We have reiterated our ‘Neutral’ recommendation on PartnerRe Ltd. (PRE).
PartnerRe’s first-quarter operating loss per share of $10.82 came in significantly wider than the Zacks Consensus Estimate for a loss of $7.68. It was also wider than the $0.60 loss recorded in the year-ago quarter, primarily due to huge losses incurred from catastrophes in Japan, Australia and New Zealand, along with net favorable loss development on prior accident years.
PartnerRe recorded about $1.02 billion in catastrophe losses in the first quarter of 2011 itself, way higher than $437 million in 2010, no loss in 2009 and $305 million in 2008. The company also expects total pre-tax impact of $50–$70 million from catastrophes in the U.S., which is to be recorded in the second quarter of 2011.
Severe exposure to catastrophe losses has even deteriorated the combined ratio and is also nibbling into the return on equity (ROE). To achieve effective and efficient capital allocation, PartnerRe focuses on operating ROE. Despite reducing the share count through a series of share buybacks and artificially inflating earnings per share, the company’s ROE has been declining over the last couple of years.
Hence, we believe that the company’s poor casualty underwriting experience, lack of risk retention by clients and low risk appetite for reinsurers, along with high CAT losses, could bring in more negative surprises in future.
On the operational front, declining premiums written and earned, poor underwriting results and lower investment income driven by low reinvestment rates have led to negative top line and book value growth through most of the first half of 2011. This is coupled with a drastic surge in total expenses.
Nevertheless, PartnerRe enjoys above-average liquidity and a low-risk balance sheet, while its consistent dividend increment and stock buybacks reflect efficient capital deployment and reserve strength. In April this year, the board of PartnerRe announced a 9% hike in its regular quarterly dividend. As a result, quarterly dividend rose to 60 cents per share from 55 cents, also marking the 20th consecutive hike since its inception.
Overall, our near-term outlook remains cautious on a weak P&C market cycle, low underwriting profitability, currency fluctuations, credit spreads and investment risk. In the long run, however, stable ratings outlook, improved pricing and market stability can help mitigate the cyclical declines.
Based on the above factors, the Zacks Consensus Estimate for the second quarter of 2011 stands at $1.39 per share, down from $1.92 per share in the year-ago quarter. However, the full-year 2011 may not be able to absorb the first quarter loss and, hence, it is pegged at a loss of $4.84 per share. Going ahead, a fairly optimistic recovery supports the full-year 2012 earnings estimate at $8.29 per share.
PartnerRe primarily competes with W. R. Berkley Corp. (WRB) and Everest Re (RE) in the reinsurance industry, both of which carry a ‘Neutral’ recommendation.
PartnerRe is currently a Zacks #3 Rank (short-term Hold rating), indicating no clear directional pressure on the shares over the near term. This is also consistent with our Neutral recommendation on the shares.
PARTNERRE LTD (PRE): Free Stock Analysis Report
EVEREST RE LTD (RE): Free Stock Analysis Report
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