PartnerRe Ltd.’s (PRE) fourth quarter operating earnings per share of $1.52 came in substantially higher than the Zacks Consensus Estimate of $1.30 per share. However, this was way behind the earnings of $3.87 per share in the year-ago quarter.
Operating earnings were calculated after payment of preferred dividends. This excluded after-tax net realized and unrealized investment gains of $71.8 million or 96 cents for the reported quarter, up from $17.6 million or 22 cents in the year-ago quarter. Including these items, GAAP net income for PartnerRe was $57.0 million or 65 cents per share, compared with $354.4 million or $4.25 per share in the year-ago quarter.
Results reflected underperformance based on declining premiums written and earned, poor underwriting results and lower investment income due to low reinvestment rates that led to negative top line growth. Moreover, total expenses increased 6.0% year over year to $123 billion.
Non-life combined ratio also deteriorated to 94.6% from 80.3% in the year-ago period. This reflects 12.0 points due to increased loss from the recent earthquake in New Zealand and floods in Australia, while an additional 4.6 points is related to an aggregate cover loss during the reported quarter.
In addition, technical ratios deteriorated for all segments. The technical result for the reported quarter was $140 million compared with $323 million in the year-ago quarter. These factors adversely impacted the bottom line.
PartnerRe’s total revenue decreased 16.8% to $1.29 billion from $1.55 billion in the year-ago quarter, and also behind the Zacks Consensus of $1.38 billion.
This included net premiums earned of $1.2 billion (down 10.4% year over year), net investment income of $160.8 million (down 11.6% year over year), pre-tax net realized and unrealized investment loss of $83.2 million, compared with gains of $25.1 million in the year-ago quarter and other income of $5.1 million, down from $6.0 million in the year-ago period.
Net premiums written decreased 9.3% year over year to $820.6 million. Overall, premiums earned witnessed weak performance across most business segments, while experiencing negative growth across the U.S., Global Property and Casualty (P&C) and Global Speciality business segments, marginally offset by the Life segment.
Full Year 2010 Highlights
For full year 2010, PartnerRe reported operating income of $504.7 million or $6.45 per share as compared with $932.1 million or $14.59 per share. However, earnings were well ahead of the Zacks Consensus Estimate of $6.28 per share. GAAP net income was $852.6 million or $10.46 per share in 2010, down from $1.5 billion or $23.51 per share in 2009.
Total revenue increased 8.1% year over year to $5.86 billion, also surpassing the Zacks Consensus of $5.44 billion. Besides, total expenses surged 34.7% year over year to $4.89 billion. Non-life combined ratio deteriorated to 95.0% from 81.8% in 2009.
Financial Update
As of December 31, 2010, PartnerRe’s total assets were $23.4 billion, down from $23.7 billion as of December 31, 2009. Total investments, cash and funds held and directly managed remained flat at $18.2 billion. As of December 31, 2010, total capital was $8.0 billion (flat from 2009) and total shareholders’ equity was $7.2 billion, down from $7.6 billion from the end of 2009.
During the reported quarter, the company’s estimate of life reserves for prior years developed favorably by $9 million compared with $5 million in the year-ago quarter. PartnerRe’s book value per common share at the end of 2010 was $93.77 compared with $84.51 as of December 31, 2009.
Annualized operating return on equity (ROE) came in at 6.3% for the reported quarter, up from 15.8% at the end of the prior quarter, while annualized net income ROE came in at 2.7%, dramatically down from 29.0% reported at the end of the prior quarter. Full year 2010 operating ROE came in at 7.1%, while net income ROE was 11.5%, well below the management’s long-term target of 13%.
Share Repurchase Update
During the reported quarter, PartnerRe bought back 5.1 million common shares for approximately $400 million. For full year 2010, the company repurchased $14.0 million shares for about $1.1 billion. Consequently, the company has about 6.5 million common shares remaining under its current repurchase authorization, at the end of 2010.
Dividend Update
Concurrent with the earnings, the board of PartnerRe declared a regular quarterly dividend of 55 cents per common share, which is payable on March 1, 2011 to common shareholders as of February 18, 2011, with the stock trading ex-dividend commencing February 16, 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 positive.
While dividend increment and share repurchases reflect efficient capital deployment and reserve strength, declining pricing, non-renewal of businesses including stringent terms on renewals and restructuring of other business will lead to challenging times at least for the next few quarters.
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.
Hence we maintain our Neutral stance on PartnerRe with a Zacks #3 Rank over the short term.
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