Last week, PartnerRe Ltd. (PRE) had its issuer credit rating (ICR) of “a-” and debt ratings reaffirmed by rating agency, A.M. Best, reflecting a stable outlook for all. Before this, in June 2010, the rating agency had avowed by the same credit and debt ratings as well as its outlook on the company.
Alongside, A.M. Best has also reaffirmed the ICR of “aa-” and the financial strength rating (FSR) of “A+” (Superior) for Partner Reinsurance Co. Ltd.
The stable ratings outlook reflects the overall operational synergies of PartnerRe in order to augment its long-term growth profile. Additionally, the steady growth in net investments remains significant and positive, implying the strong cash position of the company.
This is because the growth of net investment income is drawn on the basis of strong positive cash flow from operations and a straightforward portfolio of fixed income and equity securities that steers clear of alliances and hedge fund investments.
These factors have also helped the company maintain a superior operating leverage and risk-adjusted capitalization, thereby providing cushion to an outstanding business profile amid an intensely competitive environment.
However, A.M. Best has demoted the ratings of Paris Re, which was acquired by PartnerRe in 2009, based on its limited exposure in the respective areas of operation and deteriorating overall contribution to PartnerRe’s business profile.
Additionally, higher integration risk along with additional cash outflow from its units poses additional concerns. As a result, the rating agency has downgraded Paris Re’s FSR to “A-” (Excellent) from “A” (Excellent) and the ICR to “a-” from “a+”. The outlook for these ratings has also been revised to ‘stable’ from ‘positive’.
The stable outlook for Paris Re implies that although near-term risks related to amalgamation, finances and proper execution prevails, the Paris Re acquisition is projected to generate earnings and add to shareholder value in the long run.
The company enjoys above-average liquidity and a low-risk balance sheet. Despite the soft market conditions and adverse effect of catastrophes on the company’s earnings in the past, PartnerRe's above-average risk appetite and apparent underwriting discipline have helped it maintain a five-year average underwriting combined ratio of 88% at the end of 2010. This is satisfactory compared with its peer group. This also paves the way to uphold a modest return on equity at the target rate of 13% in the long term.
Over the last several quarters, PartnerRe has received a stable outlook on its securities and debts from rating agencies such as S&P, Moody’s Investor Service of Moody’s Corp. (MCO), Fitch and A.M. Best. This not only enhances the goodwill and market value of the company but also reflects PartnerRe's conservative investment strategy, reserve strength, low level of recoverable reinsurance and low reliance on retrocession reinsurance.
These factors appear to be strong drivers that can also offset the company’s loss reserve, investment and credit risks in the future.
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PARTNERRE LTD (PRE): Free Stock Analysis Report
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