Zacks_Analysts' Blog : PartnerRe Guides $88M in 4Q CAT Loss - Analyst Blog

Yesterday, property-casualty and life reinsurer – PartnerRe Ltd. (PRE) – projected about $88 million in pre-tax catastrophe (CAT) losses for the fourth quarter of 2011. This is primarily related to the earthquakes that hit Japan in March this year.

The company has incurred a total charge of about $730 million against the earthquake and tsunami in Japan. The additional $88 million charge has been taken after completing an intensive on-the-ground audit of the Japanese exposure and claim processes.

Additionally, PartnerRe will most likely incur an increased CAT loss from the recent floods that hit Thailand in fourth-quarter 2011. Although a particular amount has not been computed, management estimates the loss from Thailand floods to be within 0.5–1.0% of the total insured industry loss, which is anticipated to be about $8–11 billion.

Another report generated by Aon Corp. (AON) also reveals that CAT loss from Thailand floods is expected to surge over $10 billion. Meanwhile, Zurich-based Swiss Re is expected to incur pre-tax CAT loss of over $0.5 billion related to the aforementioned floods.

So far PartnerRe has already recorded about $1.4 billion in pre-tax CAT losses in the first nine months of 2011 itself, way higher than $437 million in 2010, nil loss in 2009 and $305 million in 2008. We expect these losses to escalate in 2011. We believe such uncertainty and volatility in the magnitude of catastrophic losses not only reduces financial flexibility and reserves of the company but also weakens the underwriting capacity, thereby draining out all the earnings resources.

As a result, the Zacks Consensus Estimate for the fourth quarter is currently pegged at $2.19 per share, up by a significant 44% year over year, although it excludes the estimated CAT loss. Over the last 30 days, none of the 14 analyst firms raised their estimates, while a couple of downward revisions were witnessed. However, earnings are expected to decline over 180% over 2010 to a loss of $5.27 per share, reflecting increased CAT losses incurred in the first three quarters of 2011.

Overall, our near-term outlook on PartnerRe remains cautious 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 in mitigating the cyclical declines. Hence, we maintain a Neutral recommendation on the stock in the long run, in line with the Zacks Rank #3, reflecting a short-term Hold recommendation.