them, but on the other hand that says nothing if they are going to be good investments.

Double hit for shareholders: Insurance losses

For Greenlight capital shareholders there is even a double hit in 2015: Looking at the Q3 report we can see that in the first 9 months, the overall result at -283 mn USD loss is even -47 mn lower than the -236 mn USD investment loss.

So the insurance side added a big loss at the same time that the investment result was really really bad. That had clearly an impact on how investors value Greenlight. This is the “end of period” Price/Book valuation for Greenlight Re since IPO:

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2007 2008 2009 2010 2011 2012 2013 2014 2015
P/B Ratio 1,24 0,96 1,23 1,23 1,08 1,03 1,19 1,05 0,78
P/B Ratio adj. B Shares 1,48 1,15 1,46 1,47 1,29 1,23 1,42 1,25 0,93

For some reason, the official Bloomberg ratios do not include the class B shares held by David Einhorn, so I adjusted them accordingly.

We can see clearly that in the past, investors valued Greenlight at around 1,2 -1,4 times book value. Following the incredibly bad 2015, the stock now trades below book value.

A quick look at the Insurance side:

What Greenlight does in its Insurance area can be best described as “commodity business”. I don’t think that they have any competitive advantage.

Greenlight is doing around 60% Liability insurance. Liability insurance is one of the most dangerous business lines in Property and Casualty (P&C) because it can take very long time until the claims materialize. Take car insurance for instance. If claims go up to much, you see it directly, with liability insurance you often see claims occurring many years later. If done smartly and cautiously, liability insurance can be quite interesting, because due to the long time horizon’s it creates float. In Greenlight’s case however they seem to have underwritten some bad contracts. Overall, I would not attach any significant value to the iInsurance business.

One positive observation: It seems that they do underwrite now more opportunistically which is good. Premium income declined significantly from 2013 to 2014. Reducing premium when prices are down (as they are now) is a good sign that they might have learned a lesson or two.

The “kicker”: Investment management fee agreement

This is the relevant section from the annual report:

Pursuant to the venture agreement and the advisory agreement, DME Advisors has the exclusive right to manage substantially all of our investable assets, subject to the investment guidelines adopted by the respective Boards of Directors of Greenlight Re and GRIL, for so long as the venture agreement is in effect. DME Advisors receives a monthly management fee based on an annual rate of 1.5% of the capital account balance of each participant. In addition, DME receives a performance allocation based on the positive performance change in such participant’s capital account equal to 20% of net profits calculated per annum, subject to a loss carry forward provision.

The loss carry forward provision allows DME to earn a reduced performance allocation of 10% on profits in any year subsequent to the year in which a participant’s capital account (other than DME) incurs a loss, until all the losses are recouped and an additional amount equal to 150% of the loss is earned. DME is not entitled to a performance allocation in a year in which the investment portfolio incurs a loss.

This fee structure is interesting especially after such a down year as 2015. If we assume that Einhorn finsihes -20% for 2015, he needs to earn first the -20% back and then 30% more until his old 20% carry kicks in. So for the next 50% or so he “only” can charge 10% performance premium instead of 20%. Although this is still no super bargain, it does increase the “come back” bet further as Greenlight Re shareholders will have a better upside profile than compared to the last 8 years. All other things equal, Greenlight should actually trade at higher comparable valuations than the years before because the upside is better for shareholders than in the past.

Investment case / Valuation

My investment case is quite simple. The upside case includes the following components

a) Einhorn gets his Mojo back and outperforms (10-30%) over 2-3 years
b) the upside participation for GRLE shareholders is better than in the past as the performance fee will be 10% instead of 20% for some time (+1-3%)
c) Greenlight Re at some point in time trades back to 1,2 times book value (30% upside)
d) Maybe even the Insurance part makes some profits (not included)

So overall I think the stock could earn me between 40-65% over the next 2-3 years.

I think the “Einhorn recovery” stand-alone would not be enough, but that the mean-reversion potential makes the stock interesting. However the “mean reversion” clearly is directly corellated to the outperformance. Without any outperformance, the current valuation around book value is clearly a realistic level.

Of course, Einhorn could underperform another 3 years and/or the stock market could tank. In those cases one could even imagine some more discount on the book value. Nevertheless I see better a upside than downside at this point for Greenlight in the coming 2-3 years. On top of that I think the “Einhorn come back” bet is relatively uncorrelated to the overall market.

