Partner Re (PRE, Financial) provides reinsurance for its clients in150 countries around the world. The Company provides reinsurance of non-life and life risks of ceding companies (primary insurers, cedants or reinsureds) on either a proportional or non-proportional basis through treaties or facultative reinsurance.
Insurance operation
Figures in USD millions
Source: Morningstar
As we can see here, PRE has managed successfully to expand the operation to growth in the net premiums written, growth of 11.34% compounded annually, during that time, the investment income is growing 10.86% annually for the last 10 years. Now we will break down to the segment and the investment to see clearly in terms of operating results.
Fiscal year 2010, PRE had two brokers that individually accounted for 10% or more of its gross premiums written. The Aon Group (AON, Financial) (including the Benfield Group) took around 25% of total gross premiums written, while Marsh (MMC, Financial) (including Guy Carpenter) accounted for approximately 21% of total gross premiums written.
We can divide the business into: North America, Global (Non-US) Specialty, Global Property and Casualty, Catastrophe which belongs to non-life, and life insurance. The life insurance segment is only very small percentage of the total business. The two largest segments contributing to the total premium is Global Specialty, and North America (51%-56%).
Over the last 10 years, it generated the positive profit except in 2001 and 2005, and 2008, just a little bit of profit. By the time 2001, the company’s operating results got hit by the two largest events 2001: the terrorist attacks of September 11 and the collapse of Enron. During 2005, pricing was generally flat to down, besides, that year was consider as the worst year in the history of the industry in terms of catastrophe losses, with Hurricane Katrina being the largest insured event ever. In 2008, pricing declined in most major markets and most lines of business, and there was also an increase in severity of losses, such as Hurricane Ike, frequency of losses and significant and widespread financial turmoil stemming from the sub-prime mortgage and resulting global credit and financial crisis.
When examining the operating result of any insurance companies, we should look at the expense ratio. Below are the ratios of non-life segments of PRE for the last 5 years:
The combined ratio is the common measure for the insurance industry. The ratio above 100% means that the insurance company pays out the claim larger than it receives the premium. For PRE, we can clearly see that combined ratio is well below 100%, and fluctuating over the years, highest at 2010 at 95%. However, the insurance operation is making profit. It effectively means the cost of funds is below zero for the last 05 years, and the reinsured are paying money for PRE to hold the cash, i.e the float.
The float is the money that the insurance companies temporarily hold but do not own. There is float because premiums are received before losses are paid. The time interval can sometimes extend to decades. During this time, the money can be invested by the insurer. The good insurance companies are those which can growth their float over time and the cost of float should be below the cost of Treasury 10 year notes. For PRE, we have already seen they got the cost of getting the float below zero, and we will see their float has been growing as well. I calculated the average relative float with unpaid losses, unearned premium, funds held under assumed reinsurance with adjustment for premium receivable, prepaid acquisition cost and prepaid taxes. The amount of floats that PRE generated from 2006 stands at $8.2billion, and grow gradually to $11.8billion in 2010, the compounded annual growth of 7.55% per year.
Investment portfolio
The insurance operation has done very good job of acquiring the floats which costs them less then zero. That’s the first step. The second step is how well they invest those floats; we will examine their investment portfolio.
According to their annual report in 2010, the total investment amount reached $13.4 billions. The majority is in fixed income instruments (92.5%), whereas the largest percentage is corporate bonds of 46.5%, non-U.S. sovereign government, supranational and government related of 21.7%, and residential Mortgage backed securities (MBS) of 18.3%.
Corporate bonds are comprised of obligations of U.S. and foreign corporations. At December 31, 2010, 91% of these investments were rated investment grade (BBB- or higher) by Standard & Poor’s (or estimated equivalent), while 67% were rated A- or better.
For the second largest category, non-U.S. sovereign government obligations comprised 81% of this category, of which 94% were rated AAA. The largest three non-U.S. sovereign government issuers (France, Germany and Canada) accounted for 83% of non-U.S. sovereign government obligations.
The residential MBS category included U.S. residential mortgage-backed securities, which accounted for 88%. Around 98% of these securities are backed by agencies of the U.S. government, so they generally have very low default risks, and this is considered as the standards on the mortgages before they are accepted.
