Yesterday, global reinsurance company, PartnerRe Ltd. (PRE), announced that the catastrophe (CAT) losses in the US are expected to impact the second-quarter 2011 earnings by about $50–$70 million, pre-tax. Devastating tornadoes hit the southern, mid-western and north-eastern parts of the US during the last week of April this year.
The most gravely affected area was the state of Alabama, particularly the city of Tuscaloosa. The violent tornadoes have severely affected the economy and infrastructure along with hundreds of lost lives. All the above reinsurance losses are expected to be recorded primarily within the Catastrophe and Global (Non-US) Specialty sub-segments.
PartnerRe continues to be hit by catastrophes that have adversely affected the underwriting results and recorded huge losses in the investment portfolios. Such uncertainty and volatility not only reduces financial flexibility and reserves of the company but also weakens the underwriting capacity.
During the first quarter of 2011, PartnerRe incurred about $1.02 billion due to the huge loss from the catastrophes in Japan, New Zealand and Australia. This also worsened the non-life combined ratio to 193.7% from 116.9% in the year-ago period. As a result, PartnerRe reported a net loss of $807.0 million or $11.99 per share, down from the reported net income of $79.7 million or 85 cents per share in the year-ago quarter.
Additionally, such catastrophes coupled with the soft property-casualty (P&C) cycle have resulted in a decline in policy renewals, which adversely affected the reserve development and also generated a single-digit return on earnings, well below the company’s 13% long-term target.
Hence, we believe that the company’s poor casualty underwriting experience, lack of risk retention by clients and low risk appetite for reinsurers coupled with high CAT losses could bring in negative surprises in future. Moreover, declined pricing, non-renewal of businesses including stringent terms on renewals and restructuring of other businesses will lead to challenging times at least for the next few quarters.
However, PartnerRe enjoys above-average liquidity and a low-risk balance sheet, while dividend increment and share repurchases reflect efficient capital deployment and reserve strength.
Overall, our near-term outlook on PartnerRe remains cautious 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.
PARTNERRE LTD (PRE): Free Stock Analysis Report
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