The downside case would mean further losses from Einhorn, Insurance losses and a further detoriation in the P/B multiple. The probability is definitely not zero, but overall I do think the upside outweighs the downside.

For the portfolio I therfore assume to buy a 2,5% position at ~18 USD per stock.

What’s my edge or what do I know that others don’t ?

Finally one should always ask oneself the question: What do I know more or why am I a better shareholder than those who sell at those prices.

For me, I think those are the major points to justify an investment:

– I have no problem with having an underperforming stock in my portfolio at year end (many public funds do)
– I have followed David Einhorn over quite some time now and I think he is a very good investor and will come back at some point in time
– Few people do allocate money to underperforming managers although that is statistically the best time to do so

Another interesting observation: Only one analyst is following this company…..

38 comments

  • Good analysis. I came to the same conclusion, with the exception of viewing the insurance side of the business a bit differently than you did. Currently, for example, the float is increasing which could unlock exponential value to the overal business. Management has shifted focus on getting the combined ratio below 100%. The historical industry average is 106%. Averaged out since 2004, Greenlight has done remarkably well at managing the float which evidence for is provided in he growth of their book value. They took a big hit in 2015 due to claims payments that were incurred between 2008-2011. As you mention, in this business claims sometimes take years for the requirement of payment. This time basis is their moat. It allows them to offset expenses for a number of years and gives them an opportunity to exponentially increase the cash return of the float (and all investable income). In value investing, obviously time is a significant factor.

    I’ve determined that the company is worth $32.50 per share.

  • Sold Greenlight Re today at 18,45 USD with a very small profit. After a few days of intensive reflection, I decided that I don’t want to be invested in an investment vehicle where I wouldn’t buy any single one of the public long position.

  • Returns have been published to January 19th, -1.6%

    http://www.greenlightre.ky/FinancialInformation/InvestmentReturns.aspx

    Compare that with Ackman’s Pershing Square Holdings, which is already down 14.5% this year…

    https://www.pershingsquareholdings.com/company-reports/weekly-navs/

  • Regarding ‘The loss carry forward provision allows DME to earn a reduced performance allocation of 10% on profits in any year subsequent to the year in which a participant’s capital account (other than DME) incurs a loss, until all the losses are recouped and an additional amount equal to 150% of the loss is earned. DME is not entitled to a performance allocation in a year in which the investment portfolio incurs a loss.’ This seems to mean he could charge 10% in 2016 on any gains meaning he will have charged performance fees twice on those part of the gains up to the old high water mark. It doesnt say he will charge 10% on profits in any year subsequent to a losing year once prior HWM is achieved.

    • good Point. This Looks like that the hurdle is reset every year…..one would Need to doublecheck this if this is the case or if their is some Kind of additional “High Watermark”.

  • GLRE came out with its December investment portfolio performance for Dec.(-0.1%), so in Q4 2015 the portfolio returned -4%. If I simplify and adjust the Q3 2015 NAV down by that 4%, I come out at 833 USDm or 22.5 USD per share. With yesterday’s price of 19.1 USD, I get to a P/B of 0.85x.

    I get other (historic) P/B measures than you. I think Bloomberg displays the wrong sharecount but uses the right number when calculating the book value. Hence, there is no need to do the adjustments you do. I could have done a mistake, of course.

    Nevertheless, it does not change the fundamental point. It trades materially below historic book multiple.

  • Hi mmi2007,

    the possibility of mean reverting is pretty high. But I’m not quite sure that Greenlight Re is still a better opportunity than Berkshire.

    First of all it is pretty annoying to pay Einhorn 1,5% and 20, when I have the opportunity to invest with Buffett for 0% and 0%.

    Last time i checked ( I was interested in Greenlight but decided to pass because of the free structure and an interview with the CEO (?!) of Greenlight) the PB value was slightly less than 1, what sounds pretty good. When you compare it with Berkshire it seems undervalued (Berkshire around 1,35 I think). But if you look at other Money Managers a PB-Ratio of 1 is not cheap relative wise.

    There are the Fairfax Financials, Leucadias and Loews of the world that have PB-values around 0,6-0,9.

