August Idea of the Month: Another One?

Adding to a large sector bet for our latest Idea of the Month

By Travis Johnson, Stock Gumshoe, August 23, 2013

Yep, I’m writing about another insurance company. And you’ll have this to chew on for a while, I’ll be on vacation for most of next week so we won’t have a Friday File (unless something dramatic pulls me away from the beach) or many new articles of any sort on the site next week. So until Labor Day we’ll be a bit thin (ironically enough, because a big chunk of organized labor hates the investing celebrity behind this insurance company). We’ll probably have some guest contributions from Myron Martin and Doc Gumshoe next week, so don’t panic!

I’ve dithered around in my head about what stock to feature for you this month, but in the end I decided it’s silly not to write about the new investment where I most recently put some of my own money — and therefore where I clearly have at least some “skin in the game.” So this time around our Idea of the Month is the stock I wrote to you briefly about buying last week, Third Point Reinsurance (TPRE). It’s not cheap, but it’s reasonably priced and there are both things to like and things to worry about in their business model and their valuation — so I’m going to run through the company for you as I see it.

Third Point Re is one of a small wave of hedge fund-driven reinsurance companies. Reinsurance is essentially wholesale insurance — they take on risk from other insurance companies, giving those “retail” insurance companies more capital to play with and therefore more ability to write more policies and grow. It can work in a lot of different ways — there are some nearly standardized reinsurance deals where reinsurers just take on a set percentage of exposure to a large swath of coverage, but more often these are painstakingly negotiated risk-sharing deals that are very specific to two companies and cover a specific area and sometimes a specific large event (ie, all the workmen’s compensation policies in California, or all heavy dump truck policies in Southern Illinois, or 10% of Allstate’s homeowner policies in Delaware against hurricane or wind damage — that kind of thing). Reinsurance companies don’t have armies of agents working for them or big consumer marketing costs, so overhead is lower, but they do have underwriters and dealmakers and they do have to compete for insurance company business.


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