The Green Light for more buying

by Travis Johnson, Stock Gumshoe | December 13, 2012 12:56 pm

I just added to my holdings in Greenlight RE (GLRE), which was featured as our Idea of the Month recently[1].


Mostly because the stock is a little cheaper, and other insurers are starting to indicate that they’re hurting when it comes to their investment returns — the most recent warning was from a different kind of insurer, MetLife[2] (a life insurer, as you probably know), and we shouldn’t overreact to that but it’s yet another indication of how troubled many traditional insurance companies are going to be by the low-interest-rate environment that we’re probably going to continue to see for many more years. The calculus for life insurance is different than for property and casualty insurance, largely because everyone dies and the tail of policies and obligations is far longer, but the basic issue is hitting every insurer.

Which should help those insurers who go a bit less traditional with their investments — as long as they’re good at it.

The broad argument is that when insurance companies can’t make much on risk-free or low-risk investments because interest rates are freakishly low, they then have to make doubly sure that they price risk effectively and generate an underwriting profit … which means the market in general should “harden” and competitive pricing should lessen. Which helps all insurers.

So my thesis is that those insurance companies who are less reliant on fixed income investments, the insurers who invest effectively in alternative assets, private businesses, and equities, might do better still … they get the pricing advantage of a hardening market, but they also get potentially better investment returns than the average insurance investment manager. This is good news for all of the insurance companies I hold personally, including Markel, Berkshire Hathaway and now reinsurer Greenlight Capital Re, and certainly for others that I don’t know as well, too … but of those, Greenlight Re is the one that stands out as particularly well-priced right now (though both Berkshire and Markel are reasonably priced … Markel has always been a good buy down around 1.2X book in the past, and Berkshire Hathaway has signaled that they’ll buy back shares if the stock falls below 1.2X book, and they’re both right near that target at the moment). I have an order in for additional Berkshire Shares as well, should the stock dip a bit, but I expect any significant dips would come either with a market swoon or with a lower reported book value in some future quarter — book value is a decent gauge of value for insurers in many cases, but it’s only updated quarterly so we have to remember that the “real” book value changes every day even if we don’t know exactly what it is … if the market falls, for example, Berkshire’s large holdings in stocks like Coca Cola or Wells Fargo may well drop and help bring book value down.

In general, I do like insurance companies as a great “free leverage” investment when they’re run well — and with indications that the insurance market might harden then an insurer that’s less dependent on bonds, I think, will have an edge over the next couple years. So … I own more GLRE now, I have a limit order in to buy more if it drops further, and I have a limit order in for more Berkshire shares as well.

  1. featured as our Idea of the Month recently:
  2. most recent warning was from a different kind of insurer, MetLife:

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