On Jan 22, 2015, we issued an updated research report on PartnerRe Ltd. (PRE). The company’s appreciated asset base and capital position bode well for a healthy balance sheet, while improved premiums continue to secure core growth. However, higher expenses, renewal issues and competitiveness are weighing on underwriting results.
Despite insignificant catastrophic losses, higher expenses (up 11% year over year) and a decrease in favorable prior-year loss development dragged the technical (down 7.8%) and underwriting results (down 4.4%) in the first nine months of 2014. Subsequently, these factors also impacted the bottom line, return on equity and combined ratio.
Low-risk appetite for reinsurers and risk retention by clients have also restricted catastrophe reinsurance premiums, which plunged 14.5% year over year in the first nine months of 2014. Alongside, sluggish reinvestment yields on fixed income portfolio are further expected to restrict the earnings potential in reinsurance in the upcoming quarters.
Nevertheless, a strong risk-adjusted capitalization, modest leverage and stable operating cash flow not only support the organic growth initiatives but also facilitate effective capital deployment through dividend payouts and accelerated share buybacks. Expansion into newer markets, recently in Asia-Pacific through PartnerRe Asia, and product lines are also enhancing its competitive leverage. The strategic alliances in France and Morocco will further drive growth in 2015 and beyond.
Earnings Review
This Zacks Rank #2 (Buy) stock has generated positive earnings surprises in three of the trailing four quarters with an average beat of 16%. The company’s third-quarter 2014 earnings of $4.47 a share exceeded the Zacks Consensus Estimate by 29.9% but lagged the year-ago figure by 21.6%.
Overall, a balanced risk-reward profile for the near term has led to some upward estimate revisions for 2014 while some downward revisions for 2015. The Zacks Consensus Estimate for 2014 rose 3.1% to $13.44 per share in the last 60 days, although the same for 2015 dipped 0.1% to $9.94 a share over the same duration. On a year-over-year basis, earnings are expected to grow by about 5.1% in 2014 but fall by about 26% in 2015.
Moreover, the Most Accurate estimate for PartnerRe’s 2014 and 2015 earnings currently stands at $13.56 and $9.61 a share, respectively, translating into Earnings ESP of +0.9% and -3.3%, respectively. While this indicates a likely earnings beat for 2014, it also signals possibility of a miss next year.
Key Picks in the Sector
Investors interested in the insurance sector could consider better-ranked stocks like The Allstate Corp. (ALL), HCI Group Inc. (HCI) and Platinum Underwriters Holdings Ltd. (PTP). All these sport a Zacks Rank #1 (Strong Buy).
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