    And one Point to mention. The CEO(?!) did an interview where he explained their strategy. When I remember it right, he said, that their strategy is to get some extra market share because of their ability to compound it with a high return. To me it sounds like: We lose some money in the insurance Business because we have the clue in compounding. This was the red flag for me.

    My writing is no knock on your analyses or on Einhorn. He is one of the brightest minds in investing. I like your thinking! But I don’t like Greenlight at this price and with the fee structure (not to mention their insurance strategy).

    Thanks for your post,

    Stefan

    • Stefan,

      thanks for the comment. With regard to the CEO/market share: I guess this has been an old interview, as they reduced the premium underwritten significantly in 2014.

      Leucadia, Fairfax and Loews are all interesting companies but at least for me Fairfax and Leucadia are black boxes.

      As I have mentioned, Greenlight is for me a 2-3year “bet”, not a long term compounder.And by the way, for the next 50% or so, Einhorn only gets 1,5 and 10…..

      mmi

  • Interesting to read and trying to understand, why you as contrarian want to buy into this stock.

    On Munich Re: maybe Mr Buffet saw, what no #3 Hannover Re was able to do in these difficult markets and how they performed better in underwriting, costs, AuM returns etc. than his holding. So he decided to sell.

    Covacoro

  • I don’t like the hedge fund/ insurance construct. The idea seems great from a hedgies POV, since they have permanent capital, regardless of performance, but I noted that all the vehicles like TPRE, GLRE (I think there are some others but I don’t remember them) have poor performance.
    On reason is certainly that insurance is tough and even writing standard insurance (like motor) can lose you gobs of money if you are not careful. Those companies have generally poor underwriting performance, as evident by the underwriting ration being above 100%. I think one reason for this is – no edge in Underwriting and also, high acquisition cost due to being in an expensive locale and subs ale size.
    I’d say, get the real thing instead and buy BRK, which has a great insurance business, no performance fees strong capital allocation and owns very good business that throw of a lot of cash and allow for organic investment opportunities. I think BRK will beat most of the hedgies insurance vehicles over time. There are also other insurance vehicles like Y and MKL (overpriced currently). What they do have in common is starting of with a good insurance business, and the investment return are just icing on the cake.

    • your points are valid. But as I have mentioned, this is not a long term investment but rather a shorter term “special situation” investment. As you might know I allocate a certain part of my portfolio for those kind of “special situations” which are neither “Buffet/Munger” nor “Graham” stocks.

      With regard to Y and MKL one remark: I don’t really understand what they are doing on the insurance side. Do you ?

      • I don’t really know exactly what MKL and Y are doing, but whatever they are doing, they are doing well. Y for example has a combined ratio around 90-95% and positive reserve releases almost every year (but one, I think) for 10 years counting. This means that they reserve conservatively and the book value understates the NAV.

    • maybe one more point on the Berkshire comparison:

      As much as I admire Waren and Charlie; i do think that Berkshire is very intransparent and almost impossible to value, at least for me. TThe same goes for Fairfax etc. Yes the book value increases look nice and stready but you don’t see the real mtm performance. For 2015 I am not sure that on a mTM basis Buffett would actually be positive.

      With Greenlight you have many disadvantages but one big advantage: It is very transparent.

  • Wonderful website. Really enjoy it.

    Although a lot of the statements above are valid, this seems like a smart, contrarian play – simply put, you get to access Einhorn at a 15% discount to book (I estimate BV/share is around $21.50 today after the November 30 investment results which GLRE posts on their website). This year has been horrendous; however, it is hard to argue with Einhorn’s performance since 1996.

    The reinsurance space is also terrible right now and GLRE’s underwriting results have been abysmal. However, insurance companies seem to have a tendency of lumping all the bad news into particularly brutal quarters (or years). This may be the case with GLRE as they announced another reserve strengthening in Q3 after, “a review of their run-off book” and AM Best revised their outlook to negative on October 23. The 15% discount is a much more important argument then this but something to consider none the less.

    Thanks,
    PHH

  • Few days ago a wise man wrote ““Doing things differently” itself is not something that leads to success. The 7th guy running an “insurance plus value investing shoplike Buffett” might not be that succesful.”
    The guy made a point. Why buying the 7th guy?
    Even Buffet sells reinsurances like Munich Re these days. Insurances (and Reinsurances) have a hard time when we see record low interest rates.

