Ratings agency A.M. Best has taken
PartnerRe Ltd.
(
PRE
) and its subsidiaries off of its radar, after placing it under
review since January this year. The ratings agency was wary about
the severity of catastrophe (
CAT
) losses, which had heavily battered the company's financials in
2011.
A.M. Best's review was backed by PartnerRe's assessment of
increased CAT losses in 2011. Under the review, the rating agency
analyzed and compared the company's capital position along with its
risk-bearing and risk-management capacities going forward, as
against its own historical financials and performance of its peers.
The comparable metrics came out moderately favorable.
Consequently, with 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.
However, the rating agency has assigned a negative outlook to
PartnerRe and its subsidiaries, thereby downgrading it from the
stable outlook affirmed in August last year. Nevertheless, any
severe repercussion was pulled out of the equation given the
company's renewals data of January 2012, which reveal an improved
risk profile with respect to its capital base.
A well-diversified business, both in terms of product and
geography, as well as a strong franchise, should drive its growth
once the market instability subsides. Moreover, moderate stability
achieved so far in 2012 should provide some cushion to the risk
exposure and equity capital.
CAT Losses Washed 2011 Profits
PartnerRe faced a drab exit from 2011 based on drastically
higher CAT losses that gulped down all of the earnings of the
company. Total pre-tax catastrophe losses mounted to $1.79 billion
in 2011, way higher than $437 million in 2010, breakeven in 2009
and -$305 million in 2008. Subsequently, non-life combined ratio
also deteriorated to 121.7% in 2011 from 94.6% in 2010.
We believe that such uncertainty and volatility in the magnitude
of catastrophic losses not only reduces the financial flexibility
and reserves of the company but also weakens the underwriting
capacity, thereby draining out the earnings resources. Hence, A.M.
Best is cautious about an unfavorable operating environment in
future, which could also adversely impact its risk-adjusted
capital.
Moody's and S&P Show Agreement
Earlier, in February this year, other rating agencies also
showcased their skepticism over PartnerRe based on the severity of
CAT losses that has led to huge claims and unfavorable reserve
development.
Accordingly, Moody's Investor Service of
Moody's Corp.
(
MCO
) 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.
Besides, Standards & Poor's (S&P) Ratings slashed
PartnerRe's credit and financial strength ratings by a nick to "A-"
from "A," while its preferred stock rating was lowered to "BBB"
from "BBB+." Moreover, the company's operating subsidiaries' credit
and financial strength ratings weakened to "A+" from "AA-."
The ratings downgrades also reflect its apparent apprehensions
about 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 financials
significantly.
While these factors are further expected to negate earnings
volatility, PartnerRe's conservative assessment of its risk profile
reduces its competitive strength, owing to its magnitude of
diversification, which is relatively quite low compared to its
peers such as
Everest Re Ltd.
(
RE
) and
W.R. Berkley Corp.
(
WRB
).
Nevertheless, all the rating agencies believe that PartnerRe's
meaningful debt de-leveraging, conservative reserving practices and
fair liquidity with decent operating cash flow and secure credit
facilities should provide some cushion to the risk exposure and
equity capital in 2012.
Overall, our near-term cautious outlook on PartnerRe remains in
line with the rating agencies, on the back of concerns regarding
the successful Paris Re integration and catastrophic losses, weak
P&C market cycle and low underwriting profitability. 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.
MOODYS CORP (
MCO
): Free Stock Analysis Report
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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