Returns on investments to outweigh underwriting income at the property and casualty reinsurer
“In our view, Third Point Reinsurance Ltd (NYSE:TPRE) is well positioned to weather current soft market conditions since its results are driven primarily by investment performance rather than underwriting,” says a research note on Third Point Reinsurance by Citi analyst Erik J Bass. “As a result, Third Point Reinsurance’s returns should hold up better than traditional reinsurers’, warranting a higher P/BV multiple.”
Third Point Reinsurance: Latest estimates
Citi currently maintains a Neutral rating on the stock but has moved up the price target from $15.50 to $18.00.
For the fourth quarter, Citi estimates EPS of $0.73, up from the previous estimate of $0.38 primarily due to the higher investment returns of 5.8% during the quarter against the previous estimate of 3.3%.
The company’s underwriting business will turn in a muted performance due to “high competition and a soft pricing environment,” and is likely to be in the black only by 2015, estimates Citi.See also:
Investments to drive earnings
Compared to traditional reinsurers, the company’s business model is more inclined towards assuming investment risk rather than underwriting risk.
“We believe the company is taking a prudent approach to building its reinsurance business by focusing on less volatile lines with higher frequency and lower severity, and the management team has a strong underwriting track record,” observes Citi.
Given the company’s focus on investment income, Citi points out that its portfolio is managed by Third Point LLC, “on an identical basis with its primary hedge fund strategy.” Third Point LLC is a New York based hedge fund owned by activist billionaire Dan Loeb....MORE
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