PartnerRe Beats Est., Dips YoY - Analyst Blog

PartnerRe Ltd.'s (PRE) third quarter operating earnings per share of $3.69 came in substantially higher than the Zacks Consensus Estimate of $2.96 cents per share. However, this was way behind the earnings of $4.77 per share in the year-ago quarter.

Operating earnings were calculated after payment of preferred dividends. This excluded after-tax net realized and unrealized investment gains. Including these items, GAAP net income for PartnerRe was $524.9 million or $6.76 per share, compared with $566.7 million or $9.44 per share in the year-ago quarter.

Results reflected a strong growth in premiums written and earned, underwriting profitability and net investment income that led to modest top line growth. However, total operating expenses increased 28.6% year over year to $1.18 billion.

Moreover, non-life combined ratio deteriorated to 80.7% from 78.1% in the year-ago period, reflecting 5.6 points due to an estimated $64 million loss from the recent earthquake in New Zealand. These factors adversely impacted the bottom line.

PartnerRe's total revenues increased 12.7% to $1.77 billion from $1.57 billion in the year-ago quarter, surpassing the Zacks Consensus of $1.49 billion. This included net premiums earned of $1.31 billion (up 20.4% year over year), net investment income of $164.4 million (up 13.1% year over year), pre-tax net realized and unrealized investment gains of $293.2 million, compared with $330.2 million in the year-ago quarter and other income of $3.4 million, down from $8.4 million in the year-ago period.

Net premiums written increased 10.8% year over year to $987.6 million. Overall, premiums earned witnessed fair performance across most business segments, while experiencing some tepidity in the U.S. and Global Speciality business segments.

The Paris Re business, which represented approximately 6% of total net premiums written for the quarter, reported net written premiums of $60 million, down from $217 million in the prior quarter. Net premiums earned were $242 million, slightly down from $244 million in the prior quarter.

However, the technical ratio improved to 78.3% from 90.7% in the sequential quarter. The technical result for the reported quarter was $53 million compared with $23 million in the previous quarter.

As of September 30, 2010, PartnerRe's total assets were $24.3 billion, up from $23.7 billion at December 31, 2009. Total investments, cash and funds held and directly managed increased 42% over the trailing 12 months to $18.6 billion. As of September 30, 2010, total capital was $8.4 billion (up from $8.0 billion as of December 31, 2009) and total shareholders' equity was $7.6 billion, flat from the end of 2009.

During the reported quarter, the company's estimate of life reserves for prior years developed adversely by $4 million compared with a favourable development of $14 million in the year-ago quarter. PartnerRe's book value per common share as of September 30, 2010, was $93.21 compared with $84.51 as of December 31, 2009.

Nine-month annualized operating return on equity (ROE) came in at 15.8%, up from 3.1% at the end of prior quarter, while annualized net income ROE came in at 29.0%, dramatically up from 7.1% reported at the end of the prior quarter.

Share Repurchase Update

During the reported quarter, PartnerRe bought back 1.1 million common shares for approximately $82.4 million. Including this, PartnerRe has repurchased 9.0 common shares for approximately $682.5 million in the first nine months of 2010. Consequently, the company has about 74.6 million common shares remaining under its current repurchase authorization.

Dividend Update

On October 25, the board of PartnerRe declared a regular quarterly dividend of 55 cents per common share, hiking it from 50 cents up to the last quarter. Marking the second consecutive hike in 2010, the company has increased its annual dividend by 10% to $2.20 per share.

The quarterly dividend will be payable on December 1, 2010 to common shareholders as of November 19, 2010, with the stock trading ex-dividend commencing November 17, 2010.

Our Take

The recent dividend hike also reflects PartnerRe's conservative investment strategy, reserve strength, low level of reinsurance recoverable and low reliance on retrocession reinsurance. These factors have also driven the growth of book value per share of the company.

Further, despite the soft market conditions, PartnerRe's above average risk appetite and apparent underwriting discipline can help it maintain a modest ROE at the target rate of 13% in the long term.

However, though PartnerRe enjoys above-average liquidity and a low-risk balance sheet, concerns regarding the successful Paris Re integration and catastrophic losses overweigh the positive. Hence, the 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, a stable ratings outlook, improved pricing and market stability can help in mitigating the cyclical declines.

Hence we maintain our Neutral stance on PartnerRe with a Zacks #3 Rank over the short term.

 
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