A.M. Best Wary of PartnerRe - Analyst Blog


Ratings agency A.M. Best has placed PartnerRe Ltd. ( PRE ) and its subsidiaries under the radar based on the catastrophe ( CAT ) losses, which have harshly hit the company's financials in 2011.

Hence, the rating agency has put the company and its operations under review with negative repercussions. A final say from the rating agency is expected after the company releases its earnings after the market closes on February 6, 2012. A.M. Best will analyse and compare PartnerRe's capital position along with its risk-bearing and risk-management capacities going forward, as compared to its own historical financials and performance of its peers.

A.M. Best's review follows PartnerRe's assessment of increased CAT losses. Last week, the company projected about $120 million in pre-tax CAT losses from the Thailand floods, which occurred in October and November last year. This will be recorded in the fourth quarter results of 2011.

Together with the Thailand floods, total CAT losses for the fourth quarter of 2011 are now projected to be about $208 million. This even includes an estimated $88 million from the impact of the earthquakes that hit Japan in March last year.

Until the third quarter of 2011, PartnerRe had incurred a total charge of about $730 million against the earthquake and tsunami in Japan. The additional $88 million charge has been taken after completing an intensive on-the-ground audit of the Japanese exposure and claim processes.

As a result of these CAT losses, PartnerRe now expects post-tax operating loss of $110-130 million for the fourth quarter of 2011 and $130-150 million or $1.95-2.25 per share for 2011.

So far PartnerRe has already recorded about $1.4 billion in pre-tax CAT losses in the first nine months of 2011 itself, way higher than $437 million in 2010, nil loss in 2009 and $305 million in 2008. Along with the estimate for the fourth quarter, CAT losses for 2011 are now expected to escalate to about $1.6 billion.

We believe that such uncertainty and volatility in the magnitude of catastrophic losses besides reducing financial flexibility and reserves of the company also weakens the underwriting capacity, thereby draining out all the earnings resources.

Hence, A.M. Best has also shown caution over an unfavorable operating environment in future, which could also adversely impact its risk-adjusted capital.

However, until the final outcome of the review,PartnerRe had its issuer credit rating (ICR) of "a-" and debt ratings reaffirmed by A.M. Best, who also reassured the ICR of "aa-" and the financial strength rating ( FSR ) of "A+" (Superior) for Partner Reinsurance Co. Ltd. and its divisions. Previously, in August 2011, the rating agency had affirmed these ratings with a stable outlook.

Overall, our near-term outlook on PartnerRe remains cautious on the back of concerns regarding the successful Paris Re integration and catastrophic losses, weak P&C market cycle and low underwriting profitability. The company also faces intense competition from peers such as Everest Re Ltd. ( RE ) and W.R. Berkley Corp. ( WRB ). In the long run, however, a stable rating outlook, improved pricing and market stability can help in mitigating the cyclical declines. Hence, we maintain a Neutral recommendation on the stock in the long run, in line with the Zacks Rank #3, reflecting a short-term Hold recommendation.

PARTNERRE LTD ( PRE ): Free Stock Analysis Report
EVEREST RE LTD ( RE ): Free Stock Analysis Report

BERKLEY ( WR ) CP (WRB): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: CAT , FSR , PRE , RE , WR



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