    “The portfolio is clearly a pretty “contrarian” portfolio, no “FANG” stocks to be found. I wouldn’t invest in most of them, but on the other hand that says nothing if they are going to be good investments.”
    This comment is strange. Beeing interested in shares, if I would still search for people to let them invest my money, I’d prefer people like Buffet, Matze and Katjuscha, where I admire or at least really like some of their share picks (for its purchasing price!), so I understand they have a good touch for selecting shares.
    I would start analyzing some of their lesser known picks to see if I am impressed or not. You did that with AERCAP HOLDINGS. Hence my surprise is rising.

    • Well, surprises make life more interesting. I have commented on BuffetT selling Munich Re below, I think this is a different case.

      Honestly, I wouldn’t invest in most of the stocks Buffett (and Todd and Ted) invest these days as well. In the top 30 of Berkshire’s holdings, I only find Amex and Goldman of interest. All the other stuff is not my “cup of teas”.

      But again, when allocating money to money managers in my opinion it doesn’t make sense to allocate to people who buy the same stocks than you do yourself.

      Einhorn these days runs a pretty market neutral strategy with a pretty large short book. I found out that I am pretty bad in shorting, so it makes sense to “diversify” in this regard.

      Someone like Katjuscha has a great run now for 2-3 years but my point is that even such a run will end at some point in time and mean revert. Therefore I prefer to invest into someone who I consider equally good but with a really bad recent track record.

      I think we can make a side bet: I bet that Einhiorn will perform better over the next 3 years than Katjuscha. I am pretty sure that the German Small Cap bubble will burst within the next 2.3 years…..

      • Quick question from one not as involved in the budding German asset mgmt industry: Who are Matze and Katjuscha?

      • Yeah, I wouldn’t buy most of Berkshires stocks as well. But I really appreciate the private companies they own, buy and buildt up from a scratch, like the Berkshire Home Service (Real Estate). This is the part I concentrate when thinking about Berkshire Heathaway these days.

        I did not speak about bygone runs but about the shares these people acually own and like. But if you do: I don’t think there is a necessity of “mean revert”, think about Buffet. And here you may find a quite strong running of Katjuscha since 2009: http://www.ariva.de/depot/games_search.m?id=katjuscha OK, other rules than his actual project but more than 1 or 2 years.
        In Katjuschas recent wiki-depot I really like his picks of Balda, S&T and AT&S, periodically I like his pick of Borussia Dortmund, somedays I want dig deeper in his liking of Francotyp Portalia and I am quite sceptical about Tom Tailor.

        If Einhorn is strong with shorts that is a point your you as it enhances your investments into a region you don’t really cover yourself. For some times I thought about Prem Watsas Indian investment vehicle due to this reason.

        Topp, die Wette gilt! My proposal: If you loose you have to visit Potsdam and we will make a pub crawl here, together with Katjuscha (I suppose he lremains in Potsdam for the next years too), and you have to admit your loss toward him.
        I am curious if and where you can organize Einhorn for you case of winning. 🙂

  • Even if I consider David Einhorn brilliant and person you can trust

    Have you asked yourself if your decision to invest in Greenlight can be affected by “Reciprocical tendency” (or similar Munger´s misjudgement)? You have been critisizing some of David Einhorn´s ideas and he wrote a comment in your blog (great!!), your subconscious can be inclined to compensate and invest in his stock.

    Even if Mr. Einhorn follows a market neutral strategy, I don´t think (I can´t prove it, I am not a quant person) you are just betting (at least in the short-medium term “outperforms (10-30%) over 2-3 years”) on his ability to outperform the market but on the market performance itself (your return will at the end of day depend on market returns ie: 2008), so I don´t see it as an uncorrelated bet.

    Even if Mr. Einhorn deserves to be paid fairly for his outperformance, when you compare with Berkshire structure( at least until he hired the 2 portfolio managers) I don´t think is accurate. When you buy Berkshire you are hiring Mr. Buffet for $100k, this is not fair, this is really cheap. Although I admit is better to invest with a manager that is investing a smaller amount of money.

    What would be really great is to see David Einhorn (brilliant investment skills) + Admiral (good business, competitive advantage, with high cashflows). (just in case Mr. Einhorn is reading your post).

