Incremental Share Purchase — More Insurance

by Travis Johnson, Stock Gumshoe | October 1, 2014 4:32 pm

This is just a quick note to let you know of a personal buy in my portfolio — as shares of Third Point Reinsurance (TPRE) dipped today below $14.30 they triggered an incremental buy in my account, so I increased my holdings in TPRE by about 20% today.

That doesn’t mean TPRE will go up from here, but I’m happy to buy it at very close to the book value per share, which is the standard valuation metric I fall back on for insurance and reinsurance companies. Loeb’s Third Point has done a good job managing the investment portfolio for the reinsurance company thus far, though the third quarter investment portfolio was probably roughly flat (down a bit in July, up a bit in August, flat for September). That means the book value is likely to fall a little bit when they next announce their earnings, since they will probably not be profitable on the underwriting/insurance side, but it shouldn’t fall very much — and the underwriting performance has been on a generally improving trend toward eventual (maybe this winter) break-even. Book value is reported at $14.21 per share as of June 30, though it’s down to $13.70 or so if you account for dilution, so at this price I’m paying about a 5% premium to book value.

This is a long-term hold for me, essentially a way for a small investor to invest with Dan Loeb and to possibly get a little bit of free leverage on that investment since it flows through a reinsurance portfolio (because the investment portfolio is substantially bigger than the market cap for most insurance companies — even though they’ve only had a couple years to build up the float, the portfolio managed by Third Point for TPRE is at $1.7 billion, the market cap is $1.5 billion … this will get more pronounced over time, if managed well, which will mean big boosts to earnings if the portfolio continues to be well-managed, which is why I like having one of our generation’s best investors at the helm of the portfolio).

I think Greenlight Re (GLRE), which is also falling in price, is a safer bet because of their more established insurance operation (they’ve been around for many more years than TPRE, which is only a few years old and has only been public for one year) and their better deal with their investment manager (Einhorn gives GLRE a slightly discounted management fee, Loeb doesn’t do that with TPRE), but I already have a substantially larger position in GLRE so I’m pleased to see the TPRE position grow a bit at these prices. I wouldn’t say no to GLRE at these prices, either, that’s also at only about a 5% premium to book value, but they had a worse third quarter investing (down 3.7%) than TPRE, and book value may well fall more when they report next despite their probably better underwriting performance.

The trend for this industry is not a good one — reinsurance is burdened with overcapacity, and it has been difficult for insurers and reinsurers to make a lot of money in this market, and that may well continue until some of the capacity is washed out by financial stress or by major insured losses (like a hurricane, which tends to bring better pricing and discipline along with short-term losses on claims). The companies that interest me in insurance are those that do things differently, since I don’t expect there to be a rising tide that lifts them all — I like TPRE, Markel (MKL) and GLRE because they invest much better than average insurers, and I like Lancashire (LRE.L, LCSHF), which I bought a bit more of last week[1], because they underwrite much better than other insurers. They’ll still go down if the whole industry struggles, but I think their differentiated businesses will work out well in the long term.


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Endnotes:
  1. Lancashire (LRE.L, LCSHF), which I bought a bit more of last week: http://www.stockgumshoe.com/2014/09/september-idea-of-the-month-ready-to-fly/

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