David Einhorn: The Greenlight Re investment portfolio lost 4.4% in the fourth quarter of 2012, which lowered our 2012 return to 7.1%. This was a disappointing result in a generally favorable investing environment. In the fourth quarter losses in our short portfolio included Green Mountain Coffee Roasters (NASDAQ:GMCR), Moody’s and companies sensitive to declining iron ore prices, which accounted for more than all of the losses in the quarter. The long portfolio showed slight gains, as General Motors and other longs outpaced losses in Apple and Marvel Technologies. Our macro positions were also slightly positive, with gains on a weakening yen exceeded losses on gold and various other positions. In January, the investment portfolio gained 3%, helped by a recovery in Marvel, which reversed about half of its 2012 loss. January also had contributions from the yen continuing to weaken and from gains in long investments in Vodafone and the Dutch insurer Delta Lloyd. The short portfolio lost money in January.
In 2012, profitable long positions in Apple (NASDAQ:AAPL), Arkema (ARKAY), Delphi (NYSE:DLPH), GM (NYSE:GM), Seagate (NASDAQ:STX) and Sprint (NYSE:S) drove our returns as all of the businesses generally performed at or above expectations. Although our shorts rose less than the market, our short portfolio detracted from performance, and our biggest loser on the short side last year was Moody’s (NYSE:MCO). We believe the recent case against S&P is a negative for the ratings agencies, and moody’s is not immune. We are short both Moody’s and S&P’s parent, McGraw-Hill (MHP).
Our exposures at the end of January are 104% long and 75% short. Our current largest long positions are Apple, GM, Marvel (NASDAQ:MRVL) and Vodafone (NASDAQ:VOD). GM has lots of cash on the balance sheet and recently initiated a buyback of a portion of the U.S. government’s stake. Prior to its January advance, Vodafone (NASDAQ:VOD) was trading at levels where we believe we get their 45% Verizon Wireless (NYSE:VZ) ownership stake for free, in addition to a 6% dividend yield.
Apple, one of the nation’s premier brands, trades at a mid single-digit P/E, net of cash, and has a fortress balance sheet with opportunities to unlock significant shareholder value.
Though the market made strong gains in 2012, many stocks are still attractively priced. On the other hand, the domestic economy has slowed down. U.S. GDP went negative in the fourth quarter, and earnings growth has all but come to a halt. As the market continues to advance, even as the economy doesn’t, we tend to become less enthusiastic, and we lowered our net exposure from 39% at year-end to 29% at the end of January, as we took some gains in our long portfolio, and added to our shorts.
Overall, we are disappointed with our performance in 2012. Our investment returns were pedestrian, despite the more favorable investing environment. Our underwriting results in 2012 were poor, due to adverse both development on our commercial automobile contracts and run offs, as well as a higher property catastrophe losses. Even though overall we protected capital and increased our book value per share, we need to be better. The team is motivated and I’m confident about our prospects.
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