GLRE - Greenlight Capital Re

[giofranchi]

I like the fact they write 95% high-frequency low-severity business: it seems to me that it mitigates the probability of a huge unexpected loss.

 

I know that here twacowfca probably disagrees with me. He wrote that being potentially exposed to super cat losses forces you to think hard about what you are doing, and not to take anything for granted. He also thinks that many “frequency” underwriters are more dangerous, because they tend to deceive themselves, falsely feeling safer, into going on autopilot… Do I interpret your thought correctly? That’s why I think the quality of management is the most important thing: even if they write frequency business, they must always be vigilant and well aware of the downside!

 

giofranchi

[giofranchi]

I have a position in GLRE, but I am closer to selling it than buying more.

 

The -19.2 decline would be a little worse if they were more levered like they intend to be.  They also recorded an underwriting profit that year.  So if they had an underwriting loss, it could have easily been a >20% decline in BV.  I am not sure how this will affect this business.  Will they have to post more collateral and sell out of their equity positions (effectively causing them to sell low)?  I am not sure.

 

The low frequency business should help them avoid astronomic insurance losses but they can still mess that up by under reserving or not pricing correctly like they showed this year.

 

Overall, I still like the company because of Einhorn's large position in it and I think it has a chance to compound at a high rate.  I just think it's riskier than I initially thought.  Therefore, I would not make this a core position when I think they are safer options compounding at 15%.

 

Food for thought! Thank you,

 

giofranchi

[twacowfca]

I have a position in GLRE, but I am closer to selling it than buying more.

 

The -19.2 decline would be a little worse if they were more levered like they intend to be.  They also recorded an underwriting profit that year.  So if they had an underwriting loss, it could have easily been a >20% decline in BV.  I am not sure how this will affect this business.  Will they have to post more collateral and sell out of their equity positions (effectively causing them to sell low)?  I am not sure.

 

The low frequency business should help them avoid astronomic insurance losses but they can still mess that up by under reserving or not pricing correctly like they showed this year.

 

Overall, I still like the company because of Einhorn's large position in it and I think it has a chance to compound at a high rate.  I just think it's riskier than I initially thought.  Therefore, I would not make this a core position when I think they are safer options compounding at 15%.

 

Food for thought! Thank you,

 

giofranchi

 

 

I don't think they are particularly risky.  The biggest concern I have is that their returns could be merely average.  What's their edge?  It doesn't seem to be underwriting. It is tough to get an edge shorting stocks.  Einhorn may be especially good at shorting. Is he exceptional? 

Their idea isn't a bad one.  Simon Burton who used to work for LRE is now at a start up sponsored by SAC (?) that isn't trying to copy LRE, but Greenlight.  I think he'll probably manage their underwriting very well.  They, like Greenlight, intend to focus on having a 100% CR with very low standard deviation, enabling them to invest most of the assets in stocks.

 

 

 

[jay21]

 

I don't think they are particularly risky.  The biggest concern I have is that their returns could be merely average.  What's their edge?  It doesn't seem to be underwriting. It is tough to get an edge shorting stocks.  Einhorn may be especially good at shorting. Is he exceptional?  Is it enough to compensate for the investment manager's fees?

Their idea isn't a bad one.  Simon Burton who used to work for LRE is now at a start up sponsored by SAC (?) that isn't trying to copy LRE, but Greenlight.  I think he'll probably manage their underwriting very well.  They, like Greenlight, intend to focus on having a 100% CR with very low standard deviation, enabling them to invest most of the assets in stocks.

 

Simon is a good underwriter.  I think they will do fairly well.

 

Thanks for the input.

 

I agree, they shouldn't be risky in most times, but I am worried about extreme times.  Having a large equity position and little cash means that they will be pretty stressed and unable to take advantage of bargains.  I would also be worried about rating downgrades and collateral posting having detrimental effects.

 

As far as Einhorn's edge, I think he can outperform the S&P (I would recommend "Fooling Some of the People All of the Time" to get a handle on his edge if you are unfamiliar with his process).  Although I am worried about how scale-able his strategy is.  Also it appears he did better pre financial crisis when I think his portfolio was a little more catalyst oriented (spin-offs, de-mutualizations, etc.)  Now when I look at his portfolio it looks like a lot of low multiple securities (but maybe he sees something I don't?)

