Why the Downgrade?
Third Point Re has witnessed a fall in earnings estimates since the company reported weak fourth-quarter 2014 results, also sustaining a bleak outlook for the coming quarters.
On Feb 26, Third Point Re reported fourth-quarter operating loss per share of 14 cents, wider than the Zacks Consensus Estimate of a loss of 9 cents. Results also plunged from the prior-year earnings of 75 cents a share. Additionally, this property-casualty insurer underperformed the one-year return of S&P 500 index, which grossed 13% against a negative return of 6.1% clocked by the company.
Meanwhile, the Zacks Consensus Estimate for 2015 and 2016 sank 5.8% and 5.5% to $2.11 and $2.57 per share, respectively, in the last 7 days. Moreover, the Most Accurate estimate for Third Point Re's 2015 and 2016 earnings stand at $2.02 and $2.53 a share, resulting in an Earnings ESP of -4.3% and -1.6%, respectively. This reflects a strong likelihood of earnings miss for both years.
While Third Point Re has been generating modest growth in premiums, reduced investment yields and investment losses in the portfolio has been restricting top-line growth. Furthermore, the underwriting results are hurt by a significant surge in loss and loss adjusted expenses (up 267% in fourth-quarter 2014) and policy acquisition costs (up 134%), thereby resulting in underwriting losses and a pressurized bottom line. Subsequently, return on equity (ROE) shrank to a negative 1% from positive return of 6.1% in the year-ago quarter.
With an operating history of just above three years, the company has yet to strengthen its position as a key reinsurer in the already competitive and mostly saturated reinsurance of the US. The absence of any major growth catalyst in the near future amid a weak underwriting platform and investment risks from low interest rate environment are liable to make investors jittery of the stock.
Other Worthy Insurers
While we prefer to avoid Third Point Re for the time being, some better-ranked insurers such as Arch Capital Group Ltd. ACGL , Allied World Assurance Co. Holdings AG AWH and Endurance Specialty Holdings Ltd. ENH are worth considering. All these stocks sport a Zacks Rank #1 (Strong Buy).