Recently, property-casualty and life reinsurer – PartnerRe Ltd. (PRE - Analyst Report) – announced the pre-tax catastrophe (CAT) loss projections of about $200–240 million from the Hurricane Sandy, which hit the north-east coast of the US lately. This will be recorded in the fourth quarter results of 2012.
The total insured industry loss from the Superstorm Sandy is estimated to be over $25 billion. Other insurers and reinsurers such as Allstate Corp. (ALL - Analyst Report), American International Group Inc. (AIG - Analyst Report), The Travelers Companies (TRV - Analyst Report), RenaissanceRe Holdings Ltd. (RNR - Analyst Report) and Everest Re Group Ltd. (RE - Analyst Report) have estimated CAT losses of $1.08 billion, $1.3 billion, $1.14 billion, $130 million and $220 million, respectively.
Over the past few years, catastrophe losses have not only amplified the claims payments of the insurers but also nibbled into the earnings of the companies, thereby distorting the operational dynamics for quite some time, post the weather-related events. It also causes the erosion of free capital, which could otherwise be utilized for growth purposes or to enhance shareholder value.
PartnerRe incurred a net operating loss of about $504 million or $7.43 per share in the first nine months of 2011 primarily due to escalated CAT losses owing to the Thailand floods and the Tsunami in Japan. However, lower CAT losses in the same period this year resulted in an operating net income of $568 million or $8.84 a share.
Nonetheless, losses from the Hurricane Sandy have reversed the positive trend that the company experienced in the first three quarters of 2012. We believe such uncertainty and volatility in the magnitude of catastrophic losses besides reducing financial flexibility and reserves of the company also weakens the underwriting capacity, thereby draining all the earnings resources.
Last month, PartnerRe reported its third-quarter 2012 operating earnings per share of $3.90. This significantly exceeded the Zacks Consensus Estimate of $2.06 and the year-ago earnings of $2.41.
PartnerRe’sresults benefited from the improved underwriting and technical results coupled with a significant reduction in the catastrophe and total expenses, which improved the combined ratio and also drove the bottom line, return on equity (ROE) and book value. The top line grew due to the enhanced net realized and unrealized investment gains. However, continued decline in premiums earned along with lower investment income, driven by low reinvestment and risk-free rates, partly offset the improvements.
However, as per the Zacks Consensus Estimate, net loss is pegged at 49 cents per share for the fourth quarter of 2012 and is expected to decline about 76% year over year, primarily driven by an increase in CAT losses from Hurricane Sandy. Nonetheless, earnings are expected to escalate by about 189% over the prior year in 2012 to $8.47 a share. Six out of the 16 analyst firms have lowered their earnings estimates in the last 7 days, while one upward revision was witnessed. Currently, PartnerRe carries a Zacks #3 Rank, implying a Hold rating in the short-term.