PartnerRe Ltd (PRE, Financial) has been in business for 20 years. The company has enjoyed a long track record of success financially, operationally and strategically. Management has proven to be effective and successful in the managing of shareholders company. On Septmember 8, 2014 management authorized repurchase of up to 5 million shares outstanding. The repurchase of 5 million shares is an effective way of unlocking value for shareholders, when the shares are repurchased below book value. PartnerRe is currently trading at 0.8x book value; that's before we adjust for the float the company annually produces. Buying shares below book value shows that management isn't paying a premium for the shares and is effectively using the company's capital.
The company's 20 years of valuation creation
Overview of the business
Over 20 years the business has consistently expanded its product line without endangering shareholders to permanent loss of their capital. The company is in the business of assuming risk; all insurance companies are in the business of assuming risk. PartnerRe understands how to diversify and distribute that risk in a way to prevent permanent loss of capital for shareholders. The company has a sober approach to assuming risk and managing that risk.
The firm's strategies for assuming and managing risk:
- Diversification across products and insurance markets.
- An appetite risk that delivers superior risk adjusted returns.
- Capital management to optimize long term return.
- Superior risk evaluation.
- Intelligent portfolio and relationships management.
- Enhance returns through invested assets within an appropriate risk framework.
Financial strength
The company has made it a top priority to maintain substantial financial resources over the long term. Maintaining a strong and clean balance sheet combined with maintaining financial conservativism and transparency shows how the management are good stewarts of shareholders money.
Financial ratings from rating agencies
- A.M Best - Rating - A+ Outlook - Stable
- Moody's - Rating - A1 Outlook - Stable
- Standard & Poor - Rating - A+ Outlook - Stable
- Fitch - Rating - AA Outlook - Stable
The company maintains its financial strength by maintaining strong capitalization, of which 90% is considered permanent capital. Also the company has maintained carrying reserves above the actuarial midpoint. For 2013, the company has a combined ratio of 85% and for 2012 had a combined ratio of 87%.
Balance Sheet
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Assets | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | 23038.29 | 22980.43 | 22855.37 | 23364.37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Liabilities | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | 16328.76 | 16046.94 | 16387.83 | 16157.45 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Equity | 6709.53 | 6933.5 | 6467.54 | 7206.92 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities & Shareholders' Equity | 23038.29 | 22980.43 | 22855.37 | 23364.37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Common Shares Outstanding | 52.44 | 58.91 | 65.32 | 69.99 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Preferred Shares Outstanding | 34.15 | 35.8 | 35.8 | 20.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash Flow Statements
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||
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| Period Length: | 12 Months | 12 Months | 12 Months | 12 Months | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income/Starting Line | 673.44 | 1134.51 | -520.29 | 852.55 | |||||||||||||||||||||||||||||||||||||||||||||
| Cash From Operating Activities | 827.27 | 693.29 | 573.63 | 1226.92 | |||||||||||||||||||||||||||||||||||||||||||||
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| Cash From Investing Activities | 417.99 | -219.54 | -1080.38 | 1102.51 | |||||||||||||||||||||||||||||||||||||||||||||
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| Cash From Financing Activities | -865.93 | -688.28 | -241.76 | -922.23 | |||||||||||||||||||||||||||||||||||||||||||||
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| Foreign Exchange Effects | -4.55 | -6.02 | -20.33 | -34.42 | |||||||||||||||||||||||||||||||||||||||||||||
| Net Change in Cash | 374.78 | -220.55 | -768.83 | 1372.78 | |||||||||||||||||||||||||||||||||||||||||||||
Financial Summary
For the six months ended June 30, 2014 revenues increased 36% to $3.17 billion and net income applicable to common stockholders increased from $20.2 million to $553 million. Revenues reflect in net premium earned.
