Dan Loeb’s foray into the reinsurance industry is proving to be more volatile for investors than his hedge-fund returns.
Third Point Reinsurance Ltd., a Bermuda-based firm that relies on the billionaire money manager to oversee its assets, rallied about 50 percent last year after its initial public offering. Since peaking on Dec. 20, shares have slid 17 percent. Loeb’s main hedge fund, in contrast, returned 6.4 percent this year through August after gaining 25 percent in 2013.
Money managers including Loeb and David Einhorn started reinsurers to gain access to funds that are less subject to client withdrawals. While the businesses allow shareholders to bet indirectly on the stock-and-bond picking skills of star investors, they’ve been tricky to value and are subject to risks from reinsurance operations.
“The run-up after the IPO was probably a little bit overdone” because of excitement over the team they built, Brett Shirreffs, an analyst at Keefe Bruyette & Woods, said in an interview. There was a “big valuation discrepancy” between Third Point Re and Einhorn’s Greenlight Capital Re Ltd., its closest publicly traded competitor, Shirreffs said.
Third Point Re closed Wednesday at 1.1 times book value per share, a measure of assets minus liabilities. That compares with about 1.4 times at the end of last year. Greenlight’s ratio fell from about 1.2 at year-end to about 1.1 yesterday.
Reinsurance Industry
Those valuations are still higher than the average in the 13-company Bloomberg Industries North America Property & Casualty Reinsurance Valuation Peers Index, which has risen about 16 percent since Third Point Re’s IPO on Aug. 14, 2013. The index has gained 2.9 percent since Dec. 31.
Both traditional reinsurers and the new class of underwriters started by hedge-fund managers have faced pressure this year from pricing.
Pension funds and other institutional investors have piled into the industry, boosting capital for underwriting. Reinsurers, which shoulder risks for primary carriers in return for a share of the premiums, have also seen below-average disaster claims.
That’s caused “price decreases across virtually all geographies and lines of business, many in the double-digit range,” Guy Carpenter, the reinsurance broker of Marsh & McLennan Cos., said in a July report.
For hedge-fund-linked reinsurers, it’s been tougher to get more funds into the hands of investment managers. Reinsurers buy stocks, bonds and other assets with their float, or the premiums they hold until paying out claims.
Policy Sales
Third Point Re said last month that policy sales rose 20 percent to $233 million in the first six months of the year, even amid what Chief Executive Officer John Berger described as “challenging market conditions.” The company said during an Aug. 8 conference call that it hadn’t seen deterioration in margins.
“It’s a tough market and it’s probably going to get tougher,” Berger said yesterday at an investor conference. “We think with our approach, the flow of business we’re seeing and the investment expertise, as well, we’re better positioned than anybody in the marketplace.”
Third Point Re didn’t respond to a message left on a general investor relations line.
The reinsurer’s share slide stands in contrast to the investment results that Loeb has generated for the company. Third Point Re’s portfolio returned 5.9 percent this year through August.
Investing Approach
The hedge-fund manager focuses on event-driven investing, buying and selling stocks or bonds of companies going through changes like spinoffs or mergers. He also bets on macroeconomic trends. His main hedge fund had an annualized return of almost 18 percent from its start in December 1996 through August of this year. That compares with 7.6 percent for the Standard & Poor’s 500 Index.
Buying shares in the reinsurer is a way to get access to the fund manager’s strategies for a fraction of the price. Loeb’s Third Point LLC has been closed to new investments since 2011 and returned some funds last year. It recently told investors it would reopen for a limited amount of capital.
Only institutional investors and high-net-worth clients can invest directly in the hedge fund. Shares of Third Point Re closed at $15.56 yesterday and can be purchased by retail investors.
The strategy Third Point Re and other hedge-fund-linked reinsurers are using could prove to be attractive longer term, said Steve Chirico, assistant vice president of alternative markets at A.M. Best Co., which rates the creditworthiness of insurers. Being able to generate higher investment returns is an advantage when it’s getting harder to find underwriting profits, he said.
The model aims to “toggle risk and reward on both sides of the balance sheet,” Chirico said. “As we creep further and further into the soft reinsurance market, the ability to have an invested asset return of 6 percent is a good thing.”