[Kiltacular]

Geico's loss ratio is important too.  We have a friend who was rear ended by a Geico policy holder.  As soon as she got home, a Geico representative called her on the phone and asked how she was and did she need any medical assistance.  They had a replacement car for her that was ready to be delivered to her home with a full tank of gas.  What kind of car would she like?  Someone else would be calling her soon to take care of full repair of her car.  Then, she got a call from that person arranging for those details. 

 

This went on and on. She got five calls from Geico over the next few days asking if everything was OK.  Did she need anything else?  Was there something more that Geico could do for her?  If something comes up later, any complication, please call this special number to speak to her personal representative.  She was overwhelmed with their generosity and concern.

 

All these actions increased Geico's expense ratio, perhaps by a few hundred dollars, but I bet they lowered their loss ratio dramatically by many thousands of dollars on average because she didn't sue their policy holder as many victims do after an accident. 

 

Geico has a history of having experienced and survived virtually everything that could happen to a motor insurance company.  This is a huge advantage.  Contrast them to a British motor insurer that is now on the block, trading at .4 times BV with no takers at a likely take out price of .6 to .7 times book.  In 2005,  a majority interest in that company was acquired by a large international insurance company at 4 times BV.

 

Quality and surviving many tests is very important in judging the worth of an insurance company.    I doubt that anyone at BRK would have touched commoditized auto insurance, even with a ten foot pole.  By the way, commercial trucking insurance is what almost did in Markel Canada before the group led by Prem rescued them.  Experience is a hard teacher, but the lessons learned often are retained and last a lifetime.

 

twacowfca,

 

This is an interesting anecdote and you offer some very interesting insights.  As I was reading it, I also thought that they make it much more likely than otherwise that they'll make a customer -- and a long-term one at that -- out of your friend.

 

In the 2005 Annual report, Buffett reprinted an article he had written in 1951 entitled: "The Security I like Best".  That security was GEICO.  In that same annual, Buffett said: "And that's what I still call it."

 

I told a friend about 10 years ago that I thought GEICO would eventually have the number one market share in U.S. Auto insurance.  He told me that was "Insane". 

 

Ten years later, GEICO is almost number 2 in market share.  In 10 to 20 years, GEICO will be number one.  No insurer with an agency model has a chance against their cost structure.  And, that cost structure is what allows them to offer such incredible service.

 

Could I be wrong -- of course.  But, it's one of the surest bets I've seen.  It going to be a huge engine of growth for Berkshire -- as it has been in the past.

[giofranchi]

 

I don't think they are particularly risky.  The biggest concern I have is that their returns could be merely average.  What's their edge?  It doesn't seem to be underwriting. It is tough to get an edge shorting stocks.  Einhorn may be especially good at shorting. Is he exceptional?  Is it enough to compensate for the investment manager's fees?

Their idea isn't a bad one.  Simon Burton who used to work for LRE is now at a start up sponsored by SAC (?) that isn't trying to copy LRE, but Greenlight.  I think he'll probably manage their underwriting very well.  They, like Greenlight, intend to focus on having a 100% CR with very low standard deviation, enabling them to invest most of the assets in stocks.

 

Simon is a good underwriter.  I think they will do fairly well.

 

Thanks for the input.

 

I agree, they shouldn't be risky in most times, but I am worried about extreme times.  Having a large equity position and little cash means that they will be pretty stressed and unable to take advantage of bargains.  I would also be worried about rating downgrades and collateral posting having detrimental effects.

 

As far as Einhorn's edge, I think he can outperform the S&P (I would recommend "Fooling Some of the People All of the Time" to get a handle on his edge if you are unfamiliar with his process).  Although I am worried about how scale-able his strategy is.  Also it appears he did better pre financial crisis when I think his portfolio was a little more catalyst oriented (spin-offs, de-mutualizations, etc.)  Now when I look at his portfolio it looks like a lot of low multiple securities (but maybe he sees something I don't?)

 

I have thought about it.

The investment side of the business is really the last thing I am worried about. Maybe Mr. Einhorn is not as good an investor as Mr. Buffett, Mr. Klarman, or Mr. Watsa, but one thing I am convinced of: he is an extremely good short seller! And he knows all the dangers and pitfalls of stock investing: if there is a person who won’t fall in the trap of having to post more collateral, that person is Mr. Einhorn.

