Greenlight Capital Re - A Mini-Berkshire In The Making?

Dan Naumov profile picture
Dan Naumov

Greenlight Capital Re (NASDAQ:GLRE) is a reinsurer based in the Cayman Islands that is trading at roughly 10% discount to it's book value. "What's special about Greenlight, there are plenty of insurers trading at a discount to book value?" you might ask. The answer, of course, would be "this one has David Einhorn running the investment portfolio."

When you take a closer look, you will realize that there are striking similarities between Greenlight and Berkshire Hathaway (BRK.B), but there are also significant differences.

Both companies are reinsurers that invest their prepaid premiums (commonly called "float"), aiming to obtain returns that are significantly above average. Both investment portfolios are being handled by superstar investors: David Einhorn might not have had a 40+ year career just yet, but he's had annual returns in excess of 20% since 1996, which is a significant time frame.

In both cases, the star investors running the investment portfolios have a significant personal stake in the success of the company. Greenlight Capital Re handles its investments through 2 affiliate companies: Greenlight Capital Inc. and DME Advisors. Einhorn started Greenlight Capital Inc as a hedge-fund in 1996 and he serves as a non-independent Chairman of the Board of Greenlight Capital Re, the publicly traded reinsurer.

The risks are similar, yet different too: it's all about the guy making the investment decisions. When Warren Buffett will no longer be with us, the businesses he has hand-picked will continue to produce great results for decades to come. However, the investment portfolio of Greenlight is handled by Einhorn as a part of his hedge fund that does not subscribe to the "buy wonderful businesses at a good price and hold them forever" philosophy of Buffett, and should something bad happen to David, his hedge fund - and Greenlight as a result - could very well be in serious trouble.

However, to offset this, contrary to Berkshire, succession issues should not be a topic at Greenlight for a long time - David Einhorn is just 43.

One other risk to consider are potential PR problems. Buffett has a pristine reputation and can seemingly do no wrong, while more traditional hedge-fund managers like David Einhorn seem to relatively often get involved in various SEC investigations and media probes. Einhorn has not been convicted of any wrongdoing by the US authorities, but in January 2012, Einhorn and Greenlight Capital were fined $11.2 million (split equally) by the U.K. Financial Services Authority (FSA) for trading on inside information in Punch Taverns Plc (PUB) in 2009.

Einhorn had told Punch's broker at Merrill Lynch that he did not want to be given confidential information that would prevent him from trading. The UK has a broader definition of market abuse, however, and in the US, Einhorn's specific request could well have protected him from charges of insider dealing.

All things considered, the actual insurance underwriting business of Greenlight currently seems in decent shape (there seems to be downward pressure on pretty much all US reinsurers at the moment), although it is pretty obvious that they are still rookies compared to the likes of Berkshire Hathaway's Reinsurance Group, GEICO and General Re, and are still somewhat on a quest to find their true niche.

Greenlight's main underwriting focus is in Property, Casualty and Disaster insurance. They used to be involved in Auto as well, but are now in the process of exiting that area of business. At the moment of writing, Greenlight is trading at around 0.89 times book value. If Berkshire is considered extraordinary cheap at 1.1 times book value, I think Greenlight definitely deserves a close look at these valuation levels.

Disclosure: I am long BRK.B. I may initiate a long position in GLRE over the next 72 hours.

This article was written by

Dan Naumov profile picture
I am an IT and design professional who has picked up investing as a major hobby when I have concluded that I no longer have faith in the long-term ability of the socialist governments of Europe to provide for the level of pension and retirement that people have come to expect. I was born and raised in Moscow, Russia and moved to Finland at age 13 and I have resided there ever since. I hold a dual Russian/Finnish citizenship and invest globally to maintain appropriate levels of sector and geographical diversification in my portfolio.
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