GLRE - Greenlight Capital Re

[dcollon]

Einhorn’s Greenlight to Reopen Hedge Fund to New Capital

 

http://www.bloomberg.com/news/2014-10-17/einhorn-s-greenlight-to-reopen-hedge-fund-to-new-capital.html

[Libs]

Finally grabbed some at BV, after stalking for so long....

 

I love Mr. Market. The stock sheds 10% because we are heading into the kind of environment Einhorn wants  (and is raising $$ for).

 

 

[WolfOfMainStreet]

Q3 results are in:

http://www.nasdaq.com/press-release/greenlight-re-announces-third-quarter-2014-financial-results-20141103-01371

 

10-Q:

http://quote.morningstar.com/stock-filing/Quarterly-Report/2014/9/30/t.aspx?t=XNAS:GLRE&ft=10-Q&d=6880680e1c11a57d70ee02ebdc279b5f

 

To sum up:

Net loss of $51.8 million which brought down fully diluted BV from $30.47 to $29.16 (mainly due to a large change in unrealized gains, realizes gains are more than double what they were over the comparable 9 month period last year)

Gross premiums nearly triple last period's at $97.2 million

CR up to 100.2%

 

Question:

I'm in at an average cost of about $32.21 for 33 shares. I know the Mr. Market is going smack GLRE down a bit tomorrow, maybe even a little too much. If I sell off my position at today's closing price that yields me a small profit after trading fees and then I'm going to buy into the stock once it bottoms out from the loss news, I'm looking to stick with this company for the long haul. Keeping in mind that trading fees are high for such a small portfolio, should I risk putting in the order or will the downward pressure be too much and my order will never be filled? How much would you put the sell order in for? Since I have such a small number of shares I'm thinking I may be able to catch some small negligible profits and more importantly it will free up my capital for a bit. 

 

The maths:

Selling price  Position 1  Position 2  Trading Costs

(32.64*33)-((33.50*15+31.13*18)+4.75*3) = $0.03 Absolute lowest that I can sell at to still turn out a profit

 

Selling price  Position 1  Position 2  Trading Costs

(32.73*33)-((33.50*15+31.13*18)+4.75*3) = $3 (Some Halls and tea for my sore throat)

 

[matts]

I think you will find most members here are not into the kind of trading you are describing.

[giofranchi]

I know the Mr. Market is going smack GLRE down a bit tomorrow, maybe even a little too much.

 

I don't know what Mr. Market is going to do today... But for what I can read, GLRE has beaten Mr. Market expectations for Q3 2014:

 

http://seekingalpha.com/news/2087535-greenlight-capital-beats-by-0_07-beats-on-revenue?source=email_rt_mc_title&uprof=25

 

;)

 

Gio

 

 

[giofranchi]

As I was saying, it doesn’t seem Mr. Market is punishing GLRE too much for its Q3 2014 results… ;)

 

Gio

 

[giofranchi]

 

http://seekingalpha.com/article/2698425-fast-growing-reinsurance-firm-managed-by-david-einhorn?uprof=25

 

 

Gio

[giofranchi]

Q4 2014 Conference Call Transcript

 

 

Gio

greenlights-glre-Q4-2014-conference-call.pdf

[james22]

We think that GLRE has the potential to be a Baby Berkshire and offer investors who missed Berkshire's surge from 1964 to 2000 a potential opportunity to achieve the strong returns Berkshire's investors achieved. Not only does GLRE have a fast growing reinsurance book and hedge fund manager David Einhorn of Greenlight Capital manages its general investment account portfolio. ...

 

However, we are also cautious about the overvalued equity markets crimping future investment growth for GLRE, we are disappointed in its underwriting results and we are cautious about soft performance overall in the reinsurance industry.

 

http://seekingalpha.com/article/2929866-can-greenlight-get-its-groove-back

[giofranchi]

However, we are also cautious about the overvalued equity markets crimping future investment growth for GLRE, we are disappointed in its underwriting results and we are cautious about soft performance overall in the reinsurance industry.

 

I don’t think they posted unsatisfactory results for 2014… The market punished them yesterday, but for no good reason imo. They managed to increase BVPS by 10% in 2014, and their CR was slightly above 100%... Now they are selling for 1,01 x BVPS.

Very cheap imo! ;)

 

Gio

 

 

[Jurgis]

It's not clear if GLRE is worth investing into. Einhorn is underperforming market. GLRE is paying him 2 and 20. Combined ratio is atrocious. Their business dropped almost 40% last year. It's not clear they will find good area to write policies at acceptable prices.