The underwriting side of the business is obviously not proven, it lacks a substantial track record. That’s, of course, a minus. But: how many owner-operator insurance companies you know of that were a disappointing failure? If insurance is all about management, I know of no better management than an owner-operator. I mean, look at, for instance, Geico, when Mr. Buffett started buying the company. It had been badly managed for a few years and was in deep trouble. As far as I know, Mr. Buffett never was in charge of the underwriting operations, he probably merely supervised them and steered the boat in the right direction. Quite readily Geico was back on its feet, and the rest is history. Same story with General Re: we all know it was a real mess, when Mr. Buffett acquired it, but his careful supervision of operations in time worked miracles. Now Gen Re is one of Berkshire greatest assets.

My idea is very simple, yet I find it is almost always under-appreciated: “The Eye of a Master, will do more Work than his Hand.” Benjamin Franklin.

I might decide to trim my position in GLRE a little bit in the future, but it will remain a core position of mine.

 

giofranchi

[twacowfca]

 

I don't think they are particularly risky.  The biggest concern I have is that their returns could be merely average.  What's their edge?  It doesn't seem to be underwriting. It is tough to get an edge shorting stocks.  Einhorn may be especially good at shorting. Is he exceptional?  Is it enough to compensate for the investment manager's fees?

Their idea isn't a bad one.  Simon Burton who used to work for LRE is now at a start up sponsored by SAC (?) that isn't trying to copy LRE, but Greenlight.  I think he'll probably manage their underwriting very well.  They, like Greenlight, intend to focus on having a 100% CR with very low standard deviation, enabling them to invest most of the assets in stocks.

 

Simon is a good underwriter.  I think they will do fairly well.

 

Thanks for the input.

 

I agree, they shouldn't be risky in most times, but I am worried about extreme times.  Having a large equity position and little cash means that they will be pretty stressed and unable to take advantage of bargains.  I would also be worried about rating downgrades and collateral posting having detrimental effects.

 

As far as Einhorn's edge, I think he can outperform the S&P (I would recommend "Fooling Some of the People All of the Time" to get a handle on his edge if you are unfamiliar with his process).  Although I am worried about how scale-able his strategy is.  Also it appears he did better pre financial crisis when I think his portfolio was a little more catalyst oriented (spin-offs, de-mutualizations, etc.)  Now when I look at his portfolio it looks like a lot of low multiple securities (but maybe he sees something I don't?)

 

I have thought about it.

The investment side of the business is really the last thing I am worried about. Maybe Mr. Einhorn is not as good an investor as Mr. Buffett, Mr. Klarman, or Mr. Watsa, but one thing I am convinced of: he is an extremely good short seller! And he knows all the dangers and pitfalls of stock investing: if there is a person who won’t fall in the trap of having to post more collateral, that person is Mr. Einhorn.

The underwriting side of the business is obviously not proven, it lacks a substantial track record. That’s, of course, a minus. But: how many owner-operator insurance companies you know of that were a disappointing failure? If insurance is all about management, I know of no better management than an owner-operator. I mean, look at, for instance, Geico, when Mr. Buffett started buying the company. It had been badly managed for a few years and was in deep trouble. As far as I know, Mr. Buffett never was in charge of the underwriting operations, he probably merely supervised them and steered the boat in the right direction. Quite readily Geico was back on its feet, and the rest is history. Same story with General Re: we all know it was a real mess, when Mr. Buffett acquired it, but his careful supervision of operations in time worked miracles. Now Gen Re is one of Berkshire greatest assets.

My idea is very simple, yet I find it is almost always under-appreciated: “The Eye of a Master, will do more Work than his Hand.” Benjamin Franklin.

I might decide to trim my position in GLRE a little bit in the future, but it will remain a core position of mine.

 

giofranchi

 

Giofranchi,

 

Thank you very much for posting your idea about Greenlight.

 

I think it is a very good idea, especially now that they are selling at close to BV.  Greenlight Re is a much better structure for an investor than the typical hedge fund structure because the investor has liquidity and the investment velicle avoids a possible run of investors bailing out.  Thus an investor in GRE avoids two of three of the downsides of hedge funds.

