GLRE - Greenlight Capital Re

[WolfOfMainStreet]

Just reading through the last quarterly report and I have a question:

Why is "Net realized gains on investments and financial contracts" on the statement of cash flows being subtracted? Wouldn't investment gains be part of the companies cash from operating activities?

 

Also, cash based metrics aren't a good idea to use on a company like GLRE. What are some good ones to use besides P/B and BVPS growth? I've looked at investment returns and CR just wondering if there is anything else.

 

http://quote.morningstar.com/stock-filing/Quarterly-Report/2014/6/30/t.aspx?t=XNAS:GLRE&ft=10-Q&d=34878a957c500a4212891a3e77ef10e2

[topofeaturellc]

That's just GAAP.  Its part of the reason why CF accounting for insurance companies doesn't always make sense.

[WolfOfMainStreet]

That's just GAAP.  Its part of the reason why CF accounting for insurance companies doesn't always make sense.

 

In trying to paint a financial picture what else would your really look at (ratios/simple modeling)? I am just trying to throw down as many yardsticks as possible so if anything goes wrong/right with this idea I'll have something tangible to learn from.

[muscleman]

That's just GAAP.  Its part of the reason why CF accounting for insurance companies doesn't always make sense.

 

In trying to paint a financial picture what else would your really look at (ratios/simple modeling)? I am just trying to throw down as many yardsticks as possible so if anything goes wrong/right with this idea I'll have something tangible to learn from.

 

As I said before, cost of float is more important than CR.

If you have a policy that you collect $100 premium and after 20 years, you have to pay out $200, that makes the CR 200, but it will be highly profitable for you, compared to a policy that you collect $100 and after one month you have to pay out $100.5.

[topofeaturellc]

Think about this way. If the marginal reinsurer earns its cost of equity, its worth book (which may not be the case right now) then any argument for buying GLRE has to predicated on either being less than book, or you having the ability and insight to underwrite their future combined ratios (which are generally mean reverting) and their cost of float.  There it really depends on what you think Greenlight's returns will look like after fees.  Figure those things out and you'll have the steady state ROE (which drives BV growth) and that will drive the multiple of book you think its worth.

 

You'll need to break out excel to do this math.

 

Personally I'd want it for less than book because I'm not comfortable betting that GLRE is better at investing or writing reinsurance. But different horses for courses.

 

 

[WolfOfMainStreet]

I attached the spreadsheet I am working on.

 

So what I am doing is finding out the cost of float and looking at the investment returns generated on it to see if they are good. Did I get that right?

 

For float I did, Float = Loss and loss adjustment expense reserves + Unearned premium reserves + Reinsurance balances payable + Funds withheld - Reinsurance balances receivable - Loss and loss adjustment expenses recoverable - Deferred acquisition costs, net - Unearned premiums ceded

 

Basically from your comments and what I've read float is the money you have but don't own, you use it to get investment returns. Before I go all the way back to calculate float from the very start, do my numbers seem right?

 

Next, what I did is subtract the cost of the float from the investment returns to see the true returns for the business as a whole. Did I get that right?

 

How do I factor CR into my model for value? Once I figure out how to at least paint the picture then I can make some attempt at creating investment scenarios.

 

My original investment idea included a simple spreadsheet that assumed different BVPS growths and P/B paid for those values down the line. I am much more interested in understanding the drivers behind BV growth.

 

GLRE_Float_-_Copy.xlsx

[WolfOfMainStreet]

Would ROE be something like:

 

Investment returns - cost of float = True investment returns

True investment returns - Combined ratio = 5% ROE

(10%)                            (5%)

[giofranchi]

I am much more interested in understanding the drivers behind BV growth.

 

Have you looked at the 2014 IM Presentation? Please, find it in attachment. I think you'll find page 30 and page 31 particularly interesting.

And those are the numbers with still very low leverage. Though, as I have said before, I don't see GLRE ever becoming as levered as other insurance / reinsurance companies, surely they might (and probably will) increase both Earned Premiums and Invested Assets as percentages of capital.

 

Also I think you might find interesting the 2012 IM Presentation (in attachment), where on page 35 you might find the formula they use to calculate ROE, and on page 39 you see what happens to BVPS growth if Invested Assets were to become 175% of capital (like I think they will sooner or later).

