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PartnerRe Beats on Investment Gains

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PartnerRe Ltd.’s third-quarter 2012 operating earnings per share of $3.90 significantly surpassed the Zacks Consensus Estimate of $2.06 and the year-ago earnings of $2.41. As a result, operating net income soared to $244.4 million from $164.5 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 $221.8 million or $3.55 per share and net foreign exchange losses of 2 cents per share and interest income of 6 cents per share from equity investments. The year-ago quarter had recorded after-tax net realized and unrealized investment gains of $6.2 million or 9 cents per share.

Including these items, GAAP net income for PartnerRe stood at $486.7 million or $7.53 per share against $180.1 million or $2.43 per share in the year-ago quarter.

Results benefited year over year from improved underwriting and technical results coupled with a significant reduction in the total expenses and combined ratio, which also drove the earnings, return on equity (ROE) and book value. Top line improved due to enhanced net realized and unrealized investment gains, driven by contracting credit spreads, better equity markets and reduced risk-free rates. However, continued decline in premiums earned and lower investment income offset some of the improvements.

PartnerRe’s total revenue surged 9.4% to $1.63 billion from $1.49 billion in the year-ago quarter. Total revenue also exceeded the Zacks Consensus Estimate of $1.37 billion.

This included net premiums earned of $1.2 billion (down 4% year over year), net investment income of $135 million (down 15% year over year), pre-tax net realized and unrealized investment gains of $257.4 million against $26.1 million in the year-ago quarter and other income of $2.7 million, up from $1.4 million in the year-ago period. However, net premiums written declined 3% year over year to $1.0 billion.

During the reported quarter, total expense plunged 14% year over year to $1.09 billion. Non-life combined ratio also recovered to 80.7% from 93.1% in the year-ago period. This reflects 18.2 points or $189 million related to net favourable loss development on prior accident years.

Moreover, technical ratio improved for the Global (non-U.S.) Specialty and Catastrophe segments, but deteriorated for the North America and Global (non-U.S.) P&C segments. The technical result for the reported quarter was a positive of $269 million against $150 million in the year-ago quarter.

Financial Update

As of September 30, 2012, PartnerRe’s total assets were $23.64 billion, up from $22.86 billion at 2011-end. Total investments, cash and funds held and directly managed stood at $18.4 billion, up 3% from 2011-end. As of September 30, 2012, total capital was $7.9 billion (up from $7.3 billion at 2011-end) and total shareholders' equity was $7.1 billion, up 9% from $6.5 billion at 2011-end.

However, PartnerRe's net non-life loss and loss expense reserves reduced by 4% to $10.5 billion from 2011-end, primarily due to the impact of catastrophic events during 2011. The company’s book value per common share increased 17% to $99.54, compared with $84.82 at the end of 2011.

Annualized operating ROE soared to 18.4% in the reported quarter (from 10.4% at the end of the prior quarter), while annualized net income ROE stood at 35.5%, significantly increasing from 11.8% in the prior quarter.

Share Repurchase Update

In the reported quarter, the board of PartnerRe approved a stock repurchase authorization of up to 6.0 million shares.

Accordingly, the company bought back about 1.3 million shares for $93 million during the reported quarter. Moreover, an additional 0.153 million shares have been repurchased for $12 million so far in the third quarter of 2012, until October 26, 2012, leaving about 5.7 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 November 30, 2012, to the shareholders of record as on November 19, 2012.

On August 31, 2012, PartneRe paid a regular dividend of 62 cents to the shareholders of record as on August 20, 2012.

Our Take

So far in this quarter, most of PartnerRe’s peers have booked profits due to the absence of catastrophe losses and lower claims. Last week, Everest Re Group Ltd. (RE - Free Report) reported third-quarter 2012 operating earnings of $4.05 per share, substantially higher than the Zacks Consensus Estimate of $3.44. Results surged 50% from $2.70 earned in the prior-year quarter, primarily benefiting from higher revenues along with lower claims and expenses.

Another peer, MontpelierRe Holdings Ltd. reported third-quarter 2012 operating earnings of 85 cents per share, surpassing the Zacks Consensus Estimate of 65 cents. Results exhibited a massive improvement from operating loss of 40 cents in the prior-year quarter.

Overall, we hold a cautious near-term outlook for PartnerRe on the back of concerns regarding the rating downgrades, a weak P&C market cycle, low premiums generation, currency fluctuations, credit spreads and investment risk. Nevertheless, above-average liquidity, a low-risk balance sheet and effective capital deployment strengthens the company’s long-term growth profile.

In the long run, a stable ratings outlook, improved pricing and 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, which implies a Hold rating.

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