Recently, we upgraded our recommendation on PartnerRe Ltd. (PRE) to Outperform from Neutral based on its enhanced operating growth momentum as witnessed in the first-quarter 2012. The strong quarterly performance reflects healthy recovery from catastrophe losses of 2011 and the company’s potential to boost growth in the long run.
PartnerRe’s first quarter operating earnings per share of $2.76 significantly surpassed the Zacks Consensus Estimate of $2.06 and rebounded from year-ago loss of $10.82. As a result, operating net income soared to $181.7 million from a hefty loss of $735.6 million in the prior-year quarter.
After a period of huge losses due to catastrophes in 2011 and despite the sluggish economic growth, PartnerRe emerged strongly in the first quarter of 2012 with substantially lower total expenses that plummeted 53.1% year over year, improved combined ratio of 84.7% from 193.7% in the year-ago period and higher underwriting profitability. The company enjoys a diversified business model, both geographically and across its reinsurance portfolio.
These factors not only expanded the bottom line and book value, but also helped in achieving annualized operating ratio of 13.0% in the first-quarter 2012, which was benchmarked as management’s long-term target. Operating ROE also outpaced the negative of 8.8% at the end of the prior quarter. The healthy start to 2012 coupled with the ongoing growth momentum cast a favorable outlook for the upcoming quarters, while enhancing the investors’ confidence.
Further, as a part of its core strategy, PartnerRe is focusing on underwriting, actuarial and financial areas that are critical to maintaining an independent view of risk. These factors together have contributed to stable earnings, increase in return per unit of risk and better underwriting practice as compared to many of its peers. Consequently, underwriting profitability improved to $106 million in the first quarter of 2012, drastically up from a loss of $853 million in the year-ago quarter, thereby justifying the company’s core underwriting capabilities.
Despite the soft market conditions, the company’s above average-risk appetite and apparent underwriting discipline have helped its total adjusted capital exceed the applicable risk-based capital levels. Going forward, once the market stabilizes at its historical highs, the company’s diversified business model and improved pricing can help it generate higher underwriting profitability, investment returns and reserves.
On the flip side though, higher catastrophe losses in 2011 and non-renewal of certain catastrophe exposures in January 2012 continue to weigh on the net premiums earned and loss expense reserves. Such uncertainty and volatility in the magnitude of catastrophic losses not only reduce financial flexibility and reserves of the company but also weaken the underwriting capacity, thereby draining out all the earnings resources. Moreover, a catastrophic uncertainty cannot be pulled out of the equation in the insurance industry.
Additionally, lingering concerns about higher competition, low demand, weak pricing, low interest rates amid the sluggish economic condition as well as lack of any near-term catalysts restrict the possibility of achieving the expected profitability in reinsurance in the upcoming quarters. Other risks include currency fluctuations, credit spreads and investment risk, which overall threatens the improvement of operating leverage. Nonetheless, a stable ratings outlook, improved pricing and market stability can help mitigate the cyclical declines in the long run. This will also enhance its competitive leverage against arch-rivals such as XL Group Plc (XL) and W.R. Berkley Corp. (WRB).
Hence, based on the pros and cons, the Zacks Consensus Estimate pegs earnings for the second quarter of 2012 at $1.95 per share, which is about 99% higher than the year-ago quarter. For 2012, earnings are expected to soar about 190% over 2011 to $8.51 per share. Of the 15 firms covering the stock, three upward revisions were witnessed in the last 30 days, while one firm revised its estimates downward.
PartnerRe has scheduled to release its second quarter results after the closing bell on July 30, 2012. Currently, the company carries a Zacks Rank #2, implying a short-term Buy rating, in line with long-term Outperform recommendation.
PARTNERRE LTD (PRE): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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