 

Of course, the bulls will say that Einhorn will outperform in the future, 2 and 20 is not much, combined ratio will improve when they find where to write policies and they will find where to write policies at acceptable prices really soon now...  8)

 

I'm not convinced. If this did not have Einhorn's name associated with it, it would trade much much lower.

[Txvestor]

I agree. Lot of hype and much less performance.

Firstly for any good insurance operation, you need skilled and experienced as well as disciplined underwriters. I'm not seeing that here.

Secondly, for it to be great you need an all season capital allocator who can compound without undue risk that puts the whole enterprise at risk. Einhorns recent record does not inspire.

Finally when you can get great capital allocators working for you prwctically for free, eg Watsa and Buffett, then 2/20 is insane.

[giofranchi]

Einhorn is underperforming market. GLRE is paying him 2 and 20. Combined ratio is atrocious. Their business dropped almost 40% last year.

 

Think of it this way:

 

They have increased BVPS at a CAGR of 11% from 2004 to 2013, and last year they have increased it by 10.2%… despite the fact a) Einhorn is underperforming the market, b) combined ratios are not very good, and c) their business dropped almost 40% last year! And I would add despite the fact d) they are still very little levered.

 

Now think what they could achieve with just little improvements in a), b), c) and/or d)! ;)

 

Cheers,

 

Gio

 

[AJDelphi]

And despite the fact that we are in a soft insurance market! If it hardens up at some point in the future things might improve very nicely.

 

It really is too bad that Einhorn charges management fees to Greenlight RE but you are still getting an investment manager with a great long term track record in a structure similar to Berkshire. I am also not as concerned with the premiums going down as some people. Seems to me they don't like the prices so they aren't taking on the risk. Isn't that what Buffett always says is the most intelligent thing to do in insurance....

 

Oh and Einhorn "ONLY" charges 1.5%(what a deal ::) ) annual management fee and 20% performance fee.

[Liberty]

And despite the fact that we are in a soft insurance market! If it hardens up at some point in the future things might improve very nicely.

 

I expect such a huge party among insurance people when the market finally hardens. There must be so much pent up expectation. I remember in 2011 (when a hard market was already considered overdue) I was listening to Bill Berkley talk about how he was starting to see a turn in the market, and how he thought a hard market was coming...

[Jurgis]

I am also not as concerned with the premiums going down as some people. Seems to me they don't like the prices so they aren't taking on the risk. Isn't that what Buffett always says is the most intelligent thing to do in insurance....

 

Except that other conservative (re)insurers are still writing - FFH, MKL, BRK, RE, etc.

And GLRE's combined ratio is attrocious.

 

So IMHO they are not good in insurance. Which is a problem. The reason above companies succeed is that they are good in both insurance and investing. Just investing won't carry GLRE. Especially if Einhorn continues to underperform.

 

[KinAlberta]

I am also not as concerned with the premiums going down as some people. Seems to me they don't like the prices so they aren't taking on the risk. Isn't that what Buffett always says is the most intelligent thing to do in insurance....

 

Except that other conservative (re)insurers are still writing - FFH, MKL, BRK, RE, etc.

And GLRE's combined ratio is attrocious.

 

So IMHO they are not good in insurance. Which is a problem. The reason above companies succeed is that they are good in both insurance and investing. Just investing won't carry GLRE. Especially if Einhorn continues to underperform.

 

I seem to recall FFH and MKL having some pretty mediocre combined ratios in the past.  Does anyone have a history of the ratios amongst these companies for comparison purposes?

[guowei58]

GLRE's underwriting results are horrible.  Their underwriting team has under-performed since inception. Since going public, their cumulative underwriting losses was $60M.  this is during a reasonably good insurance market.  It's clear that the team needs to be replaced.  the Company has already done some staff changes. The whole business model is dependent on reasonably profitable underwriting and they've failed at that.

 

Despite the weak underwriting and okay investment track record (by my math, the investment portfolio compounded at 6.3% per year since 2006 vs. 7.0% for the S&P 500), BVPS still compounded faster than market since the end of 2006, coming in at 10.1%.  this demonstrates the power of the leverage associated with the business model. 

 

I suspect GLRE will be an okay/good investment over the long run, although would be better if they get a better insurance team.

 

[muscleman]

GLRE's underwriting results are horrible.  Their underwriting team has under-performed since inception. Since going public, their cumulative underwriting losses was $60M.  this is during a reasonably good insurance market.  It's clear that the team needs to be replaced.  the Company has already done some staff changes. The whole business model is dependent on reasonably profitable underwriting and they've failed at that.

