We have downgraded our recommendation on
PartnerRe Ltd.
(
PRE
) to Neutral from Outperform based on its sluggish top line growth,
exposure to weak property-casualty cycle and lack of near-term
growth catalysts, which question the current sustainability factor.
However, lower catastrophe losses, strong expense management and
share repurchases have had a positive influence on the combined
ratio, bottom line, return on equity (ROE) and book value per
share.
PartnerRe reported second-quarter 2012 operating earnings per
share of $2.20, which were well ahead ofthe Zacks Consensus
Estimate of $2.02 as well as the year-ago earnings of 98 cents a
share. As a result, operating net income soared to $142.0 million
from $67.2 million in the prior-year quarter.
However, total revenue slipped 4.5% year over year to $1.29
billion. The deterioration was primarily based on low net realized
and unrealized investment gains, continued decline in premiums
earned due to cancellation and non-renewals in the prior quarters,
along with lower investment income arising from low reinvestment
and risk-free rates.
While PartnerRe has a straightforward investment portfolio of
fixed income and equity securities that steer clear of alliances
and hedge fund investments, the widened spreads and low
reinvestment rates adversely affected the net investment income,
which witnessed sharp declines throughout 2011 and in the first
half of 2012. Moreover, higher catastrophe losses in the past year
have pulled down the reserves and financial flexibility.
A sluggish top line and investment portfolio are slowly
reversing the positive trend that PartnerRe had experienced over
the past. Weak reinsurance and investment income not only marred
the top- and bottom-line growth, but also affected the cash
position of the company since the growth of net investment income
is drawn on the basis of cash flow from operations. Consequently,
operating cash flow declined 53.2% year over year in 2011 and 75.4%
in the first half of 2012. These concerns have also impelled
ratings agencies to trim their ratings and outlook on PartnerRe in
the first half of 2012.
Nevertheless, PartnerRe emerged strong from the first half of
2012 with substantially low total expenses that plummeted 36.7%
year over year, and improved combined ratio of 87.8% from 147.1% in
the year-ago period, which indicate higher underwriting
profitability. These factors have not only expanded the technical
results, bottom line and book value, but also helped in achieving
an annualized operating ROE of 11.7% in the first half of 2012,
gradually moving toward the 13% long-term target benchmarked by
management. Operating ROE also outpaced the negative 21.0% in the
prior-year period.
The stable returns so far in 2012 coupled with the ongoing
growth momentum cast a favourable outlook for the upcoming
quarters, while enhancing the investors' confidence. Alongside, a
diversified business model with proactive underwriting approach
have contributed to more stable earnings, increase in return per
unit of risk and better underwriting practice as compared to many
of its peers. A meaningful debt de-leveraging has aided in a modest
capital and balance sheet position.
Moreover, the recent expansion in the stock buyback program
along with dividend payments validates PartnerRe's commitment of
consistently enhancing shareholder value. Once the market
stabilizes at its historical highs, the company's diversified
business model and improved pricing can help it generate higher
underwriting profitability, investment returns and reserves,
thereby further enhancing investors' return. This will also enhance
its competitive leverage against arch-rivals such as
XL Group Plc
(
XL
) and
W.R. Berkley Corp.
(
WRB
).
Hence, based on the pros and cons, the Zacks Consensus Estimate
pegs earnings for the third quarter of 2012 at $1.67 per share,
which is about 31% lower than the year-ago quarter. However, for
2012, earnings are expected to soar about 189% over 2011 to $8.45
per share. Of the 17 firms covering the stock, three downward
estimate revisions were witnessed in the last 30 days, while none
revised its estimates upward.
Currently, the company carries a Zacks Rank #3, implying a
short-term Hold rating, in line with its long-term Neutral
recommendation.
PARTNERRE LTD (PRE): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis
Report
XL GROUP PLC (XL): Free Stock Analysis Report
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