Greenlight Capital Re, Ltd. (GLRE)

FC pick

i like holdings, similar to MKL, BRK.A

thanks for my daily pick

This account tracks the performance of the investment firm Ruane, Cunniff, and Goldfarb - the investment manager of Sequoia Fund.

Read Einhorn's book and you'll see how good this guy is.

Although I missed the opportunity to capitalize on GLRE being valued at below tangible book value, I still believe that this is one of the most incredible deals that has come about in a while. Einhorn is truly a genius and one of the most intelligent investors since Buffett and there is no way that GLRE will continue to hover around tangible book value as long as Einhorn is in charge. He took the traditional value investing process and flipped some of the questions around to give himself a better idea of what exactly makes the company worth what his valuation came up with. You can see this idea present in his experience with Allied. He sticks to his principles and doesn't try to make up new reasons to stay with an investment if his original thesis no longer stands. There is an incredible amount of room for this company to grow and capitalize on all the current opportunities (although these opportunities are becoming less and less abundant the more this rally continues). Look for GLRE to outperform in the long run, because this is one of those companies that you could stay invested in for decades if the underlying principles stay the same (i.e. Einhorn staying put).

Einhorn

Truly one of the most remarkable bargains I have ever seen. I am still rubbing my eyes in disbelief. Could Mr. Market really be insane enough to allow me to initiate a position in GLRE at a meaningful discount to "depressed" tangible book value? Pinch me, I must be dreaming. These are the times I live for. The bottom line...

This tax advantaged compounding machine's results will likely be driven by a combination of earnings growth and P/TBV multiple expansion over the next few years (and likely much longer) as Mr. Einhorn and Co. ferret out and capitalize on grossly mis-priced opportunities on both sides of the balance sheet. Outperform.

At current prices, Greenlight Capital Re ("Greenlight") provides an excellent opportunity to piggy-back off of the future investment performance of one of the superior value-oriented money managers of our time, David Einhorn, founder of the hedge fund Greenlight Capital.

Greenlight, founded in 2004 by Einhorn (who owns 10% of the company) operates as follows: Einhorn has hand-picked a few reinsurance veterans to head up a Cayman's based underwriter which writes casualty and property reinsurance contracts through a network of brokers. Unlike many (re)insurers, Greenlight focuses its underwriting on, and management is compensated upon, multi-year underwriting performance rather than sheer volume. The goal is long term underwriting profit (premiums collected less claims paid out). Thus far, management has been clear that it will not write policies if not profitable, it will instead sit on its hands and rely on investment performance. It should be noted that there have been and will be times when writing reinsurance policies by themselves (absent investment performance) is a losing business. The price of insuring risk fluctuates. Insurance premiums collected are then managed by Einhorn through DME Advisors (the management company of Greenlight Capital, the hedge fund). Note that Greenlight will pay fees and expenses to DME Advisors (the classic 2 and 20) just like other hedge fund investors.

The Company then profits in two ways: (1) the net difference between premiums paid for reinsurance contracts written, (2) returns on the investment of these premiums. This model may sound familiar to stock market followers - Warren Buffet has invested insurance premiums, or "float" for years. In addition to owning primary insurers (e.g., GEICO), Berkshire Hathaway also owns General Re, the world's third largest reinsurer. Insurance premiums allow an investor to essentially borrow money via an interest-free loan and invest this money. Sometimes, the (re)insurer must return all of the money, sometimes more of the money, and if contracts are written by keen actuaries with an eye towards underwriting profit, slightly less of the money.

Few investors have as stellar a performance record as David Einhorn. Starting with $1M under management in 1996 after a stint as an investment banker, Einhorn's fund has delivered anual returns of over 24%, after fees and expenses. Even more astonishing is that these returns have come without the use of leverage. Einhorn is a classic long/short stock picker, relying on relentless due diligence. As he puts it, he invests long in 9s or 10s, and shorts 1s and 2s. The stability of his investment performance (inherently hedged to overall market risk through the use of a long/short strategy) has allowed Greenlight to maintain an A- (excellent) rating from A.M. Best. We believe that Einhorn will continue to produce market beating performances (not constantly year-in and year-out but over a longer time horizon), not just because of his past performance record but because he and his team devote themselves to uncovering misunderstood situations and show an analytical ability few can match. These investment returns combined with underwriting profit will allow for compound growth that will likely substantially outperform the market for years to come.

In addition to the compound investment returns that result from underwriting premiums, Greenlight also comes with a built in tax advantage. As a Cayman Island's corporation, Greenlight doesn't pay corporate income tax, further allowing for compound growth in investment income. This treatment comes with some risk (see below).

Traditional valuation ratios (PE, PEG, EV/EBITDA) are largely irrelevant when discussing a reinsurer such as Greenlight. Profit will fluctuate wildly from year to year based on investment returns.

Greenlight's goal is to instead increase tangible book over time at a market beating rate. Assets will consist of investments managed by Einhorn and cash available to pay claims. In most years, we anticipate that Greenlight will trade at a modest premium to book value (reflecting Einhorn's superior investment performance). Greenlight currently trades at a slight discount to book value, which we believe presents a compelling investment opportunity. If Greenlight begins to trade at a premium to book value that we believe is unsustainable we will consider selling our position.

At a given moment, Greenlight will have cash roughly equal to its outstanding liabilities (which consist of an actuarial estimate of claims), and thus its book value will roughly equal the amount of money invested with Einhorn.

