TPRE - Third Point Reinsurance

[muscleman]

Also the 2/20 fee that Dan Leob charges essentially cancels out the benefit of being in Bermuda instead of in the US.

 

But who cares?! Mr. Loeb has an 18 years track record of compounding capital at 21.1% AFTER FEES, EXPENSES AND INCENTIVE ALLOCATION.

Furthermore, on this kind of extraordinary results you, as a shareholder of TPRE, don’t have to pay taxes! ;)

 

Gio

 

Deferred tax instead of no tax. But still, if I buy and hold it for 20 years, and then then for a 20% long term cap gain, it will be much better compared to directly invest in his HF and pay tax every year.

 

I sold my MBI and bought TPRE this morning. I think I am paying for a fair price (not a bargain price) for something that may go really well in the future. :)

[giofranchi]

I sold my MBI and bought TPRE this morning. I think I am paying for a fair price (not a bargain price) for something that may go really well in the future. :)

 

Hi MM!

 

I think TPRE is a wonderful vehicle for compounding capital at high rates for a very long time into the future!

Just like Mr. Watsa has written in his latest letter to shareholders of FFH: the reinsurance business is particularly leveraged to a “few good men and women at the top”. Well, Mr. Berger imo is such a “good man”. Mr. Loeb knows how to choose his partners very well and carefully! :)

 

This being said, right now I have no position in TPRE. I simply reasoned that in between FFH and LRE (my firm’s two largest holdings) I was already more than enough involved in the insurance and reinsurance business… I wanted to invest in ALS, and, instead of selling VRX, ENDP, or LMCA, I decided to sell TPRE and GLRE.

 

Yet, I do believe this is only temporary. In the not to distant future I expect to reopen substantial positions in both TPRE and GLRE. ;)

 

Cheers,

 

Gio

 

[muscleman]

I sold my MBI and bought TPRE this morning. I think I am paying for a fair price (not a bargain price) for something that may go really well in the future. :)

 

Hi MM!

 

I think TPRE is a wonderful vehicle for compounding capital at high rates for a very long time into the future!

Just like Mr. Watsa has written in his latest letter to shareholders of FFH: the reinsurance business is particularly leveraged to a “few good men and women at the top”. Well, Mr. Berger imo is such a “good man”. Mr. Loeb knows how to choose his partners very well and carefully! :)

 

This being said, right now I have no position in TPRE. I simply reasoned that in between FFH and LRE (my firm’s two largest holdings) I was already more than enough involved in the insurance and reinsurance business… I wanted to invest in ALS, and, instead of selling VRX, ENDP, or LMCA, I decided to sell TPRE and GLRE.

 

Yet, I do believe this is only temporary. In the not to distant future I expect to reopen substantial positions in both TPRE and GLRE. ;)

 

Cheers,

 

Gio

 

I see. That makes sense. How would you compare LRE's underwriters vs Mr. Burger? LRE seems to have one of the most successful underwriters. And the other quesion: Why do you think LRE wins the competition against TPRE for one position in your portfolio? I see LRE's trading at a much higher premium to book value, and their investing side is just buying bonds.

[muscleman]

Thx ni-co!

Here's a video interview with Taussig, author of the report (26 minutes):

 

Thank you! That was quite interesting. Seems to me that the reinsurance market place is should become a lot more crowded, soon. One should not forget though how big a role management plays in these insurance companies – it's not all about generating high returns on your float. Underwriting, especially in reinsurance, still involves enormous risks and Taussig makes it sound just a little to easy by trying to sell that "structural alpha"… ("no free lunch")

 

Also the 2/20 fee that Dan Leob charges essentially cancels out the benefit of being in Bermuda instead of in the US.

Dan also claims that most of BRK spectacular results are due to BRK insurance operations and not buffet's stock picking. How true is that? I find that hard to believe. if that's true BRK should still have a very good growth without buffet and in future. Thanks everyone for your insights

 

That is because regulators do not allow a leverage more than 1.5x for equities. But for bonds, they allow 3x. So if you can buy bonds that yields 6% and you leverage it 3 times, the return is 18%. If your equity skills are good enough for a 15% return, which is higher than Fairholme fund, and you leverage it 1.5x, you get a 22% return.

[giofranchi]

I see. That makes sense. How would you compare LRE's underwriters vs Mr. Burger? LRE seems to have one of the most successful underwriters. And the other quesion: Why do you think LRE wins the competition against TPRE for one position in your portfolio? I see LRE's trading at a much higher premium to book value, and their investing side is just buying bonds.

 

MM,

As I have explained in the LRE thread, I look at LRE as a “strategic” investment. It does something for my firm’s portfolio that simply no other investment (at least that I know of) might do.

