Greenlight Capital Re, Ltd. GLRE
October 24, 2008 - 10:42am EST by
pgu103
2008 2009
Price: 12.66 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 470 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Reinsurance

Description

Summary
 
I wish I could make this idea more complicated than it is, but I can’t.  Greenlight Capital Re, Ltd. (GLRE) is a specialty property & casualty reinsurance company that IPO’d in May 2007 at $19/share.  GLRE’s stock now sells for below book value.  David Einhorn of Greenlight Capital manages the investment side of GLRE’s book and is one of the great investors of our time.  On the insurance side, Einhorn has hired a very disciplined team to underwrite and price risks.  The goal of GLRE is to grow long-term book value per share through superior investment results and solid insurance results. 
 
Investments
 
Past performance is no guarantee of future results.  However, I have found that people don’t generally alternate between being smart and being stupid.  The best way to get to know David Einhorn is to read his book, Fooling Some of the People All of the Time, which chronicles his long standing saga with Allied Capital.  I hate to spoil the ending but David won.  The book also discusses Einhorn’s background, Greenlight’s inception and investment philosophy/process.
 
Also, I’m sure Einhorn is not happy about it but Greenlight’s most recent letter is posted here:
 
http://dealbreaker.com/2008/10/dear-investor.php
 
This letter gives you insight into his current thinking and some of the ideas they are involved in. 
 
Historical investment returns can be found here:
 
http://www.greenlightre.ky/?q=node/61
 
The investment information is updated each month, usually the first day after the end of a quarter.
 
Insurance Operations
 
GLRE underwrites customized contracts focused on generating superior economic returns, not GAAP underwriting profitability.  Its team of generalist underwriters have no set premium targets, and are able to write premiums across product lines in areas of capacity shortfalls or market dislocations.  The book consists mainly of frequency contracts with opportunistic severity contracts.   Frequency contracts are those which result in multiple attritional events with small losses.  Severity contracts have the potential for a fewer number of events but generally with larger losses.  Over time, GLRE expects the investment income generated by these contracts to supplement potential underwriting losses.  GLRE may write business at high combined ratios because its focus is economic profit, not GAAP profitability.
 
In short, GLRE’s insurance operation aims to be conservative, patient and opportunistic. 
 
Investment Thesis
 
Investing in GLRE at below book value effectively allows you to put money into the Greenlight hedge fund at a discount.  The two big differences between investing in GLRE and actually investing in the hedge fund are: 1) with GLRE, you also take insurance risks (but you also get the attendant benefits as well) and 2) you aren’t subject to a lock-up (as you would be with a direct investment in the hedge fund) and you have daily liquidity if needed or desired.  It’s also worth noting that the Greenlight hedge fund has been closed to new investors for quite some time.  It is planning a limited, one time re-opening in November. 
 
Valuation
 
On October 1, 2008, GLRE announced investment results for September and projected that book value per share was equal to $14.05 - $14.20.  The stock is currently trading at  $12.66, a 10% discount to the September 30th book value.  Of course, Greenlight has probably lost money in October so book value has likely decreased.  I do not know Greenlight’s investment performance month-to-date but I am reasonably comfortable that the 10% implied hit is adequate.  Most hedge funds I know aren’t down 10% this month so I am hopeful that Greenlight isn’t either.  Regardless, investing in GLRE is a long-term bet on David Einhorn’s investment ability and that is a bet I am certainly willing to make.

Catalyst

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