Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM            TO            

 

COMMISSION FILE NUMBER: I-14536

 


 

PartnerRe Ltd.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 


 

Bermuda   Not Applicable
(State of Incorporation)   (I.R.S. Employer Identification No.)

 

96 Pitts Bay Road, Pembroke, Bermuda, HM08

(Address of principal executive offices)(Zip Code)

 

(441) 292-0888

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

The number of the Registrant’s common shares (par value $1.00 per share) outstanding as of November 4, 2005 was 56,509,900.

 



PartnerRe Ltd.

INDEX TO FORM 10-Q

 

          Page

PART I—FINANCIAL INFORMATION

ITEM 1.

   Financial Statements     
     Report of Independent Registered Public Accounting Firm    3
     Unaudited Consolidated Balance Sheets, September 30, 2005 and December 31, 2004    4
     Unaudited Consolidated Statements of Operations and Comprehensive Income, Three Months and Nine Months Ended September 30, 2005 and 2004    5
     Unaudited Consolidated Statements of Shareholders’ Equity, Nine Months Ended September 30, 2005 and 2004    6
     Unaudited Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2005 and 2004    8
     Notes to Unaudited Condensed Consolidated Financial Statements    9

ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

ITEM 3.

   Quantitative and Qualitative Disclosures about Market Risk    64

ITEM 4.

   Controls and Procedures    68
PART II—OTHER INFORMATION

ITEM 1.

   Legal Proceedings    69

ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    69

ITEM 3.

   Defaults upon Senior Securities    70

ITEM 4.

   Submission of Matters to a Vote of Security Holders    70

ITEM 5.

   Other Information    70

ITEM 6.

   Exhibits    70
     Signatures    71
     Exhibit Index    72

 

2


Part I — Financial Information

 

Item 1. Financial Statements

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of PartnerRe Ltd.

 

We have reviewed the accompanying condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of September 30, 2005, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2005 and 2004 and of shareholders’ equity and of cash flows for the nine-month periods ended September 30, 2005 and 2004. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2004 and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 7, 2005, we expressed an unqualified opinion on those consolidated financial statements, which included an explanatory paragraph relating to the Company’s changes in the methods of accounting for Mandatorily Redeemable Preferred Securities and Trust Preferred Securities. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Deloitte & Touche

Hamilton, Bermuda

October 25, 2005

 

3


PartnerRe Ltd.

Unaudited Consolidated Balance Sheets

(Expressed in thousands of U.S. dollars, except parenthetical share data)

 

    

September 30,

2005


    December 31,
2004


 
Assets                 

Investments and cash:

                

Fixed maturities, available for sale, at fair value (amortized cost: 2005, $6,612,825; 2004, $6,611,683)

   $ 6,662,289     $ 6,723,580  

Short-term investments, available for sale, at fair value (amortized cost: 2005, $240,223; 2004, $28,691)

     239,966       28,694  

Equities, available for sale, at fair value (cost: 2005, $1,086,713; 2004, $887,006)

     1,204,579       1,010,777  

Trading securities, at fair value (cost: 2005, $213,328; 2004, $102,371)

     219,754       108,402  

Cash and cash equivalents, at fair value, which approximates amortized cost

     528,224       436,003  

Other invested assets

     102,907       90,268  
    


 


Total investments and cash      8,957,719       8,397,724  

Accrued investment income

     128,346       151,871  

Reinsurance balances receivable

     1,521,273       1,356,771  

Reinsurance recoverable on paid and unpaid losses

     205,519       180,710  

Funds held by reinsured companies

     990,650       1,100,107  

Deferred acquisition costs

     459,105       409,332  

Deposit assets

     297,737       299,408  

Net tax assets

     75,582       81,235  

Goodwill

     429,519       429,519  

Other

     97,340       104,564  
    


 


Total assets    $ 13,162,790     $ 12,511,241  
    


 


Liabilities                 

Unpaid losses and loss expenses

   $ 6,452,432     $ 5,766,629  

Policy benefits for life and annuity contracts

     1,237,066       1,277,101  

Unearned premiums

     1,389,864       1,194,778  

Funds held under reinsurance treaties

     18,412       21,875  

Deposit liabilities

     341,524       344,202  

Long-term debt

     220,000       220,000  

Net payable for securities purchased

     90,543       1,580  

Accounts payable, accrued expenses and other

     121,890       127,026  

Debt related to trust preferred securities

     206,186       206,186  
    


 


Total liabilities      10,077,917       9,159,377  
    


 


Shareholders’ Equity                 

Common shares (par value $1.00, issued and outstanding: 2005, 54,054,247; 2004, 54,854,398)

     54,054       54,854  

Series C cumulative preferred shares (par value $1.00, issued and outstanding: 2005 and 2004, 11,600,000; aggregate liquidation preference: 2005 and 2004, $290,000,000)

     11,600       11,600  

Series D cumulative preferred shares (par value $1.00, issued and outstanding: 2005 and 2004, 9,200,000; aggregate liquidation preference: 2005 and 2004, $230,000,000)

     9,200       9,200  

Additional paid-in capital

     1,241,883       1,288,292  

Deferred compensation

     (130 )     (199 )

Accumulated other comprehensive income:

                

Net unrealized gains on investments (net of tax amounting to: 2005, $34,269; 2004, $40,429)

     132,349       194,575  

Currency translation adjustment

     20,453       72,510  

Retained earnings

     1,615,464       1,721,032  
    


 


Total shareholders’ equity      3,084,873       3,351,864  
    


 


Total liabilities and shareholders’ equity    $ 13,162,790     $ 12,511,241  
    


 


 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


PartnerRe Ltd.

Unaudited Consolidated Statements of Operations and Comprehensive Income

(Expressed in thousands of U.S. dollars, except share and per share data)

 

    

For the

three months

ended

September 30,

2005


   

For the

three months

ended

September 30,

2004


   

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


 
Revenues                                 

Gross premiums written

   $ 780,468     $ 805,410     $ 2,993,861     $ 3,200,966  
    


 


 


 


Net premiums written

   $ 770,808     $ 805,252     $ 2,949,533     $ 3,169,674  

Decrease (increase) in unearned premiums

     144,679       138,533       (257,375 )     (378,266 )
    


 


 


 


Net premiums earned

     915,487       943,785       2,692,158       2,791,408  

Net investment income

     93,325       69,648       270,402       218,036  

Net realized investment gains

     56,009       32,838       148,979       78,693  

Other income

     8,638       6,822       20,457       13,188  
    


 


 


 


Total revenues      1,073,459       1,053,093       3,131,996       3,101,325  
Expenses                                 

Losses and loss expenses and life policy benefits

     1,111,285       660,948       2,271,321       1,850,475  

Acquisition costs

     219,428       242,608       632,779       673,756  

Other operating expenses

     63,740       68,093       210,930       203,539  

Interest expense

     7,399       10,204       22,089       30,540  

Net foreign exchange losses (gains)

     1,478       (766 )     3,921       (1,905 )
    


 


 


 


Total expenses      1,403,330       981,087       3,141,040       2,756,405  

(Loss) income before taxes and interest in earnings of equity investment

     (329,871 )     72,006       (9,044 )     344,920  

Income tax (benefit) expense

     (39,141 )     (8,323 )     15,149       (218 )

Interest in earnings of equity investment

     1,982       2,876       6,769       3,546  
    


 


 


 


Net (loss) income      (288,748 )     83,205       (17,424 )     348,684  

Preferred dividends

     8,631       4,894       25,894       14,681  
    


 


 


 


Net (loss) income available to common shareholders    $ (297,379 )   $ 78,311     $ (43,318 )   $ 334,003  
    


 


 


 


Comprehensive (loss) income, net of tax                                 

Net (loss) income

   $ (288,748 )   $ 83,205     $ (17,424 )   $ 348,684  

Change in net unrealized gains on investments

     (53,909 )     58,218       (62,226 )     (22,244 )

Change in currency translation adjustment

     8,685       16,589       (52,057 )     4,022  
    


 


 


 


Comprehensive (loss) income    $ (333,972 )   $ 158,012     $ (131,707 )   $ 330,462  
    


 


 


 


Per share data                                 

Net (loss) income per common share:

                                

Basic net (loss) income

   $ (5.48 )   $ 1.47     $ (0.79 )   $ 6.23  

Diluted net (loss) income

   $ (5.48 )   $ 1.46     $ (0.79 )   $ 6.17  

Weighted average number of common shares outstanding

     54,278.9       53,311.2       54,673.2       53,633.0  

Weighted average number of common and common share equivalents outstanding

     54,278.9       53,721.7       54,673.2       54,148.8  

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

5


PartnerRe Ltd.

Unaudited Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

     Common
shares


    Preferred
shares


  

Additional

paid-in
capital


    Deferred
compensation


   

Net

unrealized
gains on
investments,

net of tax


    Currency
translation
adjustment


    Retained
earnings


   

Total

shareholders’

equity


 

Balance at December 31, 2004

   $ 54,854     $ 20,800    $ 1,288,292     $ (199 )   $ 194,575     $ 72,510     $ 1,721,032     $ 3,351,864  

Issue of common shares

     442       —        28,912       —         —         —         —         29,354  

Repurchase of common shares

     (1,242 )     —        (75,321 )     —         —         —         —         (76,563 )

Amortization of deferred compensation

     —         —        —         69       —         —         —         69  

Net unrealized losses on investments

     —         —        —         —         (62,226 )     —         —         (62,226 )

Currency translation adjustment

     —         —        —         —         —         (52,057 )     —         (52,057 )

Net loss

     —         —        —         —         —         —         (17,424 )     (17,424 )

Dividends on common shares

     —         —        —         —         —         —         (62,250 )     (62,250 )

Dividends on preferred shares

     —         —        —         —         —         —         (25,894 )     (25,894 )
    


 

  


 


 


 


 


 


Balance at September 30, 2005

   $ 54,054     $ 20,800    $ 1,241,883     $ (130 )   $ 132,349     $ 20,453     $ 1,615,464     $ 3,084,873  
    


 

  


 


 


 


 


 


 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

6


PartnerRe Ltd.

Unaudited Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

     Common
shares


    Preferred
shares


  

Additional

paid-in
capital


    Deferred
compensation


   

Net

unrealized
gains on
investments,

net of tax


    Currency
translation
adjustment


   Retained
earnings


   

Total

shareholders’

equity


 

Balance at December 31, 2003

   $ 53,742     $ 11,600    $ 1,023,167     $ (125 )   $ 166,492     $ 16,657    $ 1,322,859     $ 2,594,392  

Issue of common shares

     167       —        14,711       —         —         —        —         14,878  

Repurchase of common shares

     (875 )     —        (45,322 )     —         —         —        —         (46,197 )

Adjustment on purchase contracts for common shares

     —         —        (3,585 )     —         —         —        —         (3,585 )

Issues of restricted common shares

     5       —        271       (276 )     —         —        —         —    

Amortization of deferred compensation

     —         —        —         156       —         —        —         156  

Net unrealized losses on investments

     —         —        —         —         (22,244 )     —        —         (22,244 )

Currency translation adjustment

     —         —        —         —         —         4,022      —         4,022  

Net income

     —         —        —         —         —         —        348,684       348,684  

Dividends on common shares

     —         —        —         —         —         —        (54,649 )     (54,649 )

Dividends on preferred shares

     —         —        —         —         —         —        (14,681 )     (14,681 )
    


 

  


 


 


 

  


 


Balance at September 30, 2004

   $ 53,039     $ 11,600    $ 989,242     $ (245 )   $ 144,248     $ 20,679    $ 1,602,213     $ 2,820,776  
    


 

  


 


 


 

  


 


 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

7


PartnerRe Ltd.

