At the Apex of the Bermuda Triangle :)

[twacowfca]

I'm on island time at the annual S&P insurance conference in Bermuda. Are there any questions  to be posed the CEO's or others in the sessions?

[giofranchi]

WOW! Next year I would really like to come!  ;)

Well, with all the questions I have already asked YOU about the insurance business in general and about the specifics of some insurance companies … it is hard to come up with something new!

Anyway, when the meeting is finished and you find some time, I guess we all will be very grateful, if you could briefly sum up the most interesting topics brought up and discussed.

Enjoy your staying in Bermuda! :)

 

giofranchi

 

[LC]

I'm on island time at the annual S&P insurance conference in Bermuda. Are there any questions  to be posed the CEO's or others in the sessions?

I wish I was knowledgeable about the subtleties of the insurance business to ask an insightful question, but alas I must pass. Enjoy the island!

[racemize]

please post interesting questions and answers!

[twacowfca]

Good speakers today.  One CEO says he expects Sandy's loss to be above $20B.  Another CEO says the P&C reinsurance industry is over capitalized by $25B.  Therefore Sandy should sop up some of the excess capital as reinsurance losses may be 1/3 to 1/2 the total industry loss, depending on the extent of the loss.

 

ILS are leading to a moderation of the hard/soft market cycle with smaller swings because the capital comes in as needed and doesn't drag down returns when the market softens as it is then withdrawn.  This is much better than when there used to be a lot of startups when the market hardened after a big loss.  That extra  capital would then drag down returns for years after the market softened.

 

more later.

[twacowfca]

It was great to see Joe Brandon back as a CEO on one of the panels.  He says that the situation at Transatlantic as a division of Allegheny is in no way to be compared to the situation at Gen Re when Buffett bought it and soon found that their reserves  needed to be strengthened by $6B.  Transatlantic doesn't need surgery.  He's very pleased with what he sees.

 

Interestingly, Joe made a remark in passing that indicated that he wouldn't be surprised if the equity market pulled back 25% in the near future.

[PlanMaestro]

Good to see Brandon back.  Any other interesting stuff twacowfca? What are the most talked concerns besides pricing?

 

Thanks for the updates (and hoping that is not all work).

 

 

It was great to see Joe Brandon back as a CEO on one of the panels.  He says that the situation at Transatlantic as a division of Allegheny is in no way to be compared to the situation at Gen Re when Buffett bought it and soon found that their reserves  needed to be strengthened by $6B.  Transatlantic doesn't need surgery.  He's very pleased with what he sees.

 

Interestingly, Joe made a remark in passing that indicated that he wouldn't be surprised if the equity market pulled back 25% in the near future.

[twacowfca]

Good to see Brandon back.

 

Any other interesting stuff twacowfca? What are the most talked concerns besides pricing?

 

 

It was great to see Joe Brandon back as a CEO on one of the panels.  He says that the situation at Transatlantic as a division of Allegheny is in no way to be compared to the situation at Gen Re when Buffett bought it and soon found that their reserves  needed to be strengthened by $6B.  Transatlantic doesn't need surgery.  He's very pleased with what he sees.

 

Interestingly, Joe made a remark in passing that indicated that he wouldn't be surprised if the equity market pulled back 25% in the near future.

 

The tone was rather subdued, compared to last year that was after the worst period ever for the P&C  industry.  This year most (re)insurers are facing the uncertainty of Sandy instead of the prospect of celebrating what would have been on of the best years ever.

 

Rates will stay firm and probably harden a little post Sandy, but that's not enough to celebrate because everyone is facing low returns on their investments.  The impact if low rates is estimated to be comparable to the KRW hurricanes of 2005, destroying the value of enormous capital annually.  Nobody is of a mind to write business at an underwriting loss.  80% of historical industry returns have been made from investing in the past.  Now everyone realizes they are going to have to make their money on underwriting or fold up.

[ubuy2wron]

Good to see Brandon back.

 

Any other interesting stuff twacowfca? What are the most talked concerns besides pricing?

 

 

It was great to see Joe Brandon back as a CEO on one of the panels.  He says that the situation at Transatlantic as a division of Allegheny is in no way to be compared to the situation at Gen Re when Buffett bought it and soon found that their reserves  needed to be strengthened by $6B.  Transatlantic doesn't need surgery.  He's very pleased with what he sees.

 

Interestingly, Joe made a remark in passing that indicated that he wouldn't be surprised if the equity market pulled back 25% in the near future.