    • #andy,
      good points. I am pretty sure that my decisions are affected by many behavioural biases. But I don’t think that the comment changed my mind. It just reminded my of the fact that you should allocate money to managers when they perform poorly, not when they are outperforming like crazy.

      Greenlight Re was on my radar screen for some time but I think it was to expensive. As I have written, the case is only interesting because the stock is now also cheap on a historic basis. Only betting on better returns would have not been enough.

      Of course Buffett gives investors a better deal with regard to fees, because of this Greeenlight for me is “only” a special situation and not a long term investment.

      You are also right with regard to corellation: There is clearly some correlation with market returns but I think it is clearly less than with a “normal” investment into a closed end fund or so.

      Finally with regard to your proposed Einhonr + Admiral strategy: Unfortunately that wouldn’t work. Admiral works the way they do because they don’t do active investments and give most of the float away. As a primary insurer you have not that much of leeway to invest especially outside the US you are quite limited and Solvency II made this even harder.
      mmi

  • I dont think it is worth it to chase Einhorns mojo in a reinsurance structure. Its bekome a bit of a fashion lately to get your own RE and therefore the competition is heating up (dont forget zirp). And as always Warren is playing the game very differently. Also he sold out of MunichRe recently.
    I am with TomB on this. No edge + difficult environment.
    You know what Warren has to say about good managers who face a crappy business…

    • #hemlock,
      I understand your point but Buffett selling Munich Re is in my opinion a different case. Muncih Re for instance suffers under the new Solvency II rules whereas non-European Reinsurers have suddenly an automatic competitive advantage.

      A non-tax paying Cayman Reinsurance vehicle is not such a bad business if run well.

      mmi

  • Great overview

  • I like the approach – truly contrarian. Good luck!

  • mmi,

    TomB already wrote about the difficult underwriting in reinsurance.
    Due to central banks providing cheap money in abundance a lot of capital seeks returns which may depress reinsurance rates. Losses in reinsurance may be greater than future returns by Einhorn. And lower premiums reduce the capital available to invest.

    Regards

    milud

    • milud,

      thanks for the comment. Reinsurance in my experience is cyclical. When rates are good, capital piles in and rates go down. Losses start coming and capital goes out. Then rates get better. etc. etc. I actually did like that they reduced prmieum in the current “soft” market. Let’s wait and see. But again, the reinsurance side is not the driver for the investment case.

      mmi

  • I find these insurance float investment situations a la Berkshire very interesting as it is a very powerful model. There are of course these two main problems, that you take care of in your article:

    1) float at zero or negative cost is not that easy to get as underwriting profit depends on (very) disciplined underwriting
    2) you need 1st class investors

    As a result, many companies which try to copy Berkshire fail in beating Berkshire, long term. With Berkshire you get top quality in both categories, so the hurdle rate to invest into a Berkshire-clone is very high.

    As for

    1)
    you write that Greenlight Re does not have an underwriting edge. For me, that is a no-go, and I would stop here. Your write that they increase their underwriting standards. Okay, but: isn’t this some kind of turnaround story (you are very sceptical about turnarounds most of the time, aren’t you)?

    2)
    I cannot evaluate this since I never really followed Einhorn’s career. Given I believe that you are correct in that he is a good investor with short term underperformance: I have to say, that the table with the long positions does not look that appealing to me. This, of course, is due to the fact that I don’t really know these companies, but together with what I wrote on 1), I would not invest in Greenlight Re.

    Just my thoughts. Thank you for the write-up, I did not know Greenlight Re before reading this article.

    By the way: did you ever take a look at Markel?
    I think this could be interesting – maybe not at current prices, but on a watchlist ;-).

    • TomB,

      thanks for the comment. You are right to a large extent. As I have written it is more a special situation investment, betting on an Einhorn recovery and mean reversion.

      Just one remark: In order to provide value to the equity holder, the float doesn’t need to earn money. As long as the cost of the float is lower than the return on the investments, the contribution is positive. Having zero cost or negative float wol dbe an add on which I explicitly did not take into account.

      With regard to MArkel: I never understood what they actually do in the insurance area. Greenlight in my opinion is more transaprent in this regard.
      mmi

    • “that the table with the long positions does not look that appealing to me”

      Quality of true contrarian picks.

      I like the “reversal to the mean” of the idea.

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