Unaudited Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

 

    

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


 

Cash Flows from Operating Activities

                

Net (loss) income

   $ (17,424 )   $ 348,684  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

                

Amortization of net premium on investments

     33,741       30,768  

Net realized investment gains

     (148,979 )     (78,693 )

Changes in:

                

Unearned premiums

     257,375       378,266  

Reinsurance balances receivable

     (262,140 )     (310,509 )

Unpaid losses and loss expenses and life policy benefits

     1,045,448       637,655  

Net tax assets

     6,081       (8,094 )

Other changes in assets and liabilities

     (43,105 )     (9,968 )

Net (purchases) sales of trading securities

     (4,485 )     13,500  

Other items, net

     3,804       (3,677 )
    


 


Net cash provided by operating activities      870,316       997,932  
Cash Flows from Investing Activities                 

Sales of fixed maturities

     3,768,824       5,122,444  

Redemptions of fixed maturities

     559,095       433,848  

Purchases of fixed maturities

     (4,619,565 )     (5,346,207 )

Net (purchases) sales of short-term investments

     (222,246 )     29,037  

Sales of equities

     2,790,691       329,120  

Purchases of equities

     (2,892,403 )     (379,000 )

Other, net

     (7,895 )     (31,521 )
    


 


Net cash (used in) provided by investing activities      (623,499 )     157,721  
Cash Flows from Financing Activities                 

Cash dividends paid to shareholders

     (88,809 )     (69,330 )

Net repurchase of common shares

     (57,835 )     (39,156 )

Adjustment on purchase contract for common shares

     —         (3,585 )
    


 


Net cash used in financing activities      (146,644 )     (112,071 )
Effect of foreign exchange rate changes on cash      (7,952 )     (1,239 )
Increase in cash and cash equivalents      92,221       1,042,343  
Cash and cash equivalents – beginning of period      436,003       558,692  
    


 


Cash and cash equivalents – end of period    $ 528,224     $ 1,601,035  
    


 


Supplemental Cash Flow Information:                 

Net taxes paid

   $ (9,247 )   $ (14,497 )

Interest paid

   $ (18,679 )   $ (27,129 )

 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

8


PartnerRe Ltd.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Organization

 

PartnerRe Ltd. (the “Company”) provides reinsurance on a worldwide basis through its wholly owned subsidiaries, Partner Reinsurance Company Ltd. (“Partner Reinsurance Company”), PartnerRe SA and Partner Reinsurance Company of the U.S. (“PartnerRe U.S.”). Risks reinsured include, but are not limited to property, casualty, motor, agriculture, aviation/space, catastrophe, credit/surety, engineering/energy, marine, special risk, other lines and life/annuity and health. The Company also offers alternative risk products that include weather and credit protection to financial, industrial and service companies on a worldwide basis.

 

2. Significant Accounting Policies

 

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to ensure the information presented is not misleading. The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While Management believes that the amounts included in the condensed consolidated financial statements reflect the best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

 

    Unpaid losses and loss expenses, including policy benefits for life and annuity contracts;

 

    Gross and net premiums written and net premiums earned;

 

    Recoverability of deferred acquisition costs;

 

    Determination of other-than-temporary impairment of investments;

 

    Recoverability of tax loss carry-forwards;

 

    Valuation of goodwill; and

 

    Valuation of certain derivative financial instruments.

 

In the opinion of Management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the nine-month period ended September 30, 2005 are not necessarily indicative of results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

 

3. Stock Options

 

The following table illustrates the net effect on net income or loss available to common shareholders and net income or loss per share as if the fair value provisions of Statement of Financial Accounting Standards (SFAS) 123 “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS 148 “Accounting for Stock-Based Compensation-Transition and Disclosure”, had been applied retroactively to all outstanding equity-based compensation for the three-month and nine-month periods ended September 30, 2005 and 2004 (in thousands of U.S. dollars, except per share data):

 

9


    

For the

three months

ended

September 30,
2005


   

For the

three months

ended

September 30,
2004


   

For the

nine months

ended
September 30,
2005


   

For the

nine months

ended
September 30,
2004


 

Net (loss) income available to common shareholders:

                                

As reported

   $ (297,379 )   $ 78,311     $ (43,318 )   $ 334,003  

Add: Stock-related compensation expense included in net income as reported

     2,554       2,004       7,044       5,499  

Less: Total stock-related compensation expense determined under fair-value method for all grants

     3,136       3,575       9,653       10,235  
    


 


 


 


Pro forma

   $ (297,961 )   $ 76,740     $ (45,927 )   $ 329,267  

Net (loss) income per common share:

                                

Basic

                                

As reported

   $ (5.48 )   $ 1.47     $ (0.79 )   $ 6.23  

Pro forma

   $ (5.49 )   $ 1.44     $ (0.84 )   $ 6.14  

Diluted

                                

As reported

   $ (5.48 )   $ 1.46     $ (0.79 )   $ 6.17  

Pro forma

   $ (5.49 )   $ 1.43     $ (0.84 )   $ 6.08  

Weighted average assumptions used:

                                

Risk-free interest rate

     4.3 %     3.4 %     4.1 %     3.7 %

Expected life

     7 years       7 years       7 years       7 years  

Expected volatility

     25 %     25 %     25 %     25 %

Dividend yield

     2 %     2 %     2 %     2 %

 

4. Investments

 

Starting in the first quarter of 2005, net payable for securities purchased includes equity securities sold but not yet purchased, which represent sales of securities not owned at the time of sale. The obligations arising from such transactions are carried at fair value, based on quoted market prices, with the change in fair value included in net realized investment gains and losses in the statement of operations. Accrued dividends payable under these obligations are included in net investment income in the statement of operations. The Company had no securities sold but not yet purchased prior to the first quarter of 2005.

 

10


5. Computation of Net Income per Common and Common Equivalent Share

 

    

For the

three months

ended
September 30,

2005


   

For the

three months

ended
September 30,

2004


  

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


Basic net (loss) income per ordinary share:

                             

Net (loss) income

   $ (288,748 )   $ 83,205    $ (17,424 )   $ 348,684

Less: preferred dividends

     8,631       4,894      25,894       14,681
    


 

  


 

Net (loss) income available to common shareholders

   $ (297,379 )   $ 78,311    $ (43,318 )   $ 334,003
    


 

  


 

Weighted average number of common shares outstanding

     54,278.9       53,311.2      54,673.2       53,633.0

Basic net (loss) income per share

   $ (5.48 )   $ 1.47    $ (0.79 )   $ 6.23
    


 

  


 

Diluted net (loss) income per ordinary share:

                             

Net (loss) income

   $ (288,748 )   $ 83,205    $ (17,424 )   $ 348,684

Less: preferred dividends

     8,631       4,894      25,894       14,681
    


 

  


 

Net (loss) income available to common shareholders

   $ (297,379 )   $ 78,311    $ (43,318 )   $ 334,003
    


 

  


 

Weighted average number of common shares outstanding - basic

     54,278.9       53,311.2      54,673.2       53,633.0

Stock options and other (1)

             410.5              515.8
            

          

Weighted average number of common shares outstanding - diluted

             53,721.7              54,148.8

Diluted net income per share

           $ 1.46            $ 6.17
            

          


(1) Diluted net loss per share has not been shown for the 2005 periods because the effect of dilutive securities would have been anti-dilutive. Dilutive securities, under the form of options and others, that could potentially dilute basic net loss per share in the future were not included in the computation of diluted net loss per share because to do so would have been antidilutive. The weighted average number of common and common equivalent shares outstanding for the three-month and nine-month periods would have amounted to 55,175.6 thousand shares and 55,566.0 thousand shares, respectively, if these securities had been included.

 

6. Credit Agreements

 

On September 30, 2005, the Company amended and restated its unsecured credit facility. This facility was executed on substantially the same terms and conditions as the original facility of June 2004, with the exception that the tenor of the facility was extended to September 30, 2010.

 

11


7. Legal Proceedings

 

The Company has received subpoenas from the office of the New York Attorney General (NYAG) and the SEC that seek information relating to the Company’s investment in Channel Re and from the United States Attorney for the Southern District of New York requesting information relating to the Company’s finite reinsurance products. In addition, the Company’s wholly owned subsidiary, Partner Reinsurance Company of the U.S, has received a subpoena from the Florida Office of Insurance Regulation requesting information in connection with its investigation of insurance industry practices related to finite reinsurance activities. The Company is cooperating with these requests for information.

 

8. Recent Accounting Pronouncements

 

FSP FAS 115-1

 

At its June 29, 2005 meeting, the FASB directed the staff to issue proposed FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF 03-1,” as final. The final FSP supersedes EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and EITF D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”. The final FSP (retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”) replaces the guidance set forth in paragraphs 10–18 of EITF 03-1 with references to existing other-than-temporary impairment guidance. FSP FAS 115-1 codifies the guidance set forth in EITF D-44 and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. At its September 14, 2005 meeting, the FASB decided that FSP FAS 115-1 would be applied prospectively and will be effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The adoption of FSP FAS 115-1 is not expected to have a significant impact on the net income or equity of the Company.

 

SFAS 123(R)

 

In December 2004, the FASB issued Statement No. 123(R) (Revised 2004) “Share-Based Payment” (SFAS 123(R)). This statement will require compensation costs related to share-based payment transactions to be recognized in the financial statements. The amount of compensation cost will be measured based on the grant-date fair value of the awards issued and will be recognized over the period that an employee provides services in exchange for the award or the requisite service period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of the instruments. SFAS 123(R) will apply to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. SFAS 123(R) was originally to be effective for the first interim or annual reporting period beginning after June 15, 2005. The Securities and Exchange Commission announced in April 2005 a new rule that allows companies to implement SFAS 123(R) at the beginning of their next fiscal year, instead of the next interim period, that begins after June 15, 2005. The Company plans to adopt SFAS 123(R) as of January 1, 2006. The adoption of SFAS 123(R) is not expected to have a significant impact on the net income or equity of the Company.

 

9. Subsequent Events

 

Hurricane Wilma

 

Hurricane Wilma hit Mexico and south Florida on October 23 and 24 and is expected to cause a sizeable loss to the insurance industry. The Company expects it will incur claims representing approximately 3% of the estimated $2.0 to $2.5 billion total insured industry loss in Mexico, and approximately 1% of the estimated $8 to $13 billion total insured industry loss in Florida.

 

12


Common Share Issuance

 

On October 25, 2005, the Company sold 2,448,980 common shares at $61.25 per share, net of underwriting discounts, to Citigroup Global Markets Inc. in a block trade. Under this transaction, the Company raised $149 million, net of underwriting discounts and other transaction costs, which will be recorded as an increase in the Company’s common shareholders’ equity in the fourth quarter. The Company will use the proceeds of this capital issuance for general corporate purposes.

