Through my research of Greenlight Re (GLRE), I discovered Third Point Reinsurance (TPRE). Third Point Re was listed as the most similar, publicly traded competitor to Greenlight Re. The company is a way to gain access to Daniel Loeb’s hedge fund without needing the typical $1 million to invest in such a fund. Loeb has been one of the best performing gurus that we follow at GuruFocus. Third Point’s funds have blown away the S&P 500 over the years. The Master Fund has provided an annual return of 20.4 percent since inception in 1995 compared to the S&P 500’s annual return of 9.7 percent.
Company Background
Third Point Re is a Class 4 reinsurance company headquartered in Bermuda. In Bermuda’s system of regulation, the Class 4 category requires the highest capital and solvency regulation requirements. The company was formed in 2011 and recently had its IPO in August 2013. The company states that it has a “total return business model positioned to perform in all market cycles.” Their goal is to deliver attractive equity returns to shareholders by combining profitable reinsurance underwriting with superior investment management provided by their investment manager, Third Point LLC.
The company’s reinsurance strategy is to build a reinsurance portfolio that generates stable underwriting profits, with margins commensurate with the amount of risk assumed. Third Point projects that the level of volatility in their reinsurance portfolio will typically be lower than that of most other reinsurance companies. As stated in their IPO filing, the lower volatility is being accomplished by focusing on lines of business that have historically demonstrated more stable return characteristics, such as limited catastrophe exposed property, auto, worker compensation and certain segments of crop. In their most recent quarterly report, Third Point Re decided not to renew a crop contract and stated that it was a result of their decision to exit the line of business given current market conditions.
The main goal of the underwriting side of the business is to achieve a consistent combined ratio of 100 or less. A reading of a 100 combined ratio indicates a break-even status in underwriting, and less than 100 indicates an underwriting profit. If an underwriting profit is achieved, the company’s float is portrayed as an interest free loan that can be used by the investment manager. The opposite is true if operating at an underwriting loss. The float will create an expense. The float is the amount of money on hand from collecting premiums but has not been paid out in claims. The company has not yet achieved a combined ratio of 100 or less, but is progressing towards that goal. The combined ratio was a high 129.7 percent in 2012 and has come down to a ratio of 107.1 percent for the first quarter of 2014.
| Ă‚ | FY 2012 | FY 2013 | Q1 2014 |
| Combined Ratio | 129.7 | 107.5 | 107.1 |
Without having an underwriting profit yet, all of the income has come from the investment side of the strategy. With Daniel Loeb (Trades, Portfolio) running Third Point LLC, the investment manager, the company is in good hands. He is one of the top performing investing gurus we follow. The performance figures can be compared with other gurus on “The Score Board of Gurus.”
Most reinsurers typically concentrate their investment portfolios in long-only, investment-grade, shorter-term, fixed-income securities. The invested management deployed by Third Point LLC is intended to achieve superior risk-adjusted returns by deploying capital in both long and shot investments with favorable risk/reward characteristics across selected classes, sectors, and geographies. Third Point LLC identifies investment opportunities via a bottom-up, value-oriented approach to single security analysis supplemented by a top-down view of portfolio and risk management. Loeb has historically favored event-driven situations, in which it believes that a catalyst, either intrinsic or extrinsic, will unlock value or alter the lens through which the greater market values a particular position.
Third Point Re provides monthly updates of their portfolio on their website. At the end of May, the portfolio was up 3.7 percent compared to the S&P 500’s return of 5 percent. The portfolio held both long and short positions.
Some of the unlocking value includes Loeb being an activist investor. His latest battle has been with Sotheby’s (BID). He and two other of his appointees were added to the board of directors. He claims that the board has become complacent and needs to be reinvigorated. It is now one of his top five equity holdings in his portfolio, and he holds 9.64 percent of the outstanding shares.
| Third Point LLC - Top 5 Equity Holdings | |
| Company | Value ($1000) |
| Actavis (ACT) | 514,625 |
| Dow Chemical (DOW) | 351,063 |
| T-Mobile US (TMUS) | 313,785 |
| AIG (AIG) | 300,060 |
| Sotheby's (BID) | 289,608 |
Third Point LLC is required to adhere to the following guidelines:
- Composition of Investments: At least 60 percent of the investment portfolio will be held in debt or equity securities of publicly traded companies and governments of OECD high income countries, asset-backed securities, cash, cash equivalents and gold and other precious metals. Except with the prior written consent of the investment committee, none of the investment portfolio will be held in illiquid investments traditionally considered “venture capital” or private equity investments. In addition, no investment in third party managed funds or other investment vehicles will be made without the consent of the investment committee.
