) witnessed a rating downgrade on its senior debt from ratings
agency- Moody's Investor Service of
) -based on the severe catastrophe (
) losses incurred by the company that resulted into a net loss in
Accordingly, Moody's demoted PartnerRe's senior debt to "A3"
from "A2", subordinated debt to "Baa1" from "A3" and preferred
stock to "Baa2" from "Baa1". Additionally, the ratings agency
relegated the insurance financial strength ratings (FSRs) of its
principal operating subsidiaries by a notch to "A1" from "Aa3".
However, the ratings continue to reflect a stable outlook.
The rating action is backed by the ongoing concerns on the
earnings volatility and decline in equity capital as a result of
increased CAT losses, higher operating expenses, reduced top line
followed by a negative return on equity (ROE) and declined book
value in 2011. PartnerRe's higher than average underwriting risk
profile also holds back the desired upside.
In 2011, PartnerRe recorded operating loss of $641.6 million or
$9.50 per share against earnings of $491.8 million or $6.29 per
share in 2010, also exceeding the Zacks Consensus Estimate of a
loss of $9.48 per share.
Additionally, total revenue plunged 8.7% year over year to $5.35
billion, while total expenses escalated 18.5% to $5.8 billion in
2011. Particularly, total pre-tax catastrophe losses rose to $1.79
billion against $437 million in 2010. Thus, non-life combined ratio
also deteriorated to 121.7% from 94.6% in the year-ago period.
Meanwhile, total shareholders' equity declined by approximately
10.3% and common equity declined by 16.6% during 2011.
Consequently, operating ROE and net income ROE came in at a
negative of 10.1% and 9.0%, respectively, in 2011.
Hence, Moody's ratings downgrade reflects its apparent
apprehensions on PartnerRe's business and risk profile. The extreme
declines in primary growth metrics should have an adverse effect on
the company's financials at least through some part of 2012.
Moreover, an adjusted financial leverage above 25% and gross
underwriting leverage of above 3.0x are expected to hamper
Nevertheless, looking ahead, Moody's believe that a meaningful
debt deleveraging -- which is below 15% -- along with its relative
reduction in the CAT losses in the fourth quarter of 2011 (and so
far through the first quarter of 2012) should provide some cushion
to the risk exposure and equity capital.
PartneRe's renewals data of January 2012 reveal an improved risk
profile with respect to its capital base. A well-diversified
business, both through product and geography, and strong franchise
should enhance growth once the market instability subsides. While
these factors are further expected to negate earnings volatility,
the company's conservative assessment of its risk profile reduces
its competitive strength given its magnitude of diversification,
which is relatively quite low compared to its peers.
Overall, we hold a cautious near-term outlook for PartnerRe on
the back of concerns regarding the catastrophic losses, weak
P&C market cycle and low underwriting profitability. Last
month, ratings agency A.M. Best also placed the company and its
operations under review with negative repercussions. A final say
from the ratings agency is expected soon now that the company has
released its financial results.
In the long run, however, improved pricing and interest rates
along with market stability can help mitigate the cyclical
declines. Hence we maintain our 'Neutral' stance on PartnerRe with
a short-term Zacks Rank #3 on the stock.
MOODYS CORP (
): Free Stock Analysis Report
PARTNERRE LTD (
): Free Stock Analysis Report
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