 

The tone was rather subdued, compared to last year that was after the worst period ever for the P&C  industry.  This year most (re)insurers are facing the uncertainty of Sandy instead of the prospect of celebrating what would have been on of the best years ever.

 

Rates will stay firm and probably harden a little post Sandy, but that's not enough to celebrate because everyone is facing low returns on their investments.  The impact if low rates is estimated to be comparable to the KRW hurricanes of 2005, destroying the value of enormous capital annually.  Nobody is of a mind to write business at an underwriting loss.  80% of historical industry returns have been made from investing in the past.  Now everyone realizes they are going to have to make their money on underwriting or fold up.

Now everyone realizes they are going to have to make their money on underwriting or fold up.

DO they? If that was the case I think the mkt would be a lot harder its really the same problem in the lifeco biz. insurance rates are going up but not to a level that anyone is making any dough.

[twacowfca]

Good to see Brandon back.

 

Any other interesting stuff twacowfca? What are the most talked concerns besides pricing?

 

 

It was great to see Joe Brandon back as a CEO on one of the panels.  He says that the situation at Transatlantic as a division of Allegheny is in no way to be compared to the situation at Gen Re when Buffett bought it and soon found that their reserves  needed to be strengthened by $6B.  Transatlantic doesn't need surgery.  He's very pleased with what he sees.

 

Interestingly, Joe made a remark in passing that indicated that he wouldn't be surprised if the equity market pulled back 25% in the near future.

 

The tone was rather subdued, compared to last year that was after the worst period ever for the P&C  industry.  This year most (re)insurers are facing the uncertainty of Sandy instead of the prospect of celebrating what would have been on of the best years ever.

 

Rates will stay firm and probably harden a little post Sandy, but that's not enough to celebrate because everyone is facing low returns on their investments.  The impact if low rates is estimated to be comparable to the KRW hurricanes of 2005, destroying the value of enormous capital annually.  Nobody is of a mind to write business at an underwriting loss.  80% of historical industry returns have been made from investing in the past.  Now everyone realizes they are going to have to make their money on underwriting or fold up.

Now everyone realizes they are going to have to make their money on underwriting or fold up.

DO they? If that was the case I think the mkt would be a lot harder its really the same problem in the lifeco biz. insurance rates are going up but not to a level that anyone is making any dough.

 

 

Let me rephrase my comment.  Virtually everyone at the meeting realizes that the only way to make more than their cost of capital is by passing on P&C business that isn't expected to make an underwriting profit because investment returns are so low.

 

Property rates especially and also casualty rates are creeping upward in response to better underwriting discipline.  No one is talking about a hard or a soft market. That has connotations of boom or bust.  The new normal  is focus on underwriting discipline.

[giofranchi]

Let me rephrase my comment.  Virtually everyone at the meeting realizes that the only way to make more than their cost of capital is by passing on P&C business that isn't expected to make an underwriting profit because investment returns are so low.

 

Property rates especially and also casualty rates are creeping upward in response to better underwriting discipline.  No one is talking about a hard or a soft market. That has connotations of boom or bust.  The new normal  is focus on underwriting discipline.

 

Thank you very much twacowfca,

very nice discussion! I got a terrible cold and I was in bed the last two days, so I can read your impressions from the meeting just now. It seems that the so-called “new normal” is very good news for Lancashire!

I also find Mr. Brandon’s comment about the stock market interesting. Time will tell!

 

giofranchi

[twacowfca]

Let me rephrase my comment.  Virtually everyone at the meeting realizes that the only way to make more than their cost of capital is by passing on P&C business that isn't expected to make an underwriting profit because investment returns are so low.

 

Property rates especially and also casualty rates are creeping upward in response to better underwriting discipline.  No one is talking about a hard or a soft market. That has connotations of boom or bust.  The new normal  is focus on underwriting discipline.

 

Thank you very much twacowfca,

very nice discussion! I got a terrible cold and I was in bed the last two days, so I can read your impressions from the meeting just now. It seems that the so-called “new normal” is very good news for Lancashire!

I also find Mr. Brandon’s comment about the stock market interesting. Time will tell!

 

giofranchi

 

I hope you are feeling better.

