Wednesday, June 17, 2015

PartnerRe Dipped to Neutral - Analyst Blog

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On Jul 11, we downgraded global life and property-casualty (P&C) insurer and reinsurer – PartnerRe Ltd. (PRE) – to Neutral based on its weak investment portfolio and high competition. While the Presidio acquisition diversifies the company's product profile, it brings in additional costs that will weigh on margins at least for some time.

Why the Downgrade?

Estimates for PartnerRe witnessed modest corrections after the company reported its first-quarter 2013 results on Apr 29, wherein earnings stood at $3.39 per share. Earnings per share outpaced both the Zacks Consensus Estimate and year-ago number of $2.47 and $2.76, respectively. Overall, PartnerRe delivered positive earnings surprises in all of the last 4 quarters with an average beat of 151.1%.

However, total revenue edged down 2.6% year over year to $1.3 billion and was almost in line with the Zacks Consensus Estimate. Growth from premiums written was more than offset by lower investment income.

While total expenses surged 13%, combined ratio improved to 81.7% from 84.7% in the year-ago period. In addition, technical results and underwriting profitability improved, driving growth in bottom line, book value per share and return on equity (ROE).

Following the release of the first-quarter results, the Zacks Consensus Estimate for 2013 inched up 1.8% to $9.25 per share in the last 60 days. Moreover, the Zacks Consensus Estimate for 2014 edged up about 1.0% to $8.11 per share in the last 60 days.

With the Zacks Consensus Estimates for both 2013 and 2014 exhibiting no clear directional pressure in the near term and estimates for both the years posing year-over-year deterioration, PartnerRe now has a Zacks Rank #3 (Hold).

Cause for Concern

The recent acquisition of Presidio not only drove the premiums of PartnerRe but ! also helped the company diversify. Presidio's robust market presence and expert management should further strengthen the company's fundamentals. However, concerns linger over the sustainability of this growth amid the weak P&C market and a history of challenges faced in the integration of ParisRe.

Moreover, intense competition, currency fluctuations, weak credit spreads and low interest rate environment have restricted investment income and yields, thereby limiting the desired upsides. Nevertheless, PartnerRe enjoys above-average liquidity and a low-risk balance sheet, which is reflected in its consistent and efficient capital deployment. In the long run, a stable ratings outlook, improved pricing and market stability can help mitigate the cyclical declines.

Other Insurers That Warrant a Look

While we prefer to avoid PartnerRe until we gain more clarity on the stock's performance, other P&C insurers and reinsurers that are worth a look are AmTrust Financial Services Inc. (AFSI), HCI Group Inc. (HCI) and American Safety Insurance Holdings Inc. (ASI). All these stocks carry a Zacks Rank #1 (Strong Buy).

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