Add-on Buy on Pre-Earnings Dip

By xiexgp@gmail.com, February 25, 2014

I wrote last month that I couldn’t justify buying more Third Point Reinsurance at $18 — and, indeed, that $16 was a stretch for new purchases as we wait for them to become profitable in their reinsurance business at some point over the next year (potentially … profitability is not, of course, guaranteed) and watch to see how Daniel Loeb’s investment portfolio does. They’ve still only reported a single quarter as a public company, so one wouldn’t want to overpay for this emerging reinsurance business … particularly when the chatter from most reinsurers is that the added capacity is pressuring reinsurance prices (particularly from “non traditional” pools of capital like hedge funds… as with TPRE).

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But when it dipped down into the $14.80s today, I doubled my position. Book value should have risen in the fourth quarter by at least a little bit, given solid investment performance in that quarter, or at least have stayed stable depending on the losses on reinsurance — so anything under $15.20 means you’re paying a premium of less than 1.2X September’s book value. Better, of course, to buy the stock at a discount to book value if you can — and there may be opportunities to do so at some point, particularly if sentiment about reinsurance turns or if the market crashes more substantially, but I’m happy to build a larger position in a well-managed and small firm at this price.

They have a great investor running the portfolio, they have excellent insurance people in charge of the reinsurance business, and this now becomes a mid-size position for me personally … still much smaller than my holdings in competitor Greenlight (GLRE) or other insurers Markel (MKL) or Berkshire Hathaway (BRK-B). We’ll see how it goes — earnings come out on Wednesday evening, and the shares have been falling for the last month after peaking at pretty ridiculous valuations in early January so I suspect the shares don’t have too far to fall even if earnings are disappointing … but I’ll re-evaluate after they release their numbers.

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