 

The low yield regime with firming P&C rates should especially favor short tail property insurers that aren't mainly dependent on investment yields.  The firming rates for companies that make most of their profits  from underwriting should more than make up for the lower yields on their relatively small investment portfolios.  P&C companies with sizeable long tailed casualty books may find it more difficult to see improvements in their ROE's as low yields may cancel much of the gains from firming rates (firming seems to be the better term, not hardening).

 

Not only Lancashire, but a number of other insurers in the Lloyd's and Bermuda axis come to mind as potentially benefiting from better ROE's going forward.  Companies with longer tail books and good underwriting discipline that are good equity investors may also do relatively well, especially if the stock market doesn't experience a P/E contraction.

 

Let's put the cat exposed property insurance market in perspective.  The last seven years have included the two biggest cat loss years ever with the KRW hurricanes of 2005 and the multiple super cats of 2011.  2008 and Q4 of 2012 have also produced large cat losses.  Oh! By the way, wasn't there some sort of financial crisis that also destroyed enormous value a few years ago?

 

My point is that normalization of the losses experienced in the last seven years should by itself produce much better returns in the future.

[giofranchi]

Well twacowfca,

no doubt I agree with you! I think good P&C underwriters, that concentrate on short tail contracts, are going to do very well in the next few years. Obviously, it follows that outstanding underwriters (like Lancashire) are going to do extremely well!

What I am not so sure about is the following:

 

Companies with longer tail books and good underwriting discipline that are good equity investors may also do relatively well, especially if the stock market doesn't experience a P/E contraction.

 

And that’s because I think a P/E contraction is a very real risk. I am not saying it will happen, just that it is a risk nobody should ignore. That’s why among companies with longer tail books I prefer those with a fully hedged stock portfolio and a lot of cash at hand (the only one I know of is Fairfax), or those which employ a long/short value based strategy and are much underleveraged if compared to their peers (the only one I know of is GreenlightRe).

 

And yes! Thank you! I am feeling much better now.

 

giofranchi

[jay21]

 

I hope you are feeling better.

 

The low yield regime with firming P&C rates should especially favor short tail property insurers that aren't mainly dependent on investment yields.  The firming rates for companies that make most of their profits  from underwriting should more than make up for the lower yields on their relatively small investment portfolios.  P&C companies with sizeable long tailed casualty books may find it more difficult to see improvements in their ROE's as low yields may cancel much of the gains from firming rates (firming seems to be the better term, not hardening).

 

Not only Lancashire, but a number of other insurers in the Lloyd's and Bermuda axis come to mind as potentially benefiting from better ROE's going forward.  Companies with longer tail books and good underwriting discipline that are good equity investors may also do relatively well, especially if the stock market doesn't experience a P/E contraction.

 

Let's put the cat exposed property insurance market in perspective.  The last seven years have included the two biggest cat loss years ever with the KRW hurricanes of 2005 and the multiple super cats of 2011.  2008 and Q4 of 2012 have also produced large cat losses.  Oh! By the way, wasn't there some sort of financial crisis that also destroyed enormous value a few years ago?

 

My point is that normalization of the losses experienced in the last seven years should by itself produce much better returns in the future.

 

My expectation/interpretation would be slightly different.  Short tails will benefit from this environment, but it will only help them earn their cost of capital while rates are low.  I think its the long tails that could benefit more.  They should be able to lock in very favorable costs of capital for years (a gift that keeps on giving).  I think its hard to predict what rates will be in the future.  Firms like MKL and BRK I think will especially benefit because they invest in high quality equities with growing cash flows, which can help offset some risk of multiple contraction as the earnings will be higher.  Regardless, I anticipate any high quality insurer to do well.

 

twacowfca, I have learned a lot about insurance from you.  If I were to start an "Insurance Questions" thread, would participate?

 

 

And that’s because I think a P/E contraction is a very real risk. I am not saying it will happen, just that it is a risk nobody should ignore. That’s why among companies with longer tail books I prefer those with a fully hedged stock portfolio and a lot of cash at hand (the only one I know of is Fairfax), or those which employ a long/short value based strategy and are much underleveraged if compared to their peers (the only one I know of is GreenlightRe).

 

And yes! Thank you! I am feeling much better now.

 

giofranchi

 

From what i know about GLRE, they are primarily short tail.

[giofranchi]

From what i know about GLRE, they are primarily short tail.

 

Well,

I guess you are right: the claim payment duration for their portfolio averages between 1.5 – 3 years.

 

twacowfca,

I looked for it hastily this morning, but could not find it: which is the average claim payment duration for Lancashire?

