On Friday, the board of global reinsurer, PartnerRe Ltd. (PRE), announced a 9% hike in its regular quarterly dividend. As a result, a quarterly dividend of 60 cents, increased from 55 cents, is scheduled for payment on July 1, to shareholders of record on May 20, 2011. Accordingly, the annual dividend was raised to $2.40 per share from $2.20 per share paid previously.
The recent dividend increment also marked the 20th consecutive hike since the company was formed. Since its inception, PartnerRe continues to return additional value to its shareholders through stock buybacks and dividend payments. The company also bought back shares worth about $180 million during the third and fourth quarters of 2010.
In October 2010, the company increased its quarterly dividend by a modest magnitude of 10% to 55 cents from 50 cents. Prior to this, in February 2010, PartnerRe had raised its quarterly dividend by 6% to 50 cents from 47 cents. The company’s annual dividend payout surged 41% in 2009 over 2008, representing 11% compounded growth in the common dividend.
CAT Losses Rising
On the flip side, PartnerRe also inflated its loss estimates from Japan catastrophe (CAT). While last month the company had expected Japan CAT losses to impact the first quarter pre-tax earnings by about $500 million, last week, it escalated its loss projections by another $230 million to $730 million.
During March this year, Japan was hit by a devastating earthquake with a magnitude of 9.0 coupled with tsunami, both of which have severely affected the country’s economy and infrastructure.
Meanwhile, blasts and leaks in nuclear plant reactors have further aggravated the losses, besides causing massive destruction to thousands of lives and infrastructure of the country. As a result of these massive catastrophes, PartnerRe projected total property and casualty insurance claims for the industry between $25 billion and $30 billion.
Previously, PartnerRe also stated the initial projections of the impact of loss from the New Zealand earthquake that occurred in February this year. Management expects pre-tax loss of about $180-$240 million that will be recorded in the first quarter of 2011. Total industry insured loss is estimated between $7.4 billion and $11.1billion.
Meanwhile, in February this year, PartnerRe also provided the initial loss estimates for the floods and cyclone in Australia, which occurred in January 2011, in the range of $80-$110 million.
All the above losses are expected to be recorded primarily within the Catastrophe sub-segment. Moreover, the catastrophe losses will be recorded during the first quarter of 2011.
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.
Additionally, such catastrophes coupled with the soft property-casualty cycle have resulted in decline in policy renewals, which adversely affected the reserve development and also generated single-digit return on earnings, well below the company’s 13% long-term target.
Hence, we believe that although the hiking dividend gives some boost to the investors’ confidence, representing an efficient capital deployment strategy, 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.
We await more details on PartnerRe, as the company will release its financial results after the market closes today.
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