ALL Allstate Corporation

PartnerRe Ltd.’s (PRE) third quarter 2011 operating earnings per share of $2.41 came in modestly higher than the Zacks Consensus Estimate of $1.99 but significantly lagged behind $3.95 recorded in the year-ago quarter. As a result, operating income substantially plunged 45.5% to $164.5 million from $301.6 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 9 cents per share for the reported quarter, compared with $3.05 per share in the year-ago quarter, and interest losses of 7 cents per share from equity investments against interest gains of 2 cents. The year-ago quarter also included net foreign exchange losses of 26 cents per share.

Including these items, GAAP net income for PartnerRe was $180.1 million or $2.43 per share, down $524.9 million or $6.76 per share in the year-ago quarter.

Results deteriorated year over year on the back of declining premiums written due to cancellations and non-renewals, poor underwriting results and lower investment income driven by low reinvestment rates that led to reduced top line and weak book value growth. Moreover, total expense climbed 6.9% year over year to $1.26 billion.

Non-life combined ratio also deteriorated to 93.1% from 80.7% in the year-ago period. This reflects 16.5 points or $178 million due to huge loss from the recent catastrophes in Japan and New Zealand while an additional 16.2 points or $176 million is related to net favorable loss development on prior accident years during the reported quarter.

Technical ratio deteriorated for all the segments. The technical result for the reported quarter was a $150 million against $303 million in the year-ago quarter. These factors adversely impacted the bottom line.

PartnerRe’s total revenue plunged 16.3% to $1.49 billion from $1.77 billion in the year-ago quarter, but exceeded the Zacks Consensus Estimate of $1.23 billion. This included net premiums earned of $1.29 billion (down 1.4% year over year), net investment income of $163.6 million (down 0.5% year over year), pre-tax net realized and unrealized investment gains of $26.1 million against $293.2 million in the year-ago quarter and other income of $1.4 million, down from $3.4 million in the year-ago period.

However, net premiums written climbed 9.3% year over year to $1.08 billion. Overall, premiums earned witnessed weak performance across most business segments except. Negative growth was experienced across the non-U.S. Global Speciality business, Catastrophe and the Global Property and Casualty (P&C) segments, partly offset by North America segment.

Financial Update

As of September 30, 2011, PartnerRe’s total assets were $23.6 billion, up from $23.4 billion at December 31, 2010. Total investments, cash and funds held and directly managed stood at $18.2 billion, flat compared to 2010-end. As of June 30, 2011, total capital was $7.5 billion (down from $8.0 billion at 2010 end) and total shareholders' equity was $6.7 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 decrease in the currency translation account. This also reflects preferred share issuance, repurchases and dividends paid so far in 2011.

PartnerRe's net non-life loss and loss expense reserves escalated by 7% to $11.0 billion from 2010-end, primarily due to the impact of catastrophic events during 2011. PartnerRe’s book value per common share declined to $85.26 when compared with $93.77 at the end of 2010.

Annualized operating return on equity (ROE) improved to 10.3% for the reported quarter (up from 4.2% at the end of prior quarter) while annualized net income ROE came in at 10.4%, significantly up from 7.2% in the prior quarter.

Dividend Update

Yesterday, the board of PartnerRe declared a regular quarterly dividend of 60 cents, payable on December 1, 2011, to shareholders of record as on November 18, 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 payouts 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 third quarter 2011 operating profit of $2.70 per share, substantially ahead of the Zacks Consensus Estimate of $1.91. Results also compare favorably with earnings of $2.76 per share in the year-ago quarter, due to heavy catastrophe incidence during the first nine months of 2011.

Many insurers in the industry, such as Allstate Corp. (ALL) and MontpelierRe Holdings Ltd. (MRH) have also faced the brunt of catastrophe losses in the third quarter of 2011, as reflected in their results.

Overall, we hold a cautious near-term outlook for PartnerRe 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 short-term Zacks #3 Rank on the stock.

 
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