As of the close on 10/13/2014, Greenlight Reinsurance (GLRE), Third Point Reinsurance (TPRE), and Pershing Square Holdings (AEX:PSH) were selling at discounted prices compared to their book values. These three companies are led by 3 of the top investing gurus we follow, David Einhorn, Daniel Loeb, and Bill Ackman.
Einhorn and Loeb are following the Warren Buffett model of using the float from an insurance company to essentially make investments on what is similar to an investment free loan. When insurance premiums are collected, the capital has to stay with the company in order to pay out the claims. The premiums collected, but not paid out yet, are referred to as float. As long as the underwriting business is profitable, the float mimics an interest free loan. A common metric used is the combined ratio. A ratio of 100 is break-even, and the lower the number, the more profitable the business. The underwriting profit is simply measured as premiums received minus expenses. In some years, claims might be higher due to certain events, so enough liquidity must be retained to pay them out. Most insurance companies invest the float in fixed income to generate extra cash flow and increase profits. The float from Greenlight Re and Third Point Re is managed by the hedge funds Greenlight Capital and Third Point. Einhorn is the manager of Greenlight Capital and Loeb is the manager of Third Point.
Greenlight Re closed at $30.65 yesterday, just slightly below its book-value-per-share (BVPS) of $30.95. The underwriting profit has been profitable or at break-even just about every year except for 2012. For the first six months of the year ended June 30, 2014, the combined ratio was about break-even at 100.7 percent. With a break-even combined ratio, the profits are determined by the investment of its capital by Greenlight. Einhorn’s investing track record includes a 19.5 percent annualized return since starting his hedge fund in 1996. This has been a slow year with the fund up 2.6 percent year-to-date at the end of September, underperforming the S&P 500 (up 6.7%), but outperforming the hedge fund index (up 1.3%). Typically, financial companies trade at a price-to-book (P/B) ratio of 1.2 to 1.3 in normal times. Currently the median P/B ratio for the Global Insurance – Property and Casualty industry is 1.25. Buying Greenlight Re will allow you to obtain both an insurance company at a discount and access to David Einhorn (Trades, Portfolio)’s hedge fund.
Third Point Re closed at $13.89 yesterday, a 2.3 percent discount to its BVPS of $14.21. The insurance business is relatively new with it being formed in 2011 and having its IPO in August 2013. The company is still working its way towards an underwriting profit and is nearly there. It started off with a high combined ratio of 129.7 percent in 2012 and recorded a combined ratio of 102.7 percent. Even with the underwriting losses, the BVPS has increased 46 percent from June 2013 to June 2014 based on Daniel Loeb (Trades, Portfolio)’s investing. Loeb’s investing track record is very impressive, as well, producing annual returns of 20.4 percent since staring his hedge fund in 1995. The hedge fund is up 5.5 percent year-to-date as of the end of September. Just like Greenlight Re, Third Point Re can be purchased at a discount to the rest of the insurance industry and will give you access to Loeb’s hedge fund.
Pershing Square Holdings closed at $22.00 yesterday, a 9.9 percent discount to its net asset value (NAV) of $24.41. Pershing Square is a closed-end fund led by Bill Ackman (Trades, Portfolio) that just started trading on the Euronext Amsterdam exchange yesterday. Rather than going through an insurance company, this investment is directly into the fund. The reason for the fund being listed in Europe is because closed-end funds in the United States are not allowed to charge an incentive fee. He can still have the typical hedge fund fee structure if it is listed overseas. The IPO was intended to raise permanent capital to help alleviate the risk of redemptions in a down year. If too many investors take their money out of a hedge fund, an activist investor such as Ackman will find it difficult to maintain controlling positions in a company in order to influence change. Ackman has been able to achieve annual gross returns of 27.7 percent since starting his hedge fund in 2004. He has been the top performing hedge fund manager this year gaining 31.5 percent year-to-date through September. Now is an excellent opportunity to buy into the fund at a discount. As of now, access to the foreign exchange is required since it does not yet trade OTC in the United States.
These are great investments that can be held for the long run. Ackman, Einhorn, and Loeb are only 48, 45, and 52 years old. Warren Buffett (Trades, Portfolio) is 84 years old. You can follow their equity portfolios at GuruFocus:
- Bill Ackman: Current Portfolio
- David Einhorn: Current Portfolio
- Daniel Loeb: Current Portfolio
- Warren Buffett: Current Portfolio
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