 

Forward Sale Agreement

 

The Company has entered into a forward sale agreement dated October 25, 2005 under which it will sell 6,732,590 of its common shares to an affiliate of Citigroup Global Markets Inc., which affiliate is referred to as the forward counterparty. Under the forward sale agreement, the Company will deliver common shares to the forward counterparty on one or more settlement dates chosen by the Company over the next three years. The purchase price the Company will receive from the forward counterparty will vary depending upon the market price of its common shares over a 40 trading day period surrounding the maturity of the forward sale agreement in three years, subject to a maximum price per share of $79.63 and a minimum price per share of $59.41. If the Company elects to settle all or a portion of the forward sale agreement prior to its maturity, the Company will deliver common shares to the forward counterparty and will initially receive the present value of the minimum price per share, and the remaining payment, if any, due to the Company will be made at maturity of the agreement based on the excess of the market price of the Company’s common shares over the minimum price per share at maturity of the contract. Settlement of the forward sale agreement may be accelerated by the forward counterparty upon the occurrence of certain events, and the maximum and minimum purchase prices will be reduced or increased quarterly depending on the amount of the Company’s dividends.

 

Contract fees of $29 million related to the forward sale agreement will be recorded against additional paid-in capital in the fourth quarter. Prior to the issuance of shares under the forward sale agreement, this transaction will have no other impact on the Company’s common shareholders’ equity and the Company will calculate the dilution related to the forward sale agreement using the treasury method prescribed under SFAS 128 “Earnings per Share”. The Company expects this instrument will be dilutive only if the Company’s share price exceeds the maximum price per share of $79.63 prior to the sale of shares.

 

Long-term Debt

 

The Company entered into a loan agreement with Citibank, N.A. on October 25, 2005 under which the Company has borrowed $400 million. The loan will bear interest quarterly at a floating rate of 3-month LIBOR plus 0.50%, and the loan agreement contains covenants and events of default substantially identical to those contained in the Company’s existing credit facility. The loan will mature on April 27, 2009. The Company will not be permitted to prepay the loan prior to its maturity, and the loan is not callable or puttable by the lender other than upon an event of default. Citibank, N.A. has pledged its rights under the loan agreement, including the proceeds of any repayment or syndication of the loan, to the Company to secure its obligations to pay the purchase price to the Company under the forward sale agreement, subject to Citibank, N.A.’s right to substitute cash collateral. The Company expects that investment income on the loan proceeds will offset the incremental interest expense on the loan. The Company will use the proceeds of this loan for general corporate purposes.

 

13


10. Segment Information

 

The Company monitors the performance of its underwriting operations in three segments, Non-life, Alternative Risk Transfer (ART) and Life. The Non-life segment is further divided into three sub-segments, U.S. Property and Casualty (“U.S. P&C”), Global (Non-U.S.) Property and Casualty (“Global (Non-U.S.) P&C”) and Worldwide Specialty. Segments and sub-segments represent markets that are reasonably homogeneous in terms of geography, client types, buying patterns, underlying risk patterns and approach to risk management.

 

The U.S. P&C sub-segment includes property, casualty and motor risks generally originating in the United States and written by PartnerRe U.S. The Global (Non-U.S.) P&C sub-segment includes property, casualty and motor risks generally originating outside of the United States, written by Partner Reinsurance Company and PartnerRe SA. The Worldwide Specialty sub-segment is comprised of business that is generally considered to be specialized due to the sophisticated technical underwriting required to analyze risks, and is global in nature, inasmuch as appropriate risk management for these lines requires a globally diversified portfolio of risks. This sub-segment consists of several lines of business for which the Company believes it has developed specialized knowledge and underwriting capabilities. These lines of business include agriculture, aviation/space, catastrophe, credit/surety, engineering/energy, marine, special risk and other lines. The ART segment includes structured risks, structured finance and weather-related products, and since the second quarter of 2004, includes the Company’s share of Channel Re’s net income. The Life segment includes life, health and annuity lines of business.

 

Because the Company does not manage its assets by segment, investment income is not allocated to the Non-life segment of the reinsurance operations. However, because of the interest-sensitive nature of some of the Company’s Life and ART products, investment income is considered in Management’s assessment of the profitability of the Life and ART segments. The following items are not considered in evaluating the results of each segment: net realized investment gains and losses, interest expense, net foreign exchange gains and losses, income tax expense or benefit and preferred share dividends. Segment results are shown net of intercompany transactions.

 

Management measures results for the Non-life segment on the basis of the “loss ratio”, “acquisition ratio”, “technical ratio”, “other operating expense ratio” and “combined ratio.” The “loss ratio” is obtained by dividing losses and loss expenses by net premiums earned, the “acquisition ratio” is obtained by dividing acquisition costs by net premiums earned and the “other operating expense ratio” is obtained by dividing other operating expenses by net premiums earned. The “technical ratio” is the sum of the loss and acquisition ratios. The “combined ratio” is the sum of the technical and other operating expense ratios. Management measures results for the Non-life sub-segments on the basis of the loss ratio, acquisition ratio and technical ratio. Management measures results for the ART segment on the basis of the “underwriting result”, which includes revenues from net premiums earned, other income and net investment income for ART, and expenses from losses and loss expenses, acquisition costs, other operating expenses. The Company’s interest in earnings of equity investment, which represents the Company’s share of Channel Re’s net income is part of the ART segment. Management measures results for the Life segment on the basis of the “allocated underwriting result”, which includes revenues from net premiums earned and allocated net investment income for Life, and expenses from losses and loss expenses and life policy benefits, acquisition costs and other operating expenses.

 

For each of the segments and sub-segments presented, premiums are earned on a basis that is consistent with the risks covered under the terms of the reinsurance contracts, which generally is one to two years. The difference between the gross and net premiums written is attributable to the cost of retrocession protection, as the Company selectively purchases retrocession protection as part of its overall risk management process.

 

The following tables provide a summary of the segment revenues and results for the nine-month and three-month periods ended September 30, 2005 and 2004 (in millions of U.S. dollars except ratios):

 

14


Segment Information

For the nine months ended September 30, 2005

 

    

US

P&C


   

Global

(Non - US

P&C)


   

Worldwide

Specialty


   

Total

Non-Life

Segment


   

ART

Segment (A)


   

Life

Segment


    Corporate

    Total

 

Gross premiums written

   $ 649     $ 726     $ 1,262     $ 2,637     $ 21     $ 336     $ —       $ 2,994  

Net premiums written

   $ 649     $ 724     $ 1,231     $ 2,604     $ 21     $ 325     $ —       $ 2,950  

Increase in unearned premiums

     (25 )     (77 )     (145 )     (247 )     (5 )     (6 )     —         (258 )
    


 


 


 


 


 


 


 


Net premiums earned

   $ 624     $ 647     $ 1,086     $ 2,357     $ 16     $ 319     $ —       $ 2,692  

Losses and loss expenses and life policy benefits

     (568 )     (427 )     (1,018 )     (2,013 )     (14 )     (244 )     —         (2,271 )

Acquisition costs

     (150 )     (162 )     (233 )     (545 )     (2 )     (86 )     —         (633 )
    


 


 


 


 


 


 


 


Technical result

   $ (94 )   $ 58     $ (165 )   $ (201 )   $ —       $ (11 )   $ —       $ (212 )

Other income

     n/a       n/a       n/a       n/a       20       —         —         20  

Other operating expenses

     n/a       n/a       n/a       (143 )     (10 )     (18 )     (40 )     (211 )
    


 


 


 


 


 


 


 


Underwriting result

     n/a       n/a       n/a     $ (344 )   $ 10     $ (29 )     n/a     $ (403 )

Net investment income

     n/a       n/a       n/a       n/a       —         38       232       270  
    


 


 


 


 


 


 


 


Allocated underwriting result (6)

     n/a       n/a       n/a       n/a       n/a     $ 9       n/a       n/a  

Net realized investment gains

     n/a       n/a       n/a       n/a       n/a       n/a       149       149  

Interest expense

     n/a       n/a       n/a       n/a       n/a       n/a       (22 )     (22 )

Net foreign exchange losses

     n/a       n/a       n/a       n/a       n/a       n/a       (3 )     (3 )

Income tax expense

     n/a       n/a       n/a       n/a       n/a       n/a       (15 )     (15 )

Interest in earnings of equity investment

     n/a       n/a       n/a       n/a       7       n/a       n/a       7  
    


 


 


 


 


 


 


 


Net loss

     n/a       n/a       n/a       n/a       n/a       n/a       n/a     $ (17 )
    


 


 


 


 


 


 


 


Loss ratio (1)

     91.0 %     66.0 %     93.7 %     85.4 %                                

Acquisition ratio (2)

     24.0       25.0       21.5       23.1                                  
    


 


 


 


                               

Technical ratio (3)

     115.0 %     91.0 %     115.2 %     108.5 %                                
    


 


 


                                       

Other operating expense ratio (4)

                             6.1                                  
                            


                               

Combined ratio (5)

                             114.6 %                                
                            


                               

(A) The Company reports the results of Channel Re on a one-quarter lag. The 2005 period includes the Company’s share of Channel Re’s net income in the amount of $6.8 million for the period of October 2004 to June 2005 while the 2004 period includes the Company’s share of Channel Re’s net income in the amount of $3.5 million for the period of February (when Channel Re commenced business) to June 2004.
(1) Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
(2) Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.
(3) Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.
(4) Other operating expense ratio is obtained by dividing other operating expenses by net premiums earned.
(5) Combined ratio is the sum of the technical ratio and the other operating expense ratio.
(6) Allocated underwriting result is defined as net premiums earned and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.

 

15


Segment Information

For the nine months ended September 30, 2004

 

    

US

P&C


   

Global

(Non - US

P&C)


   

Worldwide

Specialty


   

Total

Non-Life

Segment


   

ART

Segment (A)


   

Life

Segment


    Corporate

    Total

 

Gross premiums written

   $ 811     $ 820     $ 1,273     $ 2,904     $ 4     $ 293     $ —       $ 3,201  

Net premiums written

   $ 810     $ 821     $ 1,251     $ 2,882     $ 4     $ 284     $ —       $ 3,170  

(Increase) decrease in unearned premiums

     (125 )     (123 )     (129 )     (377 )     1       (3 )     —         (379 )
    


 


 


 


 


 


 


 


Net premiums earned

   $ 685     $ 698     $ 1,122     $ 2,505     $ 5     $ 281     $ —       $ 2,791  

Losses and loss expenses and life policy benefits

     (548 )     (528 )     (571 )     (1,647 )     (8 )     (195 )     —         (1,850 )

Acquisition costs

     (150 )     (178 )     (239 )     (567 )     (1 )     (106 )     —         (674 )
    


 


 


 


 


 


 


 


Technical result

   $ (13 )   $ (8 )   $ 312     $ 291     $ (4 )   $ (20 )   $ —       $ 267  

Other income

     n/a       n/a       n/a       —         13       —         —         13  

Other operating expenses

     n/a       n/a       n/a       (145 )     (11 )     (17 )     (31 )     (204 )
    


 


 


 


 


 


 


 


Underwriting result

     n/a       n/a       n/a     $ 146     $ (2 )   $ (37 )     n/a     $ 76  

Net investment income

     n/a       n/a       n/a       n/a       —         33       185       218  
    


 


 


 


 


 


 


 