Quarterly Income Statements
| 2014 30/06 | 2014 31/03 | 2013 31/12 | 2013 30/09 | ||||||||||||||||||||||||||||||||||||
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| Total Revenue | 1658.02 | 1513.22 | 1638.56 | 1564.8 | |||||||||||||||||||||||||||||||||||
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| Total Operating Expenses | 1300.49 | 1132.53 | 1334.92 | 1149.46 | |||||||||||||||||||||||||||||||||||
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| Operating Income | 357.52 | 380.7 | 303.63 | 415.34 | |||||||||||||||||||||||||||||||||||
| Interest Income (Expense), Net Non-Operating | -10.22 | -11.57 | -20.62 | -13.51 | |||||||||||||||||||||||||||||||||||
| Gain (Loss) on Sale of Assets | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Other, Net | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income Before Taxes | 347.31 | 369.13 | 283.02 | 401.83 | |||||||||||||||||||||||||||||||||||
| Provision for Income Taxes | 78.44 | 62.3 | 11.08 | 70.23 | |||||||||||||||||||||||||||||||||||
| Net Income After Taxes | 268.87 | 306.82 | 271.94 | 331.59 | |||||||||||||||||||||||||||||||||||
| Minority Interest | -1.95 | -3.04 | -4.14 | -4.11 | |||||||||||||||||||||||||||||||||||
| Equity In Affiliates | 4.92 | 6.06 | 3.99 | 5.94 | |||||||||||||||||||||||||||||||||||
| U.S GAAP Adjustment | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income Before Extraordinary Items | 271.84 | 309.84 | 271.79 | 333.42 | |||||||||||||||||||||||||||||||||||
| Total Extraordinary Items | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Income | 271.84 | 309.84 | 271.79 | 333.42 | |||||||||||||||||||||||||||||||||||
| Total Adjustments to Net Income | -14.18 | -14.18 | -14.18 | -14.18 | |||||||||||||||||||||||||||||||||||
| Income Available to Common Excluding Extraordinary Items | 257.66 | 295.66 | 257.6 | 319.24 | |||||||||||||||||||||||||||||||||||
| Dilution Adjustment | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Diluted Net Income | 257.66 | 295.66 | 257.6 | 319.24 | |||||||||||||||||||||||||||||||||||
| Diluted Weighted Average Shares | 51.33 | 52.73 | 54.17 | 54.63 | |||||||||||||||||||||||||||||||||||
| Diluted EPS Excluding Extraordinary Items | 5.02 | 5.61 | 4.76 | 5.84 | |||||||||||||||||||||||||||||||||||
| DPS - Common Stock Primary Issue | 0.67 | 0.67 | 0.64 | 0.64 | |||||||||||||||||||||||||||||||||||
| Diluted Normalized EPS | 5.02 | 5.61 | 4.76 | 5.84 | |||||||||||||||||||||||||||||||||||
Quarterly Balance Sheet
| 2014 30/06 | 2014 31/03 | 2013 31/12 | 2013 30/09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Assets | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | 23446.47 | 23517.5 | 23038.29 | 23138.21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Liabilities | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Liabilities | 16536.43 | 16736.58 | 16328.76 | 16566.52 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Equity | 6910.05 | 6780.93 | 6709.53 | 6571.69 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities & Shareholders' Equity | 23446.47 | 23517.5 | 23038.29 | 23138.21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Common Shares Outstanding | 49.82 | 50.86 | 52.44 | 53.23 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Preferred Shares Outstanding | 34.15 | 34.15 | 34.15 | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusting book value for float
The company has over $90 per share in float that is considered a liability based on GAAP; it's clear based on the company's combined ratio that its float isn't a liability but an asset for long-term value for shareholders. Once you add back the float into book value, you get a book value of $217.66. Based on this adjusted book value, GAAP forced the company to understate its book value by $92 per share.
Valuation
Currently the company is selling for over 10.5x its earnings, 0.80x its book value, selling at 5.4x its normalized earnings and selling at 8.9x its pretax earnings. PartnerRe has an adjusted price to book of 0.55. The company is selling for an adjusted book value of 0.55x; this clearly shows that the company is undervalued. The average price to book for the insurance sector is 1.1x, and since the company has a return on assets of 2.00%, it should trade up to industry average and trade above book value. If it traded at 1.1x its book value, then it would sell for $239.42. PartnerRe has a normalized earnings of $21.23 per share and currently sell for 5.4x its normalized earnings. If it for at least 10x its normalized earnings which is a conservative multiple for a profitable insurance company, would sell for $212.30 per share. Currently the company is selling for 8.9x its earnings, if its sold at 10x its pretax earnings then its would sell for $125.54 per share.
Factor for being undervalued:
- Selling at 5.4x normalized earnings
- Selling at 0.55x adjusted book value
- Selling at 8.9x pretax earnings.
Factors for conservative valuation
- Should sell at 10x its normalized earnings
- Should sell at 1.1x its adjusted book value
- Should sell for a premium to book value based on return on assets exceeding 1.0%
- Should sell at 10x its pretax earnings
Based on all of this it is clear that the company is undervalued, and its intrinsic value exceeds $200 per share. The company is currently selling for 55 cents on the dollar. I didn't take into account the company's investment portfolio. PartnerRe has an portfolio per share of $262.90 which far exceeds the current market value on a per share basic. PartnerRe clear is intrinsic value and offering investors a 55% margin of safety.