Thank you,

 

giofranchi

[twacowfca]

From what i know about GLRE, they are primarily short tail.

 

Well,

I guess you are right: the claim payment duration for their portfolio averages between 1.5 – 3 years.

 

twacowfca,

I looked for it hastily this morning, but could not find it: which is the average claim payment duration for Lancashire?

Thank you,

 

giofranchi

 

 

The average time til payment of a claim for property cat exposed (re)insurers varries in a band that usually averages about 18 months, depending on the types of claims they are paying and if some claims are contested.  Retrocessional claims are settled quickly normally, but when there is a super cat, claims get complicated as they often go around in a circle or even a spiral from one company to another and back to the original insurer as in the LMX spiral of the mid 1980's.  The phenomenon of loss creep is much more prevalent after a very large event. 

 

That said, Lancashire's usual average time til payment of claims has been about 18 months, until recently, but with the strange supercats of 2011 and the surprising demand of the Italian authorities that the hulk of the cruise ship be removed from the rocks in one piece (which has been fully reserved) instead of piecemeal means that their average time until claims are paid is now almost two years. 

 

 

 

[twacowfca]

 

I hope you are feeling better.

 

The low yield regime with firming P&C rates should especially favor short tail property insurers that aren't mainly dependent on investment yields.  The firming rates for companies that make most of their profits  from underwriting should more than make up for the lower yields on their relatively small investment portfolios.  P&C companies with sizeable long tailed casualty books may find it more difficult to see improvements in their ROE's as low yields may cancel much of the gains from firming rates (firming seems to be the better term, not hardening).

 

Not only Lancashire, but a number of other insurers in the Lloyd's and Bermuda axis come to mind as potentially benefiting from better ROE's going forward.  Companies with longer tail books and good underwriting discipline that are good equity investors may also do relatively well, especially if the stock market doesn't experience a P/E contraction.

 

Let's put the cat exposed property insurance market in perspective.  The last seven years have included the two biggest cat loss years ever with the KRW hurricanes of 2005 and the multiple super cats of 2011.  2008 and Q4 of 2012 have also produced large cat losses.  Oh! By the way, wasn't there some sort of financial crisis that also destroyed enormous value a few years ago?

 

My point is that normalization of the losses experienced in the last seven years should by itself produce much better returns in the future.

 

My expectation/interpretation would be slightly different.  Short tails will benefit from this environment, but it will only help them earn their cost of capital while rates are low.  I think its the long tails that could benefit more.  They should be able to lock in very favorable costs of capital for years (a gift that keeps on giving).  I think its hard to predict what rates will be in the future.  Firms like MKL and BRK I think will especially benefit because they invest in high quality equities with growing cash flows, which can help offset some risk of multiple contraction as the earnings will be higher.  Regardless, I anticipate any high quality insurer to do well.

 

twacowfca, I have learned a lot about insurance from you.  If I were to start an "Insurance Questions" thread, would participate?

 

 

And that’s because I think a P/E contraction is a very real risk. I am not saying it will happen, just that it is a risk nobody should ignore. That’s why among companies with longer tail books I prefer those with a fully hedged stock portfolio and a lot of cash at hand (the only one I know of is Fairfax), or those which employ a long/short value based strategy and are much underleveraged if compared to their peers (the only one I know of is GreenlightRe).

 

And yes! Thank you! I am feeling much better now.

 

giofranchi

 

From what i know about GLRE, they are primarily short tail.

 

Thank you for your compliment, but my participation in an insurance questions thread would merely reveal my ignorance about the answers to most questions.  I know a lot about Lancashire, but Lancashire is very different from other companies.  However, I might learn a lot from what others contribute to that thread.

[giofranchi]

From what i know about GLRE, they are primarily short tail.

 

Well,

I guess you are right: the claim payment duration for their portfolio averages between 1.5 – 3 years.

 

twacowfca,

I looked for it hastily this morning, but could not find it: which is the average claim payment duration for Lancashire?

Thank you,

 

giofranchi

 

 

The average time til payment of a claim for property cat exposed (re)insurers varries in a band that usually averages about 18 months, depending on the types of claims they are paying and if some claims are contested.  Retrocessional claims are settled quickly normally, but when there is a super cat, claims get complicated as they often go around in a circle or even a spiral from one company to another and back to the original insurer as in the LMX spiral of the mid 1980's.  The phenomenon of loss creep is much more prevalent after a very large event. 