Allocated underwriting result (6)

     n/a       n/a       n/a       n/a       n/a     $ (4 )     n/a       n/a  

Net realized investment gains

     n/a       n/a       n/a       n/a       n/a       n/a       79       79  

Interest expense

     n/a       n/a       n/a       n/a       n/a       n/a       (30 )     (30 )

Net foreign exchange gains

     n/a       n/a       n/a       n/a       n/a       n/a       2       2  

Income tax benefit

     n/a       n/a       n/a       n/a       n/a       n/a       —         —    

Interest in earnings of equity investment

     n/a       n/a       n/a       n/a       4       n/a       n/a       4  
    


 


 


 


 


 


 


 


Net income

     n/a       n/a       n/a       n/a       n/a       n/a       n/a     $ 349  
    


 


 


 


 


 


 


 


Loss ratio (1)

     80.1 %     75.6 %     50.9 %     65.8 %                                

Acquisition ratio (2)

     21.9       25.6       21.3       22.6                                  
    


 


 


 


                               

Technical ratio (3)

     102.0 %     101.2 %     72.2 %     88.4 %                                
    


 


 


                                       

Other operating expense ratio (4)

                             5.8                                  
                            


                               

Combined ratio (5)

                             94.2 %                                
                            


                               

 

16


Segment Information

For the three months ended September 30, 2005

 

    

US

P&C


   

Global

(Non - US

P&C)


   

Worldwide

Specialty


   

Total

Non-Life

Segment


   

ART

Segment (A)


   

Life

Segment


    Corporate

    Total

 

Gross premiums written

   $ 187     $ 137     $ 343     $ 667     $ 8     $ 105     $ —       $ 780  

Net premiums written

   $ 187     $ 137     $ 336     $ 660     $ 8     $ 103     $ —       $ 771  

Decrease in unearned premiums

     13       54       70       137       2       5       —         144  
    


 


 


 


 


 


 


 


Net premiums earned

   $ 200     $ 191     $ 406     $ 797     $ 10     $ 108     $ —       $ 915  

Losses and loss expenses and life policy benefits

     (263 )     (120 )     (633 )     (1,016 )     (13 )     (82 )     —         (1,111 )

Acquisition costs

     (48 )     (48 )     (92 )     (188 )     (1 )     (30 )     —         (219 )
    


 


 


 


 


 


 


 


Technical result

   $ (111 )   $ 23     $ (319 )   $ (407 )   $ (4 )   $ (4 )   $ —       $ (415 )

Other income

     n/a       n/a       n/a       —         9       —         —         9  

Other operating expenses

     n/a       n/a       n/a       (42 )     (3 )     (6 )     (13 )     (64 )
    


 


 


 


 


 


 


 


Underwriting result

     n/a       n/a       n/a     $ (449 )   $ 2     $ (10 )     n/a     $ (470 )

Net investment income

     n/a       n/a       n/a       n/a       —         13       80       93  
    


 


 


 


 


 


 


 


Allocated underwriting result (6)

     n/a       n/a       n/a       n/a       n/a     $ 3       n/a       n/a  

Net realized investment gains

     n/a       n/a       n/a       n/a       n/a       n/a       56       56  

Interest expense

     n/a       n/a       n/a       n/a       n/a       n/a       (7 )     (7 )

Net foreign exchange losses

     n/a       n/a       n/a       n/a       n/a       n/a       (2 )     (2 )

Income tax benefit

     n/a       n/a       n/a       n/a       n/a       n/a       39       39  

Interest in earnings of equity investment

     n/a       n/a       n/a       n/a       2       n/a       n/a       2  
    


 


 


 


 


 


 


 


Net loss

     n/a       n/a       n/a       n/a       n/a       n/a       n/a     $ (289 )
    


 


 


 


 


 


 


 


Loss ratio (1)

     131.5 %     62.6 %     155.8 %     127.5 %                                

Acquisition ratio (2)

     24.0       25.5       22.6       23.6                                  
    


 


 


 


                               

Technical ratio (3)

     155.5 %     88.1 %     178.4 %     151.1 %                                
    


 


 


                                       

Other operating expense ratio (4)

                             5.2                                  
                            


                               

Combined ratio (5)

                             156.3 %                                
                            


                               

(A) The Company reports the results of Channel Re on a one-quarter lag. The 2005 period includes the Company’s share of Channel Re’s net income in the amount of $2.0 million while the 2004 period includes the Company’s share of Channel Re’s net income in the amount of $2.9 million.

 

17


Segment Information

For the three months ended September 30, 2004

 

    

US

P&C


   

Global

(Non - US

P&C)


   

Worldwide

Specialty


   

Total

Non-Life

Segment


   

ART

Segment (A)


   

Life

Segment


    Corporate

    Total

 

Gross premiums written

   $ 234     $ 154     $ 317     $ 705     $ 1     $ 99     $ —       $ 805  

Net premiums written

   $ 234     $ 154     $ 319     $ 707     $ 1     $ 97     $ —       $ 805  

(Increase) decrease in unearned premiums

     (6 )     59       78       131       1       7       —         139  
    


 


 


 


 


 


 


 


Net premiums earned

   $ 228     $ 213     $ 397     $ 838     $ 2     $ 104     $ —       $ 944  

Losses and loss expenses and life policy benefits

     (214 )     (158 )     (225 )     (597 )     (8 )     (56 )     —         (661 )

Acquisition costs

     (55 )     (54 )     (79 )     (188 )     —         (55 )     —         (243 )
    


 


 


 


 


 


 


 


Technical result

   $ (41 )   $ 1     $ 93     $ 53     $ (6 )   $ (7 )   $ —       $ 40  

Other income

     n/a       n/a       n/a       —         7       —         —         7  

Other operating expenses

     n/a       n/a       n/a       (49 )     (3 )     (5 )     (11 )     (68 )
    


 


 


 


 


 


 


 


Underwriting result

     n/a       n/a       n/a     $ 4     $ (2 )   $ (12 )     n/a     $ (21 )

Net investment income

     n/a       n/a       n/a       n/a       —         12       58       70  
    


 


 


 


 


 


 


 


Allocated underwriting result (6)

     n/a       n/a       n/a       n/a       n/a     $ —         n/a       n/a  

Net realized investment gains

     n/a       n/a       n/a       n/a       n/a       n/a       33       33  

Interest expense

     n/a       n/a       n/a       n/a       n/a       n/a       (10 )     (10 )

Net foreign exchange gains

     n/a       n/a       n/a       n/a       n/a       n/a       —         —    

Income tax benefit

     n/a       n/a       n/a       n/a       n/a       n/a       8       8  

Interest in earnings of equity investment

     n/a       n/a       n/a       n/a       3       n/a       n/a       3  
    


 


 


 


 


 


 


 


Net income

     n/a       n/a       n/a       n/a       n/a       n/a       n/a     $ 83  
    


 


 


 


 


 


 


 


Loss ratio (1)

     94.0 %     74.2 %     56.7 %     71.3 %                                

Acquisition ratio (2)

     24.1       25.5       19.7       22.4                                  
    


 


 


 


                               

Technical ratio (3)

     118.1 %     99.7 %     76.4 %     93.7 %                                
    


 


 


                                       

Other operating expense ratio (4)

                             5.8                                  
                            


                               

Combined ratio (5)

                             99.5 %                                
                            


                               

 

18


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

Certain statements contained in this document, including Management’s Discussion and Analysis, may be considered forward-looking statements as defined in section 27A of the United States Securities Act of 1933 and section 21E of the United States Securities Exchange Act of 1934. Forward-looking statements are made based upon Management’s assumptions and expectations concerning the potential effect of future events on the Company’s financial performance and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. The Company’s forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments. The following review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere:

 

(1) changes in our losses related to hurricanes Katrina and Rita and the flooding in Central Europe, which have been based mainly on loss indications from brokers, clients and public announcements to date, current industry loss estimates, output from industry and proprietary models and a review of in-force contracts. In addition, the Katrina loss estimates are subject to a further level of uncertainty arising out of the extremely complex and unique causation and related coverage issues associated with the attribution of losses to wind or flood damage or other perils such as fire, business interruption or riot and civil commotion. We expect that these issues will not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments;

 

(2) the occurrence of catastrophic events or other reinsured events with a frequency or severity exceeding our expectations;

 

(3) actual losses and loss expenses exceeding our estimated loss reserves, which are necessarily based on actuarial and statistical projections of ultimate losses;

 

(4) actions by rating agencies that might negatively impact the Company’s ability to continue to write existing business or write new business;

 

(5) man-made catastrophic events, acts of terrorism, acts of war or other unanticipated perils;

 

(6) a decrease in the level of demand for reinsurance and/or an increase in the supply of reinsurance capacity;

 

(7) increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;

 

(8) concentration risk in dealing with a limited number of brokers;

 

(9) developments in and risks associated with global financial markets which could affect our investment portfolio;

 

(10) emerging claim and coverage issues;

 

(11) exposure to credit risk relating to our reinsurance brokers, cedants and other counterparties;

 

(12) exposure of our investment portfolios to interest rate, credit and market risks;

 

(13) current legal and regulatory activities relating to the insurance industry, including investigations into contingent commission arrangements and certain finite risk or non-traditional insurance products;

 

19


(14) availability of borrowings and letters of credit under the Company’s credit facilities;

 

(15) lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;

 

(16) losses due to foreign currency exchange rate fluctuations;

 

(17) loss of the services of any one of our Executive Committee members;

 

(18) changes in the legal or regulatory environments in which we operate, including the passage of federal or state legislation subjecting our non-U.S. operations to supervision or regulation, including additional tax regulation, in the United States or other jurisdictions in which we operate;

 

(19) changes in accounting policies and future pronouncements, their application or interpretation; and

 

(20) any other factors set forth in the Company’s filings with the SEC.

 

The words “believe,” “anticipate,” “estimate,” “project,” “plan,” “expect,” “intend,” “hope,” “should,” “forecast,” “evaluate,” “will likely result” or “will continue” or words of similar impact used in the Company’s Item 2 disclosures generally involve forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Executive Overview

 

The Company operates on a global basis providing multi-line reinsurance capacity to insurance companies. The Company writes multiple lines of business in virtually all markets worldwide, and differentiates itself through its approach to risk, its strategy to manage risk, and its financial strength.

 

Reinsurance is by its nature a risk assumption business. The Company’s philosophy is to assume its clients’ risks, thereby removing the volatility associated with these risks, and then manage the risks and risk-related volatility. The Company’s ability to succeed in the risk assumption business is dependent on its ability to accurately analyze and quantify risk, to understand volatility and how risks aggregate or correlate, and to establish the appropriate capital requirements and absolute limits for the risks assumed. As part of its risk management program, the Company aims to limit its exposure to a 1 in a 100 year loss event to less than 20% of its economic capital.

 

The reinsurance markets have historically been highly cyclical in nature. The cycle is driven by competition, the amount of capital and capacity in the industry, loss events, and investment returns. The Company’s long-term strategy to generate shareholder value focuses on broad product and geographic diversification of risks, assuming a greater degree of risk than the market average, managing its capital across its risk portfolio and over the duration of the cycle, achieving transactional excellence, and utilizing internal financial capabilities to achieve superior returns on capital.

