financial crisis brought this average down, despite Einhorn’s large bet against Lehman Brothers. Through the end of 2010, he averaged 21% per year.
Between 1996 and 2011, his hedge fund went up 1,635%. During the same time, the S&P 500 rose 165%. If you had invested $100,000 with him in 1996, it would now be worth $1.6 million. The same investment in the S&P 500 is now worth $265,000. That’s a return of 21.6% per year versus 6.7% per year for the S&P 500. This kind of investment performance is unmatched by any other investor during the same time period. Best of all, his results were accomplished safely. He has had only three down years since he began his fund in 1996 and he uses no debt.
Einhorn is known for shorting stocks. He has made huge profits from this technique. All good money managers should know how to short profitably. But right now, with financial conditions as treacherous as they are, shorting is an essential skill. Einhorn anticipated the European debt crisis, and his portfolio includes bets that benefit from this event. He has owned gold in the past, but recently shifted into gold stocks.
Einhorn doesn’t just bet on stocks. His portfolio of investments also includes bonds, bank loans, cash, gold, gold stocks, commodities, foreign exchanges, and more. He is not a buy-and-hold investor as he is more of a nimble trader who understands that investments fluctuate.
Greenlight Capital Re (GLRE) is Einhorn’s insurance company. GLRE is a specialist property and casualty reinsurance company based in the Cayman Islands and Ireland. The company provides a variety of custom-tailored reinsurance solutions to the insurance, risk retention group, captive and financial marketplaces.
Established in 2004, Greenlight Re selectively offers customized reinsurance solutions in markets where capacity and alternatives are limited. With a focus on deriving superior returns from both sides of the balance sheet, Greenlight Re's assets are managed according to a value-oriented equity-focused strategy that complements the Company's business goal of long-term growth in book value per share. Einhorn owns 17% of the company through ownership of 2,631,579 class B shares that were also sold in the share offering.
Insurance companies make money two ways. The first is collecting insurance and paying claims. A great insurance company takes in more premium than it pays out due to good underwriters. The true measure of this is the combined ratio. If a company has a combined ratio less than 100, then it collected more premiums than it paid in claims. GLRE’s combined ratio averaged 59 from 2006 through 2010 (see table below) indicating that there is a significant amount of cash leftover after claims have been paid.
The second way insurance companies make money is through profits on their investment portfolios. The insurance company holds a small fraction of your premium in cash. They call this “the reserves.” They invest the rest of your premium in stocks, bonds and other liquid investments. They call this money the investment float. This investment of GLRE float is handled by David Einhorn. Therefore, an investment in GLRE is an investment with Einhorn and his Greenlight Capital hedge fund. While Einhorn had a less than usual investment performance in 2011, his strategy of both long and short should rebound in 2012 and beyond.
For the reinsurance market, 2011 was a challenging environment as the amount of catastrophic damage was higher than expected. Investors should expect operating revenue for 2011 to reflect the impact of mediocre (albeit slightly improved) premium growth trends, and mixed investment results. However, revenue growth in 2012 may improve amid a firming of rates for lines of coverage impacted by catastrophe claims.
GLRE released its investment account's returns as of the end of November. That portfolio showed a 4% gain for the first 11 months of 2011, helped by a 9.6% advance in October and November. As of November 30, the portfolio's largest long positions included Apple (AAPL), General Motors (GM), Microsoft (MSFT) and Market Vectors Gold Miners ETF. GLRE will release fourth-quarter earnings on February 21.
Currently, GLRE is trading at $26.00 with a tangible book value of $20.00. You can purchase GLRE
at 1.3 times book value. The price to sales is currently 2.3 while the price to earnings is around 10. This is a good price to get into an investment with David Einhorn investing the cash for this insurance company. It is true that Greenlight Capital had a difficult 2011, but this is the time to buy GRLE as it is probable that Einhorn will return to his past investing success in 2012. Buy GLRE on any market pullbacks in the near future.