Basically, their investment policy is quite conservative, mostly in fixed income securities and the majority of them are either got the above average ratings (BBB or higher) or have low risk of default. Besides, referring to the first table in the analysis, we can see the investment income gradually rising gradually over the years. However, it will be better to see PRE moves out of the high-grade fixed income instruments and allocate more for better equity so that it can earn more on its float investments.
Exposures for Q1 2011
According to the company’s report, PRE incurred net losses of $1,071 million related to the combined impact of the Japan Earthquake, New Zealand Earthquake, Australian Floods and an aggregate contract covering losses in Australia and New Zealand. Out of the total net loss amount, $722 million related to the Japan Earthquake, $252 million related to the New Zealand Earthquake and $97 million related to the Australian Floods and the aggregate contract covering losses in New Zealand and Australia.
Obviously, the actual losses from those events may materially exceed the estimated losses as a result of, an increase in industry insured loss estimates, the expected lengthy claims development period, in particular for earthquake related losses, and the receipt of additional information from cedants, brokers and loss adjusters.
Management
Costas Miranthis, Director, President and Chief Executive Officer
Mr. Miranthis was with Tillinghast Towers Perrin in London, U.K., from 1986 to 2002. He was managing the European Non-Life Practice and the Mergers and Acquisitions European Practice. He was also a member of Tillinghast Worldwide Non-Life Management Committee. He is a Fellow of the Institute of Actuaries and a Member of the American Academy of Actuaries.
Theodore Walker, Chief Executive Officer, PartnerRe North America
Mr. Walker was appointed Head of the worldwide catastrophe underwriting operations in 2002. In 2007, Mr. Walker assumed the role of Chief Underwriting Officer for PartnerRe North America (formerly PartnerRe U.S.). He became the CEO of PartnerRe North America from Jan 2009.
Marvin Pestcoe, Chief Executive Officer, Capital Markets Group
He joined PartnerRe in 2001 to lead PartnerRe’s alternative risk operations and was appointed as Deputy Head of the Capital Markets Group and Head of Capital Assets in 2008. Mr. Pestcoe was appointed as Chief Executive Officer, Capital Markets Group from Oct 2010. Mr. Pestcoe also has executive responsibility for the Life Business Unit.
Emmanuel Clarke, Chief Executive Officer, PartnerRe Global
Mr. Clarke joined PartnerRe in 1997 and was appointed as Head of Credit & Surety PartnerRe Global in 2001 and Head of Property and Casualty, PartnerRe Global in 2006. In 2008 Mr. Clarke took the position as Head of Specialty Lines, PartnerRe Global and Deputy Chief Executive Officer, PartnerRe Global. Mr. Clarke was appointed as Chief Executive Officer of PartnerRe Global from September 2010.
William Babcock, Executive Vice President and Chief Financial Officer
Mr. Babcock joined PartnerRe in 2008 as Group Finance Director. He was appointed as Executive Vice President and Chief Financial Officer in 2010. Prior to joining PartnerRe Mr. Babcock held the position of Chief Accounting Officer and Director of Financial Operations at Endurance Specialty Ltd.
David Outtrim, Chief Accounting Officer
David Outtrim became Chief Accounting Officer in April 2010. He joined the Company in January 2007 as Group Controller and was responsible for the management of Group accounting and reporting processes and implementation and on-going management of the internal control environment procedures, processes and systems to support these requirements. Prior to that, he was the Financial Controller at Quanta Capital Holdings Ltd. from 2004 to 2006. Before that, Mr. Outtrim was an Auditor and Senior Manager at KPMG (Bermuda and Europe) from 1996 through 2004.
The executive team has experience in insurance industry, in the ages of nearly 40-50s. What makes me not very interested in the management aspect is that the board of management and directors only hold very small percentage in the company (only 0.33% in total).
Valuation
Liquidation valuation
Tangible book value is considered as the proxy for liquidation value -- an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. As of March 2011, tangible book value of PRE stands at $5 billions. With current market value of $4.6 billions, the stock is trading at 92% of its tangible book value.
Relative valuation
As we can see, historically, PRE has been trading above its book value, even with the year of losses in 2001, 2005. And currently it is traded at the lowest P/B comparing to its own 10-year history
Comparing to some of its close competitors and its industry, it is trading at the lowest level with the P/B ratio.