 

I hope this helps. ;)

 

Gio

GLRE-Investor-Meeting-Presentation-May-2014-final.pdf

Greenlight_Re_2012_Investor_Meeting.pdf

[topofeaturellc]

Would ROE be something like:

 

Investment returns - cost of float = True investment returns

True investment returns - Combined ratio = 5% ROE

(10%)                            (5%)

 

not quite because combined ratio is on earned premiums and investment returns are on float+capital so its different denominators.  That and you'd be generating an ROA - so you'd need to multiply that number by leverage (earned premiums/equity for underwriting, invested assets/equity for investment results)

 

Cost of float is a metric that takes into account underwriting results already, so no need to use it on both the underwriting result and the investment result.  You could n theory reformulate the whole thing to  use cost of float if you wanted to.

 

But because of the nature of the risks GLRE is mostly writing - short lived, frequency risk, there isn't going to be much revealed by doing a more complicated calculation of cost of float then what the simpler combined ratio+investment return analysis gives you.

 

Perhaps worth doing as an exercise though.

 

 

 

 

[topofeaturellc]

That's just GAAP.  Its part of the reason why CF accounting for insurance companies doesn't always make sense.

 

In trying to paint a financial picture what else would your really look at (ratios/simple modeling)? I am just trying to throw down as many yardsticks as possible so if anything goes wrong/right with this idea I'll have something tangible to learn from.

 

Realistically there are three risks and they are all sort of inter-related.  The price you paid, their ability to write reinsurance, and Einhorn's future investment performance.

 

That's really about it.  Especially since they fund the business primarily with capital and a smidge of PB borrowing (which sort of makes me nervous in an abstract way, but whatevs)

 

 

[muscleman]

I attached the spreadsheet I am working on.

 

So what I am doing is finding out the cost of float and looking at the investment returns generated on it to see if they are good. Did I get that right?

 

For float I did, Float = Loss and loss adjustment expense reserves + Unearned premium reserves + Reinsurance balances payable + Funds withheld - Reinsurance balances receivable - Loss and loss adjustment expenses recoverable - Deferred acquisition costs, net - Unearned premiums ceded

 

Basically from your comments and what I've read float is the money you have but don't own, you use it to get investment returns. Before I go all the way back to calculate float from the very start, do my numbers seem right?

 

Next, what I did is subtract the cost of the float from the investment returns to see the true returns for the business as a whole. Did I get that right?

 

How do I factor CR into my model for value? Once I figure out how to at least paint the picture then I can make some attempt at creating investment scenarios.

 

My original investment idea included a simple spreadsheet that assumed different BVPS growths and P/B paid for those values down the line. I am much more interested in understanding the drivers behind BV growth.

 

You don't need to factor in CR. It doesn't matter what the CR is. The truly important thing is cost of float.

As you can see, the cost of float is 5% 2013 and 20% 2012, which is not that great.

If they use a margin loan in IB, it can get them a borrowing cost of less than 2%, which is far better than running this reinsurance operation.  :)

[topofeaturellc]

I attached the spreadsheet I am working on.

 

So what I am doing is finding out the cost of float and looking at the investment returns generated on it to see if they are good. Did I get that right?

 

For float I did, Float = Loss and loss adjustment expense reserves + Unearned premium reserves + Reinsurance balances payable + Funds withheld - Reinsurance balances receivable - Loss and loss adjustment expenses recoverable - Deferred acquisition costs, net - Unearned premiums ceded

 

Basically from your comments and what I've read float is the money you have but don't own, you use it to get investment returns. Before I go all the way back to calculate float from the very start, do my numbers seem right?

 

Next, what I did is subtract the cost of the float from the investment returns to see the true returns for the business as a whole. Did I get that right?

 

How do I factor CR into my model for value? Once I figure out how to at least paint the picture then I can make some attempt at creating investment scenarios.

 

My original investment idea included a simple spreadsheet that assumed different BVPS growths and P/B paid for those values down the line. I am much more interested in understanding the drivers behind BV growth.

 

You don't need to factor in CR. It doesn't matter what the CR is. The truly important thing is cost of float.

As you can see, the cost of float is 5% 2013 and 20% 2012, which is not that great.

If they use a margin loan in IB, it can get them a borrowing cost of less than 2%, which is far better than running this reinsurance operation.  :)

 

CR is implicit in cost of float.  Its perfectly reasonable to just use CR and investment return to derive and ROE.  the size of the float is included in investible assets and the underwriting cost is implicit in CR.

 

For someone taking long tailed severity risk Cost of float is an interesting thing to look at - especially as long tailed risk allows you to take equity but here what GLRE has done is combined short term frequency risk with an underlevered investment portfolio in a L/S manager who runs like 40% net.. 

