PartnerRe Poised for Long-Term Growth, Risks Linger - Analyst Blog

On Jul 18, 2014, we issued an updated research report on PartnerRe Ltd. (PRE). The company's core fundamentals, strong capital and low-risk balance sheet bode well for long-term growth, although some market risks and weather-related uncertainties remain.

This Zacks Rank #3 (Hold) stock maintained an earnings streak in all the last four quarters with an average beat of 47.1%. Although the company's first-quarter 2014 earnings topped the Zacks Consensus Estimate by about 40%, it lagged the year-ago quarter figure by 0.9%.

Over the past few years, PartnerRE has shown resilient growth, braving periods of huge catastrophe losses, by making meaningful changes made to its catastrophic risk-profile. This helped the company improve its operating leverage, book value and return on equity (ROE). PartnerRe steadily achieved annualized operating ROE of 12.3% in 2012, 12.7% in 2013 and 12.3% at Mar 2014-end, thereby progressing toward the management's pervious yardstick of 13% return in the long term.

While the reinsurance industry is at an inflection point, PartnerRe enjoys a diversified business model, both geographically and across its reinsurance portfolio. Prudent capital management and lower debt obligations are also contributing to increase in premiums and return per unit of risk along with improved underwriting experience and above-average risk appetite, as compared to peers.

The stable returns in 2012 and 2013 coupled with the ongoing growth momentum cast a favorable outlook for 2014. Moreover, increased capital deployment scores well with ratings agencies, and boosts investor sentiment.

Inherent Risks

Despite improved fundamentals, PartnerRe faces challenges such as intense price competition, increased claims expenses during higher catastrophes, sluggish property-casualty market cycle and the persistent low interest rate environment.

Moreover, the widened spreads and low reinvestment rates have been dragging net investment income, which witnessed sharp declines throughout 2011, 2012, 2013 and in first-quarter 2014, slowly reversing the positive trend experienced in the past years.These factors limit chances of any significant upsides in the near term.

Overall, a favorable risk-reward balance in the near term has prompted upward estimate revisions in the last 60 days. Thus, the Zacks Consensus Estimate for 2014 and 2015 rose 5.4% and 0.7% to $11.43 and $10.06 per share, respectively, during the same period. Notably, estimate for second-quarter 2014 moved north by 13.8% to $2.73 a share.

Furthermore, the Most Accurate estimate for PartnerRe's second-quarter 2014 as well as for full-year 2014 and 2015 earnings currently stand at $2.95, $11.40 and $10.45, resulting in an Earnings ESP of +8.1%, -0.3% and +3.9%, respectively.

Key Picks in the Sector

One could considerbetter-ranked insurance stocks like Endurance Specialty Holdings Ltd. (ENH), Navigators Group Inc. (NAVG)and White Mountains Insurance Group Ltd. (WTM). All these stocks sport a Zacks Rank #1 (Strong Buy).