PartnerRe, Ltd's (PRE) 2Q08 operating earnings of $183.8 million or $3.39 per diluted share were substantially ahead of our estimates. The results benefited from a moderate level of incurred losses, strong investment income growth, and a weakening U.S. dollar, which were slightly offset by a softening in reinsurance pricing and higher costs.
After reviewing 2Q08 results, which were higher-than-expected, on operating basis, we are slightly increasing our FY08 and FY09 estimates to $10.87 per share and $10.10 per share respectively. At the current price, the shares of PRE trade at 0.98x its 2Q08 book value of $70.22 per share, well below the middle of its 10-year range, and at a 22.5% discount to the peer group median.
We expect some expansion in the multiples in the coming quarters based on PRE's superior capitalization, strong underwriting results, and diversified portfolio, somewhat offset by an above average risk profile and financial leverage.
Our six-month price target of $76.00 per share reflects a slightly expanded multiple of approximately 1.05x to our estimated December 2008 book value of $72.30 per share. It also equates to approximately 7.0x our earnings estimate for FY08. Combined with the annual dividend of $1.84 per share, this target price implies a return of about 11.2% over the period.
We expect PRE to continue delivering strong results for the coming quarters based on its excellent underwriting abilities, strong capitalization, solid ratings and reputation in the market, despite some softening in the non-life reinsurance pricing and higher costs, though we suspect that the current negative sentiment for the financials as a whole may somewhat weigh on the share price momentum. We are maintaining our Buy recommendation on the shares.
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