[giofranchi]

For someone taking long tailed severity risk Cost of float is an interesting thing to look at - especially as long tailed risk allows you to take equity but here what GLRE has done is combined short term frequency risk with an underlevered investment portfolio in a L/S manager who runs like 40% net..

 

What’s the difference, if short tailed risk is always revolving? The fact is float is increasing… slowly, but increasing. As long as float is increasing, I think you want to know its cost, don't you?

 

Gio

 

[muscleman]

I attached the spreadsheet I am working on.

 

So what I am doing is finding out the cost of float and looking at the investment returns generated on it to see if they are good. Did I get that right?

 

For float I did, Float = Loss and loss adjustment expense reserves + Unearned premium reserves + Reinsurance balances payable + Funds withheld - Reinsurance balances receivable - Loss and loss adjustment expenses recoverable - Deferred acquisition costs, net - Unearned premiums ceded

 

Basically from your comments and what I've read float is the money you have but don't own, you use it to get investment returns. Before I go all the way back to calculate float from the very start, do my numbers seem right?

 

Next, what I did is subtract the cost of the float from the investment returns to see the true returns for the business as a whole. Did I get that right?

 

How do I factor CR into my model for value? Once I figure out how to at least paint the picture then I can make some attempt at creating investment scenarios.

 

My original investment idea included a simple spreadsheet that assumed different BVPS growths and P/B paid for those values down the line. I am much more interested in understanding the drivers behind BV growth.

 

You don't need to factor in CR. It doesn't matter what the CR is. The truly important thing is cost of float.

As you can see, the cost of float is 5% 2013 and 20% 2012, which is not that great.

If they use a margin loan in IB, it can get them a borrowing cost of less than 2%, which is far better than running this reinsurance operation.  :)

 

CR is implicit in cost of float.  Its perfectly reasonable to just use CR and investment return to derive and ROE.  the size of the float is included in investible assets and the underwriting cost is implicit in CR.

 

For someone taking long tailed severity risk Cost of float is an interesting thing to look at - especially as long tailed risk allows you to take equity but here what GLRE has done is combined short term frequency risk with an underlevered investment portfolio in a L/S manager who runs like 40% net..

 

As I said before, certain insurance don't generate float, such as crop insurance, so if your crop insurance does not have a CR below 100, you are doomed to lose.

So CR is way less important than cost of float.

[giofranchi]

So CR is way less important than cost of float.

 

I agree. But I think it is a mistake to look at two very difficult years… and jump to the conclusion they’d better borrow money than run insurance operations!

 

Gio

 

[muscleman]

So CR is way less important than cost of float.

 

I agree. But I think it is a mistake to look at two very difficult years… and jump to the conclusion they’d better borrow money than run insurance operations!

 

Gio

 

Of course!  :)

[muscleman]

Gio, do you know what it means by "deposit liabilities"? I see 121 Mn item on TPRE's balance sheet as this item, and it says this is for insurance contracts that don't carry sufficient reinsurance risks to be qualified as premiums. I don't quite understand what it is and if it is part of the float.

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10140498-898-343057&type=sect&TabIndex=2&companyid=910805&ppu=%252fdefault.aspx%253fsym%253dTPRE

 

Does TPRE collect deposit like a bank?

 

Deposit liabilities

Certain contracts do not transfer sufficient insurance risk to be deemed reinsurance contracts and are accounted for using the deposit method of accounting. Management exercises judgment in determining whether contracts transfer sufficient risk to be accounted for as reinsurance contracts. Using the deposit method of accounting, a deposit liability, rather than written premium, is initially recorded based upon the consideration received less any explicitly identified premiums or fees. In subsequent periods, the deposit liability is adjusted by calculating the effective yield on the deposit to reflect actual payments to date and future expected payments.

 

11.    Deposit contracts

Deposit liability contracts each contain a fixed interest crediting rate, which ranges from 2.5% to 3.0% . Certain deposit contracts also contain a variable interest crediting feature based on actual investment returns realized by the Company that can increase the overall effective interest crediting rate on those contracts to 6.1% to 6.5% . These variable interest crediting features are considered embedded derivatives. We include the estimated fair value of these embedded derivatives with the host deposit liability contracts. Changes in the estimated fair value of these embedded derivatives are recorded in other expenses in the condensed consolidated statements of income.

The following table represents activity in the deposit liabilities for the six months ended June 30, 2014 and the year ended December 31, 2013:

 

June 30,

2014

 

December 31,

2013

 

($ in thousands)

Balance, beginning of period

$

120,946

 

 

$

50,446

 

Consideration received

—

 

 

66,369

 

Net investment expense allocation and change in fair value of embedded derivatives

1,263

 

 

4,731

 

Payments

(250

)

 

(600

)

Balance, end of period

$

121,959

 

 

$

120,946

 

 

[topofeaturellc]

I attached the spreadsheet I am working on.

