PartnerRe Beats, Earnings Sink

PartnerRe Ltd.’s (PRE - Analyst Report) second quarter operating income of $3.12 per diluted share substantially topped estimates. Better-than-expected results were mainly attributed to higher revenue, lower expenses and positive return on invested assets, partly offset by the strengthening U.S. dollar.

Net income for the quarter came in at $474.3 million or $8.10 per diluted share, compared to a net loss of $26.0 million or $0.64 per diluted share in the prior-year quarter. Net income for 2Q09 includes net after-tax realized and unrealized gains on investments of $279.6 million or $4.86 per diluted share, compared to net after-tax realized and unrealized losses on investments of $219.1 million, or $4.04 per diluted share in the prior-year quarter.

Operating income (excluding net after-tax realized and unrealized investment gains/losses), for the quarter was $179.3 million or $3.12 per diluted share, compared to $183.8 million or $3.39 per diluted share recorded in the prior-year quarter.

Net premiums written for the quarter were $844.7 million, down 11.7% from $956.3 million in the prior-year quarter. Total revenues for the quarter were $1.3 billion, up 57.1% from $0.8 billion in the prior-year quarter. Total revenues for the reported quarter included $826.1 million of net premiums earned, down 13.5% from $955.5 million in the prior-year quarter, and net investment income of $135.6 million, down 6.8% year-over-year.

At June 30, 2009, total capital was $5.3 billion and total shareholders' equity was $4.8 billion, compared to total capital of $4.9 billion and total shareholders' equity of $4.2 billion at December 31, 2008. Book value at June 30, 2009 was $73.85 per diluted common share, compared to $65.55 at March 31, 2009 and $63.95 at December 31, 2008.

Non-life segment

Net premiums written for the quarter were $724 million, down 11.1% from $814 million in the prior-year quarter. However, the combined ratio improved to 83.5% from 85.9% in the prior-year quarter. Non-life's technical result was $171 million for the reported quarter, compared to $176 million for the year-ago quarter.

The U.S. business, which represented 29.3% of total net premiums written for the quarter, reported net premiums written of $249 million, compared to $246 million in the prior-year quarter. Net premiums earned were $258 million, down 9.5% from $285 million in the prior-year period. The technical ratio for this sub-segment was 87.9%, compared to 102.3% in the prior-year quarter.

The Global (Non-U.S.) P&C business, which represented 14.0% of total net premiums written for the quarter, reported net premiums written of $118 million, compared to $132 million in the prior-year quarter. Net premiums earned during the quarter were $161 million, down 13.4% from $186 million in the year-ago quarter. The technical ratio for this sub-segment was 75.2%, compared to 72.3% in the prior-year quarter.

The Worldwide Specialty business, which represented 27.5% of total net premiums written for the quarter, reported net premiums written of $232 million, compared to $291 million in the prior-year quarter. Net premiums earned were down 14.7% year-over-year to $232 million. The technical ratio for this sub-segment was 87.0%, compared to 80.5% in the prior-year quarter.

The Catastrophe business, which represented approximately 14.8% of total net premiums written for the quarter, reported net premiums written of $125 million, down 13.8% from $145 million in the prior-year quarter. Net premiums earned were $52 million, compared to $65 million in the prior-year quarter. This sub-segment’s technical ratio came in at negative 35.1%, compared to negative 20.5% in the year-ago quarter.

Life segment

The Life segment, which represented 13.7% of total net premiums written for the quarter, reported net premiums written of $116 million, down 14.7% from $136 million in the prior-year quarter. The allocated underwriting result was $15 million for the reported quarter, compared to $7 million in the prior-year quarter.
 
Corporate & Other segment

The Corporate & Other segment, which comprises capital markets and investment activities, contributed pre-tax operating income of $123 million during the reported quarter, compared to $128 million in the prior-year quarter. The technical result for the reported quarter was $3 million, compared to $2 million for the same period a year ago.

Concurrent with the second quarter earnings release, PRE declared a regular quarterly dividend of $0.47 per common share. The dividend will be paid on September 1, 2009, to common shareholders of record as on August 21, 2009.

While the results were strong with a solid operating ROE, improved book value per share, and improved combined ratio, the company suffered from substantial losses in its investment portfolio.

We remain positive on PRE due to its excellent underwriting abilities, strong capitalization, solid ratings and reputation in the market, which will enable it to take advantage of the stronger demand and better pricing compared to many of its peers -- ACE Limited (ACE - Analyst Report), Axis Capital Holdings (AXS - Analyst Report), Everest Re Limited (RE - Analyst Report) and Renaissance Re (RNR - Analyst Report).
 
However, we suspect that additional losses in the investment portfolio and the current negative sentiment for the financials as a whole may somewhat weigh on the share price. After reviewing the results, we are maintaining our Buy rating on the shares.