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Investing with David Einhorn via His Berkshire: Greenlight Capital Re - GLRE


WarrenWatsa
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Interesting read from last year:

http://seekingalpha.com/article/306622-greenlight-capital-the-next-berkshire-hathaway

 

I've been waiting for a drop in this stock and it now seems cheap, although I admit it could certainly get cheaper (in which case it would become more attractive). Invest with David Einhorn's hedge fund via his insurance company for, currently, 1.08x book. I believe Einhorn's fund has gotten off to a good start this year so that indicates GLRE's book value has risen since year-end and may in fact be selling for closer to 1x book. While almost all of the return on BV is driven by Greenlight’s investment portfolio, there is some impact from the underwriting side of the business. But, not much and it should even out over time - Einhorn's goal is to increase book via his hedge fund strategies and to break-even or better on the underwriting, it seems to me.

 

Practically like 1% the size of Berkshire Hathaway, so a lot of future potential to grow. And, book value has been growing nicely in recent years. An added bonus over companies like MKL and BRK: Einhorn is successfully able to put on macro positions that you and I wouldn't have access to and may have difficulty sizing up anyway.

 

I think Einhorn's annualized returns via his hedge fund have been somewhere inbetween 15-20% annualized since 1996.

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Yes, since the stock has been at/near book it's pretty much the same as investing in Greenlight capital, but with the added bonus of daily liquidity and the non-recourse free leverage that insurance provides. Very good deal in my opinion.

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Here is the link for earning release statement explaining charges for the services provided by DME advisor to Greenlight Capital in related party transactions

http://greenlightre.com/files/file/2010%20Consolidated%20Financial%20Statements%20of%20Greenlight%20Capital%20Re,%20Ltd_.pdf

 

But then we cannot expect everyone to be WEB, can we?

 

 

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Here is the link for earning release statement explaining charges for the services provided by DME advisor to Greenlight Capital in related party transactions

http://greenlightre.com/files/file/2010%20Consolidated%20Financial%20Statements%20of%20Greenlight%20Capital%20Re,%20Ltd_.pdf

 

But then we cannot expect everyone to be WEB, can we?

 

Thanks for the link.

 

Per note 14:

 

14. RELATED PARTY TRANSACTIONS

 

Investment Advisory Agreement

 

The Company and its reinsurance subsidiaries are party to an Investment Advisory Agreement (the ‘‘Advisory Agreement’’)

with DME Advisors, LP (“DME Advisors”) under which the Company, its reinsurance subsidiaries and DME Advisors created a

joint venture for the purpose of managing certain jointly held assets. DME Advisors is a related party and an affiliate of David

Einhorn, Chairman of the Company’s Board of Directors.

Pursuant to the Advisory Agreement, performance compensation equal to 20% of the net income of the Company’s share of

the account managed by DME Advisors is allocated, subject to a loss carry forward provision, to DME Advisors’ account. The loss

carry forward provision allows DME Advisors to earn reduced incentive compensation of 10% on net investment income in any

year subsequent to the year in which the investment account incurs a loss, until all the losses are recouped and an additional amount

equal to 150% of the aggregate investment loss is earned. DME Advisors is not entitled to earn performance compensation in a year

in which the investment portfolio incurs a loss. For the year ended December 31, 2008, the portfolio reported a net investment loss of

$126.1 million and as a result no performance compensation was paid to DME Advisors. For the year ended December 31, 2009,

performance compensation paid to DME Advisors was at a reduced rate of 10%. During the fourth quarter of 2010, the loss carry

forward balance was reduced to nil and as a result the performance compensation reverted to a rate of 20%. For the year ended

December 31, 2010, included in net investment income (see Note 11) is performance compensation of $12.9 million (2009: $21.9

million, 2008: $0) of which $9.4 million was calculated at a rate of 10% and the remaining $3.5 million was calculated at a rate of

20%.

Additionally, pursuant to the Advisory Agreement, a monthly management fee equal to 0.125% (1.5% on an annual basis) of

the Company’s investment account managed by DME Advisors is paid to DME Advisors. Included in the net investment income for

the year ended December 31, 2010 are management fees of $13.4 million (2009: $10.8 million, 2008: $9.9 million). The

management fees have been fully paid as of December 31, 2010.