 

Despite the weak underwriting and okay investment track record (by my math, the investment portfolio compounded at 6.3% per year since 2006 vs. 7.0% for the S&P 500), BVPS still compounded faster than market since the end of 2006, coming in at 10.1%.  this demonstrates the power of the leverage associated with the business model. 

 

I suspect GLRE will be an okay/good investment over the long run, although would be better if they get a better insurance team.

 

I would far more prefer the business model of FFH and BRK than GLRE. There is way too much hidden risk embedded in the long/short strategies, even though the apparent net exposure looks low.

I read a book call "Inside the black box", and it mentioned in 2007, there was a big crisis for long/short strategy funds. Even though the whole market index barely moved, a lot of long/short guys lost as much as 45% in 2 months.

[twacowfca]

GLRE's underwriting results are horrible.  Their underwriting team has under-performed since inception. Since going public, their cumulative underwriting losses was $60M.  this is during a reasonably good insurance market.  It's clear that the team needs to be replaced.  the Company has already done some staff changes. The whole business model is dependent on reasonably profitable underwriting and they've failed at that.

 

Despite the weak underwriting and okay investment track record (by my math, the investment portfolio compounded at 6.3% per year since 2006 vs. 7.0% for the S&P 500), BVPS still compounded faster than market since the end of 2006, coming in at 10.1%.  this demonstrates the power of the leverage associated with the business model. 

 

I suspect GLRE will be an okay/good investment over the long run, although would be better if they get a better insurance team.

 

I would far more prefer the business model of FFH and BRK than GLRE. There is way too much hidden risk embedded in the long/short strategies, even though the apparent net exposure looks low.

I read a book call "Inside the black box", and it mentioned in 2007, there was a big crisis for long/short strategy funds. Even though the whole market index barely moved, a lot of long/short guys lost as much as 45% in 2 months.

 

Long/short strategies can work well in flattish markets when stock picking skills shine, and in down markets relative to long only strategies, but not in up markets.

 

There is a big issue however with their underwriting model that would be problematic with any manager. They seek to write mainly low volatility business such that rating agencies will allow them to invest most of their assets in potentially volatile equities.  However, other (re)insurers like to retain low volatility business, which doesn't pinch their capital adequacy as determined by rating agencies,  unless they think a segment is going to perform poorly.

 

There is often information asymmetry between the cedant and the reinsurer of apparently low volatility lines of business that sometimes leads to unanticipated tail risk. Motor insurance is notorious for tail risk that doesn't always manifest suddenly as catastrophes, but may become a continuing loss.

 

They are not a potentially more profitable  lead (re)insurer,  and they can't become one with their business model.  If they are extremely picky, the brokers won't bring them business , and the reduction in premiums could lead to  a determination that they are a passive foreign investment company with major tax disadvantages for shareholders, not mainly a tax advantaged insurance company.

 

They are in a catch 22.

 

[abitofvalue]

GLRE's underwriting results are horrible.  Their underwriting team has under-performed since inception. Since going public, their cumulative underwriting losses was $60M.  this is during a reasonably good insurance market.  It's clear that the team needs to be replaced.  the Company has already done some staff changes. The whole business model is dependent on reasonably profitable underwriting and they've failed at that.

 

Despite the weak underwriting and okay investment track record (by my math, the investment portfolio compounded at 6.3% per year since 2006 vs. 7.0% for the S&P 500), BVPS still compounded faster than market since the end of 2006, coming in at 10.1%.  this demonstrates the power of the leverage associated with the business model. 

 

I suspect GLRE will be an okay/good investment over the long run, although would be better if they get a better insurance team.

 

I would far more prefer the business model of FFH and BRK than GLRE. There is way too much hidden risk embedded in the long/short strategies, even though the apparent net exposure looks low.

I read a book call "Inside the black box", and it mentioned in 2007, there was a big crisis for long/short strategy funds. Even though the whole market index barely moved, a lot of long/short guys lost as much as 45% in 2 months.

 

Long/short strategies can work well in flattish markets when stock picking skills shine, and in down markets relative to long only strategies, but not in up markets.

 

There is a big issue however with their underwriting model that would be problematic with any manager. They seek to write mainly low volatility business such that rating agencies will allow them to invest most of their assets in potentially volatile equities.  However, other (re)insurers like to retain low volatility business, which doesn't pinch their capital adequacy as determined by rating agencies,  unless they think a segment is going to perform poorly.

 

There is often information asymmetry between the cedant and the reinsurer of apparently low volatility lines of business that sometimes leads to unanticipated tail risk. Motor insurance is notorious for tail risk that doesn't always manifest suddenly as catastrophes, but may become a continuing loss.

