| Daniel Loeb, Third Point (Bloomberg) |
Like many hedge fund firms, Daniel Loeb’s Third Point lost money in January, posting a roughly 3.4 percent decline in its flagship fund.
However, this is a fraction of the decline experienced by the stock of the reinsurance company Loeb created several years ago. Shares of Bermuda-based Third Point Reinsurance, which went public in August 2013, on Wednesday fell to their all-time low and dropped another 2 percent or so on Thursday, closing at $10.48. As a result, the stock is down about 22 percent this year alone.
So why is it down so much? Investors seem to be concerned that Third Point will continue to lose money in its hedge fund for the foreseeable future.
Loeb created Third Point Re mostly to provide permanent capital for his New York hedge funds, just as Greenlight Capital founder David Einhorn did when he earlier created his reinsurance company, Greenlight Capital Re.
Reinsurers take on part of the risk of insurers, but these two Bermuda-based reinsurers basically exist to invests the premiums in the hedge funds. “They turned the reinsurance industry on its head,” says Kenneth Billingsley, who follows Third Point Re’s stock for Compass Point Research & Trading, a Washington, D.C.–based investment firm.
He explains that most reinsurance companies spend most of their time managing their liabilities — the insurance they underwrite. This is where they take the most risk.
Third Point and Greenlight, on the other hand, try to underwrite low-risk, plain-vanilla insurance and focus most of their risk-taking on the asset management side.
Billingsley says Third Point’s reinsurance business is not quite at the maturity level it is aiming for from an underwriting standpoint, since the company was created less than three years ago. However, Billingsley says it is almost there, and once Third Point achieves the level of underwriting business it is seeking, “there is potentially big upside.”
The ultimate goal of these reinsurers is to grow assets and then boost the company’s overall profits mostly from investing the assets in the hedge funds. Right now Third Point Re’s stock is seemingly discounting a bear market or a big market correction, in some ways extrapolating that 3.4 percent January loss out many more months. Most reinsurance companies’ conservatively run investment portfolios typically post declines that are a fraction of what Third Point experienced or is expected to experience if the current market decline persists.
But how the stocks of these hedge fund–backed reinsurers perform is closely tied to the performance of the hedge funds that are managing their assets. “At the end of the day, it still mostly comes down to what [Third Point Re] does on the investment side,” Billingsley acknowledges. “The stock is partially a call on where the markets are going.”
In fact, Greenlight Re’s stock is up more than 3 percent this year, in large part because its investment portfolio, which closely tracks New York–based Greenlight’s flagship fund, was up 1.4 percent in January.
Last year, however, the stock was down more than 42 percent, when its investment portfolio was down more than 20 percent. When the financial markets turn, however, Billingsley thinks Third Point’s investment portfolio — and stock price — will snap back much quicker than that of a traditional reinsurance company facing similar declines.
So if someone wants to invest with Loeb, this could be a great time to get into the reinsurance stock, especially for individuals who are not accredited investors and would therefore be unable to invest in the underlying hedge funds.
At its current stock price, Third Point Re offers investors an intriguing arbitrage opportunity. It is currently like a closed-end fund trading at a steep discount to its net asset value — in this case the Third Point hedge funds’ relative performance — that is managed by one of the best hedge fund managers in the industry.
And it comes with an extra little warrant attached: the company reporting better results from its reinsurance business.