Ø Discounted Dividend Valuation (Gordon Growth Model)
Return on Equity in %
Book Value/share and Div in USD
For 10 years, PRE has ups and downs with different disastrous events. Nevertheless, on average, it has successfully gained the return on equity of 10.6%. Dividends over the last 10 years grow at 6.42% annually. If we assumed the growth in dividends would be 6.42% forever in the future, using the discount rate of 10%, the intrinsic value stays at $61/share.
Conclusions
PRE is good reinsurance company, earning average of 10.6% on equity for the last 10 years, with the history of underwriting profit and growing float at the rate of 7.55%/year. However, the management and board of directors own very little stake in the company, and PRE’s investment portfolio is quite conservative.
At the current price of $68/share, it is trading below its liquidation value, below its historical P/B and its competitors as well as industry P/B. For the discounted dividend valuation, the assumptions of dividends growing at 6.42%, discount rate of 10%, it is trading at premium above the calculated intrinsic value.
PRE seems to be a good buy for conservative and income investors who prefer growing dividends over time. But for value investors, this stock would not be in their portfolio as it is not the screaming bargain at this price. There are better insurance companies out there which in the past have shown very satisfactory return over the long period, both operating results and performance in the market.
Disclosure: This is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wish to buy, hold or sell the stocks has to do his/her own analysis at his/her own risks.
Anh HOANG
Insurance operation
Figures in USD millions
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Net Premiums Earned | 1634 | 2426 | 3503 | 3734 | 3599 | 3667 | 3777 | 3928 | 4120 | 4776 |
| Net Investment income | 240 | 245 | 262 | 298 | 365 | 449 | 523 | 573 | 596 | 673 |
| Net income | -160 | 190 | 468 | 492 | -51 | 749 | 718 | 47 | 1537 | 853 |
| Preferred dividends | 20 | 20 | 29 | 21 | 35 | 35 | 35 | 35 | 35 | 35 |
| Net income | -180 | 170 | 438 | 471 | -86 | 715 | 683 | 12 | 1502 | 818 |
As we can see here, PRE has managed successfully to expand the operation to growth in the net premiums written, growth of 11.34% compounded annually, during that time, the investment income is growing 10.86% annually for the last 10 years. Now we will break down to the segment and the investment to see clearly in terms of operating results.
Fiscal year 2010, PRE had two brokers that individually accounted for 10% or more of its gross premiums written. The Aon Group (AON, Financial) (including the Benfield Group) took around 25% of total gross premiums written, while Marsh (MMC, Financial) (including Guy Carpenter) accounted for approximately 21% of total gross premiums written.
We can divide the business into: North America, Global (Non-US) Specialty, Global Property and Casualty, Catastrophe which belongs to non-life, and life insurance. The life insurance segment is only very small percentage of the total business. The two largest segments contributing to the total premium is Global Specialty, and North America (51%-56%).
Over the last 10 years, it generated the positive profit except in 2001 and 2005, and 2008, just a little bit of profit. By the time 2001, the company’s operating results got hit by the two largest events 2001: the terrorist attacks of September 11 and the collapse of Enron. During 2005, pricing was generally flat to down, besides, that year was consider as the worst year in the history of the industry in terms of catastrophe losses, with Hurricane Katrina being the largest insured event ever. In 2008, pricing declined in most major markets and most lines of business, and there was also an increase in severity of losses, such as Hurricane Ike, frequency of losses and significant and widespread financial turmoil stemming from the sub-prime mortgage and resulting global credit and financial crisis.
When examining the operating result of any insurance companies, we should look at the expense ratio. Below are the ratios of non-life segments of PRE for the last 5 years:
| 2006 | 2007 | 2008 | 2009 | 2010 | |
| Loss ratio | 54.8% | 50.8% | 63.9% | 52.7% | 65.9% |
| Acquisition ratio | 23.1% | 22.9% | 23.3% | 21.9% | 21.3% |
| Other operating expense | 6.5% | 6.7% | 6.9% | 7.2% | 7.8% |
| Combined ratio | 84.4% | 80.4% | 94.1% | 81.8% | 95.0% |
The combined ratio is the common measure for the insurance industry. The ratio above 100% means that the insurance company pays out the claim larger than it receives the premium. For PRE, we can clearly see that combined ratio is well below 100%, and fluctuating over the years, highest at 2010 at 95%. However, the insurance operation is making profit. It effectively means the cost of funds is below zero for the last 05 years, and the reinsured are paying money for PRE to hold the cash, i.e the float.
