PartnerRe Ltd.’s (PRE) second quarter operating earnings per share of 98 cents came in significantly higher than the Zacks Consensus Estimate of 68 cents but lagged behind $1.80 recorded in the year-ago quarter. As a result, operating loss substantially plunged to $67.2 million from $141.8 million in the prior-year quarter.
Operating earnings were calculated after payment of preferred dividends. This excluded after-tax net realized and unrealized investment gains of $41.0 million or 60 cents per share for the reported quarter, compared to $29.7 million or 38 cents per share in the year-ago quarter.
Including these items, GAAP net loss for PartnerRe was $124.2 million or $1.69 per share, down from GAAP net income of $190.9 million or $2.31 per share in the year-ago quarter.
Results deteriorated year over year on the back of higher catastrophe (CAT) losses, declining premiums written, poor underwriting results and lower investment income driven by low reinvestment rates that led to tepid top line and book value growth.
Moreover, total expense climbed 4.6% year over year to $1.17 billion. Particularly, catastrophe losses stood at $181 million, of which $178 million were recorded in the non-life segment and $3.0 million were recorded under the corporate and other segment.
Non-life combined ratio also deteriorated to 101.7% from 89.8% in the year-ago period. This reflects 13.2 points or $119 million due to huge loss from the recent catastrophes in the U.S., New Zealand and Australia while an additional 17.8 points or $161 million is related to net favorable loss development on prior accident years during the reported quarter.
Besides, technical ratio deteriorated for all the segments. The technical result for the reported quarter was a $64 million compared with a $156 million in the year-ago quarter. These factors adversely impacted the bottom line.
PartnerRe’s total revenue inched up 1.5% to $1.35 billion from $1.33 billion in the year-ago quarter, and also exceeded the Zacks Consensus Estimate of $1.20 billion. This included net premiums earned of $1.11 billion (up 0.3% year over year), net investment income of $158.3 million (down 9.3% year over year), pre-tax net realized and unrealized investment gains of $78.2 million, compared to $46.1 million in the year-ago quarter and other income of $1.6 million, up from $0.8 million in the year-ago period.
Net premiums written decreased 5.1% year over year to $1.06 billion. Overall, premiums earned witnessed weak performance across most business segments. Negative growth was experienced across the U.S., and Global Speciality business, Catastrophe and Life segments, marginally offset by the Global Property and Casualty (P&C) segment.
Financial Update
As of June 30, 2011, PartnerRe’s total assets were $24.6 billion, up from $23.4 billion at December 31, 2010. Total investments, cash and funds held and directly managed jumped to $18.9 billion from $18.2 billion. As of June 30, 2011, total capital was $7.4 billion (down from $8.0 billion at 2010 end) and total shareholders’ equity was $6.6 billion, down from $7.2 billion at 2010 end.
The decline in total capital and equity were primarily due to the comprehensive loss, which was driven by the net loss and was partially offset by an increase in the currency translation account. This also reflects share repurchases and dividends paid during the quarter.
PartnerRe’s net non-life loss and loss expense reserves escalated by 13% to $11.6 billion from prior-quarter end, primarily due to the impact of catastrophic events during 2011. PartnerRe’s book value per common share declined to $83.71 when compared with $93.77 at the end of 2010.
Annualized operating return on equity (ROE) improved to 4.2% for the reported quarter (up from negative 46.1% at the end of prior quarter) while annualized net income ROE came in at 7.2%, significantly up from negative 51.2% in the prior quarter.
Dividend Update
Yesterday, the board of PartnerRe declared a regular quarterly dividend of 60 cents, payable on September 1, 2011, to shareholders of record as on August 19, 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 positives. While dividend increment and share repurchases reflect efficient capital deployment and reserve strength; declined pricing, risks related to renewal of businesses including stringent renewals and restructuring terms for other businesses will surface further challenges at least in the next few quarters.
Taking a look at the peer group, last month Everest Re Group Ltd. (RE) reported second quarter 2011 operating profit of $2.46 per share, 2 cents ahead of the Zacks Consensus Estimate.
Results, however, compared unfavorably with earnings of $3.18 per share incurred in the year-ago quarter, due to heavy catastrophe incidence during the first half of the year. Many insurers in the industry, such as Allstate Corp. (ALL), MontpelierRe Holdings Ltd. (MRH) and RenaissanceRe Holdings Ltd. (RNR) faced the brunt of catastrophe losses in the second quarter of 2011.
Overall, we hold a cautious near-term outlook for 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 mitigate the cyclical declines.
Hence we maintain our Neutral stance on PartnerRe with a Zacks Rank of #4, indicating slight downward pressure on the stock in the near term.