Pursuant to the Advisory Agreement, the Company has agreed to indemnify DME Advisors for any expense, loss, liability, or

damage arising out of any claim asserted or threatened in connection with DME Advisors serving as the Company’s investment

advisor. The Company will reimburse DME Advisors for reasonable costs and expenses of investigating and/or defending such

claims provided such claims were not caused due to gross negligence, breach of contract or misrepresentation by DME Advisors.

During the year ended December 31, 2010, there were no indemnification payments made by the Company.

 

Service Agreement

 

The Company has entered into a service agreement with DME Advisors, pursuant to which DME Advisors provides investor

relations services to the Company for compensation of $5,000 per month (plus expenses). The agreement is automatically

renewed for one year periods until terminated by either the Company or DME Advisors for any reason with 30 days prior written

notice to the other party.

 

So looks to me like on the fee part it's still the same as investing in his hedge fund. But like Hester said it might be interesting to get the added liquidity of a stock as well as the insurance float for Einhorn to invest.

 

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Here's a good video explaining the structural advantages, and the math, of insurance companies with professional investors. Plenty of talk about Greenlight.

 

I would rather invest in this insurance model and pay Einhorn the fees than invest directly in his fund and not have to pay any fees (if that were possible, hypothetically). The catch is, usually, that fund investors get in at book, while investors in the insurance have to pay a premium to book determined by the market. Right now, however, GLRE is probably selling under book with the market runup since the last report.

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Right now, however, GLRE is probably selling under book with the market runup since the last report.

 

http://www.greenlightre.ky/?q=node/141

 

Looks like GLRE missed the big runup in the S&P for January, with returns of only 2.7%.

 

That's almost exactly how Greenlight Capital's hedge fund did, as well, for the month of January (i.e. 2.7%).

 

Guess their long exposure was not as high as it should've been.

 

This also means that price-to-book right now for GLRE is likely about 1.03-1.05 I would estimate.

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  • 7 months later...

I don't know much about insurance.  I know a lot of people here do, so I have a question: Is it possible for a great investor who understands insurance to come close to doing what Buffett did?  Could a Buffett clone even do it if he were starting out today?  It seems simple -  lever up, buy the safest and strongest businesses you can find, and don't chase after unprofitable insurance business.  But I wonder if the insurance industry has changed or gotten competitive so that it isn't possible anymore.

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I don't know much about insurance.  I know a lot of people here do, so I have a question: Is it possible for a great investor who understands insurance to come close to doing what Buffett did?  Could a Buffett clone even do it if he were starting out today?  It seems simple -  lever up, buy the safest and strongest businesses you can find, and don't chase after unprofitable insurance business.  But I wonder if the insurance industry has changed or gotten competitive so that it isn't possible anymore.

 

I think the way to think about it is - if you have a good insurance operation that generates float at zero or even negative cost, then an investor can probably be "plugged in" to the operation to invest the float, and due to the leverage can get great returns. So the key here I think, is having a great insurance business.

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tell that to Prem Watsa...his insurance biz is not what I would call "great" though it is improving...but he has been putting out spectacular results for over 20 years without the help of a "great" insurance op

 

If book value per share continues to compound at 15% per annum, as I expect it to, then you can expect FFH to double every 5 years or so, which means FFH will be a pretty big conglomerate in 10-15 years, much like Berkshire is right now.

 

Monish Pabrai would probably agree when I say that I think the model is very clonable, but very few people try to do it. It is hard to find someone like Buffett or Prem who doesn't take a huge cut of the assets under management or the profits from investments, they only get paid a modest salary and most of their compensation comes as being a shareholder. We are all equal partners in the business. Most other attempted "clones" have the manager scoring big fees, and over a 10 or 20 year period that compounding effect ends up being a huge portion of the total return. It also creates a perverse incentive as it rewards increasing AUM or short term gains. People like Buffett and Prem can make a lot more money for themselves if they wish, but they choose to be equal partners with their shareholders.

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