Description
GLRE is in large part a closed-end fund version of Greenlight Capital, with 2 main differences from the reinsurance business component: (i) potential reinsurance tail risk and (ii) potential modest underwriting profit. Over time, GLRE ought to mirror Greenlight Capital’s investment performance, but with an added kicker from BV multiple expansion and the potential for accretive capital transactions. It is presently trading at just 106% of Tangible Book Value.
The stated goal of the business seems remarkably sensible – long term growth in BV per share by focusing on both sides of the balance sheet. I believe the key differentiating factor for GLRE relative to other reinsurance companies lies in the investment portfolio. Rather than a heavy concentration in fixed income, this is essentially a concentrated long-short equity portfolio that mirrors those of Greenlight’s hedge funds. While returns should be lumpier than those of a more traditional insurer’s portfolio, over the long term they ought to compound at higher rates.
The other differentiating factor lies in the underwriting approach. While the true approach will only be clear several years from now when we have the benefit of hindsight, the stated goals are logical: underwriting for economic profitability rather than volume goals. As such, premiums written should be lumpy too.
In addition to being a vehicle with exposure to the returns from Greenlight’s investment portfolio, the biggest positive about GLRE may be the potential for the stock to trade at a significant premium to BV over time. If GLRE’s investment portfolio returns anywhere near Einhorn’s long term record, a significant premium to BV will be warranted. I think the present 6% premium is a modest price to pay for that optionality.
Moreover, there is potential for modest enhancement of BV / share growth from accretive capital transactions. To the extent GLRE trades at a discount to BV, the company could logically generate growth in BV / share by repurchasing stock. To the extent the company trades at a decent premium to BV, the company could logically issue additional equity to generate BV / share growth.
According to the proxy, Einhorn purchased 2.6mm Class B shares at the time of the IPO at the IPO price of $19.00 per share, or $50mm total. By my reading, he owns personally (as opposed to Greenlight’s funds owning) an additional 3.6mm shares from before the IPO purchased at $10.00 per share. So in total, he owns 17.1% of the FD shares outstanding, worth $108mm today, for which he paid $86.2mm. I consider this to be a material amount of “skin in the game” that should help to mitigate many other concerns. This is rather important to the thesis since I am no insurance expert, nor have I evaluated the insurance that GLRE is underwriting.
Below is a simplistic sensitivity analysis with the following simplifying assumptions:
- Underwriting profit of $0
- Investment portfolio in $ = TBV
- 15% net returns (you can use your own assumption in the table if you believe this is too aggressive or too conservative)
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2008 |
2009 |
2010 |
2011 |
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TBV, BOP |
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$16.33 |
$18.78 |
$21.59 |
$24.83 |
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Net Return |
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$2.45 |
$2.82 |
$3.24 |
$3.73 |
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TBV, EOP |
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$18.78 |
$21.59 |
$24.83 |
$28.56 |
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TBV Multiple, EOP |
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1.20x |
1.25x |
1.30x |
1.40x |
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Share Price, EOP |
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$22.53 |
$26.99 |
$32.28 |
$39.98 |
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Today's Share Price |
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$17.26 |
$17.26 |
$17.26 |
$17.26 |
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Multiple of $ |
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1.31x |
1.56x |
1.87x |
2.32x |
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IRR |
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31% |
25% |
23% |
23% |
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2 Year IRR Sensitivity |
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Assumed Annual Net Investment Return |
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25% |
5% |
10% |
15% |
20% |
25% |
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1.00x |
2% |
7% |
12% |
17% |
22% |
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1.10x |
7% |
12% |
17% |
22% |
28% |
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TBV Mult |
1.20x |
12% |
17% |
23% |
28% |
33% |
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at Exit |
1.30x |
16% |
22% |
28% |
33% |
39% |
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1.40x |
21% |
27% |
32% |
38% |
44% |
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1.50x |
25% |
31% |
37% |
43% |
49% |
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1.60x |
29% |
35% |
41% |
48% |
54% |
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3 Year IRR Sensitivity |
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Assumed Annual Net Investment Return |
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23% |
5% |
10% |
15% |
20% |
25% |
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1.00x |
3% |
8% |
13% |
18% |
23% |
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1.10x |
6% |
11% |
17% |
22% |
27% |
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TBV Mult |
1.20x |
10% |
15% |
20% |
25% |
30% |
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at Exit |
1.30x |
12% |
18% |
23% |
29% |
34% |
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1.40x |
15% |
21% |
26% |
32% |
37% |
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1.50x |
18% |
24% |
29% |
35% |
40% |
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1.60x |
21% |
26% |
32% |
38% |
44% |
Risks
The biggest risk is the tail risk on the insurance side – that this investment vehicle structured as a reinsurance company slips up on the insurance underwriting side and suffers from significant adverse reserve developments. The level of insurance written relative to BV appears quite modest ($101mm of net premiums written in 2007 and $121mm of loss reserves + unearned premium reserves + reinsurance payable compared to $605mm BV). So while the reinsurance business’ float will likely grow over time, it strikes me that the bulk of the investment portfolio today is effectively financed by BV and not by float.
Of course, there is always the risk that the investment portfolio returns are weak. But it’s my understanding that David Einhorn’s long term investment track record speaks for itself.
A final risk relates to taxes. As I understand it, GLRE is a Cayman Islands corporation and does not pay taxes on income or capital gains in the Cayman Islands (at least until 2025). Likewise, it does not operate in a manner that subjects it to US income taxes either, though there is always the risk that US tax laws or interpretations change.
Catalysts
No near term catalysts.
Longer term, strong investment results should be accentuated by P/TBV multiple expansion.
Catalyst
No near term catalysts.
Longer term, strong investment results should be accentuated by P/TBV multiple expansion.