 

They are not a potentially more profitable  lead (re)insurer,  and they can't become one with their business model.  If they are extremely picky, the brokers won't bring them business , and the reduction in premiums could lead to  a determination that they are a passive foreign investment company with major tax disadvantages for shareholders, not mainly a tax advantaged insurance company.

 

They are in a catch 22.

 

Good post.

 

Your point about GLRE needing to write business to avoid  PFIC status is something I had not given much thought to before today.  Would this also be an issue if say Einhorn has a couple of lights out years and the investment earnings are extraordinary but insurance earnings continue to be weak?

[giofranchi]

They are in a catch 22.

 

twacowfca,

sorry I don't understand the expression… Could you please let me know what it means exactly? ;)

 

Thank you!

 

Gio

 

[Liberty]

They are in a catch 22.

 

twacowfca,

sorry I don't understand the expression… Could you please let me know what it means exactly? ;)

 

Thank you!

 

Gio

 

https://en.wikipedia.org/wiki/Catch-22_(logic)

 

This comes from the Joseph Heller book of the same name:

 

https://en.wikipedia.org/wiki/Catch-22

 

This refers to bomber plane crews:

 

There was only one catch and that was Catch-22, which specified that a concern for one's safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he were sane he had to fly them. If he flew them he was crazy and didn't have to; but if he didn't want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle. (p. 56, ch. 5)

[twacowfca]

They are in a catch 22.

 

twacowfca,

sorry I don't understand the expression… Could you please let me know what it means exactly? ;)

 

Thank you!

 

Gio

 

https://en.wikipedia.org/wiki/Catch-22_(logic)

 

This comes from the Joseph Heller book of the same name:

 

https://en.wikipedia.org/wiki/Catch-22

 

This refers to bomber plane crews:

 

There was only one catch and that was Catch-22, which specified that a concern for one's safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he were sane he had to fly them. If he flew them he was crazy and didn't have to; but if he didn't want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle. (p. 56, ch. 5)

 

Or to use a fancy word: nonplussed, but that's not as good.

[twacowfca]

GLRE's underwriting results are horrible.  Their underwriting team has under-performed since inception. Since going public, their cumulative underwriting losses was $60M.  this is during a reasonably good insurance market.  It's clear that the team needs to be replaced.  the Company has already done some staff changes. The whole business model is dependent on reasonably profitable underwriting and they've failed at that.

 

Despite the weak underwriting and okay investment track record (by my math, the investment portfolio compounded at 6.3% per year since 2006 vs. 7.0% for the S&P 500), BVPS still compounded faster than market since the end of 2006, coming in at 10.1%.  this demonstrates the power of the leverage associated with the business model. 

 

I suspect GLRE will be an okay/good investment over the long run, although would be better if they get a better insurance team.

 

I would far more prefer the business model of FFH and BRK than GLRE. There is way too much hidden risk embedded in the long/short strategies, even though the apparent net exposure looks low.

I read a book call "Inside the black box", and it mentioned in 2007, there was a big crisis for long/short strategy funds. Even though the whole market index barely moved, a lot of long/short guys lost as much as 45% in 2 months.

 

Long/short strategies can work well in flattish markets when stock picking skills shine, and in down markets relative to long only strategies, but not in up markets.

 

There is a big issue however with their underwriting model that would be problematic with any manager. They seek to write mainly low volatility business such that rating agencies will allow them to invest most of their assets in potentially volatile equities.  However, other (re)insurers like to retain low volatility business, which doesn't pinch their capital adequacy as determined by rating agencies,  unless they think a segment is going to perform poorly.

 

There is often information asymmetry between the cedant and the reinsurer of apparently low volatility lines of business that sometimes leads to unanticipated tail risk. Motor insurance is notorious for tail risk that doesn't always manifest suddenly as catastrophes, but may become a continuing loss.

 

They are not a potentially more profitable  lead (re)insurer,  and they can't become one with their business model.  If they are extremely picky, the brokers won't bring them business , and the reduction in premiums could lead to  a determination that they are a passive foreign investment company with major tax disadvantages for shareholders, not mainly a tax advantaged insurance company.

 

They are in a catch 22.

 

Good post.

 

Your point about GLRE needing to write business to avoid  PFIC status is something I had not given much thought to before today.  Would this also be an issue if say Einhorn has a couple of lights out years and the investment earnings are extraordinary but insurance earnings continue to be weak?

 

I studied that a few years ago. but I'm no expert. I think it has to do more with how much premium they write in relation to assets rather than profits. That's a main point, but not the only point.

Their CEO said on their recent conference call that they're not there yet.