So Third Point Reinsurance Ltd. (TPRE) filed their S-1 recently. This is basically part of a move by hedge funds to seek 'permanent capital', like Einhorn's Greenlight Re (GLRE).
The insurance business is only ramping up now so there isn't much to chew on in terms of analysis. Like GLRE, the key is going to be underwriting profits (or at least break-even) and investment returns. If TPRE can generate float at a low cost and Third Point can generate some decent returns, this can be a great investment.
Third Point Investment Returns
Of course, the big question is how the insurance operation is going to turn out. The investments will be managed on the same basis as the hedge fund and the historical returns are pretty good. Third Point LLC has AUM of $13.2 billion (as of June 2013) and has returned 21.0%/year from June 1995 through December 2012.
The five and ten year returns (through December 2012) were:
Five year: +9.7%/year
Ten year: +17.7%/year
Third Point will own 8.5% of TPRE after the offering. Kelso and Pine Bank will own 26.5% and 13.4% respectively.
Here's a cut and paste from the S-1 that shows the long term performance of Third Point Partners:
Management and incentive fees will be 2%/20%, a standard rate. (GLRE pays 1.5%/20% to Einhorn).
Assuming the offering price is $13.50 (range of $12.50 - 14.50), the proforma book value after the offering comes to $12.41/share (excluding greenshoe). On a fully diluted basis, the BPS comes to $12.17/share (assuming no greenshoe and 7% underwriting spread).
So at $13.50/share, that comes to 1.1x fully diluted proforma BPS. That sounds good to me.
There is the question of the insurance business. These hedge funds that start up reinsurers typically go for the low volatility, low tail risk strategies by focusing on high frequency / low severity risks. This is true with GLRE too, as they want to minimize insurance risk and take the risk on the investment side; to the extent that their portfolios are not low risk fixed income like most insurers/reinsurers, they would want less p/l volatility on the insurance side.
I can't say anything to comfort anyone with concerns in the insurance business of these entities (TPRE, GLRE etc.) other than to say that these hedge fund folks have made a career out of managing risk. They may not understand the insurance business as well as people who are actually in the business, but I would imagine that they would know enough (and have the resources to figure out) to get the right people and understand the risk. Things may not look good now for hedge funds with what's going on with JCP (and SHLD), but that may just indicate how tough bricks and mortar retailing is now more than anything about hedge funds.
Of course, this is no guarantee of anything. Even Loew's James Tisch has said in a recent interview that he thinks that some of these hedge funds that start reinsurance companies may be underestimating what the insurance business can lose in a really bad year.
Just because a reinsurer writes a bunch of short-tail, capped risks (like selling deep out of the money put spreads) doesn't mean that they can't blow up. And if the insurance portfolio is managed to eliminate too much risk, there is a question of how much they can earn on such businesses.
So for me, these issues might put a constraint on how much exposure I would want in each of these entities; it is certainly not as rock solid as Berkshire Hathaway (but what is?), but that doesn't mean it can't have an attractive return/risk profile; just don't put 80% of your net worth in it.
For those interested in Third Point but don't care for float leverage, tax free BPS growth (and the insurance risk that comes with it), Third Point Offshore Investors is still trading at a slight discount to NAV in London (TPOU:LN).
At 1.1 or 1.2x BPS, I do think TPRE is an attractive opportunity. I know that there is a big split in the opinions about hedge funds; some people love them, others hate them. I don't have a problem with banks, investment banks or hedge funds (as long as they are doing things that I think I understand; I have no idea how SAC has made such high returns over the years, for example. But Greenlight, Third Point and others seem to be doing things that I feel comfortable with; value investing, event driven trades, value investing with a catalyst, distressed debt and other special situations etc.)
The S-1 does include an overview on the various strategies that Third Point does and it's certainly an interesting read, particularly for those curious about what some of these funds do.
This post is a little light, but I just wanted to get this out as I do think it's interesting. If I have anything to add, I may post followups (and I probably will over time as it lists and more results come in).
Isn't TPOU definitely the play here,if your broker can access it?ReplyDelete
TPOU is interesting for sure. But if you think TPRE doesn't blow up on the insurance side, TPRE can be a much better investment. It won't pay out dividends and doesn't pay taxes (Bermuda) so whatever they earn will compound tax free. Also I don't know what TPRE is thinking in terms of a steady-state investment leverage, but insurers typically have investment leverage greater than one.
At the investor day last year, GLRE had a slide that showed 1.75x investment leverage for "potential future results".
With Third Point's returns, if you get leverage up to even 1.2-1.5x and they can keep float cost low, this can be very interesting.
Of course, it's not so simple as there is a risk here that the insurance side (and/or the investment side0 doesn't do well, or does very poorly. There is always a chance of that.
Thanks for reading.