 

The Company was established in 1993 as a specialty catastrophe reinsurer. Recognizing the limitations and inherent volatility in writing a single line of business, the Company made a strategic shift to diversify its risk portfolio. The Company began pursuing acquisition opportunities, and in 1997 acquired French reinsurer SAFR, and then the following year acquired the reinsurance operations of the Winterthur Group. Through these acquisitions and organic growth, the Company has evolved into a leading multi-line reinsurer. The Company writes business from four principal locations: Bermuda, Greenwich (Connecticut), Zurich and Paris. Risks reinsured include property, casualty, motor, agriculture, aviation/space, catastrophe, credit/surety, engineering/energy, marine, special risk, life/annuity and health, and alternative risk transfer solutions. Through its broad product and geographic diversification, its excellent execution capabilities, and its local presence in most major markets, the Company is able to respond quickly to market needs, and capitalize on business opportunities virtually anywhere in the world. Today, the Company has more than 900 employees and does business in approximately 140 countries around the world.

 

20


The Company primarily writes business through its wholly owned subsidiaries Partner Reinsurance Company Ltd., PartnerRe SA, and Partner Reinsurance Company of the U.S. The Company reports on three operating segments: Non-Life, which comprises its traditional property and casualty business in the U.S. (U.S P&C sub-segment) and the rest of the world (Global (Non-U.S.) P&C sub-segment) and its significant specialty lines business (Worldwide Specialty sub-segment), Life, and Alternative Risk Transfer (ART).

 

The Company generates its revenue primarily from premiums. Premium rates and terms and conditions vary by line of business depending on market conditions. Pricing cycles are driven by supply and demand, and the amount of capital in the industry. The reinsurance business is also influenced by several other factors, including variations in interest rates and financial markets, changes in legal, regulatory and judicial environments, loss trends, inflation and general economic conditions. Throughout the late 1990s, the industry’s operating profitability and cash flows declined as a result of declining prices, a deterioration in terms and conditions and increasing loss costs. These negative trends were, however, offset by high investment returns that led to continued growth in capital. Premium rates began to increase in 2001, when the large loss events of that year, including the September 11 tragedy and the Enron bankruptcy, in addition to steep declines in interest rates and equity values, added to the pressure for improvements in pricing and underwriting conditions. From January 2002 through the middle of 2003, the Company experienced the strongest renewal seasons in over five years.

 

In the second half of 2003, the Company began to see a flattening in the rate of improvement in the terms and conditions of the most profitable lines and a slower rate of improvement in those lines that had not yet reached their peak in terms of profitability. From the middle of 2003 to the end of 2004, this resulted in a slower growth rate in pricing, although there was good pricing discipline in the industry. During the 2005 renewals, the Company saw increased competition in the industry, which led to a modest deterioration in prices. Although certain lines, primarily the Life business and the U.S. casualty business, saw modest rate increases or at least price stability, the majority of lines, including short-tail specialty lines of business saw rate decreases, except for certain markets that were affected by the 2004 Atlantic hurricanes. In addition, there were higher net retentions by primary insurance companies, which resulted in reinsurers competing for a shrinking pool of premiums. The deterioration in market conditions that the Company has seen in 2005, however, has been generally orderly and gradual and has affected Europe to a greater extent than the U.S., where retentions were higher but profitability has held firmer.

 

The third quarter of 2005 was unprecedented in terms of natural disasters, including hurricane Katrina, the largest insured event in history. These events have led to the largest quarterly incurred losses experienced by the Company in its 12-year history. The fourth quarter has already seen one large natural loss event, as hurricane Wilma hit Mexico and south Florida on October 23 and 24 and is expected to cause a sizeable loss to the insurance industry. The Company believes that the losses experienced during the third quarter and the increased frequency of large natural catastrophic losses will reverse the current downward trend in the overall reinsurance market. The short-tailed lines (catastrophe, specialty property, energy and marine) should benefit the most from a better pricing environment and improved terms and conditions during the 2006 renewals, while the other lines should see a stabilization of prices after declines in 2004 and 2005.

 

The Company believes that by closely monitoring the progression of each line of business, being selective in the business that it writes, and maintaining the diversification of its portfolio, it will optimize returns to shareholders. Individual lines of business and markets have their own unique characteristics and are at different stages of the reinsurance pricing cycle at any given point in time. Management strives for appropriate portfolio diversification by product, geography, line and type of business, length of tail, and distribution channel, and believes that this diversification, in addition to the financial strength of the Company and its strong global franchise, will help to respond quickly to a changing market.

 

21


The Company also generates revenue from its substantial and high quality investment portfolio. The Company follows conservative investment guidelines through a strategy that seeks to maximize returns while managing investment risk in line with the Company’s overall objectives of earnings stability and long-term book value growth. Liability funds are used to support the Company’s net reinsurance liabilities, defined as the Company’s reinsurance liabilities net of the reinsurance assets, and are matched in size, currency and duration with existing liabilities in the Company’s underwriting portfolio. The Company invests the liability funds in high-quality fixed income securities with the primary objective of preserving liquidity and protecting capital. Capital funds are used to generate shareholder returns and are invested in investment-grade and below-investment-grade fixed income securities and equity instruments.

 

In addition to revenues generated from its underwriting operations and investment activities, the Company’s profitability is also based upon the level of its losses and loss expenses. The Company recognizes losses and loss expenses on the basis of actual and expected claims on business written. The Company’s non-life net reserve position at September 30, 2005 was $6.3 billion. Management believes that it follows conservative investing and reserving policies in pursuit of a strong financial position.

 

Critical Accounting Policies

 

See the discussion of the Company’s Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2004 Annual Report on Form 10-K. The following discussion updates specific information related to the Company’s estimates for unpaid loss and loss expense reserves and life policy benefits since December 31, 2004.

 

Losses and Loss Expenses and Life Policy Benefits

 

Because a significant amount of time can lapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company (“the primary company” or “the cedant”), the subsequent reporting to the reinsurance company (“the reinsurer”) and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid losses and loss expenses (“loss reserves”) is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (“case reserves”), additional case reserves (“ACR”) and incurred but not reported (“IBNR”) reserves. Case reserves represent unpaid losses reported by the Company’s cedants and recorded by the Company. ACR are established for particular circumstances where, on the basis of individual loss reports, the Company estimates that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves and ACR. Unlike case reserves and ACR, IBNR reserves are generally calculated in the aggregate for each line of business and they cannot usually be identified as reserves for a particular loss or treaty. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses associated with the loss reserves (“ULAE”) and these form part of the Company’s loss adjustment expense reserves. The Company’s Non-life loss reserves for each category and sub-segment are reported in the table later in this section.

 

22


The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the “reporting tail.” Lines of business for which claims are reported quickly are commonly referred to as “short-tailed” lines; and lines of business for which a longer period of time elapses before claims are reported to the reinsurer are commonly referred to as “long-tailed” lines. In general, for reinsurance, the time lags are longer than for primary insurance due to the delay that occurs between the cedant becoming aware of a loss and reporting the information to its reinsurer(s). The delay varies by reinsurance market (country of cedant), type of treaty, whether losses are paid by the cedant and the size of the loss. The delay could vary from a few weeks to a year or sometimes longer. For both short and long-tailed lines, the Company’s objective is to estimate ultimate losses and loss expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACR from total loss reserves.

 

The Company analyzes its ultimate losses and loss expenses after consideration of the loss experience of various reserving cells. The losses on each treaty for every underwriting year are assigned to a reserving cell. An underwriting year is the year during which the reinsurance treaty was entered into as opposed to the year in which the loss occurred (“accident year”), or the calendar year for which financial results are reported. The reserving cells are selected in order to ensure that the underlying treaties have homogeneous loss development characteristics (e.g. reporting tail) but are large enough to make estimation of trends credible. The selection of reserving cells is reviewed annually and changes over time as the business of the Company evolves. For each reserving cell, the Company’s estimates of loss reserves are reached after a review of the results of several commonly accepted actuarial projection methodologies. In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the cell and underwriting year for which the projection is made. The methodologies that the Company employs include, but may not be limited to, paid loss development methods, incurred loss development methods, paid Borhuetter Ferguson (B-F) methods, incurred B-F methods, loss ratio methods and Bektander methods. In addition, the Company uses other methodologies to estimate liabilities for specific types of claims. For example, internal and vendor catastrophe models are typically used in the estimation of loss and loss expenses at the early stages of catastrophe losses before loss information is reported to the reinsurer. In the case of asbestos and environmental claims, the Company established reserves for future loss and allocated loss expenses based on the results of an actuarial study, which considers the underlying exposures of the Company’s cedants.

 

The reserve methodologies employed by the Company are dependent on data that the Company collects. This data consists primarily of loss amounts reported by the Company’s cedants, loss payments made by the Company’s cedants, and premiums written and earned by the Company. The actuarial methods used by the Company to project its liabilities recorded today but that will be paid in the future (“future liabilities”) do not generally include methodologies that are dependent on claim counts reported, claim counts settled or claim counts open because, due to the nature of the Company’s business, this information is not routinely provided by the cedants for every treaty. Consequently, actuarial methods relying on this information cannot be used by the Company to estimate loss reserves.

 

23


In general, the estimates of loss reserves recorded for short-tailed business are subject to less volatility than those for long-tailed lines. Carried loss reserves for the U.S. P&C sub-segment are considered to be predominantly long-tailed due to the significant volume of U.S. casualty business written in this sub-segment. The casualty line comprised 68% of the net premiums written for this sub-segment, or 15% of the Company’s total net premiums written in the first nine months of 2005. The remaining business within this sub-segment, motor and property, is considered to be short-tailed. Within the Global (Non-U.S.) P&C sub-segment, the Company considers both its casualty business as well as its non-proportional motor business to be long-tailed. These two lines represented 26% of the net premiums written in the Global (Non-U.S.) P&C sub-segment, or 6% of the Company’s total net premiums written in the first nine months of 2005. Management considers the short-tailed lines within the Global (Non-U.S.) P&C sub-segment to be property and proportional motor. The Worldwide Specialty sub-segment is primarily comprised of lines of business that are thought to be either short or medium-tailed. The short-tailed lines consist of agriculture, catastrophe, energy, credit/surety and specialty property and account for 60% of the net premiums written in this sub-segment, or 25% of the Company’s total net premiums written in the first nine months of 2005. Aviation/space, engineering and marine are considered by the Company to have a medium-tail and represent 30% of this sub-segment’s first nine months net premiums written, or 12% of the Company’s total net premiums written. Specialty casualty business is considered to be long-tailed and represents 10% of net premiums written in this sub-segment, or 4% of the Company’s total net premiums written in the first nine months of 2005.

 

In the third quarter of 2005 and 2004, the Company reviewed its estimates for prior year losses for each sub-segment of the Non-life segment and, in light of developing data, determined to adjust its ultimate loss ratios for prior accident years.

 

For the U.S. P&C sub-segment, this primarily affected the casualty and motor lines in the third quarter of 2005 and most lines during the same quarter of 2004. For these lines of business, the Company received loss information from cedants for prior accident years that included no significant individual losses but a series of attritional losses. Attritional losses or reductions are losses or reductions that may not be significant on an individual basis, but are monitored on an aggregated basis by the Company to identify trends that may be meaningful from a reserving standpoint. Upon consideration of this new information received during 2005 and 2004, the Company revised the loss development assumptions it uses in performing its actuarial analysis and (i) increased its loss ratios for prior accident years in the third quarter of 2005 and this had the effect of increasing losses by $24 million in the quarter, and (ii) increased its loss ratios in the third quarter of 2004 and this had the effect of increasing losses by $18 million during that quarter. In particular, the Company revised the historical loss patterns and expected loss ratios that it uses in its actuarial analysis of loss reserves for the affected losses.

