“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.
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.
Since Third Point Reinsurance Ltd (NYSE:TPRE)’s earnings would be primarily investment related, and therefore more volatile, Citi expects the company to trade a discount when compared to traditional reinsurers.
TPRE’s investments will mirror Third Point’s positions
In this context it would be interesting to take a brief look at the current major holdings and strategy of Third Point Reinsurance Ltd (NYSE:TPRE) as revealed in Loeb’s Q4 letter to Investors.
- The Dow Chemical Company (NYSE:DOW): This is Third Point’s biggest investment and Loeb is demanding the company hire consultants to assess whether it would be more valuable for shareholders to spin off the company’s petrochemical business and increase buybacks;
- Third Point is also invested in Japanese wireless operator Softbank Corp as well as the latter’s US arm Sprint. Sprint’s rumored merger with T-Mobile US Inc (NYSE:TMUS) is likely to benefit Third Point’s Softbank Corp (USA) (OTCMKTS:SFTBF) (TYO:9984) investment.
- In Sony Corporation (NYSE:SNE) (TYO:6758), Third Point has used its stake to try and persuade the company management to sell off its entertainment unit. “Despite the rise in the Company share price earlier in the year, Sony shares still trade significantly below their sum of the parts valuation,” says Loeb’s letter.
- Intrexon Corp (NYSE:XON) is an innovation leader in synthetic biology with a unique value proposition and proven leadership team. “Most attractive to us is Intrexon’s potential to transform multiple industries, including the health, food, and energy markets,” says Loeb.
- Third Point also holds a large stake in private auto lender Ally Financial, “a highly successful, nearly-completed restructuring that remains undervalued, with an explosive earnings story led by a talented management team who are economically aligned with shareholders.”