The float is the money that the insurance companies temporarily hold but do not own. There is float because premiums are received before losses are paid. The time interval can sometimes extend to decades. During this time, the money can be invested by the insurer. The good insurance companies are those which can growth their float over time and the cost of float should be below the cost of Treasury 10 year notes. For PRE, we have already seen they got the cost of getting the float below zero, and we will see their float has been growing as well. I calculated the average relative float with unpaid losses, unearned premium, funds held under assumed reinsurance with adjustment for premium receivable, prepaid acquisition cost and prepaid taxes. The amount of floats that PRE generated from 2006 stands at $8.2billion, and grow gradually to $11.8billion in 2010, the compounded annual growth of 7.55% per year.
Investment portfolio
The insurance operation has done very good job of acquiring the floats which costs them less then zero. That’s the first step. The second step is how well they invest those floats; we will examine their investment portfolio.
According to their annual report in 2010, the total investment amount reached $13.4 billions. The majority is in fixed income instruments (92.5%), whereas the largest percentage is corporate bonds of 46.5%, non-U.S. sovereign government, supranational and government related of 21.7%, and residential Mortgage backed securities (MBS) of 18.3%.
Corporate bonds are comprised of obligations of U.S. and foreign corporations. At December 31, 2010, 91% of these investments were rated investment grade (BBB- or higher) by Standard & Poor’s (or estimated equivalent), while 67% were rated A- or better.
For the second largest category, non-U.S. sovereign government obligations comprised 81% of this category, of which 94% were rated AAA. The largest three non-U.S. sovereign government issuers (France, Germany and Canada) accounted for 83% of non-U.S. sovereign government obligations.
The residential MBS category included U.S. residential mortgage-backed securities, which accounted for 88%. Around 98% of these securities are backed by agencies of the U.S. government, so they generally have very low default risks, and this is considered as the standards on the mortgages before they are accepted.
Basically, their investment policy is quite conservative, mostly in fixed income securities and the majority of them are either got the above average ratings (BBB or higher) or have low risk of default. Besides, referring to the first table in the analysis, we can see the investment income gradually rising gradually over the years. However, it will be better to see PRE moves out of the high-grade fixed income instruments and allocate more for better equity so that it can earn more on its float investments.
Exposures for Q1 2011
According to the company’s report, PRE incurred net losses of $1,071 million related to the combined impact of the Japan Earthquake, New Zealand Earthquake, Australian Floods and an aggregate contract covering losses in Australia and New Zealand. Out of the total net loss amount, $722 million related to the Japan Earthquake, $252 million related to the New Zealand Earthquake and $97 million related to the Australian Floods and the aggregate contract covering losses in New Zealand and Australia.
Obviously, the actual losses from those events may materially exceed the estimated losses as a result of, an increase in industry insured loss estimates, the expected lengthy claims development period, in particular for earthquake related losses, and the receipt of additional information from cedants, brokers and loss adjusters.
Management
Costas Miranthis, Director, President and Chief Executive Officer
Mr. Miranthis was with Tillinghast Towers Perrin in London, U.K., from 1986 to 2002. He was managing the European Non-Life Practice and the Mergers and Acquisitions European Practice. He was also a member of Tillinghast Worldwide Non-Life Management Committee. He is a Fellow of the Institute of Actuaries and a Member of the American Academy of Actuaries.
Theodore Walker, Chief Executive Officer, PartnerRe North America
Mr. Walker was appointed Head of the worldwide catastrophe underwriting operations in 2002. In 2007, Mr. Walker assumed the role of Chief Underwriting Officer for PartnerRe North America (formerly PartnerRe U.S.). He became the CEO of PartnerRe North America from Jan 2009.
Marvin Pestcoe, Chief Executive Officer, Capital Markets Group
He joined PartnerRe in 2001 to lead PartnerRe’s alternative risk operations and was appointed as Deputy Head of the Capital Markets Group and Head of Capital Assets in 2008. Mr. Pestcoe was appointed as Chief Executive Officer, Capital Markets Group from Oct 2010. Mr. Pestcoe also has executive responsibility for the Life Business Unit.