 

The final question is whether it is worth the large over ride of the investment manager's fee.  That is a judgement call.  Mr. Einhorn is on the short list of fund managers who may be worth a large fee.  :)

 

:)

[giofranchi]

 

The final question is whether it is worth the large over ride of the investment manager's fee.  That is a judgement call.  Mr. Einhorn is on the short list of fund managers who may be worth a large fee.  :)

 

 

twacowfca,

thank you for your kind comment! Much appreciated!

To judge Mr. Einhorn as an investor, I definitely would suggest to read his book “Fooling some of the people all of the time”. When I read it, I was really impressed by the depth of his research and analysis!

I like GLRE, but my firm’s portfolio is more heavily weighted on GLRE than on LRE. And I think that is an imprudence, irrespective of price, because LRE’s business model is much more proven. So, while keeping GLRE as a core position of mine, I will make the right adjustment to my firm’s portfolio, giving more relevance to LRE and a little bit less to GLRE.  :)

 

giofranchi

[twacowfca]

 

The final question is whether it is worth the large over ride of the investment manager's fee.  That is a judgement call.  Mr. Einhorn is on the short list of fund managers who may be worth a large fee.  :)

 

 

twacowfca,

thank you for your kind comment! Much appreciated!

To judge Mr. Einhorn as an investor, I definitely would suggest to read his book “Fooling some of the people all of the time”. When I read it, I was really impressed by the depth of his research and analysis!

I like GLRE, but my firm’s portfolio is more heavily weighted on GLRE than on LRE. And I think that is an imprudence, irrespective of price, because LRE’s business model is much more proven. So, while keeping GLRE as a core position of mine, I will make the right adjustment to my firm’s portfolio, giving more relevance to LRE and a little bit less to GLRE.  :)

 

giofranchi

 

Haven't read his book, but I have heard Einhorn speak a couple of times about what an unethical bunch  that was, and I read a lengthly article David wrote in a major periodical about them.  He was very thorough.  Can you break down how the short positions Greenlight has taken have performed?

[ItsAValueTrap]

Mr. Einhorn is conservatively positioned right now: 100% long and 73% short as of 31-October-2012.

 

Maybe I am extremely contrarian, but I don't see that allocation as being conservative.  The problem with long/short strategies is this:

 

There is some force that causes the long/short mispricing to exist in the first place.  That force can cause the mispricing to be even more severe.  Some of the time, the long/short trade will go against you.  With high levels of leverage, these trades can be dangerous.

 

I'm not sure how concentrated Einhorn is with his short positions.  I don't think he is that conservative with his shorting and this can one day get him into trouble.  If you look back into history, a lot of short sellers have LOST money even though they were right.

1- Your broker might screw you over.  This is what happened to Copper River.  (There's a book about it... Selling America Short: The SEC and Market Contrarians in the Age of Absurdity.)

This happened to Jim Cramer when he first started his hedge fund.

2- The SEC might investigate your hedge fund and you'll take a bath in legal fees.  This happened to Einhorn before.  Because he publicizes his short positions, he is going to attract a lot of negative attention.

Ed Thorp's stat arb fund closed down because of this.

3- Short squeezes.

4- Other people may engineer buy-ins on you.

5- Extremely irrational markets like the tech bubble.  (A lot of short sellers lost money shorting the US housing bubble too by being too early.)

 

I have a lot of respect for Einhorn as an investor, but I'm not sure I'd be comfortable with his position sizing.  The history of short selling is ugly for the shorts.  Only the guys who are long options (e.g. Taleb) and long other asymmetrical bets (e.g. Michael Burry) seem to have done well with reasonable levels of risk.

[jay21]

 

Haven't read his book, but I have heard Einhorn speak a couple of times about what an unethical bunch  that was, and I read a lengthly article David wrote in a major periodical about them.  He was very thorough.  Can you break down how the short positions Greenlight has taken have performed?

 

His most publicized shorts were probably Allied, Lehman, St. Joe's, and GMCR.  A great track record on all of those.  I think he was short Diamond Foods around this time last year, which was a pretty big gain.  Also he was short FSLR.  He has a really good track record of shorts. 

 

This link has some links to his letters where he occasionally discusses his shorts: http://www.hedgefundletters.com/category/greenlight-capital/

 

I do not doubt his investing acumen and his ability to beat the S&P after fees.  I do wonder how scale-able his strategy and am wondering when his results might lessen from his outstanding record.  Also, remember GLRE's investment portfolio is all equities so when you leverage even slightly above S&P results, you get a wonderful return.

