Given the "low" valuation attached to PartnerRe in the announced MOE, I am increasingly hearing chatter that some entity may take a run at this fine company. If one believes that there is approximately $1 billion in equity in PRE's loss reserves and there are additional costs that can be taken out of the entity, it wouldn't be surprising to observe someone bid a 10% premium to book for this reinsurer. It will be interesting to observe if the topic comes up on PartnerRe's 4Q14 investor call.
Does the recent favorable action in OHI shares reflect investor recognition of the beneficial impact of the soon-to-be-completed merger with AVIV? I believe so. I think Wall Street is increasingly cognizant of the improved financing costs that can be obtained from an improved debt rating and improved growth opportunities resulting from greater sourcing capabilities. Consequently, the combined entity should carry an improved valuation reflecting higher sustainable growth and improved margins. I continue to like this company's prospects.
Between now and the end of January, PartnerRe will disclose the results of its 1/1 treaty renewals. In light of significant pessimism about the state of the worldwide reinsurance industry, the forecasts are for declining numbers out of the Bermuda-based reinsurer. The question is: How bad will they be? My personal belief is that they will show a decline -- paced by a meaningful drop in catastrophe reinsurance volume, but not as large as the most ardent naysayers anticipate. Offsetting the decline in "cat" premium will be growth in some other specialty areas and some new lines. I am particularly bullish about PRE's expansion opportunities in its health re/insurance and wholesale businesses. Moreover, I foresee the opportunity for gains in new ventures that the underwriter is currently undertaking. Amidst all the gloom and doom in the reinsurance sector, PartnerRe should continue to achieve reasonable growth in book value while maintaining an extremely strong balance sheet and further meaningful share repurchases.
Recently several Wall Street analysts have raised their 4Q14 EPS estimate for PartnerRe to well above $3.00@share. This is substantially above the consensus estimate of around $2.50@share. This increase reflects a benign catastrophe loss environment in last year's final period. The estimate boost also incorporates accretive share repurchases. Notwithstanding a poor fundamental environment for the reinsurance sector, we continue to see significant value in PRE shares at current depressed levels.
I note that some Wall Street analyses are forecasting that PartnerRe will end 2014 with BVPS of more than $125@share. That number seems a stretch to me, since I'm look for a number in excess of $125. Moreover, i've seen a projection of shares repurchased in the interval of 1.5 million, which seems reasonable to me. I continue to find these shares quite attractive at current price levels.
I think the comment about "sleep good" insurance is the best offered. My position is through AVIV, since I was a significant Lindsay Goldberg investor. I have NO PLANS to sell any of my shares because I'm very bullish on the soon to be completed OHI/AVIV merger. I believe there is a strong likelihood that the larger, stronger OHI will get a credit rating upgrade which can significantly lower its cost of capital. I also like the increased sourcing capability of the enlarged organization. Finally, I believes these guys are in a demographic "sweet spot" and the need for facilities to take care of old folks is only going in one direction.
OHI's share price had a nice increase today in a BIG down equity market. Was there a news event to explain this significant counter-move? Such favorable stock action typically doesn't happen without an external catalyst. I'm quite bullish on the OHI/AVIV transaction, and it appears I'm not alone in this view.
IMO, the two BIG themes in the reinsurance sector will be consolidation and share repurchase. Moreover, I believe the major surprise will be how well these stocks perform in 2015 despite the lousy fundamental environment. In particular, I believe that PartnerRe will record a significant increase in BVPS in 4Q14 -- something in excess of 3%. Expect a lot of activity in this industry during the New Year.
IMO, PartnerRe is likely to reduce its share count by at least 10% through repurchases in 2015. This would be equivalent to approximately 5 million shares, which is the size of the current buy-back authorization. In fact, I expect that the share count (including equivalents) will be below 50 million by year-end. Such an initiative should be highly accretive to both book value and earnings per share. Moreover, I expect a sizable increase in the company's quarterly dividend sometime early in the new year.
Furthermore, I believe that Partmer's stated book value ($121.95@ share at 9/30/14) significantly understates "true" book value because of significant redundancies in the reinsurer's loss reserves. If correct, this makes share buy-backs even more beneficial to increasing shareholder value. IMO, PRE stock is quite attractive at current levels.