Greenlight comes with several risks, including (1) underwriting risks, (2) investment risks, and (3) organizational/tax risks. Underwriting, particularly in the property and casualty space comes with inherent risks beyond the control of management, including the occurrence of natural disasters. While we believe Einhorn's investment performance will beat the market over a long period of time, Greenlight's investments are subject at any time to market dislocations or even mistakes of Einhorn. Greenlight could also lose its current tax status if deemed to be a passive foreign investment under US law. If so, stockholders would be taxed based upon on corporate level earnings at their ordinary income rate. Greenlight will need to be conscientious about being a reinsurer first, and a hedge fund investor second.

People can invest in gold without paying a hedge fund. The days are numbered for this game.

After reading Buffet's book, I've learned that there is nothing wrong with piggybacking on another person's investment's (or their investing abilities).

In this case, Einhorn is at the helm and I believe in his abilities to continue outperforming the market.

GLRE has a too high valuation compared to its assets under management. It is also loss making and does not distribute any dividend.

Reinsurance gives a keen investor constant cash to make smart investments, while also accruing conventional earnings. This company gives Einhorn a vehicle for tremendous compound growth. Definitely a buy and hold forever (or as long as Einhorn does).

Einhorn

Two of the most important characteristics investors desire (or at least should) of the business interests in which they own are the ability of those businesses to generate a high rates of return on their equity and the opportunity to reinvest excess cash flow back into their business to grow earnings and improve results.

Indeed, these are the traits of any excellent business, and by excellent I mean businesses that are growing their per share economic values, have high returns on capital and have managements with a history of intelligent capital allocation as well as acting in the best interests of long-term shareholders.

Greenlight Re is exactly this type of business, and investors who purchase shares at or around today's levels will likely reap outsized returns for decades to come, driven by a combination of multiple expansion and earnings growth from current levels.

GLRE is in the business of reinsurance, and like all similar companies is valued on an appropriate multiple to book value. As a general rule of thumb, businesses with high ROE's should trade at higher book values, and vice versa.

A quick analysis:

Greenlight's unique operating strategy as well as the character and investment acumen of its chairman and investment manager David Einhorn, provide important clues to what GLRE's normalized ROE is likely to be and hence what a normalized (appropriate) book value multiple should be. For a variety of reasons, I believe that GLRE should trade around 2x book (at minimum) for the forseable future. Here's why...

One thing that sets GLRE apart from your typical insurance business (similar to MKL or early BRK-A) is Greenlight Re's investment strategy is primarily long/short equity driven (instead of the typical insurers float being invested in primarily fixed income instruments). By managing the asset side of the equation for capital preservation on an investment by investment basis in common stocks, and concentrating only on Mr. Einhorn's best ideas, Greenlight Re is likely to compound their investment assets at a much faster clip than would ordinarily be possible. Although this unique strategy will increase the volatility of GLRE's results in the short term, over the full cycle this investment strategy should significantly outperform relative to other insurance companies bond dominated float on a risk-adjusted basis.

A quick browsing of the companies latest investor presentation provides a sensitivity analysis regarding investment returns and their likely impact on Greenlight's ROE. The results are enlightening. Although still relatively unknown to the public, David Einhorn's track record speaks for itself. In comparison to an essentially flat S&P 500 over the last ten years, Einhorn's Greenlight Capital was able to produce investment returns net to partners (after his 2&20 fees) of roughly 25% over the same time period. Assuming GLRE simply breaks even on the underwriting side of the equation and investment returns are considerably less going forward than they have been historically, say 15% annualized instead of 25%...and assuming a BV multiple indicative of an avg. business with an avg. ROE of 1.5x (which this certainly is not), returns should approach %40 yoy.

Looking forward 5-10 years and assuming Einhorn can compound GLRE's capital at his historical pace, mangagement underwrites consistently profitable business, and the market comes to his senses and awards a more appropriate book value of 2X the upside gets ridiculous.

Also worth noting is the reinsurance units unique operating strategy, which allows the company to operate w/ a fraction of the capital its competitors require (GLRE has only of handful of full time employees). Additionally, Like any insurer worth their salt, mgmt is focused first and foremost on profitability, as opposed to a volume at any price mentality that so often destroys undisciplined competitors. And last but not least, Mr. Einhorn sunk roughly 50 million of his own money into GLRE last year, putting his money where his mouth is, and aligning his interests firmly with those of his shareholders.

GLRE, at around book value...offers patient investors an opportunity to purchase an outstanding business at a truly ludicrous price relative to its long term earnings power.

Returns over the next 2-3 yrs should be driven by a combination of earnings growth and multiple expansion. I expect returns approaching 100% as the market comes to its senses and rewards this "Little Berkshire" with a more appropriate valuation (2x Book at minimum).

My favorite investor on the planet.

David Einhorn is the new age investor that will be a household name for the coming decades.

$630mm market cap is a very nice gift to investors.

gobble gobble.

I don't understand why this stock is not being followed. The numbers in todays second quarter report are impressive.

Have I found this stock too late? It's up over 30% from its lows of less than two months ago.

The run-up followed Einhorn publicly discussing his Lehman Brothers short, and the subsequent problems that became apparent at Lehman Brothers.
http://nymag.com/news/businessfinance/47844/?dlbk

Opinions? I'm tempted to wait to see if the 2008 hurricane season will be a bad one. Also, another pitch mentioned that this might be a volatile stock.