 

In terms of their underwriting edge, they try to explain how they different from other re-insurers in their 10-k:

 

Our underwriting operations are designed to capitalize on inefficiencies that we perceive exist in the traditional approach to underwriting. We believe that we conduct our business differently from traditional reinsurers in multiple ways, including:

 

 

 

● we focus on offering customized reinsurance solutions to select customers at times and in markets where capacity and alternatives are limited rather than pursuing and participating in broadly available traditional property and casualty opportunities;

 

● we aim to build a reinsurance portfolio of frequency and severity contracts with favorable ultimate economic results measured after all loss payments have been made rather than focusing on interim reported results when losses may be incurred but not yet reported or paid;

 

● we seek to act as the lead underwriter on a majority of the contracts we underwrite in an effort to obtain greater influence in negotiating pricing, terms and conditions rather than focusing on taking a minority participation in contracts that have been negotiated and priced by another party;

 

● we maintain a small staff of experienced generalist underwriters that are capable of underwriting many lines of property and casualty business rather than a large staff of underwriters, each with an individual, specific focus on certain lines of business;

 

● we implement a ‘‘cradle to grave’’ service philosophy where the same individual underwrites and services each reinsurance contract rather than separating underwriting and servicing duties among many employees; and

 

● we compensate our management with a cash bonus structure largely dependent on our underwriting results over a multi-year period rather than on premium volume or underwriting results in any given financial accounting period.

[twacowfca]

 

Haven't read his book, but I have heard Einhorn speak a couple of times about what an unethical bunch  that was, and I read a lengthly article David wrote in a major periodical about them.  He was very thorough.  Can you break down how the short positions Greenlight has taken have performed?

 

His most publicized shorts were probably Allied, Lehman, St. Joe's, and GMCR.  A great track record on all of those.  I think he was short Diamond Foods around this time last year, which was a pretty big gain.  Also he was short FSLR.  He has a really good track record of shorts. 

 

This link has some links to his letters where he occasionally discusses his shorts: http://www.hedgefundletters.com/category/greenlight-capital/

 

I do not doubt his investing acumen and his ability to beat the S&P after fees.  I do wonder how scale-able his strategy and am wondering when his results might lessen from his outstanding record.  Also, remember GLRE's investment portfolio is all equities so when you leverage even slightly above S&P results, you get a wonderful return.

 

In terms of their underwriting edge, they try to explain how they different from other re-insurers in their 10-k:

 

Our underwriting operations are designed to capitalize on inefficiencies that we perceive exist in the traditional approach to underwriting. We believe that we conduct our business differently from traditional reinsurers in multiple ways, including:

 

 

 

● we focus on offering customized reinsurance solutions to select customers at times and in markets where capacity and alternatives are limited rather than pursuing and participating in broadly available traditional property and casualty opportunities;

 

● we aim to build a reinsurance portfolio of frequency and severity contracts with favorable ultimate economic results measured after all loss payments have been made rather than focusing on interim reported results when losses may be incurred but not yet reported or paid;

 

● we seek to act as the lead underwriter on a majority of the contracts we underwrite in an effort to obtain greater influence in negotiating pricing, terms and conditions rather than focusing on taking a minority participation in contracts that have been negotiated and priced by another party;

 

● we maintain a small staff of experienced generalist underwriters that are capable of underwriting many lines of property and casualty business rather than a large staff of underwriters, each with an individual, specific focus on certain lines of business;

 

● we implement a ‘‘cradle to grave’’ service philosophy where the same individual underwrites and services each reinsurance contract rather than separating underwriting and servicing duties among many employees; and

 

● we compensate our management with a cash bonus structure largely dependent on our underwriting results over a multi-year period rather than on premium volume or underwriting results in any given financial accounting period.

 

He's smart in focusing on shorting companies that have papered over disappointing results with accounting that misses the spirit of accounting standards if not fraud.  These situations are good catalysts for a selloff of the stock.  :)

 

Can anyone quantify how well Greenlight Re's shorts have performed annually.  The reason I ask is that Chanos says that his short positions lose a little bit over the cycle, although there are gains when the market turns bearish.

