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PartnerRe Swings to YoY Profit

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PartnerRe Ltd.’s first-quarter 2012 operating earnings per share of $2.76 significantly surpassed the Zacks Consensus Estimate of $2.06 and rebounded from year-ago loss of $10.82. As a result, operating net income soared to $181.7 million from a hefty loss of $735.6 million in the prior-year quarter.

Operating earnings were calculated after payment of preferred dividends. This also excluded after-tax net realized and unrealized investment gains of $2.42 per share and interest income of 8 cents per share from equity investments for the reported quarter, partially offset by net foreign exchange losses of 2 cents per share. The year-ago quarter had recorded net adjustment loss of $1.17 per share.

Including these items, GAAP net income for PartnerRe stood at $376.2 million or $5.27 per share, as opposed to a loss of $769.4 million or $11.99 per share in the year-ago quarter.

Results benefited year over year from higher net realized and unrealized investment gains, improved underwriting results coupled by a significant reduction in the total expenses and combined ratio, which also drove the top line, earnings, return on equity (ROE) and book value. However, premiums earned continued to decline due to cancellations and non-renewals in the prior quarters, while investment income was lower driven by low reinvestment and risk-free rates.

During the reported quarter, total expense plunged 53.1% year over year to $910 million. Non-life combined ratio also recovered to 84.7% from 193.7% in the year-ago period. This reflects 20.6 points or $164 million related to net favourable loss development on prior accident years.

Besides, technical ratio improved for all the segments. The technical result for the reported quarter was a positive of $202 million against a loss of $751 million in the year-ago quarter. These factors supported the bottom-line growth.

PartnerRe’s total revenue escalated 20.5% to $1.33 billion from $1.11 billion in the year-ago quarter, and also exceeded the Zacks Consensus Estimate of $1.25 billion. This included net premiums earned of $989.8 billion (down 7.0% year over year), net investment income of $146.9 million (down 3.1% year over year), pre-tax net realized and unrealized investment gains of $192.7 million as opposed to losses of $112.2 million in the year-ago quarter and other income of $2.7 million, up from $1.8 million in the year-ago period.

However, net premiums written inched up 2.0% year over year to $1.47 billion. Overall, premiums earned witnessed weak performance across most business segments. Negative growth was experienced across the catastrophe, non-life, North America, non-U.S. global speciality and the global property and casualty (P&C) segments, partly offset by life segment.

Financial Update

As of March 31, 2012, PartnerRe’s total assets were $23.80 billion, up from $22.86 billion at 2011-end. Total investments, cash and funds held and directly managed stood at $18.2 billion, up 2% from 2011. As of March 31, 2012, total capital was $7.6 billion (up from $7.3 billion at 2011-end) and total shareholders' equity was $6.8 billion, down from $6.5 billion at 2011-end. The upside in total capital and equity were primarily due to the comprehensive income of $376 million, which was driven by the net income.

However, PartnerRe's net non-life loss and loss expense reserves reduced by 1% to $10.8 billion from 2011-end, primarily due to the impact of catastrophic events during 2011. The company’s book value per common share increased to $89.63 when compared with $84.82 at the end of 2011.

Annualized operating ROE soared to 13.0% for the reported quarter (up from a negative of 8.8% at the end of prior quarter), while annualized net income ROE stood at 24.7%, significantly rising from a negative of 2.1% in the prior quarter.

Share Repurchase Update

On November 21, 2011, the board of PartnerRe approved and authorized the extension of its stock repurchase program up to 7.0 million shares, depending on the market conditions. Meanwhile, about 3.7 million common shares were already available for repurchase under its previous authorization.

Accordingly, the company bought back about 0.18 million shares for $12 million during the reported quarter. Besides, an additional 0.84 million shares have been repurchased for $56 million so far in the second quarter of 2012, until April 27, 2012, leaving about 4.3 million shares available for repurchases under the current authorization.

Dividend Update

Concurrently, the board of PartneRe declared a regular dividend of 62 cents payable on June 1, 2012, to the shareholders of record as on May 21, 2012.

On February 2, 2012, PartnerRe had hiked its regular annual dividend by 3% to $2.48 per share from $2.40 per share. This marked the nineteenth consecutive year that the company has increased the common share dividend since its inception in 1993.

Consequently, the hiked quarterly dividend of 62 cents per share was paid on March 1, 2012, to shareholders of record as on February 17, 2012.

Our Take

Most of the players in PartnerRe’s peer group have booked profits so far due to the absence of catastrophe losses and higher underwriting profitability. Last week Everest Re Group Ltd. (RE - Free Report) reported first-quarter 2012 operating earnings of $4.48 per share, substantially higher than the Zacks Consensus Estimate of $3.51. Results were in contrast to an operating loss of $5.95 per share recorded in the prior-year quarter. Another peer, MontpelierRe Holdings Ltd. also reported first-quarter 2012 operating earnings of $1.23 per share, which breezed past the Zacks Consensus of 65 cents and thus, reversed the loss of $1.90 incurred in the prior-year quarter.

Overall, we hold a cautious near-term outlook for PartnerRe on the back of concerns regarding the successful Paris Re integration, product pricing and weak P&C market cycle along with low premiums generation, credit spreads and investment risk. Nevertheless, a stable outlook from rating agencies backed by meaningful debt de-leveraging, conservative reserving practices, overall operational synergies of strong competitive position, above-average liquidity, a low-risk balance sheet, effective capital deployment and solid long-term operating profitability strengthens the company’s long-term growth profile.

In the long run, improved pricing and interest rates along with market stability can help mitigate the cyclical declines. Hence we maintain our ‘Neutral’ stance on PartnerRe with a short-term Zacks Rank #3 on the stock.

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