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GLRE - Greenlight Capital Re

premfan

By premfan
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giofranchi Newbie

giofranchi

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The fees are one of the reasons why i ended up selling this.  Einhorn put down a lot of capital himself, but the capital that attracted made the fee stream > his equity ownership.

 

Hi Jay,

not being worried about the fees, I would like to know instead which were the other reasons that prompted you to sell out of GLRE.

Thank you! :)

 

giofranchi

 

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jay21 Newbie

jay21

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The fees are one of the reasons why i ended up selling this.  Einhorn put down a lot of capital himself, but the capital that attracted made the fee stream > his equity ownership.

 

Hi Jay,

not being worried about the fees, I would like to know instead which were the other reasons that prompted you to sell out of GLRE.

Thank you! :)

 

giofranchi

 

Gio, overall I think that GLRE can do fine, but I want to be sure that it WILL do fine in the same way that I am sure MKL and BRK will do fine.

 

Here are a few of my reasons for selling:

 

- limited confidence in the underwriting.  The team said that they will grow revenues only when rates are attractive.  In 2007, they earned 114,949 of premiums with a 96.5 CR.  In 2012, they earned 466,714 of premiums with a CR  of 112.9.  So they wrote a lot more and were less profitable.

 

- less confidence in Einhorn's investing style.  His returns over the last 5 or more years have not been as good as his earlier years.  More importantly it seems to me his process has changed.  I believe that a lot of his early returns were event driven, easy money such as demutualizations.  He has now added more macro positions and I believe I read that he now actively manages his long/short % based upon the market rather than each position reflecting pure alpha.  (Also, I don't really want to pay his fees for him to invest in AAPL).

 

- less confidence in GLRE as a vehicle.  The basic premise sounds promising.  Pair an all star investor with a good underwriter and watch the vehicle compound at an amazing rate.  However, matching a lot of equities against short term insurance liabilities seems dangerous.  A classic example of permanent loss is matching short term liabilities with long term assets.  Also, I think that some reinsurance can be levered (I think of excess loss contracts as writing options). That type of liability seems like a dangerous pairing to a hedge fund asset.

 

I feel much more confident in investing something like MKL which has a much more sensible style imo.  Pair your insurance liabilities with debt assets and earn a spread between your underwriting and bonds.  Pair your equity with long term equities that should on average beat the market.  Buy whole businesses when you can that earn sensible returns on investment.  Get paid when you add value over the long term (BVPS growth of >10%).

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giofranchi Newbie

giofranchi

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Gio, overall I think that GLRE can do fine, but I want to be sure that it WILL do fine in the same way that I am sure MKL and BRK will do fine.

 

Here are a few of my reasons for selling:

 

- limited confidence in the underwriting.  The team said that they will grow revenues only when rates are attractive.  In 2007, they earned 114,949 of premiums with a 96.5 CR.  In 2012, they earned 466,714 of premiums with a CR  of 112.9.  So they wrote a lot more and were less profitable.

 

- less confidence in Einhorn's investing style.  His returns over the last 5 or more years have not been as good as his earlier years.  More importantly it seems to me his process has changed.  I believe that a lot of his early returns were event driven, easy money such as demutualizations.  He has now added more macro positions and I believe I read that he now actively manages his long/short % based upon the market rather than each position reflecting pure alpha.  (Also, I don't really want to pay his fees for him to invest in AAPL).

 

- less confidence in GLRE as a vehicle.  The basic premise sounds promising.  Pair an all star investor with a good underwriter and watch the vehicle compound at an amazing rate.  However, matching a lot of equities against short term insurance liabilities seems dangerous.  A classic example of permanent loss is matching short term liabilities with long term assets.  Also, I think that some reinsurance can be levered (I think of excess loss contracts as writing options). That type of liability seems like a dangerous pairing to a hedge fund asset.

 

I feel much more confident in investing something like MKL which has a much more sensible style imo.  Pair your insurance liabilities with debt assets and earn a spread between your underwriting and bonds.  Pair your equity with long term equities that should on average beat the market.  Buy whole businesses when you can that earn sensible returns on investment.  Get paid when you add value over the long term (BVPS growth of >10%).

