PartnerRe Faces Drab Exit from 2011 - Analyst Blog


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PartnerRe Ltd. 's ( PRE ) fourth-quarter 2011 operating loss per share of $2.06 came in slightly lower than the Zacks Consensus Estimate of a loss of $2.10 but significantly lagged behind the earnings of $1.33 recorded in the year-ago quarter. As a result, operating loss substantially plunged to $137.7 million from an income of $98.8 million in the prior-year quarter.

Operating earnings were calculated after payment of preferred dividends. This also excluded after-tax net realized and unrealized investment gains of 85 cents per share for the reported quarter and net foreign exchange gains of 75 cents per share, partially offset by interest loss of 3 cents per share from equity investments. Meanwhile, the year-ago quarter recorded net adjustment of a loss of 68 cents per share.

Including these items, GAAP net loss for PartnerRe was $17.6 million or 49 cents per share, down from an income of $57.0 million or 66 cents per share in the year-ago quarter.

Results deteriorated year over year on the back of declining premiums earned due to cancellations and non-renewals, poor underwriting results, higher catastrophe losses and lower investment income driven by low reinvestment and risk-free rates that led to reduced top line and weak book value growth. Moreover, total expense climbed 16.4% year over year to $1.43 billion.

Non-life combined ratio also deteriorated to 121.7% from 94.6% in the year-ago period. This reflects 12.4 points or $120 million due to huge loss from the recent Thailand floods and 21.6 points or $210 million from net losses on prior quarter events, while an additional 5.3 points or $52 million is related to net favourable loss development on prior accident years during the reported quarter.

Besides, technical ratio deteriorated for all the segments. The technical result for the reported quarter was a loss of $127 million against a positive $140 million in the year-ago quarter. These factors adversely impacted the bottom line.

PartnerRe's total revenue improved 9.9% to $1.42 billion from $1.29 billion in the year-ago quarter, and also exceeded the Zacks Consensus Estimate of $1.28 billion. This included net premiums earned of $1.18 billion (down 1.9% year over year), net investment income of $155.5 million (down 3.3% year over year), pre-tax net realized and unrealized investment gains of $74.6 million as opposed to losses of $83.2 million in the year-ago quarter and other income of $3.1 million, down from $5.1 million in the year-ago period.

However, net premiums written climbed 7.2% year over year to $879.9 million. Overall, premiums earned witnessed weak performance across most business segments. Negative growth was experienced across the catastrophe, non-life, life and the global property and casualty (P&C) segments, partly offset by North America and non-U.S. global speciality segments.

Full-Year 2011 Highlights

For full year 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.

Besides, the GAAP net loss came in at $520.3 million or $8.40 per share, drastically behind the net income of $852.6 million or $10.46 per share in 2010. Meanwhile, total revenue plunged 8.7% to $5.35 billion from $5.86 billion in the year-ago period, but exceeded the Zacks Consensus Estimate of $5.2 billion.

Total expenses also escalated 18.5% year over year to $5.8 billion in 2011. Total pre-tax catastrophe losses rose to $1.79 billion against $437 million in 2010.  Non-life combined ratio also deteriorated to 121.7% from 94.6% in the year-ago period.

Financial Update

As of December 31, 2011, PartnerRe's total assets were $22.86 billion, down from $23.36 billion at December 31, 2010. Total investments, cash and funds held and directly managed stood at $17.9 billion, down 2% from 2010. As of December 31, 2011, total capital was $7.3 billion (down from $8.0 billion at 2010-end) and total shareholders' equity was $6.5 billion, down from $7.2 billion at 2010-end.

The decline in total capital and equity were primarily due to the comprehensive loss of $537 million, which was driven by the net loss. This also reflects preferred share issuance, repurchases and dividends paid in 2011.

PartnerRe's net non-life loss and loss expense reserves escalated by 6% to $10.9 billion from 2010-end, primarily due to the impact of catastrophic events during 2011. The company's book value per common share declined to $84.82 when compared with $93.77 at the end of 2010.

Annualized operating return on equity (ROE) deteriorated to a negative of 8.8% for the reported quarter (up from 10.3% at the end of prior quarter) while annualized net income ROE came in at a negative of 2.1%, significantly down from 10.4% in the prior quarter. Operating ROE and net income ROE came in at a negative of 10.1% and 9.0%, respectively, in 2011.

Share Repurchase Update

On November 21, 2011, the board of PartnerRe approved and authorized the extension of its stock repurchase program up to 7.0 million shares, depending on the market conditions. Meanwhile, about 3.7 million common shares were already available for repurchase under its previous authorization.

Accordingly, the company bought back about 2.6 million shares for $170 million during the reported quarter. PartnerRe repurchased a total of 5.4 million shares for $396 million in 2011, leaving about 5.3 million shares available for repurchases under the current authorization.

Dividend Update

On February 2, 2012, the board of PartnerRe announced a 3% hike in its regular annual dividend to $2.48 per share from $2.40 per share. This marks the nineteenth consecutive year that the company has increased the common share dividend since its inception in 1993.

Consequently, the hiked quarterly dividend of 62 cents per share will be paid on March 1, 2012, to shareholders of record as on February 17, 2012.

On December 1, 2011, PartnerRe paid a regular quarterly dividend of 60 cents per share to its shareholders of record as on November 18, 2011.

Our Take

Although PartnerRe enjoys above-average liquidity and a low-risk balance sheet, concerns regarding the successful Paris Re integration and catastrophic losses overweigh the positives. While dividend payouts and share repurchases reflect efficient capital deployment and reserve strength; declined pricing, risks related to renewal of businesses including stringent renewals and restructuring terms for other businesses will surface further challenges at least in the next few quarters.

Taking a look at the peer group, Everest Re Group Ltd. ( RE ) is scheduled to announce its financial results after the market closes on February 8, 2012, while MontpelierRe Holdings Ltd. ( MRH ) is slated to release its results after the market closes on February 9, 2012. Other insurers in the industry such as Allstate Corp. ( ALL ) have also faced the brunt of severe catastrophe losses in 2011.

Overall, we hold a cautious near-term outlook for PartnerRe on the back of concerns regarding the successful Paris Re integration and catastrophic losses, weak P&C market cycle and low underwriting profitability. Last month, ratings agency A.M. Best also put 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.

ALLSTATE CORP ( ALL ): Free Stock Analysis Report
MONTPELIER RE ( MRH ): Free Stock Analysis Report
PARTNERRE LTD ( PRE ): Free Stock Analysis Report
EVEREST RE LTD ( RE ): 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 Nasdaq, Inc.

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