 

So what I am doing is finding out the cost of float and looking at the investment returns generated on it to see if they are good. Did I get that right?

 

For float I did, Float = Loss and loss adjustment expense reserves + Unearned premium reserves + Reinsurance balances payable + Funds withheld - Reinsurance balances receivable - Loss and loss adjustment expenses recoverable - Deferred acquisition costs, net - Unearned premiums ceded

 

Basically from your comments and what I've read float is the money you have but don't own, you use it to get investment returns. Before I go all the way back to calculate float from the very start, do my numbers seem right?

 

Next, what I did is subtract the cost of the float from the investment returns to see the true returns for the business as a whole. Did I get that right?

 

How do I factor CR into my model for value? Once I figure out how to at least paint the picture then I can make some attempt at creating investment scenarios.

 

My original investment idea included a simple spreadsheet that assumed different BVPS growths and P/B paid for those values down the line. I am much more interested in understanding the drivers behind BV growth.

 

You don't need to factor in CR. It doesn't matter what the CR is. The truly important thing is cost of float.

As you can see, the cost of float is 5% 2013 and 20% 2012, which is not that great.

If they use a margin loan in IB, it can get them a borrowing cost of less than 2%, which is far better than running this reinsurance operation.  :)

 

CR is implicit in cost of float.  Its perfectly reasonable to just use CR and investment return to derive and ROE.  the size of the float is included in investible assets and the underwriting cost is implicit in CR.

 

For someone taking long tailed severity risk Cost of float is an interesting thing to look at - especially as long tailed risk allows you to take equity but here what GLRE has done is combined short term frequency risk with an underlevered investment portfolio in a L/S manager who runs like 40% net..

 

As I said before, certain insurance don't generate float, such as crop insurance, so if your crop insurance does not have a CR below 100, you are doomed to lose.

So CR is way less important than cost of float.

 

That's not what I'm saying.  I'm saying in lieu of calculating cost of float, a calculation that includes combined ratio, earned premiums, capital, and reserves is getting you to the same place as "cost of float" in a much simpler to calculate from GAAP way.  I mean its algebra. You can rearrange it how you want that is most intuitive to you.

 

The difference is that the longer tailed the book of risk is the greater the size of the provisioning relative to equity and the more important the investment return on the portfolio is relative to CR.  To your own point, the shorter the term of the contract, the more important CR is.

 

For someone like GLRE or a marginal P&C carrier, CR is a much bigger driver of Return on Equity than it is for an entity that takes more complex kinds or risk.

[topofeaturellc]

For someone taking long tailed severity risk Cost of float is an interesting thing to look at - especially as long tailed risk allows you to take equity but here what GLRE has done is combined short term frequency risk with an underlevered investment portfolio in a L/S manager who runs like 40% net..

 

What’s the difference, if short tailed risk is always revolving? The fact is float is increasing… slowly, but increasing. As long as float is increasing, I think you want to know its cost, don't you?

 

Gio

 

Because you always have to bid new contracts and you can't guarantee the same pricing.  Geico can do that successfully because they have a lower cost to serve and do a good job of positive selection. Pretty much all reinsurers have the same marginal cost. GLRE could say " we can invest this better over the long-term and therefore our marginal cost is lower" but that's a really easy way to let a few years of worse than expected returns on the investment portfolio to eat in to capital.

[WolfOfMainStreet]

I am much more interested in understanding the drivers behind BV growth.

 

Have you looked at the 2014 IM Presentation? Please, find it in attachment. I think you'll find page 30 and page 31 particularly interesting.

And those are the numbers with still very low leverage. Though, as I have said before, I don't see GLRE ever becoming as levered as other insurance / reinsurance companies, surely they might (and probably will) increase both Earned Premiums and Invested Assets as percentages of capital.

 

Also I think you might find interesting the 2012 IM Presentation (in attachment), where on page 35 you might find the formula they use to calculate ROE, and on page 39 you see what happens to BVPS growth if Invested Assets were to become 175% of capital (like I think they will sooner or later).