 

Chanos sells his fund as a cheap put on the market, not something that will make money long term.  If Einhorn can't do much better than Chanos,  His potential outperformance will be limited to how well his longs perform after fees.  That will take away all the leverage of the insurance float.  :(

[ShahKhezri]

I thought he got caught in the VW-Porche situation a while back.

[twacowfca]

I thought he got caught in the VW-Porche situation a while back.

 

Who?

[jay21]

He's smart in focusing on shorting companies that have papered over disappointing results with accounting that misses the spirit of accounting standards if not fraud.  These situations are good catalysts for a selloff of the stock.  :)

 

Can anyone quantify how well Greenlight Re's shorts have performed annually.  The reason I ask is that Chanos says that his short positions lose a little bit over the cycle, although there are gains when the market turns bearish.

 

Chanos sells his fund as a cheap put on the market, not something that will make money long term.  If Einhorn can't do much better than Chanos,  His potential outperformance will be limited to how well his longs perform after fees.  That will take away all the leverage of the insurance float.  :(

 

He supposedly invests for alpha only (unlike Chanos).  I can't see his shorts losing money when his performance has been phenomenal.  From the Jan 2012 letter: "Since inception in May 1996, Greenlight Capital LP, has returned 1685% cumulatively or 20% annually, both net of fees and expenses."

[ShahKhezri]

I thought he got caught in the VW-Porche situation a while back.

 

Who?

 

Einhorn had a small position, but it turned out to be costly.

[giofranchi]

I have a lot of respect for Einhorn as an investor, but I'm not sure I'd be comfortable with his position sizing.  The history of short selling is ugly for the shorts. 

 

ItsAValueTrap,

it is a bit strange to hear that from you! Aren’t you “shorting stocks that other value investors are long…”?!  :)

Anyway, a long/short strategy is something completely different from a short only strategy. What you write might be certainly true for a short only strategy, but for a long/short strategy I guess what Mr. Julian Robertson suggests is mostly true:

 

“I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.”

 

Also Mr. Templeton was used to going long the best stocks and going short the worst stocks he could find. That’s what also Mr. Watsa is doing.

 

And Mr. Einhorn is extremely clever… I think you can imagine what it takes to be n.3 in the world in any endeavour: ask Mr. Andy Murray what it takes to be the third best tennis player in the world! I play tennis a lot… I can assure it is tough to be the third best tennis player in my tennis club!! ;D

Well, Mr. Einhorn is probably the best non-professional poker player in the world today (he ended n.3, because he was defeated by a professional player, who then won the Poker World Series 2012). And he said he plays poker 10 times a year!

No, position size is really the last thing I am worried about: the only reason why he can compete with professional poker players is because he is a real master of position sizing and risk managing!

 

giofranchi

 

[muscleman]

I have a lot of respect for Einhorn as an investor, but I'm not sure I'd be comfortable with his position sizing.  The history of short selling is ugly for the shorts. 

 

ItsAValueTrap,

it is a bit strange to hear that from you! Aren’t you “shorting stocks that other value investors are long…”?!  :)

Anyway, a long/short strategy is something completely different from a short only strategy. What you write might be certainly true for a short only strategy, but for a long/short strategy I guess what Mr. Julian Robertson suggests is mostly true:

 

“I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.”

 

Also Mr. Templeton was used to going long the best stocks and going short the worst stocks he could find. That’s what also Mr. Watsa is doing.

 

And Mr. Einhorn is extremely clever… I think you can imagine what it takes to be n.3 in the world in any endeavour: ask Mr. Andy Murray what it takes to be the third best tennis player in the world! I play tennis a lot… I can assure it is tough to be the third best tennis player in my tennis club!! ;D

Well, Mr. Einhorn is probably the best non-professional poker player in the world today (he ended n.3, because he was defeated by a professional player, who then won the Poker World Series 2012). And he said he plays poker 10 times a year!

No, position size is really the last thing I am worried about: the only reason why he can compete with professional poker players is because he is a real master of position sizing and risk managing!

 

giofranchi

 

The adjusted book value per share, at the end of Q3 2012 is $23.58, which means that we are around book right now.

This guy seems good at investing. Last year I was tracking GMCR, and Einhorn made a lot from that.

[muscleman]

http://www.hedgefundletters.com/category/greenlight-capital/

 

Anyone looked into this? It has Einhorn's letters, but only up to Jan. 2012. I hope I could read more.

