On Wednesday, Fitch Ratings affirmed the issuer default rating (IDR) of PartnerRe Ltd. (PRE) at “A+” and the insurer financial strength rating of its principal insurance operating subsidiary – Partner Reinsurance Company Ltd. – at “AA-”. The rating agency also affirmed the “BBB+” rating on PartnerRe’s cumulative redeemable perpetual preferred securities and junior subordinated notes along with an “A” rating on its senior unsecured notes. All the above-mentioned ratings carry a stable outlook.
The affirmation of the ratings was based on PartnerRe’s impressive balance sheet, sturdy earnings growth trend, competitive strength and regular capital generation. The ratings take into consideration Fitch’s confidence in the company’s risk management ability, which will help it overcome the phases of volatile capital markets or increased underwriting losses without affecting the strength or liquidity of its balance sheet. However, these positive factors are partially offset by the impact of PartnerRe’s high exposure to catastrophic events, which occur sporadically but have a significant impact on the company.
Nevertheless, PartnerRe has a high credit rating at present. As a result, an upgrade in the near term by Fitch is not expected unless PartnerRe witnesses a substantial decline in underwriting volatility over a long time, leading to a significant improvement in the risk profile. However, a downgrade is possible in the upcoming 12–18 months if the company witnesses weak operating results over a long frame of time, its balance sheet weakens due to a substantial write-down in investments or a large adverse loss reserve development, or if the underwriting results and profits fall substantially lower than its peers.
Additionally, if the run-rate of PartnerRe’s combined ratios falls below the mid-90s or the operating earnings-based interest coverage, and interest and preferred dividend coverage ratios decline below 10x and 6x, respectively, then Fitch might revise the rating downward. Moreover, an increase in the run-rate net written premium to GAAP equity ratio above 1.0x for any reason other than a considerable shift in business mix toward less volatile lines can lead to a rating downgrade.
PartnerRe currently carries a Zacks Rank #2 (Buy). We maintain a long-term Neutral recommendation on the stock. Peers AmTrust Financial Services Inc. (AFSI) and AllState Corp. (ALL) carry a Zacks Rank #1 (Strong Buy).
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