 

For the Global (Non-U.S.) P&C sub-segment, the Company determined, in light of developing data, to decrease its expected ultimate loss ratios for prior accident years in each period. This resulted in a decrease in the Company’s losses of $25 million in the third quarter of 2005 primarily for the property line, and a decrease of $16 million in the third quarter of 2004 for the property line, partially offset by an increase in the motor line.

 

For the Worldwide Specialty sub-segment, the Company determined, in light of developing data, to decrease its expected ultimate loss ratios for prior year losses in each period, which resulted in a decrease in the Company’s losses of $89 million and $45 million during the third quarter of 2005 and 2004, respectively. The decreases related to most lines of business within this sub-segment.

 

24


The following table summarizes the favorable (adverse) development of loss reserves in the Non-life segment (in millions of U.S. dollars):

 

    

For the

three months

ended

September 30,
2005


   

For the

three months

ended

September 30,
2004


   

For the

nine months

ended
September 30,
2005


   

For the

nine months

ended
September 30,
2004


 

Prior year favorable (adverse) loss development:

                                

Non-life segment

                                

U.S. P&C

   $ (24 )   $ (18 )   $ (28 )   $ (27 )

Global (Non-U.S) P&C

     25       16       72       (1 )

Worldwide Specialty

     89       45       177       159  
    


 


 


 


Total prior year loss development

   $ 90     $ 43     $ 221     $ 131  

 

The components of the net favorable loss development for the three months and nine months ended September 30, 2005 and 2004 are described in more detail in the discussion of the sub-segments that make up the Non-life segment.

 

Case reserves are reported to the Company by its cedants, while ACR and IBNR are estimated by the Company. The following table shows the gross reserves reported by cedants (case reserves) and those estimated by the Company (ACR and IBNR) for each Non-life sub-segment and the total net loss reserves recorded as of September 30, 2005 (in millions of U.S. dollars):

 

     Case reserves

   ACR

   IBNR

   Total gross
loss reserves
recorded


   Retrocession

    Total net loss
reserves
recorded


U.S. P&C

   $ 495    $ 81    $ 1,339    $ 1,915    $ (14 )   $ 1,901

Global (Non-U.S.) P&C

     1,004      31      1,008      2,043      (47 )     1,996

Worldwide Specialty

     947      82      1,451      2,480      (120 )     2,360
    

  

  

  

  


 

Total Non-life

   $ 2,446    $ 194    $ 3,798    $ 6,438    $ (181 )   $ 6,257

 

The Company estimates its net loss reserves using single point estimates for each sub-segment. These loss reserves represent the Company’s best estimate of future losses and loss expense amounts. Ranges around these point estimates are developed using stochastic simulations and techniques and provide an indication as to the degree of variability of the loss reserves. The Company interprets the ranges produced by these techniques as confidence intervals around the best estimates for each sub-segment. However, due to the inherent volatility in the business written by the Company, there can be no guarantee that the final settlement of the loss reserves will fall within these ranges. The point estimates recorded by the Company and the range of estimates around these point estimates at September 30, 2005 for each Non-life sub-segment, were as follows (in millions of U.S. dollars):

 

     Recorded Point
Estimate


   High

   Low

Net Non-life loss reserves:

                    

U.S. P&C

   $ 1,901    $ 2,270    $ 1,421

Global (Non-U.S.) P&C

     1,996      2,214      1,638

Worldwide Specialty

     2,360      2,493      1,971

 

It is not appropriate to add together the ranges of each sub-segment in an effort to determine a high and low range around the Company’s total Non-life carried loss reserves.

 

25


Estimates of ultimate liabilities are contingent on many future events. The eventual outcome of these events may be different from the assumptions underlying the reserve estimates. In the event that the business environment and social trends diverge from historical trends, the Company may have to adjust its loss reserves to amounts falling significantly outside its current range of estimates. Management believes that the recorded loss reserves represent Management’s best estimate of future liabilities based on information available as of September 30, 2005. The estimates are continually reviewed and the ultimate liability may be in excess of, or less than, the amounts provided, for which any adjustments will be reflected in the periods in which the need for an adjustment is determined.

 

Liabilities for policy benefits for ordinary life and accident and health policies have been established based upon information reported by cedants supplemented by actuarial estimates of mortality, morbidity, persistency and future investment income, with appropriate provision to reflect uncertainty. Future policy benefit reserves for annuity and universal life products are carried at their accumulated values. Reserves for policy claims and benefits include both mortality and morbidity claims in the process of settlement and claims that are assumed to have been incurred but not yet reported. Interest rate assumptions used to estimate liabilities for policy benefits for life and annuity contracts ranged from 1.5% to 5.5%. Actual experience in a particular period may vary from assumed experience and, consequently, may affect the Company’s results in future periods.

 

Included in the business that is considered to have a long reporting tail is the Company’s exposure to asbestos and environmental claims. The Company’s reserve for unpaid losses and loss expenses for asbestos and environmental exposures has not changed significantly since December 31, 2004. (See Note 4 to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K.)

 

Results of Operations—for the Three Months and Nine Months Ended September 30, 2005 and 2004

 

Overview

 

The Company measures its performance in several ways. Among the performance measures accepted under U.S. GAAP are diluted net income or loss per share and annualized return on beginning common shareholders’ equity (ROE), two measures that focus on the return provided to the Company’s common shareholders. Diluted net income per share is obtained by dividing net income available to common shareholders by the weighted average number of common and common share equivalents outstanding. As the effect of dilutive securities would have been antidilutive in the three months and nine months of 2005 due to the reported net loss, the fully diluted per shares figures for those periods were compiled using the basic weighted average number of common shares outstanding. Net income or loss available to common shareholders is defined as net income or loss less preferred share dividends. Net income or loss available to common shareholders is also used in the calculation of the Company’s ROE, which is calculated by dividing net income or loss available to common shareholders by the net book value of the common shareholders’ equity at the beginning of the year. ROE figures are presented on an annualized basis. The net book value of the common shareholders’ equity is obtained by subtracting the aggregate liquidation value of the preferred shares from total shareholders’ equity.

 

26


Net income or loss, preferred dividends, net income or loss available to common shareholders, diluted net income or loss per share and annualized ROE for the three months and nine months ended September 30, 2005 and 2004 were as follows (in millions of U.S. dollars, except per share data and ROE):

 

    

For the

three months

ended

September 30,
2005


    % Change
2005 over
2004


   

For the

three months

ended

September 30,
2004


   

For the

nine months

ended
September 30,
2005


    % Change
2005 over
2004


   

For the

nine months

ended
September 30,
2004


 

Net (loss) income

   $ (289 )   NM     $ 83     $ (17 )   NM     $ 349  

Less: preferred dividends

     8     76 %     5       26     76 %     15  
    


       


 


       


Net (loss) income available to common shareholders

   $ (297 )   NM     $ 78     $ (43 )   NM     $ 334  

Diluted net (loss) income per share

   $ (5.48 )   NM     $ 1.46     $ (0.79 )   NM     $ 6.17  

Annualized return on beginning common shareholders’ equity (ROE)

     (42.0 )%           13.6 %     (2.0 )%           19.3 %

NM: not meaningful

 

Net income or loss, net income or loss available to common shareholders, diluted net income or loss per share and ROE decreased in the third quarter and nine months of 2005 compared to the same periods in 2004 as a result of a higher level of large or catastrophic losses, leading the Company to negative results. Results for the third quarter and nine months of 2005 included pre-tax losses, adjusted for reinstatement premiums, of $615 million related to hurricanes Katrina and Rita and the Central European Floods.

 

Uncertainty related to Katrina losses

 

The Company’s estimated losses resulting from hurricane Katrina are subject to an unusual level of uncertainty arising out of these losses’ extremely complex and unique causation and related coverage issues associated with the attribution of losses to wind or flood damage or other perils such as fire, business interruption or riot and civil commotion. For instance, many of the Company’s cedants’ underlying policies exclude flood damage; however, water damage directly related to wind damage may be covered. The Company expects that these issues will not be resolved for a considerable period of time and may be influenced by evolving legal and regulatory developments.

 

The Company’s actual losses from hurricane Katrina may exceed the estimated losses as a result of, among other things, an increase in current industry insured loss estimates, the receipt of additional information from cedants, brokers and loss adjusters, the attribution of losses to coverages that, for the purpose of the estimates the Company assumed would not be exposed , in which case the financial results could be further materially adversely affected.

 

The impact of the large losses on the results for the third quarter of 2005 was partially offset by higher net realized investment gains, net investment income and income tax benefit. The decrease in the first nine months of 2005 resulted from losses in the amount of $698 million related to hurricanes Katrina and Rita, the Central European Floods, Winterstorm Erwin and a single loss in the energy line in Canada, and from a higher income tax expense, partially offset by higher net realized investment gains and net investment income.

 

Preferred dividends increased in the third quarter and the first nine months of 2005 compared to the same periods in 2004 as the Company issued Series D cumulative preferred shares (“Series D preferred shares”) in the fourth quarter of 2004. In the same quarter, the purchase contracts associated with the Company’s PEPS units were settled in exchange for the Company’s common shares and the Company purchased and cancelled the Series B cumulative preferred shares (“Series B preferred shares”) that were part of the PEPS units. The increase in preferred dividends in the third quarter and the first nine months of 2005 is largely offset by the decrease in interest expense related to the Series B preferred shares for the same periods.

 

Review of Net Income or Loss

 

Management analyzes the Company’s net income or loss in three parts: underwriting result, investment income and other components of net income. Investment income includes interest and dividends, net of investment expenses, generated by the Company’s investment portfolio, as well as interest income generated on funds held and certain ART transactions. Other components of net income or loss include net realized investment gains and losses, interest expense, net foreign exchange gains and losses, income tax expense or benefit and interest in earnings of equity investment.

 

27


The components of net income or loss for the three months and nine months ended September 30, 2005 and 2004 were as follows (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

nine months

ended
September 30,

2004


 

Underwriting result

                                            

Non-life

   $ (449 )   NM     $ 4     $ (344 )   NM     $ 146  

ART

     2     NM       (2 )     10     NM       (2 )

Life

     (10 )   (18 )%     (12 )     (29 )   (22 )%     (37 )

Corporate expenses

     (13 )   20       (11 )     (40 )   33       (31 )

Net investment income

     93     34       70       270     24       218  

Net realized investment gains

     56     71       33       149     89       79  

Interest expense

     (7 )   (28 )     (10 )     (22 )   (28 )     (30 )

Net foreign exchange (losses) gains

     (2 )   NM       —         (3 )   NM       2  

Income tax benefit (expense)

     39     388       8       (15 )   NM       —    

Interest in earnings of equity investment

     2     (31 )     3       7     91       4  
    


       


 


       


Net (loss) income

   $ (289 )   NM     $ 83     $ (17 )   NM     $ 349  
    


       


 


       



NM: not meaningful

 

Underwriting result is a key measure that Management uses to manage and evaluate segments and sub-segments, as it is a primary measure of underlying profitability for the Company’s core reinsurance operations, separate from the Company’s investment results. The Company believes that in order to enhance the understanding of its profitability, it is useful for investors to evaluate the components of income separately and in the aggregate. Underwriting result should not be considered as a substitute for net income and does not reflect the overall profitability of the business, which is also impacted by investment results and other items.

