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. Continue Reading »