Description
TPRE was conceived originally as a fundraising vehicle for Dan Loeb’s Third Point Hedge Fund. Recently, TPRE announced a merger with Sirius International (ticker, SG) that will create a combined insurance/reinsurance company with LTM GWP of $2.5B putting in the bigger leagues of notable companies like Argo, Aspen and Alleghany. In addition the pro-forma investment portfolio will be less dependent on Third Point’s investment results and look more like a traditional reinsurer. The resulting entity should have dampened volatility both on the underwriting and investment side and thus earn a rerating in the stock.
Profile of SiriusPoint (merged entity)
Global insurance/reinsurance platform with access to admitted and non-admitted paper in Europe, U.S., Bermuda
and Lloyd’s
$2.5B of GWP, $6b combined assets
AM Best A-
S&P A-
Fitch A-
Proforma Mix of Gross Written Premium
1/3 Property
1/3 Casualty
1/3 Accident and Health
Less than 30% leverage at close of deal
TPRE Valuation from historical lows set to rebound closer to industry peers
Median P/B of TPRE
Last 7 yrs .90
Last 5 yrs .86
Last 3 yrs .73
Last yr .61
The multiple has steadily come down from the IPO in 2017 reflecting volatile investment and underwriting results, the negative stigma of a hedge fund moniker and likely, broader small cap underperformance
Several of those issues are about to be resolved with the merger. SiriusPoint will be larger with dampened volatility and the investment portfolio will look more like a traditional reinsurer heavily weighted towards bonds. This should help close the gap towards book value. A steadier 9-10% ROE reinsurer should trade more like .9x BV or $12, 72% return potential.
2021e P/E Current P/Adj Book
Renaissance Re 11x .8x
Everest Re 8x .8x
Axis Capital 9x .8x
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TPRE 4-5x .5x
Earnings Power of combined SiriusPoint
Base case yields $1.63 in EPS. Current price is 4.5x EPS.
Low case of bear market shows slight losses but valuation buttressed by downside BV/share of $13+.
Low Mid High
GWP $2,500 $2,500 $2,500
Combined Ratio 98% 95% 93%
Underwriting Income $50 $125 $175
Investment Return
Third Point (25%) -10% 10% 15%
ROP (75%) 1% 2% 3%
Investment Income -105 218 338
Tax rate 27% 25% 22%
Net Income $(40) $257 $400
Proforma Shares* 158 158 158
EPS $(0.25) $1.63 $2.53
*assumes 80% of SG shareholders elect option 2
The merger presentation lays out the case for the deal and the link is below:
https://s1.q4cdn.com/849943712/files/doc_downloads/2020/08/Third-Point-Re-and-Sirius-Group-Merger-Presentation.pdf
The deal is expected to be accretive to EPS and ROE. For this to be true. the old Sirius would have to make $90mm to be accretive to TPRE legacy shareholders assuming the vast majority of SG shareholders elect the second option for consideration (TPRE shares plus two year CVR which, taken together, guarantees that on the second anniversary of the closing date the electing shareholderwill have received equity and cash of at least $13.73 per share on that date).
Siri has lost money in the last several years so its exposure needs to be re-underwritten to become profitable. TPRE management has already evidenced this ability with its own shift in portfolio and move away from unprofitable lines of business as the combined ratio has been under 100 for two quarters now and is positioned to stay that way for the foreseeable future.
New Management is highly experienced, own shares and focused on profitable underwriting.
Chairman and CEO: Siddhartha (Sid) Sankaran – former AIG CFO and Chief Risk Officer, and Oscar Health CFO
COO: David Junius-former Corp Treasurer of AIG and CFO of International Division
Senior Underwriting Role: Dan Malloy – current Third Point Re CEO
Institutional Support
The Institutional holders of Sirius preference B shares (Bain and Centerbridge) will remain holders of the combined company.
CMIH, Sirius’ majority shareholder, estimated to own approximately 37% of SiriusPoint, with a 9.9% voting cap
Insider Buying at higher than current levels
CEO and CFO of TPRE, Chairman/CEO of SiriusPoint, Directors
Hard Underwriting cycle provides a tailwind
Catalyzed by low interest rates, CATS, closure of ILS market.
Double-digit price increases for June 2020 renewals depending on line and more of the same expected in January
RNR, RE and others have raised capital to take advantage of the favorable pricing environment
Other Potential Growth vehicles
Arcadian Investment: TPRE announced they are buying a minority interest in a Bermuda based MGA that according to a recently filed 8-k expects to write $75-125mm in GWP in 2021. At a combined ratio of 95% that could add $5mm to the bottomline.
2 MGA's within legacy Siri A&H with sticky relationships that could accelerate top line under new management
Risks
Cat Risk: Despite the confluence of Cats this year (hurricanes, fires, riots, Covid etc) TPRE’s underweighting in property/cat will make this an average year from a Cat perspective, meaning 4 points or so in expense.
Mortgage portfolio: 5% of gross writings 30mm/ yr and they have aggregate caps within a year and over the life of contracts
Sirius legacy reserve additions persist
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Deal Closing in Q1
January renewal period