And I don’t look at LRE as a compounding machine.

If you are interested, you find my view on LRE on its thread.

 

Gio

 

[muscleman]

Thx ni-co!

Here's a video interview with Taussig, author of the report (26 minutes):

 

I read this interview again, and I found it weird that this guy claimed Buffet made only 12.3% a year during his investment career. Is it true that Buffet made over 20% a year?

[giofranchi]

March 2014 Report

 

 

Gio

2014-March-Monthly-Report-TPRE.pdf

[dcollon]

The S&P is up more than 1.8% ytd.

[gfp]

Really?  How do you figure that?

 

The S&P is up more than 1.8% ytd.

[dcollon]

My bad, the number I looked at quickly captured yesterday.  I apologize.

 

[giofranchi]

April 2014 Monthly Report + Q1 2014 Letter

 

 

Gio

2014-04-April-Monthly-Report-TPRE.pdf

Third-Point-Q1-2014-Investor-Letter-TPRE.pdf

[dcollon]

Third Point’s Loeb Says Harder to Gain on Mortgages

 

http://www.bloomberg.com/news/2014-05-09/third-point-s-loeb-says-harder-to-gain-on-mortgages.html

[giofranchi]

May 2014 Monthly Report

 

 

Gio

2014-05-May-Monthly-Report-TPRE.pdf

[muscleman]

http://www.zacks.com/stock/news/139642/Third-Point-Reinsurance-Down-to-Strong-Sell-on-Weak-Fundamentals

 

"Most Accurate estimate for Third Point Reinsurance’s 2014 and 2015 earnings currently stand at $1.70 and $2.45 a share"

This is hilarious.  :) These guys think that earning $2.45 in 2015 is too bad and people should sell this stock in a panic.

[giofranchi]

Q2 2014 Letter

 

 

Gio

Third-Point-Q2-2014-Investor-Letter-TPOI.pdf

[zuokk]

http://www.digitaljournal.com/pr/2109694

 

 

For the three months ended June 30, 2014, diluted book value per share increased by $0.29 per share, or 2.2%, to $13.72 per share from $13.43 per share as of March 31, 2014.  For the six months ended June 30, 2014, diluted book value per share increased by $0.60 per share, or 4.6%, to $13.72 per share from $13.12 per share as of December 31, 2013.

 

"Our Total Return approach continued to generate growth in diluted book value per share in the second quarter," commented John Berger, Chairman, Chief Executive Officer and Chief Underwriting Officer.  "Our combined ratio dropped to 102.7% from 105.5% in the prior year's second quarter as we continue to gain scale and Third Point LLC, our investment manager, successfully navigated market volatility through selective investments in securities and market hedges.  We have managed to maintain our underwriting margins so far in 2014, despite challenging market conditions."

 

 

[muscleman]

http://www.digitaljournal.com/pr/2109694

 

 

For the three months ended June 30, 2014, diluted book value per share increased by $0.29 per share, or 2.2%, to $13.72 per share from $13.43 per share as of March 31, 2014.  For the six months ended June 30, 2014, diluted book value per share increased by $0.60 per share, or 4.6%, to $13.72 per share from $13.12 per share as of December 31, 2013.

 

"Our Total Return approach continued to generate growth in diluted book value per share in the second quarter," commented John Berger, Chairman, Chief Executive Officer and Chief Underwriting Officer.  "Our combined ratio dropped to 102.7% from 105.5% in the prior year's second quarter as we continue to gain scale and Third Point LLC, our investment manager, successfully navigated market volatility through selective investments in securities and market hedges.  We have managed to maintain our underwriting margins so far in 2014, despite challenging market conditions."

 

I think it is making good progress.

Buffet said what's more important that the combined ratio is insurance loss/float ratio. This is the actual cost of float.

In this case, the first 6 months, they lost 13 mn insurance, so I assume a whole year loss would be 26 mn. That supports a float of 520 mn. So the cost of float would be 5%, which is not ideal but I expect they will do better as they ramp up the float size.  :)

I wonder if GIO has any special insights here.

[giofranchi]

I think it is making good progress.

 

No special insight, except that I agree with you! :)

 

TPRE is another business that has the potential to grow BV at high CARs for many years to come. And they are delivering what promised: from an operating point of view they said high CRs were due to start-up costs, and that they would be progressively coming down... That's precisely what's happening.

 

Also keep in mind that a 9% annualized increase in BVPS is not bad at all, for two reasons:

1) third point is underperforming this year (and this will change),

2) TPRE is still the less levered reinsurance company I know of (even less than GLRE, which employs very low leverage): as float grows, a 9% unlevered will easily translate into a double digit levered return.

