Moody Ratings Pull Down PartnerRe - Analyst Blog

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Last week, PartnerRe Ltd. ( PRE ) witnessed a rating downgrade on its senior debt from ratings agency- Moody's Investor Service of Moody's Corp. ( MCO ) -based on the severe catastrophe ( CAT ) losses incurred by the company that resulted into a net loss in 2011.

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 financials significantly.

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 ( MCO ): Free Stock Analysis Report

PARTNERRE LTD ( PRE ): 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.

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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