Dan Loeb’s Third Point Reinsurance Ltd., which had a public offering last month, will probably produce better underwriting results than David Einhorn’s Greenlight Capital Re Ltd. (GLRE), JPMorgan Chase & Co. (JPM) analysts said.
Third Point Re’s managerial talent and business model will help limit volatility, analysts led by Jimmy Bhullar wrote in a note to clients today initiating coverage of the Bermuda-based company with a neutral rating. Greenlight Re posted inconsistent underwriting results because of poor risk selection, they wrote.
“While TPRE is unlikely to earn significant underwriting profits, we believe that its margins will be more stable than GLRE’s given a difference in business line mix and a superior underwriting team,” Bhullar and his colleagues wrote, using the ticker symbols for the two companies.
Loeb and Einhorn started the reinsurers, in part, to funnel capital to their hedge funds. Both companies rely on the money managers’ abilities to boost investment returns and to attract shareholders. Still, mistakes on underwriting can crimp profit, as Greenlight Re’s results have shown.
Einhorn’s reinsurer lost money on underwriting from 2010 to 2012 as it faced claims, including losses on contracts tied to dump trucks and other commercial vehicles. Third Point Re spent about $1.30 for every premium dollar it collected last year, in part because of losses on crop insurance.
Third Point Re will probably post an underwriting profit by 2015, the analysts wrote. Chief Executive Officer John Berger and other executives have led profitable reinsurance underwriting operations in the past and are focusing on low-severity policies that should mitigate volatility, they said.
Third Point Re rose 1 percent to $13.01 at 4:15 p.m. in New York, while Cayman Islands-based Greenlight Re advanced 1.9 percent. Loeb’s reinsurer has climbed 4.1 percent from its $12.50 offering price on Aug. 14. Brian Ruby, a spokesman with ICR Inc. who represents Greenlight Re, had no comment on the research note.
Wall Street analysts are releasing reports on Third Point today after delaying recommendations because their banks were involved in the reinsurer’s initial public offering. Citigroup Inc. (C) analysts also gave the company a neutral rating, while highlighting the company’s management talent and lower-volatility underwriting strategy.
Investors shouldn’t expect dividends or buybacks from Third Point Re, since excess cash is invested with Loeb’s hedge fund, Third Point LLC, the Citigroup analysts wrote. That contrasts with other reinsurers, which often return money to shareholders when there isn’t an attractive way to deploy funds.
“Third Point never views itself as having ‘excess’ capital,” the analysts wrote. “While we believe this makes economic sense, it also benefits Third Point LLC which is collecting fees based on assets under management.”
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