I would bet TPRE has been responsible for closign some of the discount at TPOU. Will be easier to arbitrage the discount now. Or Loeb can just buy TPOU and do it himself.Delete
Here is the road showReplyDelete
Thanks for posting that. It's a good presentation.Delete
Isn't there some sort of legal issue with Americans owning TPOU? Or are those warnings on their website simply boilerplate to be ignored?ReplyDelete
I don't own it so I don't know, but there may be. There could be a QIB or accredited investor restriction (or else all hedge funds would just list their funds in LDN!), and I don't know about taxes so I would check with your accountant etc...Delete
I was able to buy from U.S. broker.ReplyDelete
There's the lingering possibility of being subject to UBTI on TPOU, but you don't get a tax form or anything on it, obviously.ReplyDelete
Are the returns before or after fees ? After fees they would be impressive. Before fees... well, that would be part of the reason why I am not too fond of most HFs.ReplyDelete
After fees. But you have to take into account the effects of size on returns. Third Point's recent returns haven't been as stellar. I think it lost over 30% in 2008. Plus last year investors paid over 6% in fees, the 2% fee plus performance fees. I don't care who you are, it's hard to overcome that hurdle. This is not a nascent Berkshire, Berkshire did not have to pay out that sort of fee to the manager every year. It's not clear that at this size and with the fees, Loeb has any secret sauce other than leverage.Delete
bjdubbs - You are looking at fees and returns all wrong. I am not defending hedge funds but Loeb's returns are net of all fees and expenses. Baseline fees are likely 2% mgmt and 0.25-0.50% in fund expenses. The 6% you quote above includes incentive allocation that only arises if the fund generates positive returns above the management fee and expenses so not exactly a 6% "hurdle". The better way to think about the fund is that the hurdle is 250bps + 20% of all gross returns. If Loeb only returned 10% gross, the hurdle would be 4%. Loeb's "gross" returns last year were probably 19.5%.Delete
As a proxy, Berkshire book value increased 14.4% in 2012 compared to 13.1% "net returns" for Loeb managing a portfolio that was likely somewhat hedged most of the year.
I meant to say Loeb's returns YTD are likely around 20% on a gross basis, not last year.Delete
I went back and looked at TPOU returns vs. SPY. Since IPO, beat SPY by about 50%. So I didn't look carefully enough at his returns, which have been good recently. I think this has a better chance of success than GLRE.ReplyDelete
I like Einhorn and GLRE, but frankly I sort of agree. There seems to be more insurance expertise involved here too than at GLRE; private equity investors with experience in insurance etc... and insurance management at TPRE seems more 'seasoned' than at GLRE. So you have more insurance eyes (with big investments) looking at TPRE than at GLRE so that's a positive.Delete
Plus I don't recall Loeb being distracted by things like trying to buy a major league ball team or anything like that; that's usually not a good sign. But then again, I may be wrong. Maybe Loeb has other distractions so who knows.
I think over time they will both do very well, but on paper, yes, TPRE looks a little more solid here...
By the way, "seasoned" doesn't necessarily guarantee success. Jack Byrne, one of the most respected insurance person in the industry had a disastrous sidecar investment at WTM a few years ago. I remember being on the conference call and he sounded horribly regretful and sad about the blowup. Yes, that was catastrophe stuff so not what GLRE/TPRE is going to do, but it just shows you that being the best in the business doesn't mean there isn't a lot of risk there...Delete
Oops, I should say "doesn't mean there isn't some risk". "a lot of risk" may be an overstatement...Delete
So far the leverage is extremely low. I would hope they would crank it up a little bit. Right now it's just an investment business with a little bit of underwriting tacked on.ReplyDelete
My investing style is more Einhorn (long-short value) than Loeb (activist / special situations / distressed debt), but that might be all the more reason to invest in TPRE instead of GLRE.
On the positive side, it is great to see better transparency on how they generate their returns but in a sector such as this I can't help but be concerned about a wipe-out in some black swan event scenario. If anyone hasn't read Nassim Nicholas Taleb's book The Black Swan, I would highly encourage it before investing in this sector!ReplyDelete
TPOU discount to NAV is about 9% (was close to 20% last year). Board taking active steps to narrow.ReplyDelete
I have been invested with Loeb and Einhorn since 1996. I bought into TPRE, but I di not buy GLRE. Both guys are great investors. However, I think the TPRE team is better thant the one at GLRE. GLRE has already stubbed its toe insuring dump trucks that went bad.ReplyDelete
Buy TPRE and don't look back Hol dit forever wand watchb it compound as long as Dan Loeb does not retire.
I agree. That's the sense I got looking at TPRE. I much more seasoned management team and also coinvestors in TPRE with experience in investing in insurance companies; it means more experienced eyeballs are watching TPRE.
Thanks for your insight.
Hey, big fan of your blog, thanks and more updates please.ReplyDelete
The investment results for the fund TPRE is investing in seems to be materially underperfoming the main hedge fund net of fees and I was wondering if you had any idea why? Through November it's 6.6% vs 9.1%. GLRE on the other hand seems to be just about matching Greenlight, (which finallllly seems to be having a decent year and is now trading around book I believe.)
That's a good question. I don't know. It could be a legacy position held at the main fund that TPRE doesn't own but I don't know. I will try to put up some posts in the near future!