Sometimes, getting a quick buck just ain't all it's cracked up to be.
As investors, we laboriously research. We find a select number of companies that we like – companies that have competent management teams, a solid strategy, and that stocks that are trading below what we think the company is really worth. We buy them. And then we sit around and own them through the crazy ups and downs of Mr. Market. It's not easy work.
Then, every once in a while, one of those companies is ripped out from under us. Such is the case of my Real Money Portfolio holding Platinum Underwriters Holdings (NYSE: PTP).
While the buyout helped my Real Money Portfolio score a 25% gain on Platinum in just over a year, it means that I have to part with a company that I had hoped would be bolstering the portfolio for years to come.
Wait... that's my stock!!
The reason I originally purchased Platinum for my Real Money Portfolio originally was a combination of:
1) It's good at its core business of reinsurance.
2) Management has been making great capital allocation decisions.
Number one is almost always a non-negotiable point not matter what kind of business you're investing in. But it's particularly important for an insurer. If an insurer is not good at choosing the risks to insure, pricing those risks appropriately, and keeping the right assets on hand to pay claims, that insurer can be wiped off the map quickly. Even if it's not that dire, you'll have a lousy experience as an investor.
Number two is what I especially liked about Platinum. The company's CEO, Michael Price, didn't take the same route as Warren Buffett or Tom Gayner when it comes to investing insurance float (the money insurers hold onto between when they collect insurance premiums and when they have to pay out claims). But instead of investing in equities and buying out entire companies, Price was great at shifting where he employed Platinum's capital based on where he saw opportunity. In attractive insurance market cycles, Platinum would expand how much coverage it was writing. When bonds offered attractive potential returns, he'd ratchet up Platinum's exposure to bonds. And if the company's stock was cheap – as it has been – he'd aggressively buy back stock.
That all added up to better long-term returns for shareholders because their capital was redeployed in the best way possible.
But now... I'm selling
The reason that I'm selling is simple: RenaissanceRe (RNR 0.85%) is acquiring Platinum.
There are still some reasonable questions that need to be answered regarding why I'm selling right now, since the deal hasn't closed yet. Let's take a quick look at them:
- In Platinum's press release about the deal, it says that the offer price is $76 / share, and today Platinum is only about $73. What gives? The deal has been structured as a cash and stock deal, and Platinum shareholders can elect to either receive cash consideration equal to $76, or some cash and some RenaissanceRe stock, or all RenaissanceRe stock. However, there is a set amount of cash and stock that RenaissanceRe is using in the deal. So, if there is an "oversubscribed" number of Platinum shareholders asking for all cash, then they won't get the flat $76, but rather as much cash as the overall deal will support and the rest in stock. So in other words, even though there's an all-cash option for Platinum shareholders, the ultimate payout will depend on the closing price of RenaissanceRe's stock -- and may be lower than $76.
- Yeah, but it still could be $76... or more. Why not hold out to see where things stand when the deal closes? I've been a Platinum investor here, not a RenaissanceRe investor. To hold out in "hope" that RenaissanceRe's share price will go up before the deal's closing date would be speculation on my part. And I try to avoid that.
- What do you have against RenaissanceRe? Why not just take the shares in that company? This deal actually gives me a good reason to take a closer look at RenassanceRe. I thought that Platinum was a really good company that was underpriced, and apparently so did RenaissanceRe. I can only assume that that means that RenaissanceRe's management team is brilliant. But... I don't know that for sure, and it will take some time and research to figure that out. I can always come back later to pick up RenaissanceRe shares.
It would be nicer to cash out at $76, but I think that even at $73, we're now seeing a fair price for Platinum's shares, so I'm comfortable selling at this price.
Where to put it?
As outlined above, what we're losing from the portfolio here is an insurance company that's skilled at profitably running its insurance business, while at the same time managing its capital allocation in such a way that creates long term value for shareholders.
What company could we possibly find to fill in this spot? Followers of my Real Money Portfolio won't be surprised at all to hear me say: Markel (MKL 1.43%). That's right, I'm going to the well once again for the stellar specialty insurer deftly managed by Alan Kirshner and Tom Gayner.
Markel was the first addition to this portfolio – along with Platinum – back in August of 2013. It's since climbed nearly 30% and I've added the stock three additional times. In the meantime, Markel has continued to perform and I've had the chance to sit down and chat with Tom Gayner.
As of today, Markel's stock still trades at just about 1.3 times its book value. At that valuation, I have good confidence – plus a nice margin of safety – that the stock will outperform the rest of the S&P 500 in the coming years.
Want to see what else is in my Real Money Portfolio? Click here.
And if you have cheers, jeers, or questions about the portfolio, you can find me on Twitter @KoppTheFool.