 

That said, Lancashire's usual average time til payment of claims has been about 18 months, until recently, but with the strange supercats of 2011 and the surprising demand of the Italian authorities that the hulk of the cruise ship be removed from the rocks in one piece (which has been fully reserved) instead of piecemeal means that their average time until claims are paid is now almost two years.

 

twacowfca,

thank you! Your answer is accurate and precise as usual.

Here is something I don’t understand though: you once wrote that Mr. Brindle could not invest the way Mr. Buffett does, because Lancashire concentrates on short tail contracts, while Mr. Buffett could hold the float for much longer. If that is really the case, how do you explain the way Mr. Einhorn invests? GRLE, just like Lancashire, underwrites short tail contracts, but invests almost nothing in short-term low-yielding bonds.

What am I missing here?

 

giofranchi

[twacowfca]

From what i know about GLRE, they are primarily short tail.

 

Well,

I guess you are right: the claim payment duration for their portfolio averages between 1.5 – 3 years.

 

twacowfca,

I looked for it hastily this morning, but could not find it: which is the average claim payment duration for Lancashire?

Thank you,

 

giofranchi

 

 

The average time til payment of a claim for property cat exposed (re)insurers varries in a band that usually averages about 18 months, depending on the types of claims they are paying and if some claims are contested.  Retrocessional claims are settled quickly normally, but when there is a super cat, claims get complicated as they often go around in a circle or even a spiral from one company to another and back to the original insurer as in the LMX spiral of the mid 1980's.  The phenomenon of loss creep is much more prevalent after a very large event. 

 

That said, Lancashire's usual average time til payment of claims has been about 18 months, until recently, but with the strange supercats of 2011 and the surprising demand of the Italian authorities that the hulk of the cruise ship be removed from the rocks in one piece (which has been fully reserved) instead of piecemeal means that their average time until claims are paid is now almost two years.

 

twacowfca,

thank you! Your answer is accurate and precise as usual.

Here is something I don’t understand though: you once wrote that Mr. Brindle could not invest the way Mr. Buffett does, because Lancashire concentrates on short tail contracts, while Mr. Buffett could hold the float for much longer. If that is really the case, how do you explain the way Mr. Einhorn invests? GRLE, just like Lancashire, underwrites short tail contracts, but invests almost nothing in short-term low-yielding bonds.

What am I missing here?

 

giofranchi

 

I haven't looked that closely at Greenlight Re for a few reasons. 

 

I think Mr. Einhorn is a good investor, but not great.  (very few are great, in my opinion)

 

Mr. Einhorn gets a rather large amount of the profits, before the remainder are available for the shareholders.

 

Greenlight has not been able to write a lot of property business and still keep their good rating.  Thus the leverage they have gotten from their model has not been great.  S&P discounts assets according to type when they rate a company.  They discount equity investments by 39% compared to high grade, low duration, sovereign debt.  Thus, if Greenlight invested in high quality, low duration sovereign debt instead of equity, they could write perhaps 65% more insurance dollar for dollar of invested assets.

 

It is very hard for a start up to participate in the best opportunities, even if they know where these are and how to do this.  It's like being a rookie fighter pilot.  You will be placed in the most vulnerable spot in the squadron until you earn your wings.  Mr Einhorn is a good poker player, but playing in this league is more about knowing the players and being respected for your knowledge and experience than for being smart in another field, especially as an absentee owner.  As such, opportunities may be limited to the more commoditized types of reinsurance that are price sensitive.  Even Brindle as one of the most respected players in the industry had to cool his heels for a year or two after LRE's start up before LRE was able to first participate in and then become the lead underwriter in some of the better niches.

 

For these and perhaps other reasons, Greenlight Re has experienced P/B contraction since immediately after their IPO.  They are a better buy now than then.  :)

 

 

[Green King]

twacowfca

 

What kind if returns are  you looking at for Lancashire at current prices ? and did you get that ? i've been having a little problem. The company seems top notch.

 

 

[giofranchi]

I haven't looked that closely at Greenlight Re for a few reasons. 

 

I think Mr. Einhorn is a good investor, but not great.  (very few are great, in my opinion)

 

Mr. Einhorn gets a rather large amount of the profits, before the remainder are available for the shareholders.