[muscleman]

I have a lot of respect for Einhorn as an investor, but I'm not sure I'd be comfortable with his position sizing.  The history of short selling is ugly for the shorts. 

 

ItsAValueTrap,

it is a bit strange to hear that from you! Aren’t you “shorting stocks that other value investors are long…”?!  :)

Anyway, a long/short strategy is something completely different from a short only strategy. What you write might be certainly true for a short only strategy, but for a long/short strategy I guess what Mr. Julian Robertson suggests is mostly true:

 

“I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.”

 

Also Mr. Templeton was used to going long the best stocks and going short the worst stocks he could find. That’s what also Mr. Watsa is doing.

 

And Mr. Einhorn is extremely clever… I think you can imagine what it takes to be n.3 in the world in any endeavour: ask Mr. Andy Murray what it takes to be the third best tennis player in the world! I play tennis a lot… I can assure it is tough to be the third best tennis player in my tennis club!! ;D

Well, Mr. Einhorn is probably the best non-professional poker player in the world today (he ended n.3, because he was defeated by a professional player, who then won the Poker World Series 2012). And he said he plays poker 10 times a year!

No, position size is really the last thing I am worried about: the only reason why he can compete with professional poker players is because he is a real master of position sizing and risk managing!

 

giofranchi

 

Could you please provide some thoughts on their 2012 Q3's insurance loss? The composite rate is 114%, which is pretty big. They said they have exited that contract that caused the big loss, so probably this is just a one-time charge?

[giofranchi]

Could you please provide some thoughts on their 2012 Q3's insurance loss? The composite rate is 114%, which is pretty big. They said they have exited that contract that caused the big loss, so probably this is just a one-time charge?

 

muscleman,

I think that during the Q3 2012 conference call they said to have increased reserves by $43 million (if I remember well) for the quarter, to cover all the claims they expect to pay during the next two years, due to the commercial motor liability contracts. Those contracts are now in run-off. So, yes, I agree those losses could be seen as a one-time charge. But, be careful: GLRE writes short-tail contracts, so it seems to me that every underwriting decision they take, if it is a bad one, could lead to a “one-time charge”… Sum together all those “one-time charges” and you can lose a lot of money!

I think they must improve the underwriting side of the business. And the underwriting worries me much more than the investments.

 

giofranchi

[muscleman]

Could you please provide some thoughts on their 2012 Q3's insurance loss? The composite rate is 114%, which is pretty big. They said they have exited that contract that caused the big loss, so probably this is just a one-time charge?

 

muscleman,

I think that during the Q3 2012 conference call they said to have increased reserves by $43 million (if I remember well) for the quarter, to cover all the claims they expect to pay during the next two years, due to the commercial motor liability contracts. Those contracts are now in run-off. So, yes, I agree those losses could be seen as a one-time charge. But, be careful: GLRE writes short-tail contracts, so it seems to me that every underwriting decision they take, if it is a bad one, could lead to a “one-time charge”… Sum together all those “one-time charges” and you can lose a lot of money!

I think they must improve the underwriting side of the business. And the underwriting worries me much more than the investments.

 

giofranchi

 

Got it! Thank you!

What do you mean by "run-off"?

 

Yes. They are all short-tail. When I ask if this is one-time charge, I checked the history of the composite ratio, and they look ok to me until this quarter, so I wonder if this is the only contract that they decide is bad. In the CC, they mentioned that they believe all other contracts are in good standing.

[giofranchi]

Could you please provide some thoughts on their 2012 Q3's insurance loss? The composite rate is 114%, which is pretty big. They said they have exited that contract that caused the big loss, so probably this is just a one-time charge?

 

muscleman,

I think that during the Q3 2012 conference call they said to have increased reserves by $43 million (if I remember well) for the quarter, to cover all the claims they expect to pay during the next two years, due to the commercial motor liability contracts. Those contracts are now in run-off. So, yes, I agree those losses could be seen as a one-time charge. But, be careful: GLRE writes short-tail contracts, so it seems to me that every underwriting decision they take, if it is a bad one, could lead to a “one-time charge”… Sum together all those “one-time charges” and you can lose a lot of money!

I think they must improve the underwriting side of the business. And the underwriting worries me much more than the investments.

 

giofranchi

 

Got it! Thank you!

What do you mean by "run-off"?