Emmanuel Clarke, Chief Executive Officer, PartnerRe Global
Mr. Clarke joined PartnerRe in 1997 and was appointed as Head of Credit & Surety PartnerRe Global in 2001 and Head of Property and Casualty, PartnerRe Global in 2006. In 2008 Mr. Clarke took the position as Head of Specialty Lines, PartnerRe Global and Deputy Chief Executive Officer, PartnerRe Global. Mr. Clarke was appointed as Chief Executive Officer of PartnerRe Global from September 2010.
William Babcock, Executive Vice President and Chief Financial Officer
Mr. Babcock joined PartnerRe in 2008 as Group Finance Director. He was appointed as Executive Vice President and Chief Financial Officer in 2010. Prior to joining PartnerRe Mr. Babcock held the position of Chief Accounting Officer and Director of Financial Operations at Endurance Specialty Ltd.
David Outtrim, Chief Accounting Officer
David Outtrim became Chief Accounting Officer in April 2010. He joined the Company in January 2007 as Group Controller and was responsible for the management of Group accounting and reporting processes and implementation and on-going management of the internal control environment procedures, processes and systems to support these requirements. Prior to that, he was the Financial Controller at Quanta Capital Holdings Ltd. from 2004 to 2006. Before that, Mr. Outtrim was an Auditor and Senior Manager at KPMG (Bermuda and Europe) from 1996 through 2004.
The executive team has experience in insurance industry, in the ages of nearly 40-50s. What makes me not very interested in the management aspect is that the board of management and directors only hold very small percentage in the company (only 0.33% in total).
Valuation
Liquidation valuation
Tangible book value is considered as the proxy for liquidation value -- an estimate of what the insurance company would be worth if the company closed its doors, paid out claims, and returned excess capital to shareholders. As of March 2011, tangible book value of PRE stands at $5 billions. With current market value of $4.6 billions, the stock is trading at 92% of its tangible book value.
Relative valuation
| P/B | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | TTM |
| PRE | 1.60 | 1.30 | 1.20 | 1.00 | 1.20 | 1.10 | 1.10 | 0.90 | 0.80 | 0.80 | 0.70 |
As we can see, historically, PRE has been trading above its book value, even with the year of losses in 2001, 2005. And currently it is traded at the lowest P/B comparing to its own 10-year history
| PRE | RE | RNR | Industry | |
| P/B | 0.7 | 0.8 | 1.2 | 1.1 |
Comparing to some of its close competitors and its industry, it is trading at the lowest level with the P/B ratio.
Ø Discounted Dividend Valuation (Gordon Growth Model)
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Book Value/share | 34.7 | 39.82 | 47.92 | 61.63 | 55.9 | 65.14 | 74.72 | 75.1 | 119.34 | 91.85 |
| Return on Equity | -9.44 | 8.95 | 18.85 | 15.92 | -2.67 | 20.91 | 16.94 | 0.28 | 25.46 | 11.05 |
| Dividends | 1.1 | 1.15 | 1.2 | 1.36 | 1.52 | 1.6 | 1.72 | 1.84 | 1.88 | 2.05 |
Book Value/share and Div in USD
For 10 years, PRE has ups and downs with different disastrous events. Nevertheless, on average, it has successfully gained the return on equity of 10.6%. Dividends over the last 10 years grow at 6.42% annually. If we assumed the growth in dividends would be 6.42% forever in the future, using the discount rate of 10%, the intrinsic value stays at $61/share.
Conclusions
PRE is good reinsurance company, earning average of 10.6% on equity for the last 10 years, with the history of underwriting profit and growing float at the rate of 7.55%/year. However, the management and board of directors own very little stake in the company, and PRE’s investment portfolio is quite conservative.
At the current price of $68/share, it is trading below its liquidation value, below its historical P/B and its competitors as well as industry P/B. For the discounted dividend valuation, the assumptions of dividends growing at 6.42%, discount rate of 10%, it is trading at premium above the calculated intrinsic value.
PRE seems to be a good buy for conservative and income investors who prefer growing dividends over time. But for value investors, this stock would not be in their portfolio as it is not the screaming bargain at this price. There are better insurance companies out there which in the past have shown very satisfactory return over the long period, both operating results and performance in the market.
Disclosure: This is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wish to buy, hold or sell the stocks has to do his/her own analysis at his/her own risks.
Anh HOANG