 

Greenlight has not been able to write a lot of property business and still keep their good rating.  Thus the leverage they have gotten from their model has not been great.  S&P discounts assets according to type when they rate a company.  They discount equity investments by 39% compared to high grade, low duration, sovereign debt.  Thus, if Greenlight invested in high quality, low duration sovereign debt instead of equity, they could write perhaps 65% more insurance dollar for dollar of invested assets.

 

It is very hard for a start up to participate in the best opportunities, even if they know where these are and how to do this.  It's like being a rookie fighter pilot.  You will be placed in the most vulnerable spot in the squadron until you earn your wings.  Mr Einhorn is a good poker player, but playing in this league is more about knowing the players and being respected for your knowledge and experience than for being smart in another field, especially as an absentee owner.  As such, opportunities may be limited to the more commoditized types of reinsurance that are price sensitive.  Even Brindle as one of the most respected players in the industry had to cool his heels for a year or two after LRE's start up before LRE was able to first participate in and then become the lead underwriter in some of the better niches.

 

For these and perhaps other reasons, Greenlight Re has experienced P/B contraction since immediately after their IPO.  They are a better buy now than then.  :)

 

Well twacowfca,

I know that what you say about Mr. Einhorn and about GLRE is correct, but:

 

1) Mr. Einhorn is a good investor, not a great one: true, but I think his long/short value based with macro hedges way of investing is very conservative. It might not lead to outstanding results all the times, but it surely is conservative. And I like conservative investing. Actually, I think that conservative investing is the only kind of investing I could agree with. I think those who shoot for the sky still have to learn how to make their capital truly and effectively work for themselves. That is not to say that I admire cowards! I would never leave my capital in very short term bonds, which earn a pittance!

 

2) GLRE could not write a lot of business, so the leverage they have gotten from their model has not been great: true, but I like a reinsurer which is underleveraged, a 10% decline in the value of their investments means just a 14% decline in the value of their equity, compared to a 25% decline in the equity of their average peer competitor. And that makes me sleep soundly at night!

 

3) Notwithstanding 1) and 2), they have achieved a CAGR in BV per share of 11.7% from 2004 to 2011. Not bad, if you think that those years were among the most difficult for investing!

 

What’s not to like about 1), 2), and 3)?

 

Please look also at page 39 of the presentation in attachment: if they grow invested assets to 175% of capital, they would still be underleveraged compared to their peers. Earned Premium at 50% of capital is also a conservative number. With investment returns in between 10% and 15% (reasonable for a “good” investor like Mr. Einhorn) and with a combined ratio in between 90% and 100% (reasonable for a “good” underwriter), they would be compounding BV per share in between 18% and 31% annualized.

 

I bought in at book value.

 

giofranchi

Greenlight_Re_2012_Investor_Meeting.pdf

[twacowfca]

twacowfca

 

What kind if returns are  you looking at for Lancashire at current prices ? and did you get that ? i've been having a little problem. The company seems top notch.

 

I think their returns going forward will average about what they have been for the more than two decades combined record of Brindle at Lloyd's plus Lancashire, about 19.5%.  Realize that about one year in ten, they may have a loss that will wipe out about 20% of their equity that would take about 4 quarters  to make up, assuming that rates would go up a lot, perhaps 20% or more after a large industry wide loss. 

 

Optimistically, they could do better than that.  Their first sidecar is performing better than expected, despite large industry losses recently.  Their new and very different sidecar, Saltire, looks like it will be a huge hit in the market. Please see the LRE thread for more info on it.  These could be expected to add about 1 1/2 to 2% to their normalized ROE.  Plus, they recently locked in $130M in ten year fixed debt at a good rate.  That will give them the capacity to write more business if they want to do so at a lower cost of capital during a time of firming rates after the industry feels the full impact of Sandy. :)

[Green King]

twacowfca

 

What kind if returns are  you looking at for Lancashire at current prices ? and did you get that ? i've been having a little problem. The company seems top notch.

 

I think their returns going forward will average about what they have been for the more than two decades combined record of Brindle at Lloyd's plus Lancashire, about 19.5%.  Realize that about one year in ten, they may have a loss that will wipe out about 20% of their equity that would take about 4 quarters  to make up, assuming that rates would go up a lot, perhaps 20% or more after a large industry wide loss. 

