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PartnerRe Buys Presidio Reinsurance

Zacks Equity Research

Yesterday, PartnerRe Ltd. (PRE) announced its intention to purchase Presidio Reinsurance Group – California-based leading U.S. specialty accident and health reinsurer and insurer. The deal is expected to culminate by the first quarter of 2013, subject to the fulfillment of regulatory compliances.

Presidio Reinsurance’s business primarily consists of a Managing General Agency (MGA) and a reinsurance carrier, generating $250 million in accident and health premiums through its 18-year history of underwriting profitability. It is a leading health maintenance organization (:HMO) reinsurance writer and offers stop-loss insurance, medical treaty reinsurance, accident insurance and reinsurance in the U.S.

PartnerRe has agreed to pay $72 million for the MGA and the book value of the reinsurance carrier, which will be evaluated during the closure of the deal. Moreover, the company has accepted to augment the value of the business, if it exceeds certain profitability targets over time.

We believe that the deal is a good-fit for PartnerRe and complement its core growth strategy through diversification. Presidio Reinsurance’s strong market presence and proficient management personnel should boost PartnerRe’s business model, while also exposing its product portfolio to another specialty risk category that was least accessible to the company until now. Additionally, expansion into newer markets and product lines will also enhance its competitive leverage against arch-rivals such as XL Group Plc (XL) and W.R. Berkley Corp. (WRB).

Earnings Review

Last month, PartnerRe reported its third quarter operating earnings per share of $3.90. This significantly exceeded the Zacks Consensus Estimate of $2.06 and the year-ago earnings of $2.41.

PartnerRe’s results benefited from improved underwriting and technical results coupled with a significant reduction in the total expenses and combined ratio, which also drove the earnings, return on equity (:ROE) and book value. The top line also improved due to enhanced net realized and unrealized investment gains. However, continued decline in premiums earned along with lower investment income, driven by low reinvestment and risk-free rates, partly offset the improvements.

Moreover, for the fourth quarter of 2012, loss is pegged at 4 cents per share by the Zacks Consensus Estimate, and is expected to decline about 98% year over year, primarily driven by increase catastrophe losses from Hurricane Sandy. Nevertheless, earnings are expected to escalate by about 192% over the prior year in 2012 to $8.76 a share. Currently, PartnerRe holds a Zacks #3 Rank, implying a Hold rating in the short-term.

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