 

I hope this helps. ;)

 

Gio

 

Gio this is exactly what I was looking for, thanks. The matrix on page 31 of the 2014 report pretty much sums up what I was trying to do. Even with averageish CR and investment returns there are still double digit ROEs at the current numbers. The only thing I'm worried about is that earned premiums have decreased from the same period last year. I think this is probably a temporary hiccup on the underwriting side. The float has also been on a downward trend since 2012. During the beginning of this year the market was willing to pay ~33.70 for a diluted book value of 27.91 (2013). I picked GLRE up for 33.50 with a diluted BV of 30.47, roughly a 10% premium to diluted BVPS. Using their ROE calculation I also set up several conservative scenarios and I still see a pretty good margin of safety with this investment. It won't be a ten bagger next year but if I hold for enough time I think I'll see something good down the line. I attached my mess on excel  :)

 

That's just GAAP.  Its part of the reason why CF accounting for insurance companies doesn't always make sense.

 

In trying to paint a financial picture what else would your really look at (ratios/simple modeling)? I am just trying to throw down as many yardsticks as possible so if anything goes wrong/right with this idea I'll have something tangible to learn from.

 

Realistically there are three risks and they are all sort of inter-related.  The price you paid, their ability to write reinsurance, and Einhorn's future investment performance.

 

That's really about it.  Especially since they fund the business primarily with capital and a smidge of PB borrowing (which sort of makes me nervous in an abstract way, but whatevs)

 

 

 

Topofeature to answer your investment criteria: I think I paid and OK price, I trust their ability to write reinsurance, and Einhorn has a great track record. The last two are aided by the fact that management has skin in the game. They want free float and great investment returns as bad as we do.

GLRE_ROE_-_Copy.xlsx

[WolfOfMainStreet]

I attached the spreadsheet I am working on.

 

So what I am doing is finding out the cost of float and looking at the investment returns generated on it to see if they are good. Did I get that right?

 

For float I did, Float = Loss and loss adjustment expense reserves + Unearned premium reserves + Reinsurance balances payable + Funds withheld - Reinsurance balances receivable - Loss and loss adjustment expenses recoverable - Deferred acquisition costs, net - Unearned premiums ceded

 

Basically from your comments and what I've read float is the money you have but don't own, you use it to get investment returns. Before I go all the way back to calculate float from the very start, do my numbers seem right?

 

Next, what I did is subtract the cost of the float from the investment returns to see the true returns for the business as a whole. Did I get that right?

 

How do I factor CR into my model for value? Once I figure out how to at least paint the picture then I can make some attempt at creating investment scenarios.

 

My original investment idea included a simple spreadsheet that assumed different BVPS growths and P/B paid for those values down the line. I am much more interested in understanding the drivers behind BV growth.

 

You don't need to factor in CR. It doesn't matter what the CR is. The truly important thing is cost of float.

As you can see, the cost of float is 5% 2013 and 20% 2012, which is not that great.

If they use a margin loan in IB, it can get them a borrowing cost of less than 2%, which is far better than running this reinsurance operation.  :)

 

muscleman, I agree with you that cost of float is very important. My original calculation of float gave me those 5% and 20% numbers which aren't too great. When I did loss/float based off the IM presentation numbers I get totally different results. It looks to me (based off the IM #s) that float has been increasing and only since 2012 has actually cost the company something. Am I missing something or are the IM float numbers missing something?

 

I was using average float but they are just giving a number (2014 IM page 28). Could it be that their float numbers are more accurate since they have a better knowledge of their own books?

 

If their float is too expensive for too long I'll let the stock go. It seems to me that they probably hit a rough patch due to contracts made a few years ago. Could be wrong. Small circle of competence  :)

 

Attached the numbers on excel and the 2014 IM presentation.

GLRE_Cost_of_Float_-_Copy.xlsx

GLRE-Investor-Meeting-Presentation-May-2014-final.pdf

[giofranchi]

The only thing I'm worried about is that earned premiums have decreased from the same period last year. I think this is probably a temporary hiccup on the underwriting side. The float has also been on a downward trend since 2012.

 

I wouldn’t be too much worried about the recent decrease in earned premiums and float. In fact, when the market is a difficult one, and not enough opportunities are to be found, you want to see the discipline to shrink the business, instead of increasing it at all costs!

 

Of course, at some point growth has to resume, but right now I think what we are seeing is good discipline and not a failure to do business.

 

Gio

 

[leeway]

CONN’s Hurts Einhorn In Q3 As Greenlight Sinks 4%

 

http://www.valuewalk.com/2014/09/einhorn-q3-2014-returns/?utm_source=mailchimp&utm_medium=email&utm_campaign=EMAIL_DAILY&utm_content=quick_link

[WolfOfMainStreet]

Getting cheaper, not too far from BV

[giofranchi]

Getting cheaper, not too far from BV

 

I am buying more today. :)

 

Gio