 

Yes. They are all short-tail. When I ask if this is one-time charge, I checked the history of the composite ratio, and they look ok to me until this quarter, so I wonder if this is the only contract that they decide is bad. In the CC, they mentioned that they believe all other contracts are in good standing.

 

An insurance is in run-off, when it stops writing new contracts, and just manages (invests) the float it has collected during the years, until all claims are paid out.

Yes, until recently they did well enough with their underwriting strategy. I guess the problem with the absence of a long dated and proven track record is precisely this: as soon as something bad happens, you start worrying, because you don’t have history to help you put the present mistake into the right perspective.

Anyway, I still like GLRE and I think they can do very well in the future.

 

giofranchi

[muscleman]

Could you please provide some thoughts on their 2012 Q3's insurance loss? The composite rate is 114%, which is pretty big. They said they have exited that contract that caused the big loss, so probably this is just a one-time charge?

 

muscleman,

I think that during the Q3 2012 conference call they said to have increased reserves by $43 million (if I remember well) for the quarter, to cover all the claims they expect to pay during the next two years, due to the commercial motor liability contracts. Those contracts are now in run-off. So, yes, I agree those losses could be seen as a one-time charge. But, be careful: GLRE writes short-tail contracts, so it seems to me that every underwriting decision they take, if it is a bad one, could lead to a “one-time charge”… Sum together all those “one-time charges” and you can lose a lot of money!

I think they must improve the underwriting side of the business. And the underwriting worries me much more than the investments.

 

giofranchi

 

Got it! Thank you!

What do you mean by "run-off"?

 

Yes. They are all short-tail. When I ask if this is one-time charge, I checked the history of the composite ratio, and they look ok to me until this quarter, so I wonder if this is the only contract that they decide is bad. In the CC, they mentioned that they believe all other contracts are in good standing.

 

An insurance is in run-off, when it stops writing new contracts, and just manages (invests) the float it has collected during the years, until all claims are paid out.

Yes, until recently they did well enough with their underwriting strategy. I guess the problem with the absence of a long dated and proven track record is precisely this: as soon as something bad happens, you start worrying, because you don’t have history to help you put the present mistake into the right perspective.

Anyway, I still like GLRE and I think they can do very well in the future.

 

giofranchi

 

I see. Thanks a lot!

Is there any way to get more detailed understanding of the economics of these contracts?

[giofranchi]

Could you please provide some thoughts on their 2012 Q3's insurance loss? The composite rate is 114%, which is pretty big. They said they have exited that contract that caused the big loss, so probably this is just a one-time charge?

 

muscleman,

I think that during the Q3 2012 conference call they said to have increased reserves by $43 million (if I remember well) for the quarter, to cover all the claims they expect to pay during the next two years, due to the commercial motor liability contracts. Those contracts are now in run-off. So, yes, I agree those losses could be seen as a one-time charge. But, be careful: GLRE writes short-tail contracts, so it seems to me that every underwriting decision they take, if it is a bad one, could lead to a “one-time charge”… Sum together all those “one-time charges” and you can lose a lot of money!

I think they must improve the underwriting side of the business. And the underwriting worries me much more than the investments.

 

giofranchi

 

Got it! Thank you!

What do you mean by "run-off"?

 

Yes. They are all short-tail. When I ask if this is one-time charge, I checked the history of the composite ratio, and they look ok to me until this quarter, so I wonder if this is the only contract that they decide is bad. In the CC, they mentioned that they believe all other contracts are in good standing.

 

An insurance is in run-off, when it stops writing new contracts, and just manages (invests) the float it has collected during the years, until all claims are paid out.

Yes, until recently they did well enough with their underwriting strategy. I guess the problem with the absence of a long dated and proven track record is precisely this: as soon as something bad happens, you start worrying, because you don’t have history to help you put the present mistake into the right perspective.

Anyway, I still like GLRE and I think they can do very well in the future.

 

giofranchi

 

I see. Thanks a lot!

Is there any way to get more detailed understanding of the economics of these contracts?

 

Unfortunately, if there is a way, I am not aware of it…  :(

That’s why management is my n.1 concern, whenever I consider purchasing shares of an insurance company. Because you have to trust them 100%, both their abilities and their integrity. I won’t invest in an insurance company, even if it is trading at 0.5xBV, if I don’t know its management very well and don’t have full confidence in them.

 

giofranchi