General: Greenlight Capital (GLRE)

Greenlight Re (GLRE – 10%) is a Cayman Islands-based property and casualty reinsurer focused on writing policies in markets where it considers capacity and alternatives to be limited. It is run by it chairman David Einhorn, one of the investment community’s brightest young minds and founder of Greenlight Capital (an equity based, long/short hedge fund).

Their basic strategy is similar to what Berkshire Hathaway or Markel tries to do: generate superior underwriting results on a contract by contract basis, without any concern about growth in premium volume, while reinvesting a significant amount of its float in an equity based strategy that is meant to generate incremental returns. In this case, the float is invested in a long/short strategy run by Einhorn that replicates his hedge fund, which has compounded capital at a roughly 25% annualized for over a decade.

Notably, Einhorn purchased $50M of stock last year (with a cost basis around $19) and he currently owns roughly 18% of the outstanding common. We think it is safe to say that his money is where his mouth is, and his interests are firmly aligned with shareholders (something we love to see).

Our thesis here is simple. A disciplined insurer like GLRE, who can execute on both sides of the balance sheet, should experience growth in book value per share that is well above average for the foreseeable future. Any insurance firm that has been consistently generating costless float and redeploying that float into an investment portfolio that generates attractive risk-adjusted returns deserves to trade hands at a premium to book (at an absolute minimum). For GLRE, all things considered (such as the inherent power of the business model coupled with Einhorn's unique skills in utilizing it), we believe 2x book is a much more appropriate valuation.

We were recently delighted to have the opportunity to accumulate a sizable position in GLRE at a basis of roughly $12 per share, or a meaningful discount to tangible book value. Today’s price is simply too cheap for this “little Berkshire”. After all, this is a competitively advantaged, high return business with above average growth prospects and a best in class management team.

Eventually, we believe the market will come to its senses and assign a more appropriate valuation. When it does, we expect a combination of growth in BV per share and multiple expansion to drive outstanding risk-adjusted returns for years to come.