Loeb Poised for IPO as Einhorn Dump-Truck Bet Shows Insurer Risk
Investors in Third Point Reinsurance Ltd. (TPRE)’s initial public offering are betting on billionaire hedge fund manager Daniel Loeb. They’re also taking on risk from an unprofitable underwriting operation.
The sale could raise as much as $322.2 million and price today, according to data compiled by Bloomberg. Proceeds will boost underwriting capacity at the Bermuda-based reinsurer, which relies on Loeb’s Third Point LLC to oversee an investment portfolio valued at more than $900 million at midyear.
Money managers including Loeb, David Einhorn, John Paulson and Steven A. Cohen have started reinsurers that funnel capital to their hedge funds and draw on their investing abilities to boost returns. While shareholders in the reinsurers may gain from those results, poor underwriting can crimp profit.
“The biggest issue with this versus a traditional reinsurer is they need to have a sustainable underwriting platform,” said Austin Hawley, co-director of research at Diamond Hill Capital Management Inc., which oversees about $10.8 billion. “If they don’t, I don’t think you’re getting anything. You’re just buying into the hedge fund with the risk of making a mistake on the reinsurance side.”
Third Point Re and existing owners are offering 22.2 million shares for $12.50 to $14.50, filings show. The midpoint of the range would value the reinsurer after the IPO at about $1.4 billion, or 1.1 times estimated book value, a measure of assets minus liabilities.
That’s similar to the current ratio of Einhorn’s Greenlight Capital Re Ltd. (GLRE) Endurance Specialty Holdings Ltd. and Axis Capital Holdings Ltd. trade at about book value, while Arch Capital Group Ltd. changed hands yesterday at 1.5 times book.
Diamond Hill purchased shares in Greenlight Re this year after the gap between the share price and book value narrowed, according to Hawley. He said he evaluates Third Point Re and Greenlight Re based on whether their investment strategies can outperform over the long term, and if the companies have sound underwriting.
Third Point Re spent about $1.30 on claims and expenses for every premium dollar it collected last year, on costs tied to “the startup nature of our business in 2012,” according to a filing from the company, which counts Loeb, 51, as a founding shareholder. That ratio improved to $1.08 in the six months ended June 30 as general and administrative expenses fell.
The better underwriting results and investments helped the company post $100.7 million in net income in the six months through June 30, compared with $99.4 million in all of 2012. Third Point Re Chief Financial Officer Rob Bredahl didn’t respond to messages seeking comment. Elissa Doyle, a managing director at Loeb’s Third Point LLC, declined to comment.
The reinsurer aims to curb underwriting volatility by limiting risks from natural disasters and focusing on auto coverage, workers’ compensation and crop protection, filings show. Still, Third Point had a $10 million underwriting loss on crop coverage last year.
Greenlight Re shows what can go wrong in the industry, which takes on risks initiated by primary insurers. The Cayman Islands-based company posted a third-quarter underwriting loss of $43.9 million last year fueled by liability contracts protecting dump trucks and other commercial vehicles.
The losses were frustrating and Greenlight Re learned from the experience, Einhorn said at the time. The reinsurer’s shares fell 5.7 percent the day after the disclosure.
Underwriting results diluted the benefits of Einhorn’s investments at Greenlight Re in the last few years, said Brian Meredith, an analyst at UBS AG. Most of the company’s 45 percent gain since its 2007 IPO was on the first day of trading.
Loeb, who managed $13.2 billion at New York-based Third Point LLC as of June 30, specializes in so-called event-driven investing, buying and selling stocks or bonds of companies going through corporate changes like spinoffs or mergers. His main fund has climbed 15.9 percent this year through July 31 and produced an annualized return of 17.9 percent since inception in December 1996, according to reports sent to investors.
Axis, Arch Capital and Endurance hold the majority of their investment portfolios in bonds, an allocation that can help them meet the standards of credit-rating firms. That strategy has pressured return on equity in the industry as the Federal Reserve and other central banks keep interest rates low to stimulate the economy.
Hedge funds can offer better returns, though volatility can hurt companies whose business model involves a promise of financial strength. Third Point Re said in filings that it has the liquidity to meet requirements of ratings firm A.M. Best Co.
Max Capital Group Ltd., the reinsurer co-founded by hedge-fund manager Louis Bacon, announced a plan in 2008 to scale back its allocation to “alternative” strategies after losses on the holdings. The company merged with Harbor Point Ltd. in 2010 to gain underwriting scale. Third Point Re Chief Executive Officer John Berger previously was vice chairman of the combined company Alterra Capital Holdings Ltd.
Potential Third Point Re shareholders should be cautious about the investing strategy’s risk, said Hugh Johnson, who oversees about $2.2 billion as chairman of the Albany, New York-based Hugh Johnson Advisors LLC. About half the reinsurer’s investments were in stocks and 40 percent were in bonds as of June 30, according to filings.
“If a large percentage of the reinsurance company’s assets are invested in equities, then I’m going to start to feel very uncomfortable,” Johnson said in a phone interview. “I would really take a hard look at this.”
Results last year benefited from holdings of Greek government bonds and Loeb’s bet on Yahoo! Inc., the reinsurer said. Net investment income was $136.4 million in 2012.
Affiliates of private-equity firms Kelso & Co. and Pine Brook Road Partners LLC have some of the largest Third Point Re stakes. Loeb will have a holding of about 8.5 percent after the offering. Neither Loeb nor the private-equity firms are selling in the IPO.
JPMorgan Chase & Co., Credit Suisse Group AG, Morgan Stanley, Bank of America Corp. and Citigroup Inc. are among the banks managing Third Point Re’s offering. The stock will be listed on the New York Stock Exchange under the symbol TPRE.