Both XL and Catlin announced this morning that they are in discussions regarding a merger of the two entities. Apparently, the transaction would be structured as a purchase of Catlin by XL. This development follows the announcement of RenRe purchasing Platinum Ltd, two Bermuda-based reinsurers. We expect more such M&A activity in the re/insurance sector as this industry needs to consolidate in light of significant over-capacity. We believe this trend will benefit larger carriers, such as PartnerRe, as will the opportunity to potentially be involved in this industry consolidation. The company has one of the strongest balance sheets in the industry and is well positioned to take advantage of any opportunity that presents itself. I remain bullish on this stock.
I hope that PartnerRe management is utilizing the current retreat in the stock price to aggressive repurchase shares. At current levels, I calculate that the equity is selling at about a 15% discount from year-end book value, which is likely considerably understated because of significant loss reserve redundancies. Moreover, current repurchases would be HIGHLY accretive to both book value and EPS. At current levels, I know of no better use of corporate capital than to buy-back common equity.
Central Securities announced that it will utilize the share price of $22.13 for converting its $1.55@share year-end distribution into additional stock should this pay-out option be selected by a shareholder. The closed-end fund is currently trading above this price level, so a gain would already be recorded on this transaction. With this news out, I suspect the shares will continue to trade higher, reflecting the lifting of this uncertainty.
The dramatic decline in the price of oil and its spillover implications for lower gasoline costs is a significant positive for McKesson. As a large distribution company, a major expense of the company is the gas required to operate their massive fleet of trucks around the US and Europe. With the major drop in gas prices reducing a key expense item for McKesson, the firm should benefit with improved profit margins. I wonder if Wall Street equity analysts have factored this development into the company's future profit projections.
MRH is probably the next Bermuda-based reinsurer to be acquired after the recently announced PTP transaction. Most industry pundits realize that Montpelier is simply too small and insignificant a reinsurance player to survive long-term as a free-standing entity. My prediction is that this company will be gone as an independent firm by year-end 2015.
Renaissance Re this morning announced that it's buying Platinum Underwriters for approximately $76@ share, or the equivalent of 1.13X book value. I personally believe that this is only the first of several M&A transactions that will occur in the reinsurance sector, as this industry has over-capacity and needs to further consolidate. Moreover, IMO it highlights the significant value inherent in PartnerRe, which currently sells at around a 10% discount to BVPS, has significant excess capital on its balance sheet, and has a worldwide franchise that is dramatically superior to that of Platinum. I continue to foresee a year-end share price target for PRE of $120.
With PartnerRe's 3Q14 book value per share at $121.95, it is reasonable to expect that the reinsurer can achieved a year-end book value per share of at least $125. Moreover, a factor which could materially increase this number is the amount of share repurchases undertaken by the company in the fourth quarter. The more aggressive the buy-back in this period, the higher the book value, reflecting the fact that PRE is making these purchases at a discount to BVPS. Obviously, we favor aggressive repurchases as the best way to enhance shareholder returns in the current environment. We continue to like our year-end price target for the stock of $120.
All these plaintiff law firms start legal actions after mergers are announced. Its a game they play to extort money out of the firms to permit them to get their transaction completed. IMO, this charade is a black mark on our business environment, but for some strange reason it seems to have a life of its own. I don't believe these suits speak to the merits of the OHI/AVIV transaction,which I personally like a lot.
I'm a large AVIV shareholder via my position as a fund investor in Lindsay Goldberg. I couldn't be MORE delighted with this transaction. I listened to a replay of the investor call this morning and thought that management did an excellent job in explaining the rationale of this deal. Moreover, I believe that the synergy projection for this combination is, as it should be, a conservative number. Finally, I very much like the demographic trends in this sector. My plan is to hold on to the distributed Omega shares I receive for a very long time and perhaps even increase my position.
Personally, I don't think there is a chance in hell that the year-end payout will be $4@share. My optimistic guess is that it will be in the vicinity of $1.00. However, that is only a WAG.