- Concentration of Investments: Other than cash, cash equivalents and United States government obligations, no single investment in the investment portfolio will constitute more than 15 percent of the portfolio.
- Liquidity: Assets will be invested in such fashion that Third Point Re has a reasonably expectation that it can meet any of its liabilities as they become due. Third Point Re reviews the liquidity of the Third Point LLC portfolio on a periodic basis.
- Net Exposure Limits: The investment portfolio may not employ greater than 1.5 times portfolio assets managed for more than 10 trading days in any 30-day trading period.
Financial Strength
The company is strong financially based on its Class 4 ranking, A.M. Best rating of “A-“, and its GuruFocus financial strength score of 7/10. The rating by A.M. Best is described as “excellent” and “assigned to companies that have, in our opinion, an excellent ability to meet their ongoing insurance obligations.” Also the company carries no debt on its balance sheet and has an equity-to-asset ratio of 0.57, much higher than the Global Insurance – Property & Casualty industry average of 0.25. A higher equity-to-asset ratio indicates that the company is using less leverage.
Management
Although Daniel Loeb (Trades, Portfolio) is one of the founders of the company, he is not listed as being on the board of directors. He is associated with the company as its investment portfolio manager through Third Point LLC. The chairman, chief executive officer, and chief underwriting officer is John R. Berger. His is an insurance industry veteran with over 30 years of experience. He has CEO and chairman experience at multiple companies, including being the CEO and president of Chubb Re from 1998 to 2005.
Risks
Third Point Re typically writes larger customized reinsurance contracts. For the year of 2013, three contracts individually contributed more than 10 percent of the gross premiums written. The three contracts contributed 14.9 percent, 11.2 percent and 10.5 percent, respectively, of total gross premiums written for 2013. As the business expands over time, the proportion of total gross premiums written by individual contracts will decline. If one of these large contracts goes against them, it could create a large negative impact on their earnings.
In the 2013 annual report, Third Point Re states the risk of their operational structure is not fully developed. They are continuing to develop and implement their operational structure and enterprise framework, including exposure management, financial reporting, information technology controls. Once their operational structure is fully implemented, expenses should start to come down and help bring their underwriting operations closer to profitability.
There is also a risk with Third Point LLC managing the investment portfolio. Daniel Loeb (Trades, Portfolio) has provided superior investing returns, but the portfolio can be more volatile than the typical fixed income portfolios run by most insurance companies. This is a risk that most people are well aware of since having Third Point LLC manage the investment portfolio is likely the reason why someone would buy the stock.
Valuation
Just like the other insurance companies with investing gurus, book value per share is a key metric. The company is trading in line with its nearest competitor, Greenlight Re, with a price-to-book ratio of 1.10. With Daniel Loeb (Trades, Portfolio) controlling the investment portfolio, Third Point Re should be trading at least at the industry average price-to-book ratio of 1.28. If trading at the industry average price-to-book ratio, Third Point Re would be valued at $17.66 per share. The stock closed at $15.23 today, June 4, 2013, making it undervalued by about 14 percent. Third Point Re will warrant a higher valuation if it can achieve their goal of a combined ratio of 100 or less.
Outlook
Third Point Re has yet to earn an operating profit. Daniel Loeb (Trades, Portfolio)’s superior investing skill has carried the load so far. Until the company can provide an underwriting profit, I would choose Greenlight Re over Third Point Re. Greenlight Re is operating with an underwriting profit with an investment portfolio managed by David Einhorn (Trades, Portfolio). Recent disclosures show that some of the gurus agree with me. There are no listed gurus owning Third Point Re and Greenlight Re recently had six buys and no sells. Two of the gurus that bought Greenlight Re sold out of their Third Point Re positions.