 

The underwriting result for the Non-life segment decreased from a gain of $4 million in the third quarter of 2004 to a loss of $449 million in the third quarter of 2005 and from a gain $146 million for the nine months ended September 30, 2004 to a loss of $344 million for the nine months ended September 30, 2005. The decreases in the Non-life underwriting result were principally attributable to a higher level of large or catastrophic losses in the 2005 periods and less significantly to a decrease in the volume of business earned and a modest decline in profitability for the 2005 underwriting year business that resulted in a lower contribution to underwriting result during the third quarter and the first nine months of 2005. Underwriting result for the three months ended September 30, 2005 for the Non-Life segment included $506 million of net losses related to hurricane Katrina, $36 million of net losses related to hurricane Rita and $67 million of net losses related to the Central European floods, while the same period in 2004 included $137 million of net losses related to the four Atlantic hurricanes. In addition to the third quarter losses, the underwriting result for the nine months ended September 30, 2005 included $63 million of net losses related to Winterstorm Erwin and $20 million on a single loss in the energy line in Canada, while the underwriting result for the nine months ended September 30, 2004 included, in addition to the losses related to the Atlantic hurricanes, a $30 million loss on the explosion of an Algerian gas plant. The three month and nine month periods of 2004 and 2005 included favorable development on prior accident years as the Company reduced its estimate of losses for certain lines as the “at risk” period for older underwriting years expired and updated information was received from cedants. Favorable development on prior accident years amounted to $90 million in the third quarter of 2005 compared to $43 million for the same period of 2004, and $221 million in the first nine months of 2005 compared to $131 million in the first nine months of 2004. The components of the favorable loss development on prior accident year losses are described in more detail in the discussion of individual sub-segments in the next section.

 

28


Underwriting result for the ART segment increased from a loss of $2 million in the third quarter of 2004 to a gain of $2 million in the third quarter of 2005, and from a loss of $2 million for the nine months ended September 30, 2004 to a gain of $10 million for the nine months ended September 30, 2005. The increases resulted from gains in all lines of business except for structured risk transfer, which included $6 million of net losses related to hurricane Katrina.

 

Underwriting result for the Life segment improved by 18%, from a loss of $12 million in the third quarter of 2004 to a loss of $10 million in the third quarter of 2005, and improved by 22%, from a loss of $37 million in the first nine months of 2004 to a loss of $29 million in the first nine months of 2005. The nine months ended September 30, 2004 included a $5 million charge to reduce deferred acquisition costs on annuity treaties retained in the sale of PartnerRe Life Insurance Company of the U.S.

 

Corporate expenses increased by $2 million for the third quarter of 2005 compared to the same period in 2004, and increased by $9 million in the first nine months of 2005 compared to the same period in 2004. The increases resulted from the addition of staff in corporate departments, higher compliance expenses, as well as the adoption, on January 1, 2003, of the fair value method of accounting for equity-based awards on a prospective basis. The latter results in a phase-in period whereby equity-based compensation increases with each new grant until the first grants issued after adoption of the fair value method are vested.

 

The Company reported net investment income of $93 million in the third quarter of 2005 compared to $70 million in 2004, and $270 million in the first nine months of 2005 compared to $218 million in 2004. The increase in investment income is primarily attributable to investment of the Company’s significant cash flows from operations, which totaled $1,136 million since September 30, 2004, as well as the effect of the decline of the U.S. dollar against the euro and other currencies, which contributed approximately 2% to the growth in the first nine months of 2005.

 

Net realized investment gains were $33 million in the third quarter of 2004 compared to $56 million in the third quarter of 2005, and were $79 million for the nine months ended September 30, 2004 compared to $149 million for the nine months ended September 30, 2005. Realized investment gains and losses are generally a function of multiple factors with the most significant being the prevailing interest rates and equity market conditions, and the timing of disposition of available for sale fixed maturities and equity securities, and charges for the recognition of other-than-temporary impairments in the Company’s investment portfolio. As the Company repositions its investment portfolio to take advantage of market conditions, it generates sales of securities that result in the realization of the unrealized market value appreciation or depreciation on the securities. The realization of the unrealized market value appreciation or depreciation does not change the Company’s shareholders’ equity, as it merely transfers the gain or loss from the accumulated other comprehensive income section of the balance sheet to net income on the statement of operations and retained earnings on the balance sheet.

 

Interest expense declined in the third quarter and the first nine months of 2005 compared to the same periods in 2004, as distributions on the Series B preferred shares, which amounted to $2.8 million per quarter and were presented as interest expense, ended in the fourth quarter of 2004. In the fourth quarter of 2004, the purchase contracts associated with the Company’s PEPS units were settled in exchange for the Company’s common shares and the Company purchased and cancelled the Series B preferred shares that were part of the PEPS units.

 

29


The Company hedges a significant portion of its currency risk exposure as discussed in the Quantitative and Qualitative Disclosures about Market Risk in Item 3 of this report. The combined effect of movements in foreign exchange rates and the Company’s hedging activities resulted in modest net foreign exchange losses in the third quarter and the first nine months of 2005 compared to a modest net foreign exchange gains in the third quarter and the first nine months of 2004.

 

The income tax benefit increased from $8 million in the third quarter of 2004 compared to $39 million for the same period in 2005. For the nine-month periods, the Company recognized a benefit of $0.2 million in 2004 compared to an expense of $15 million in 2005. The changes resulted primarily from a tax benefit related to the losses from hurricanes Katrina and Rita and the Central European floods in the amount of $48 million and a tax benefit related to the release of a valuation allowance in Switzerland in the amount of $15 million. Management concluded that it was appropriate to release the valuation allowance as a result of the positive evidence, under FASB 109, relating to the generation of significant taxable income in Switzerland during the first six months of 2005 and more meaningfully in the third quarter of 2005. The third quarter results confirmed the Company’s ability to generate taxable income in Switzerland in a quarter hit by significant large or catastrophic losses. In addition, the Company expects that the loss events of the third quarter will have a positive influence on the 2006 underwriting environment for its Swiss operations. The Company also updated in the third quarter of 2005 its in-depth analysis of various tax exposures and based upon its analysis, tax reserves were reduced by $15 million. These tax benefits were partially offset by higher tax expense as a result of higher realized investment gains in 2005 compared to 2004.

 

The Company reports its share of the results of Channel Re on a one-quarter lag on the interest in earnings of equity investment line of its statement of operations. The three months ended September 30, 2005 and 2004 included the Company’s share of the results of Channel Re’s net income in the amount of $2.0 million and $2.9 million, respectively. The nine months ended September 30, 2005 included the Company’s share of Channel Re’s net income in the amount of $6.8 million for the period of October 2004 to June 2005, while the 2004 period included the Company’s share of Channel Re’s net income in the amount of $3.5 million for the period of February (when Channel Re commenced business) to June 2004.

 

Results by Segment

 

The Company monitors the performance of its underwriting operations in three segments, Non-life, ART and Life. The Non-life segment is further divided into three sub-segments, U.S. Property and Casualty (“U.S. P&C”), Global (Non-U.S.) Property and Casualty (“Global (Non-U.S.) P&C”) and Worldwide Specialty. Segments and sub-segments represent markets that are reasonably homogeneous in terms of geography, client types, buying patterns, underlying risk patterns and approach to risk management. See the description of the Company’s segments and sub-segments as well as a discussion of how the Company measures its segment results in Note 10 to Unaudited Condensed Consolidated Financial Statements (included in Item 1 of Part I above).

 

Segment results are shown net of intercompany transactions. Business reported in the Global (Non-U.S.) P&C and Worldwide Specialty sub-segments and the Life segment is, to a significant extent, denominated in foreign currencies and is reported in U.S. dollars at the weighted average exchange rates for each period. The U.S. dollar has declined in value in the first nine months of 2005 compared to the same period in 2004 and this should be considered when making period over period comparisons.

 

30


Non-life Segment

 

U.S. P&C

 

The U.S. P&C sub-segment includes the U.S. specialty casualty line, which represents approximately 52% and 49% of net premiums written in this sub-segment in the third quarter and the first nine months of 2005, respectively, compared to 49% and 42% in the same periods of 2004. Treaties in this line typically tend to have a higher loss ratio and lower technical result, due to the long development tail of the risks involved. U.S. specialty casualty treaties also typically produce investment income on premiums invested over a longer period, as losses are typically paid later than for other lines. Investment income, however, is not considered in technical result.

 

The following table provides the components of the technical result and the corresponding ratios for this sub-segment (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

nine months

ended
September 30,

2004


 

Gross premiums written

   $ 187     (20 )%   $ 234     $ 649     (20 )%   $ 811  

Net premiums written

     187     (20 )     234       649     (20 )     810  

Net premiums earned

   $ 200     (12 )   $ 228     $ 624     (9 )   $ 685  

Losses and loss expenses

     (263 )   23       (214 )     (568 )   4       (548 )

Acquisition costs

     (48 )   (13 )     (55 )     (150 )   —         (150 )
    


       


 


       


Technical result(1)

   $ (111 )   169     $ (41 )   $ (94 )   587     $ (13 )

Loss ratio(2)

     131.5 %           94.0 %     91.0 %           80.1 %

Acquisition ratio(3)

     24.0             24.1       24.0             21.9  
    


       


 


       


Technical ratio(4)

     155.5 %           118.1 %     115.0 %           102.0 %

(1) Technical result is defined as net premiums earned less losses and loss expenses and acquisition costs.
(2) Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
(3) Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.
(4) Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.

 

Premiums

 

The U.S. P&C sub-segment represented 24% and 22% of total net premiums written in the third quarter and the first nine months of 2005, respectively.

 

Three-month results

 

The decline in gross and net premiums written for the three months ended September 30, 2005 over 2004 resulted from all lines in this sub-segment. Approximately half of the decline in net premiums written resulted from lower renewal premiums due to the increased risk retention by cedants and from cancellation of programs (or non-renewals) where the renewal terms did not meet the Company’s profitability objective, while the remainder of the decline resulted from reduced premium estimates received from cedants, principally in the property and casualty lines. Net premiums earned declined at a slower pace than net premiums written due to the time lag whereby trends in net premiums earned trail trends in net premiums written. Net premiums written are recognized at the inception of the treaty while the net premiums earned are recognized over the risk period.

 

31


Nine-month results

 

The decline in gross and net premiums written for the nine months ended September 30, 2005 over 2004 resulted from all lines in this sub-segment, but was most evident in the motor and casualty lines. The Company observed increased competition in the short-tailed motor and property lines, as primary companies retained more risk and reinsurers were competing for a declining amount of business. Although pricing and terms and conditions remained fairly stable in 2005 for the long-tailed casualty line, the Company’s net premiums written also decreased for this line. Approximately half of the decline in net premiums written resulted from lower renewal premiums due to the increased risk retention by cedants and from cancellation of programs (or non-renewals) where the renewal terms did not meet the Company’s profitability objective, while the remainder of the decline resulted from timing of renewals and reduced premium estimates from cedants and increased competition among reinsurers. Notwithstanding the increased competition prevailing in this sub-segment and higher risk retention by cedants, the terms and conditions remained fairly stable throughout 2005 and the Company was able to pursue business that met its profitability objectives.

