Berkshire Hathaway is legendary among investors. This company’s secret sauce comes from a two pronged approach. Prong one is a profitable insurance underwriting business. You see, when an insurance company writes a policy, there is time lag between collection of premiums and the payout of claims. This lag allows the insurance company to invest the latent cash (known as “float”) while waiting. If the underlying business was written profitably, this float is like a margin loan with a negative interest rate. It boosts investment returns coming and going.
The second prong is a having a superior securities analyst to invest the float for additional profit. Berkshire Hathaway has had this advantage since 1965 in Warren Buffet and returned an average of almost 20% a year since that time. Ten thousand invested in 1965 BRK-A is now worth approximately eleventy bajillion dollars. Let’s just say it will get you to Wal-Mart and back. Finding the “next BRK” is one of the Holy Grails of the investing world. Today, I’m going to introduce you to two insurance underwriters with superstar stock pickers that I think are capable of reproducing what Buffet has done.
Superstar number one is David Einhorn. Wikipedia notes that Mr. Einhorn, “is the founder and president of Greenlight Capital a “long-short value-oriented hedge fund.” He started Greenlight Capital in 1996 with $900,000. Greenlight has generated about a 20% annualized return for investors.” Twenty percent annual returns is right in Warren Buffet range. The problem for ordinary investors has been his hedge fund won’t take on anyone who isn’t putting in millions of dollars (and the fact he charges “2 and 20”.) But there is good news. Mr. Einhorn has started a Cayman Islands insurance company that even wee raptors can buy into. And it is attractively priced. As of today, Greenlight Capital Re, Ltd. (GLRE) trades for 1.091 times net book value. GLRE is a BUY.
Superstar number two is Daniel Loeb. Mr. Loeb is another hedge fund manager who is notorious as an activist investor. He manages over 14 billion dollars at his Third Point, LLC. The minimum investment to get on board is $10 million but all of his funds are currently closed to new cash, even if you can afford that. Like Einhorn, you’d be charged the standard hedge fund “2 and 20.” But Mr. Loeb has also gotten into the insurance game so he can invest some float of his own. A small bit of warning, when insurance companies are new, the oftentimes have a combined ratio over 100 (signifying they are underwriting at a loss.) Mr. Loeb’s Third Point Reinsurance Ltd. (TPRE) is no exception and is only a couple years old. It started out with a combined ratio of 130 (abysmal!) and has been improving performance by gaining scale. I’m not concerned about long term underwriting discipline as Mr. Loeb has brought on insurance industry insider John Berger, who has around three decades of managing successful insurance operations. The combined ratio continues to improve and fell to 101.7 in the most recent quarter and should fall below the important 100 threshold with next quarter’s reporting. TPRE trades for a mere 97.26% of book value, a real bargain that likely will not last once underwriting turns profitable! TPRE is a BUY.
Ordinarily, the Lizard King recommends income centric investments. Neither GLRE nor TPRE pay a dividend. They are built to emulate BRK-A (which has never paid a distribution.) That doesn’t mean a raptor can’t make a ton of money over a sufficiently long period of time however. It should also be noted that both company’s have options available and raptors could earn a few points a year safely by going 10% out of the money and writing unlikely to be exercised covered calls for income. Insurance companies are powerful wealth compounders and every raptor should make room for them in their portfolio.
Devour your prey, raptors!