 

Thank you Jay! I understand point 1) and 2), but I am not sure if I agree with point 3): I think investing in bonds today is far more dangerous than investing in a long/short equity strategy… why would you invest the float in bonds, if you run a higher risk of a permanent loss of capital than in a long/short equity portfolio? Yields might still resume their downtrend, but right now even Mr. Shilling acknowledges that you invest in bonds for capital appreciation, not for yield. And that's much closer to "macro investing" than even Mr. Einhorn is doing these days! ;)

 

giofranchi

 

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bargainman Newbie

bargainman

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Just looking at the limited historical return

 

http://financials.morningstar.com/ratios/r.html?t=GLRE&region=USA&culture=en-us

 

looks like BVPS has followed this trend starting in 2007:

 

Book Value Per Share USD 16.77 13.47 19.24 21.76 22.00 22.39 23.88

 

Does anyone know what happened in 2008, 2009?  that's quite a drop and recovery.  Also since then it's been modestly up, but not even 10% for the last 3 years.  What gives you confidence that it will increase from here?

 

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giofranchi Newbie

giofranchi

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Also since then it's been modestly up, but not even 10% for the last 3 years.  What gives you confidence that it will increase from here?

 

Much like FFH, right? Both Mr. Watsa and Mr. Einhorn think we are living through a once in a 100 years period fraught with economic perils and difficulties… So, they both are behaving very conservatively… They are not reaching for yield and are leaving a lot of money on the table… This doesn’t mean they have become all of a sudden stupid! If their fears do not materialize, we must be content with a 5% to 10% for two or three years more, then I don’t see why growth shouldn’t resume at a satisfactory rate. Vice versa, if their fears do materialize, they will outperform almost anybody else.

All considered, I like the proposition above. To wait is hard, no doubt about it. But the only other proposition I like is LRE’s: a business that will make a lot of money no matter what happens around it… The problem is, imo, LRE is almost unique.

 

giofranchi

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jay21 Newbie

jay21

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Gio, overall I think that GLRE can do fine, but I want to be sure that it WILL do fine in the same way that I am sure MKL and BRK will do fine.

 

Here are a few of my reasons for selling:

 

- limited confidence in the underwriting.  The team said that they will grow revenues only when rates are attractive.  In 2007, they earned 114,949 of premiums with a 96.5 CR.  In 2012, they earned 466,714 of premiums with a CR  of 112.9.  So they wrote a lot more and were less profitable.

 

- less confidence in Einhorn's investing style.  His returns over the last 5 or more years have not been as good as his earlier years.  More importantly it seems to me his process has changed.  I believe that a lot of his early returns were event driven, easy money such as demutualizations.  He has now added more macro positions and I believe I read that he now actively manages his long/short % based upon the market rather than each position reflecting pure alpha.  (Also, I don't really want to pay his fees for him to invest in AAPL).

 

- less confidence in GLRE as a vehicle.  The basic premise sounds promising.  Pair an all star investor with a good underwriter and watch the vehicle compound at an amazing rate.  However, matching a lot of equities against short term insurance liabilities seems dangerous.  A classic example of permanent loss is matching short term liabilities with long term assets.  Also, I think that some reinsurance can be levered (I think of excess loss contracts as writing options). That type of liability seems like a dangerous pairing to a hedge fund asset.

 

I feel much more confident in investing something like MKL which has a much more sensible style imo.  Pair your insurance liabilities with debt assets and earn a spread between your underwriting and bonds.  Pair your equity with long term equities that should on average beat the market.  Buy whole businesses when you can that earn sensible returns on investment.  Get paid when you add value over the long term (BVPS growth of >10%).

