PartnerRe Restated at Neutral - Analyst Blog

Considering the current market volatility coupled with other valued growth indicators, we are reiterating our recommendation for the shares of PartnerRe Inc. (PRE) at Neutral. Although the current economic turmoil has dampened growth and the operating leverage of organizations across the reinsurance industry, we believe that once the economy rebounds, it will also elevate the earning power of the company.

PartnerRe's 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.

Results reflected a strong growth in premiums written and earned, underwriting profitability and net investment income that led to a 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.

PartnerRe continues to incur a huge expense on account of loss expenses and benefit payments on life policies. Moreover, natural catastrophes have adversely affected the underwriting results and recorded steep losses in the investment portfolios. These factors adversely impacted the bottom line.

Further, PartnerRe appears to provide earnings cushion to the substantially exposed and softening P&C cycle. Meanwhile, the company's lack of casualty underwriting experience, risk retention by clients and low risk appetite for reinsurers could result in negative surprises in the future.

Given the ongoing market volatility, PartnerRe's prime reinsurance business has been harshly affected. Higher competition, low demand, weak pricing as well as lack of any near-term catalyst are further expected to restrict further profitability in reinsurance, in the upcoming quarters.

However, PartnerRe continues to return additional value to its shareholders through stock buybacks and dividend payments. The company's annual dividend payout increased 41% in 2009 over 2008, representing 11% compounded growth in the common dividend since its inception. Further in 2010, PartnerRe increased its dividend twice by 6% and 10%, representing the eighteenth consecutive year when PartnerRe increased its common share dividend since its inception. Meanwhile, the company has also returned about $782 million of wealth in 2010 through stock repurchases.

Besides, low level of debt obligations makes PartnerRe's balance sheet risk-free while also enhancing its operating leverage and maintaining an above average liquidity. Despite the soft market conditions, the company's above average risk appetite and apparent underwriting discipline have helped it generate a modest ROE at the target rate of 13% in the long term.

Moreover, PartnerRe continues to enjoy a stable outlook for 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. In fact, last week, A.M. Best reiterated its ratings and stable outlook on the company. 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.

Overall, PartnerRe is well poised for growth once the economic conditions become more favorable for the macro factors such as unemployment rate levels, consumer risk transfer practices and stable interest rates. Consistent stock buybacks and dividend increments further help retain investors' confidence. However, PartnerRe's exposure to catastrophic losses, weak P&C market cycle, higher expenses and risk related to successful Paris Re integration amid the ongoing market volatility restricts growth visibility and stock's upside.

Hence, our near-term outlook remains shady though fundamentally PartnerRe has the potential to out beat the industry in the long run. While strong balance sheet and liquidity generate operating leverage, the rating affirmation from A.M. Best also suggests long-term stability. Therefore, we maintain our Neutral stance with a Zacks Rank #3 on the stock.

On Thursday, the shares of PartnerRe closed at $81.15, up 0.4%, on the New York Stock Exchange.

 
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