S&P’s affirms PartnerRe’s ‘A’ rating; outlook negative

Standard & Poor’s Ratings Services affirmed the ‘A’ counterparty credit rating on Bermuda-based reinsurer PartnerRe Ltd. (NYSE: PRE), but changed its outlook on the reinsurer from’stable’ to ‘negative.’
According to the ratings agency, “the revised outlook reflects PartnerRe’s operating capital adequacy, which remains below Standard & Poor’s expectations for a ‘AA-‘ rating, at an estimated 121% as of Mar. 31, 2006, as measured by Standard & Poor’s capital adequacy model.”
S&P’s credit analyst Laline Carvalho added: “Although the group’s capital adequacy is likely to improve throughout the year through retained earnings, PartnerRe’s current capital adequacy places it in a weaker than expected position relative to the upcoming hurricane season.”
S&P’s has also affirmed its ‘AA-‘ counterparty credit and financial strength ratings on PRE’s operating reinsurance subsidiaries Partner Reinsurance Co. Ltd., PartnerRe S.A., and Partner Reinsurance Co. of U.S., and its ‘AA-‘ financial strength rating on Partner Re Ireland Insurance Ltd., (collectively PartnerRe).
S&P’s affirmed the ratings on PartnerRe “based on the group’s very strong historical operating performance, reasonable (albeit large) 2005 catastrophe losses, very strong competitive position, strong modeling capabilities, and conservative reserving practices.
“In addition, the group’s prudent underwriting approach is reflected in its strategy to cap its zonal exposures for all lines of business at a maximum of 25% of its capital base.”
Offsetting these positives, S&P’s added, “are the group’s potential underwriting volatility due to low retrocessional usage, lower than expected capital adequacy, and risks associated with the group’s strategy to increase diversification through the further expansion into relatively new lines of business such as life reinsurance and annuities.”
S&P’s said “the potential revision of PartnerRe’s outlook back to stable over the next six to 18 months is expected to be dependent on the group’s ability to improve its capital adequacy to levels more commensurate with the ratings, as well as its ability to continue to demonstrate better than industry operating results.”
Assuming normal catastrophe losses, S&P’s expects PartnerRe’s 2006 operating performance to improve significantly, with the group expected to report a combined ratio in the low to mid-90% range and returns on revenue of more than 12%. “This strong performance is expected to stem from substantially improved pricing and terms and conditions in property and other short-tail lines of business, as well as the group’s efforts to prudently manage its aggregate exposures given the potential frequency of large natural catastrophe events in coming years,” S&P’s said in a release. “Capital adequacy is also expected to improve to about 140% by year-end 2006, reflecting expected strong earnings and relatively flat premium growth for the year.”