 

Thank you Jay! I understand point 1) and 2), but I am not sure if I agree with point 3): I think investing in bonds today is far more dangerous than investing in a long/short equity strategy… why would you invest the float in bonds, if you run a higher risk of a permanent loss of capital than in a long/short equity portfolio? Yields might still resume their downtrend, but right now even Mr. Shilling acknowledges that you invest in bonds for capital appreciation, not for yield. And that's much closer to "macro investing" than even Mr. Einhorn is doing these days! ;)

 

giofranchi

 

I agree that bonds are not a great long term investment.  What I am discussing is sensible risk control.  If you have to pay out your liabilities between 1 and 3 years, how can you invest that into equities where you run the risk of a 50% temporary loss at any time?  You may have to sell at the bottom.  I can imagine many more ways that GLRE can incur a significant impairment of capital than I can for MKL or BRK.

 

Insurance is all about risk control and I am not sure if their inherent structure prioritizes risk control.

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giofranchi Newbie

giofranchi

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Hi Jay,

During the last month and a half, 10 years tresuries went from a yield of 1.7% to a yield of 2.5%, causing significant paper losses. If you would be forced to book them, because of some short-term liabilities that come due, what's the difference with a stock market loss?

I don't see any.

And, as far as risk is concerned, I think Mr. Einhorn is among the best risk managers I know of.

 

giofranchi

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jay21 Newbie

jay21

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Hi Jay,

During the last month and a half, 10 years tresuries went from a yield of 1.7% to a yield of 2.5%, causing significant paper losses. If you would be forced to book them, because of some short-term liabilities that come due, what's the difference with a stock market loss?

I don't see any.

And, as far as risk is concerned, I think Mr. Einhorn is among the best risk managers I know of.

 

giofranchi

 

I am not talking about long term bonds as an investment.  I am talking about asset liability matching. 

 

Also, GLRE has short term liabilities so matching them with 10 years would also not be prudent.  A more appropriate fixed income instrument would be floating rate Short Term ABS.  MTM losses do not scare me.  Being forced to sell because a liability comes due does scare me.  By having short term debt assets you will have a bunch of assets coming due which will improve your liquidity and ability to meet short term liabilities.

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giofranchi Newbie

giofranchi

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I am not talking about long term bonds as an investment.  I am talking about asset liability matching. 

 

Also, GLRE has short term liabilities so matching them with 10 years would also not be prudent.  A more appropriate fixed income instrument would be floating rate Short Term ABS.  MTM losses do not scare me.  Being forced to sell because a liability comes due does scare me.  By having short term debt assets you will have a bunch of assets coming due which will improve your liquidity and ability to meet short term liabilities.

 

Hi Jay,

I understand what you mean, and in theory I also agree with it, though in practice please consider: a AA Municipal Bond with a maturity of 2 years last month yielded 0.56%. If your short tail contracts come due in, let’s say, 1 year, and you want to match their duration with the duration of your investments, you would be forced to accept an even lower yield…

We like insurance, because it provides us with a safe mean to leverage our investments. But, if we invest our equity in stocks, and the float generated by insurance contracts in AA Municipal Bonds with a maturity of less than 2 years, the end result is we won’t enjoy any leverage at all! So, why take the pain to run insurance operations? To achieve an underwriting profit? …Well, no thank you!

In fact, it is exactly when “underwriting comes first” a la LRE, that what you suggest finds a practical and true application. But LRE is an outlier and its business is unique and completely different from GLRE’s or MKL’s.

I admit I don’t know the average duration of MKL’s bond portfolio, but I would be very surprised if it were less than 5 years.

 

On the other hand, a well thought-out long/short strategy hopefully will always have some positions that are profitable (the longs in a bull market, the shorts in a correction), which could be liquidated at a profit, if the need to cover losses on poorly conceived insurance policies actually should come to pass. I very well know there will be periods of time when both the longs and the shorts will move against you, but, thanks to Mr. Einhorn’s skilled watchfulness, let’s hope they will be short, few, and far in between! ;)

 

giofranchi

 

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Liberty Newbie

Liberty

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Actually: http://www.bloomberg.com/news/2013-07-30/einhorn-trades-bullion-for-gold-miners-on-stock-free-fall-1-.html

 

“Overall, we modestly increased our exposure to this area, and our view towards gold has not changed.”

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giofranchi Newbie

giofranchi

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They have been shorting the Yen for some time now… but probably you already knew that! I am not aware of what other FX positions they might be holding right now… Sorry, cannot be of much help!

 

giofranchi

 

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