Citi Research Equities analyst, Eric J. Bass maintained his neutral rating, but raised his price target to $15.50 a share for Daniel Loeb’s Third Point Reinsurance Ltd (NYSE:TPRE) based on expectations that the stock performance of the company will be highly correlated with investment returns.

Dan Loeb Third Point Reinsurance

Bass noted that Third Point Reinsurance Ltd (NYSE:TPRE) inverted the typical reinsurance model by taking limited risk and investing 100% of its asset portfolio in the hedge fund strategy of Third Point LLC, its parent company.

According to Bass, the reinsurance firm’s strategy could generate above average ROEs over time, but he expects Third Point Reinsurance Ltd (NYSE:TPRE) to trade at a discount compared with traditional reinsurers due to higher volatility. He explained that his $15.50 price target was based on multiples of 1.1x 2014E diluted book value and 9x 2014E EPS.

Third Point Reinsurance raised $276.5 million from its IPO

Third Point Reinsurance Ltd (NYSE:TPRE) raised $276.5 million from its initial public offering (IPO) in August. The reinsurance firm offered 22.1 million share at $12.50 a share. After its IPO, the company was given a valuation of $1.27 billion.

In addition, Bass also raised his estimates for Third Point Reinsurance Ltd (NYSE:TPRE) after delivering strong investment returns of approximately 4.7% in the third quarter of the current fiscal year. The performance of the reinsurance company was higher than 3.3% estimate and above its returns in the previous months (2.5% in September, -0.7% in August, and 2.9% in July).  The analysts emphasized that investment income is the main driver of its earnings based on its business model.

Bass projected that Third Point Reinsurance Ltd (NYSE:TPRE) will deliver 13% return, and he assumed that every 1% change has an impact of ~$0.15 (9%) impact on 2014E EPS. According to him, that is the difference between Citi’s $1.68 estimate and the current consensus of $1.91.

The margins of Third Point Reinsurance will continue to improve

The analysts believe that the margins of Third Point Reinsurance Ltd (NYSE:TPRE) will continue to improve, but he projected that that it will not be able to generate underwriting profit until 2015 because of the existing high fixed costs relative to premiums.

Bass said, “Our primary concern is high competition, which could hold back written premium growth and pricing.”

He projected that NPW will increase by 52% to $290 million this year and 28% to $370 million next year as Third Point Reinsurance Ltd (NYSE:TPRE) deploys more capital. “A key point of differentiation for TPRE is the experience and underwriting track record of its management, which is critical for a startup (especially in a soft market),” according to Bass.

In his previous report, Bass praised the management team of the reinsurance firm and expressed confidence in its CEO John Berger with almost three decades of proven experience.