David Einhorn Adds to Shorts, Says Earnings Growth “Halted”

David Einhorn Adds to Shorts, Says Earnings Growth “Halted”
David Einhorn <a href="http://www.InsiderMonkey.com" target="_blank">InsiderMonkey</a> (CC BY-ND 2.0)

David Einhorn’s re-insurer, Greenlight Capital Re, Ltd. (NASDAQ:GLRE) has released its fourth quarter earnings.  Greenlight Re reported EPS of -$1.65 per share, and a net investment loss of $52.2 million was reported for the fourth quarter 2012, representing a loss of 4.4% on Greenlight Re’s investment portfolio. This compares to an investment gain of $77.7 million, or a 7.6% gain, in the fourth quarter of 2011. The conference call recently concluded and we have obtained a transcript of the call (some of the information can be found in Greenlight Capital’s Q4 2012 letter). On the call Einhorn noted that he is still short Moody’s and The McGraw-Hill Companies, Inc. (NYSE:MHP), and states that he added to his shorts.  Einhorn had some interesting comments about a Bloomberg article regarding taxes and re-insurers. From the comments appears that David Einhorn expects regulators to look into re-insurers and the tax structure. Below we highlight some of David Einhorn’s comments from the call:

David Einhorn Adds to Shorts, Says Earnings Growth "Halted"

David Einhorn – Greenlight Capital Re, Ltd. – Chairman

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Thanks, Bart, and good morning, everyone. The Greenlight Capital Re, Ltd. (NASDAQ:GLRE) reinvestment 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 Inc. (NASDAQ:GMCR), Moody’s Corporation (NYSE:MCO), and companies sensitive to declining iron ore prices, which accounted for more than all of the losses in the quarter. The loan portfolio showed slight gains as General Motors Company (NYSE:GM) and other loans outpaced losses in Apple Inc. (NASDAQ:AAPL) and Marvell Technology Group Ltd. (NASDAQ:MRVL).

Our macro positions were also slightly positive as gains on a weakening yen exceeded loss on gold and various other positions. In January, the investment portfolio gained 3% helped by a recovering in Marvell Technology Group Ltd. (NASDAQ:MRVL), 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 Group Plc (LON:VOD) (NASDAQ:VOD) and the Dutch insurer, Delta Lloyd NV (AMS:DL). The short portfolio lost money
in January.

In 2012 profitable, long positions in Apple Inc. (NASDAQ:AAPL), Arkema S.A. (ADR) (PINK:ARKAY), Delphi, General Motors Company (NYSE:GM), Seagate Technology PLC (NASDAQ:STX), and Sprint Nextel Corporation (NYSE:S) drove our returns as all 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 Corporation (NYSE:MCO). We believe the recent case against S&P 500 (INDEXSP:.INX) is a negative for the rating agencies and Moody’s is not immune. We are short both Moody’s and S&P’s parent, The McGraw-Hill Companies, Inc. (NYSE:MHP).

Our exposures at the end of January are 104% long and 75% short.

Our current largest equity long positions are Apple Inc. (NASDAQ:AAPL), General Motors Company (NYSE:GM), Marvel, and Vodafone Group Plc (LON:VOD) (NASDAQ:VOD). GM has lots of cash on the balance sheet and recently initiated a buyback of a portion of the US government stake. Prior to its January advance, Vodafone was trading at levels where we believe we get their 45% Verizon Wireless ownership stake for free, in addition to a 6% dividend yield. Apple, one of the world’s premier brands, trades at a mid-single-digit PE 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. US 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 long 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 investment environment. Our underwriting results in 2012 were poor due to both adverse development on our commercial automobile contracts in run-off as well as the higher property catastrophe losses.

Even though overall we protected capital and increased our book value per share, we need to do better. The team is motivated and I am confident about our prospects.

Jeff Carrington – Regen Kaplan – Analyst

Good morning. My name is Jeff Carrington from a company called Regen Kaplan. Basically an individual investor these days. I spent a career in the insurance and reinsurance industry, however, winding up with Gen Re.

I want to start with a complement. I am kind of a new devote to Greenlight; having gone through your information I have to commend you on your candor and your attention to detail. It is very refreshing.

My question concerns David. If you could comment — I have noticed some renewed activity, if that is the right way to characterize it, in discussion of potential IRS attention to offshore reinsurance. In particular, the tax aspects of same with the reported renewed activity and interest in hedge fund involvement in offshore reinsurance.

I guess that is a little bit of a vague question in some respects, and I know it is speculative, but what do you think about the prospect for increased regulation impacting your business?

David Einhorn – Greenlight Capital Re, Ltd. (NASDAQ:GLRE) – Chairman

Yes, this is David. First of all, thank you for the nice words relating to the attention to detail and so forth that preceded your question. Relating to the taxes and so forth, there was an article in the newspaper yesterday and I believe we all read it. It is really the first we have heard on this topic in some time.

When we structured the Company we gave a lot of thought relating to what an appropriate structure was, what an
appropriate jurisdiction was, what the various tax rules are.

We have designed this — this is, in fact, a real reinsurance company. We have lots of people working in multiple countries, in the Cayman Islands and in Ireland, actually reinsuring actual risk in substantial size. As a result, we don’t believe that there is any new reason or particular reason to worry on this topic.

On the other hand, we would have expected at some point sooner or later somebody would come and take a look. We are prepared for that to happen if and when it ever does, although all we have at this point is a newspaper article.

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