Citigroup Inc (NYSE:C) assigned a Neutral rating to Third Point Reinsurance Ltd (NYSE:TPRE), as the reinsurance major focuses more on investment performance rather than underwriting.
Erik J. Bass and the team at Citi Research feel the property and casualty reinsurance company inverts the typical reinsurance model by taking on limited insurance risk and investing 100 percent of its assets portfolio in Third Point LLC’s hedge fund strategy.
Third Point to trade at lower P/E
Citi analysts report that such an inverted model could generate above-average returns over time, and Third Point Reinsurance Ltd (NYSE:TPRE)’s stock is likely to trail traditional reinsurance, given higher volatility from their investments.
Citi analysts feel investors would hence assign a lower multiple to earnings when revenues are generated from investment income, as opposed to underwriting income. This would thus pull Third Point’s price to trade at a P/E discount to its traditional reinsurer peers.
Lower entry barriers
Erik J. Bass and team observe the reinsurance market has limited barriers to entry. Hence, startups could replicate the investment-centric model adopted by Third Point Reinsurance Ltd (NYSE:TPRE) and Greenlight Capital Re, Ltd. (NASDAQ:GLRE), accentuating competition to Third Point. Besides, the Citi analysts feel some forms of alternative capital are starting to focus on non-catastrophe lines, which could hamper capacity issues.
Strong management team
Citi analysts compliment Third Point Reinsurance Ltd (NYSE:TPRE)’s management led by its CEO John Berger as the company has underwritten only $370 million of premiums since inception, while it has over $1 billion of available capital. With nearly three decades of proven experience, John Berger produced an average combined ratio of 89 percent for the period from 1984- 2009 (except for two years, when he switched jobs), which is substantially higher than the underwriting margins posted by peer companies during the same period.
Citi analysts expressed confidence that John Berger would deploy capital prudently, particularly when he views market conditions as relatively unfavorable.
Erik J. Bass and team note Third Point Partners LP posted 21.2 percent annualized return since inception in 1995, surpassing 6 percent annualized return generated by S&P 500 (INDEXSP:.INX) and about 10 percent annualized return posted by both the Tremont and HFRI Event Driven indices. The following graph evidences the superior returns posted by Third Point Reinsurance Ltd (NYSE:TPRE):
Citi analysts have set a target price of $14.50 based on multiples of 8x 2014E EPS and 1.1x 2Q14E Book Value.