What happened
Shares of reinsurance company SiriusPoint (TPRE 1.60%) rose 10% Wednesday on news that hedge fund titan Dan Loeb's Third Point may take the company private.
Generally, when word circulates about a company potentially being acquired, that usually means the buyer is expected to pay a premium relative to its recent share prices. In addition, a decision to take a company private usually means the board and other owners think the stock price is undervaluing it. So, it's no surprise that SiriusPoint shares rose in response to the news.
So what
SiriusPoint was created back in 2021 out of a merger between Third Point Reinsurance and Sirius International Insurance Group in order to create a more diversified operation and expand on the two companies' complementary offerings. (Yes, Third Point had already owned its own reinsurer, which it founded back in 2011.) Several hedge funds and private equity companies have acquired insurance operations over the past decade in order to generate steady streams of insurance float that they can then put to work in their investment strategies.
If that sounds familiar, these companies are essentially taking a page out of Warren Buffett's playbook, as he made insurance the cornerstone of Berkshire Hathaway decades ago. Insurance float is generally attractive for investors, as it provides a steady stream of permanent capital that isn't subject to flight in the same way that funds from outside partners are when they get nervous or grow dissatisfied with their investment manager.
Of note, Loeb already owns a 9.3% stake in SiriusPoint and has a seat on its board of directors. In a filing Wednesday, Third Point noted:
... the Reporting Person has full confidence in the Issuer's approach to the de-risking of its investment portfolio to strengthen its balance sheet and capital position. However, the Reporting Person believes that the Issuer may be best positioned to execute on its turnaround strategy as a privately held company while continuing to strengthen its financial position, enhance its credit ratings, and adhere to the highest regulatory standards. As a result, the Reporting Person has determined to explore a potential acquisition of all or substantially all of the outstanding Common Shares of the Issuer.
The filing also added that if Loeb were to acquire the company, it "would value the Issuer in such an Acquisition Transaction in a manner that is generally consistent with recent precedent transactions in the Issuer's industry."
Now what
Even after Wednesday's jump, SiriusPoint still trades at just 0.78 times book value, a low valuation that perhaps indicates a lack of investor confidence in its operations, which have yielded quarterly losses for some time. However, the company has a relatively new CEO who was appointed in September, and a new CFO appointed in October.
Thus, Loeb may be seeing a value investment opportunity to buy the company at or even under its tangible book value, and then turn around its operations as a private company. If Loeb does buy SiriusPoint for book value, that would be a roughly 25% premium to the stock price, even after Wednesday's surge.