 

Optimistically, they could do better than that.  Their first sidecar is performing better than expected, despite large industry losses recently.  Their new and very different sidecar, Saltire, looks like it will be a huge hit in the market. Please see the LRE thread for more info on it.  These could be expected to add about 1 1/2 to 2% to their normalized ROE.  Plus, they recently locked in $130M in ten year fixed debt at a good rate.  That will give them the capacity to write more business if they want to do so at a lower cost of capital during a time of firming rates after the industry feels the full impact of Sandy. :)

 

Thx seems there is more work for me do

[twacowfca]

I haven't looked that closely at Greenlight Re for a few reasons. 

 

I think Mr. Einhorn is a good investor, but not great.  (very few are great, in my opinion)

 

Mr. Einhorn gets a rather large amount of the profits, before the remainder are available for the shareholders.

 

Greenlight has not been able to write a lot of property business and still keep their good rating.  Thus the leverage they have gotten from their model has not been great.  S&P discounts assets according to type when they rate a company.  They discount equity investments by 39% compared to high grade, low duration, sovereign debt.  Thus, if Greenlight invested in high quality, low duration sovereign debt instead of equity, they could write perhaps 65% more insurance dollar for dollar of invested assets.

 

It is very hard for a start up to participate in the best opportunities, even if they know where these are and how to do this.  It's like being a rookie fighter pilot.  You will be placed in the most vulnerable spot in the squadron until you earn your wings.  Mr Einhorn is a good poker player, but playing in this league is more about knowing the players and being respected for your knowledge and experience than for being smart in another field, especially as an absentee owner.  As such, opportunities may be limited to the more commoditized types of reinsurance that are price sensitive.  Even Brindle as one of the most respected players in the industry had to cool his heels for a year or two after LRE's start up before LRE was able to first participate in and then become the lead underwriter in some of the better niches.

 

For these and perhaps other reasons, Greenlight Re has experienced P/B contraction since immediately after their IPO.  They are a better buy now than then.  :)

 

Well twacowfca,

I know that what you say about Mr. Einhorn and about GLRE is correct, but:

 

1) Mr. Einhorn is a good investor, not a great one: true, but I think his long/short value based with macro hedges way of investing is very conservative. It might not lead to outstanding results all the times, but it surely is conservative. And I like conservative investing. Actually, I think that conservative investing is the only kind of investing I could agree with. I think those who shoot for the sky still have to learn how to make their capital truly and effectively work for themselves. That is not to say that I admire cowards! I would never leave my capital in very short term bonds, which earn a pittance!

 

2) GLRE could not write a lot of business, so the leverage they have gotten from their model has not been great: true, but I like a reinsurer which is underleveraged, a 10% decline in the value of their investments means just a 14% decline in the value of their equity, compared to a 25% decline in the equity of their average peer competitor. And that makes me sleep soundly at night!

 

3) Notwithstanding 1) and 2), they have achieved a CAGR in BV per share of 11.7% from 2004 to 2011. Not bad, if you think that those years were among the most difficult for investing!

 

What’s not to like about 1), 2), and 3)?

 

Please look also at page 39 of the presentation in attachment: if they grow invested assets to 175% of capital, they would still be underleveraged compared to their peers. Earned Premium at 50% of capital is also a conservative number. With investment returns in between 10% and 15% (reasonable for a “good” investor like Mr. Einhorn) and with a combined ratio in between 90% and 100% (reasonable for a “good” underwriter), they would be compounding BV per share in between 18% and 31% annualized.

 

I bought in at book value.

 

giofranchi

 

Thank you, Giofranchi,

 

I'll take a look at their presentation.

 

Are the 10% to 15% returns on stock investments you anticipate before or after Mr Einhorn's investment management company takes their cut?  How much is the cut? Is it the usual 2% and 20%  or is it more or less? 

[giofranchi]

Thank you, Giofranchi,

 

I'll take a look at their presentation.

 

Are the 10% to 15% returns on stock investments you anticipate before or after Mr Einhorn's investment management company takes their cut?  How much is the cut? Is it the usual 2% and 20%  or is it more or less?

 

twacowfca,

on page 21 of the presentation you find an annualized investment return of 9,6% since formation of GLRE (2005-2011):

2005: 14.2%

2006: 24.4%

2007: 5.9%

2008: (17.6%)

2009: 32.1%

2010: 11.0%

2011: 2.1%

2012 YTD: 10.5%

Those are all after fees and expenses. That’s why I think in more normal times Mr. Einhorn might achieve a 10%-15% investment return after fees and expenses.

Actually, from 1996 (inception of his fund) until 2006 Mr. Einhorn achieved an annualized return of 29% (I don’t know if before or after fees… :)).

 

giofranchi