This won’t shock you, probably, but I bought into the stock of a reinsurance company last week and, after reading up on the company some more and spending time with their filings and reports, I’m going to suggest that you take a look at this one as well. And it doesn’t hurt that, thanks to the downturn in the markets, you can buy it cheaper than I did.
So our “Idea of the Month” this time around is David Einhorn’s Greenlight Re, sometimes called Greenlight Capital Re (GLRE). (Not that the name matters that much, but Greenlight Capital Re is the holding company, Greenlight Reinsurance is the operating company, both are Cayman Islands corporations, and there are also an Irish and a US subsidiary). This company was started in 2004 and went public in 2007, and, coincidentally, we can now buy the shares for just about where they traded up to on that IPO day five and a half years ago, just over $22 a share.
Greenlight Capital is the investment firm managed by David Einhorn, who is one of the shining lights of the hedge fund world and who has built a truly enviable record over the last 15 years or so with a long-short strategy that’s largely built on intensive bottom-up analysis (with some macro bets thrown in — as he’s talked about this year, for example, with his exposure to the Japanese Yen and gold). Greenlight Re is effectively controlled by Einhorn, with his ownership of Class B shares, and he is the Chairman of GLRE. Greenlight Capital manages all of GLRE’s investment portfolio, which includes the insurance “float.”
The reason to buy Greenlight Re is that you get exposure to a non-commoditized reinsurance company that I think, with their current strategy, should be able to come close to a combined ratio of near 100 most of the time (meaning that the underwriting side of the business breaks even, at least) — and that the performance of David Einhorn’s investment strategy means they should continue, over time, to earn a substantial return on their large float of “free money.” I like the strategy, I like their ability to recover from mistakes, I like their valuation, and I think they deserve to trade at a small premium to book value … and that if their underwriting strategy is successful, they may reach a substantial premium to book. ...