 

Gio

[WolfOfMainStreet]

Hey all,

 

I'm pretty new to investing in general so I have a very small circle of competence. Never took a finance course in my life. My education is based on the Intelligent Investor and from any finance I've taught myself. I attached my first attempt at a write up about a company, TPRE. Please let me know what you think, any input is greatly appreciated. Thanks.

Third_Point_Reinsurance_LTD_TPRE_-_1_-_Copy.docx

[muscleman]

Hey all,

 

I'm pretty new to investing in general so I have a very small circle of competence. Never took a finance course in my life. My education is based on the Intelligent Investor and from any finance I've taught myself. I attached my first attempt at a write up about a company, TPRE. Please let me know what you think, any input is greatly appreciated. Thanks.

 

You don't need this much staff to make a good investment decision. Too much data makes the decision making process harder. And also you stacked a lot of things without elaborating. For example, you said "By December of 2011 TPRE had $784.3 million in equity capital and now the equity is worth around double at $1.5 billion. " This is clearly a misleading statement to readers because the major reason for this increase is from its IPO, not from its organic earnings.

 

I made a large sized investment in TPRE too and my thesis is:

1. Dan Leob's investment has low volatility, which is good for leveraging up.

2. John Berger may be able to grow the float to a good size in the next few years, especially after his non compete agreement with the previous employer expires in 2015.

3. When both happens, the market may realize that and push up the stock price to 2x book value.

4. When that fails to happen, the stock will probably not go below book value, so I won't lose too much if I choose to exit.

[WolfOfMainStreet]

Thanks for the honest feedback. I know there's lots of data but I'm just trying to throw down some yard sticks to see what works in the future. My investment decision isn't solely based off the quantitative measures, the value for me here is Berger's 30+ years and Loeb's investment record. Where else would you say I stacked a lot of things without elaborating?

 

Also, how exactly did you calculate the loss/float ratio?

 

[muscleman]

Thanks for the honest feedback. I know there's lots of data but I'm just trying to throw down some yard sticks to see what works in the future. My investment decision isn't solely based off the quantitative measures, the value for me here is Berger's 30+ years and Loeb's investment record. Where else would you say I stacked a lot of things without elaborating?

 

Also, how exactly did you calculate the loss/float ratio?

 

I've been reading the annual letter of Buffet. I strongly recommend that you do the same. You can buy the kindle version from Amazon for $2.

There is an extensive discussion about insurance company. Using float to leverage up.

Basically, the float is the unearned premium reserves + loss reserves + loss adjustment reserves - policy acquisition costs.

The expense of the insurance policies in any year is the earned premium - a few insurance related expenses, including salaries, insurance loss etc.

Then you can get the actual cost of float by using the expense/float.

 

Note that different insurance have quite different behaviors. Crop insurance generates almost no float because they take in premium and almost right after that, farmers will report loss and ask them to pay. So for crop insurance, it does not make any sense to have combined ratio above 100.

Workers compensation is quite different. It can take many years before paying, so a combined ratio of 110 could work really well.

So it will be great if your report can break down these numbers and do a float quality analysis.

 

In addition, it does not provide much value to compare TPRE with companies like AMBC, which is a totally different beast. AMBC just emerged from bankruptcy last year so a lot of its numbers are not comparable.

[WolfOfMainStreet]

Are these the letters you are talking about?

 

http://www.berkshirehathaway.com/letters/letters.html

 

http://www.amazon.com/Berkshire-Hathaway-Letters-Shareholders-Buffett/dp/1595910778

 

I've taken a peek at these before but now that I did a bit more research I can probably understand more. What year would you suggest starting from?

[muscleman]

Are these the letters you are talking about?

 

http://www.berkshirehathaway.com/letters/letters.html

 

http://www.amazon.com/Berkshire-Hathaway-Letters-Shareholders-Buffett/dp/1595910778

 

I've taken a peek at these before but now that I did a bit more research I can probably understand more. What year would you suggest starting from?

 

I found letters from 1975 and later to be more useful.

[giofranchi]

I made a large sized investment in TPRE too and my thesis is:

1. Dan Leob's investment has low volatility, which is good for leveraging up.

 

Muscleman,

I wouldn't be so sure about that... According to Soros:

You can get either high returns or low volatility, but you cannot get both.

And Loeb is returning 18% annual for almost 20 years now... And his portfolio in 2008 has been very volatile...

I don't see TPRE (nor GLRE) becoming as levered as other insurance/reinsurance companies. Anyway, given Loeb's track record, it doesn't need to! ;)

 

Gio