Within the past week both Greenlight Re (GLRE) and Third Point Re (TPRE) released their second quarter earnings for 2014. The reinsurance companies both have investing gurus we follow running the investment portfolios. David Einhorn handles the portfolio for Greenlight Re, and Daniel Loeb is in charge of Third Point Re’s portfolio. Einhorn and Loeb started their long/short hedge funds in the mid-1990s and have had annual gains of about 20 percent each since inception.
The two reinsurance companies are ways to gain access to the hedge funds while potentially receiving even higher returns if the insurance underwriting businesses are profitable. The metric that insurance companies use to measure underwriting profits is the combined ratio. A combined ratio of 100 indicates break even and the lower the number, the more profitable the underwriting business is. Greenlight Re and Thirdpoint Re are both relatively new companies, and it takes time to establish the insurance business so it can provide consistent underwriting profits. Greenlight Re has already reached the point of consistent profits, but Third Point Re is still developing its business and is not yet there.
Here is a brief description of their recent earnings reports:
Greenlight Re (GLRE)
Greenlight Re earned $2.89 per share compared to $0.76 for the same period in 2013. The combined ratio for the first six months of the year was 100.7 percent compared to ratio of 98.3 percent for the first half of 2013. A slightly higher combined ratio indicates that the gain earnings purely came from the investment side. Greenlight Re has written fewer premiums due to difficulty of finding contracts that offer appropriate risk-adjusted returns. The premiums written for the quarter went down to $33.7 million from $135.2 million a year ago. The company exited a large auto contract at the end of 2013 that will have a total impact of $125 million in insurance premiums for the year. Einhorn is not willing to write a contract if the risk-adjusted returns are not in the company’s favor and is willing to take in less revenue rather than sacrifice profitability. Book value per share is likely the most important valuation for these companies. Currently the stock is trading just above its book value with a P/B ratio of 1.04. The book value per share has increased 25.9 percent over the past year. The stock is undervalued and should be trading at a higher book value given Einhorn’s record of outperforming the S&P 500 and the established underwriting business. At the end of the quarter, Greenlight Re had a total of $1.5 billion in its investment portfolio according to the recent Form 10-Q. The book value of the company is $1.15 billion, or $30.94 per share. If Einhorn continues to achieve superior returns in the portfolio while at least breaking even in the insurance side, the P/B ratio should be at least 1.30 and likely higher given his track record. The median P/B ratio for global insurance companies is 1.30, making that valuation very reasonable. Using that measure, Greenlight Re is 20 percent undervalued. The stock is currently trading for $32.27 and would be trading at $40.22 if trading at the industry’s median P/B ratio.
Third Point Re (TPRE)
I have been watching for Third Point Re’s earnings report to see if they have broken even on the underwriting side. It has not gotten there yet but is still on its path to underwriting profitability. The company just started underwriting in 2012 and its IPO occurred in August of last year. The combined ratio was 102.7 percent, down from 105.5 percent a year ago. Earnings per share dropped to $0.29 from $0.33 a year ago for the second quarter, but the drop was due to more shares being created as the stock was coming out to market. In absolute terms, revenue increased to $31.3 million from $26.2 million. Book value was reported as $13.72 per share at the end of the second quarter and has increased 23.9 percent over the past year. Gross premiums written actually increased compared to Greenlight Re’s decrease. The premiums written were $145.5 million for the second quarter, an increase of 48.2 percent over the same period last year. Third Point Re is a slightly larger company on a market cap basis. Its market cap is 1.58 billion compared to Greenlight Re’s market cap of 1.2 billion. The current P/B ratio for Third Point Re is 1.11. The investment portfolio for Third Point was valued at $1.69 billion at the end of June. Given that the company has yet to break even on the underwriting side, the stock seems to be fairly valued where it is currently. Daniel Loeb (Trades, Portfolio)’s investing abilities is what is keeping the company profitable until the underwriting side is more established. The stock closed at $15.27 today. Until Third Point Re begins to generate underwriting profits, it could be a better play to directly invest in the Third Point Offshore Fund (TPNTF) for now.
To sum it up, I have positive opinions of both Greenlight Re and Third Point Re due to the performance of their investment managers, David Einhorn (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio). At this point in time, Greenlight Re would be my first choice given its underwriting profits. Third Point Re is on track to soon have underwriting profits. When that happens, the reinsurance company can provide higher returns above that of its hedge fund. You can follow the hedge fund managers at GuruFocus through the following links: David Einhorn Stock Picks, Daniel Loeb Stock Picks.
I also recommend listening to Einhorn and Loeb discus their investment portfolio performances of their companies on their quarterly conference call. The investment discussions are only a few minutes long and provide valuable insight into their strategies.
Greenlight Re Quarterly Conference Call: Einhorn’s discussion starts at 7 minutes, 35 seconds.
Third Point Re Quarterly Conference Call: Loeb’s discussion starts at 5 minutes, 27 seconds.