 

Pricing indications and renewal information received from cedants and brokers as well as reduced premiums estimates by cedants indicate that gross and net premiums written and net premiums earned are expected to continue to decline for the remainder of 2005 for this sub-segment.

 

Losses and loss expenses

 

Three-month results

 

The losses and loss expenses and loss ratio reported in the third quarter of 2005 included losses in the amount of $86 million related to hurricane Katrina and $10 million related to hurricane Rita for a total impact of 48.2 points on the loss ratio of this sub-segment. The comparable period for 2004 included losses in the amount of $51 million or 22.6 points on the loss ratio related to the Atlantic hurricanes. The losses and loss expenses reported in the third quarter of 2005 also reflected the decrease in the Company’s book of business and exposure as evidenced by the decrease in net premiums earned.

 

The losses and loss expenses and the loss ratio reported in the three months ended September 30, 2005 and 2004 included $24 million, or 11.7 points on the loss ratio, and $18 million or 7.8 points on the loss ratio, of net adverse loss development on prior accident years, respectively, for this sub-segment. In the third quarter of 2005, the net adverse loss development of $24 million included adverse loss development for prior accident years in the casualty and motor lines of $26 million, partially offset by favorable loss development in the short-tailed property lines of $2 million. Loss information provided by cedants for prior years during the third quarter of 2005 for all lines in this sub-segment included no individually significant losses or reductions of losses but a series of attritional losses or reductions. Based on the Company’s assessment of this loss information, the Company has increased its expected ultimate loss ratios for the casualty and motor lines (decreased for the property line), which had the net effect of increasing losses for this sub-segment. The net adverse loss development of $18 million recorded in the third quarter of 2004 included adverse loss development in all lines of business.

 

Nine-month results

 

The losses and loss expenses and loss ratio reported in the first nine months of 2005 included losses in the amount of $86 million related to hurricane Katrina and $10 million related to hurricane Rita for a total impact of 15.5 points on the loss ratio of this sub-segment. The comparable period for 2004 included losses in the amount of $51 million or 7.5 points on the loss ratio related to the Atlantic hurricanes. The losses and loss expenses reported in the first nine months of 2005 also reflected the decrease in the Company’s book of business and exposure as evidenced by the decrease in net premiums earned.

 

32


The losses and loss expenses and the loss ratio reported in the first nine months ended September 30, 2005 and 2004 included $28 million, or 4.4 points on the loss ratio, and $27 million or 4.0 points on the loss ratio, of net adverse loss development on prior accident years, respectively, for this sub-segment. In the first nine months of 2005, the net adverse loss development of $28 million included adverse loss development for prior accident years in the casualty and motor lines of $39 million, partially offset by favorable loss development in the short-tailed property lines of $11 million. Loss information provided by cedants for prior years during 2005 for all lines in this sub-segment included no individually significant losses or reductions of losses but a series of attritional losses or reductions. Based on the Company’s assessment of this loss information, the Company has increased its expected ultimate loss ratios for the casualty and motor lines (decreased for the property line), which had the net effect of increasing losses for this sub-segment. The net adverse loss development of $27 million recorded in the first nine months of 2005 included adverse loss development of $46 million in the casualty and motor lines, which was partially offset by a favorable loss development of $19 million in the shorter-tailed property line.

 

Acquisition costs

 

Three-month results

 

The decrease in acquisition costs from 2004 to 2005 resulted from the decrease in the Company’s book of business and exposure as evidenced by the decrease in net premiums earned, partially offset by a slight shift in the third quarter of 2005 compared to the same period in 2004 from non-proportional business to proportional business. Proportional business typically carries higher commission and brokerage expenses. Also affecting the comparison are additions in the third quarter of 2004 in acquisition costs for anticipated adjustments on treaties with experience credits in the form of sliding scale and profit commission adjustments. The acquisition ratio for the 2005 period did not change significantly compared to the acquisition ratio for the same period of 2004.

 

Nine-month results

 

While the Company’s book of business and exposure have declined in 2005 compared to 2004, as evidenced by the decrease in net premiums earned, the acquisition costs for the 2005 period did not change significantly compared to the acquisition costs for the same period in 2004. A shift from non-proportional business to proportional business, which carries higher commission and brokerage expenses, and reductions of acquisition costs in 2004 on treaties with experience credits in the form of sliding scale and profit commission adjustments resulted in the increase in the acquisition ratio from 2004 to 2005.

 

33


Global (Non-U.S.) P&C

 

The Global (Non-U.S.) P&C sub-segment is composed of long-tail business, in the form of casualty and non-proportional motor business, that represents approximately 17% and 26% of net premiums written for the third quarter and the first nine months of 2005 in this sub-segment, respectively, and short-tailed business, in the form of property and proportional motor business. The following table provides the components of the technical result and the corresponding ratios for this sub-segment (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

nine months

ended
September 30,

2004


 

Gross premiums written

   $ 137     (11 )%   $ 154     $ 726     (12 )%   $ 820  

Net premiums written

     137     (11 )     154       724     (12 )     821  

Net premiums earned

   $ 191     (11 )   $ 213     $ 647     (7 )   $ 698  

Losses and loss expenses

     (120 )   (25 )     (158 )     (427 )   (19 )     (528 )

Acquisition costs

     (48 )   (10 )     (54 )     (162 )   (9 )     (178 )
    


       


 


       


Technical result

   $ 23     3,923     $ 1     $ 58     NM     $ (8 )

Loss ratio

     62.6 %           74.2 %     66.0 %           75.6 %

Acquisition ratio

     25.5             25.5       25.0             25.6  
    


       


 


       


Technical ratio

     88.1 %           99.7 %     91.0 %           101.2 %

NM: not meaningful

 

Premiums

 

The Global (Non-U.S.) P&C sub-segment represented 18% and 25% of the total net premiums written for the third quarter and the first nine months of 2005, respectively.

 

Three-month results

 

The decline in gross and net premiums written and net premiums earned for the three months ended September 30, 2005 over 2004 resulted from all lines in this sub-segment, except for the motor line, which increased in the third quarter of 2005 compared to the same period in 2004. The decrease in net premiums written was principally attributable to increased competition as well as increased risk retention from cedants. Notwithstanding the increased competition prevailing in this sub-segment, and higher risk retention from cedants, the terms and conditions remained acceptable in 2005. Foreign exchange offset the decrease in net premiums written for the three months ended September 30, 2005 by approximately 2 points for this sub-segment as the U.S. dollar weakened since the third quarter of 2004 and premiums denominated in currencies that have appreciated against the U.S. dollar were converted into U.S. dollars at higher exchange rates.

 

34


Nine-month results

 

The decline in gross and net premiums written and net premiums earned for the nine months ended September 30, 2005 over 2004 resulted from all lines in this sub-segment, but was most evident in the casualty and motor lines. The decrease in net premiums written was principally attributable to increased competition as well as increased risk retention from cedants. Notwithstanding the increased competition prevailing in this sub-segment, and higher risk retention from cedants, the terms and conditions remained acceptable in 2005. Foreign exchange offset the decrease in net premiums written for the nine months ended September 30, 2005 by approximately 5 points for this sub-segment as the U.S. dollar weakened since the first nine months of 2004 and premiums denominated in currencies that have appreciated against the U.S. dollar were converted into U.S. dollars at higher exchange rates.

 

Based on pricing indications and renewal information received from cedants and brokers, and assuming constant foreign exchange rates, gross and net premiums written and net premiums earned are expected to continue to decline in 2005 for this sub-segment.

 

Losses and loss expenses

 

Three-month results

 

The losses and loss expenses and loss ratio reported in the third quarter of 2005 included losses in the amount of $12 million or 6.5 points on the loss ratio related to hurricane Katrina and the Central European floods. The comparable period for 2004 included losses in the amount of $19 million or 9.0 points on the loss ratio related to the Atlantic hurricanes.

 

The losses and loss expenses and loss ratio reported in the third quarter of 2005 and 2004 reflected net favorable loss development of $25 million, or 13.3 points on the loss ratio, and $16 million or 7.6 points on the loss ratio, respectively, for this sub-segment. In the third quarter of 2005, the net favorable loss development of $25 million included favorable loss development in all lines of business, primarily in the property line. The net favorable loss development is primarily due to a reassessment of the loss development assumptions used by the Company to estimate future liabilities due to what it believes are favorable experience trends in these lines of business, as losses reported by cedants during the third quarter of 2005 for prior accident years, and for treaties where the risk period expired, were lower than the Company expected. Loss information provided by cedants in the third quarter of 2005 for all lines in this sub-segment for prior years included no individually significant losses or reductions but a series of attritional losses or reductions. In the third quarter of 2004, the net favorable loss development of $16 million included favorable loss development of $22 in the property line, which was partially offset by adverse loss development of $6 million in the other lines. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for the property line (increased for the other lines), which had the net effect of decreasing the level of losses for this sub-segment.

 

Nine-month results

 

The losses and loss expenses and loss ratio reported in the first nine months of 2005 included losses in the amount $12 million related to hurricane Katrina and the Central European floods and $2 million related to Winterstorm Erwin, which accounted in total for 2.2 points on the loss ratio for this sub-segment. The comparable period for 2004 included losses in the amount of $19 million or 2.8 points on the loss ratio related to the Atlantic hurricanes.

 

35


The losses and loss expenses and loss ratio reported in the nine months ended September 30, 2005 and 2004 reflected $72 million, or 11.1 points on the loss ratio, of net favorable loss development, and $1 million of net adverse loss development, respectively, for this sub-segment. In the first nine months of 2005, the net favorable loss development of $72 million included favorable loss development of $73 million for prior accident years in the property and casualty lines, partially offset by adverse loss development of $1 million in the motor line. The net favorable loss development is primarily due to a reassessment of the loss development assumptions used by the Company to estimate future liabilities due to what it believes are favorable experience trends in these lines of business, as losses reported by cedants during 2005 for prior accident years, and for treaties where the risk period expired, were lower (higher for motor) than the Company expected. Loss information provided by cedants in 2005 for all lines in this sub-segment for prior years included no individually significant losses or reductions but a series of attritional losses or reductions. The net adverse loss development of $1 million recorded in the first nine months of 2004 included adverse loss development of $49 million in the casualty and motor lines, substantially offset by favorable loss development of $48 million in the property line. Based on the Company’s assessment of this loss information, the Company increased its expected ultimate loss ratios for the casualty and motor lines (decreased for the property line), which had the net effect of increasing the level of losses for this sub-segment.

 

Acquisition costs

 

The acquisition ratio for the third quarter and first nine months of 2005 did not change significantly compared to the acquisition ratio for the same periods of 2004. Acquisition costs decreased from 2004 to 2005 for the three months and nine months periods due to the decrease in the Company’s book of business and exposure as evidenced by the decrease in net premiums earned.

 

36


Worldwide Specialty

 

The following table provides the components of the technical result and the corresponding ratios for this sub-segment (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

nine months

ended
September 30,

2004


 

Gross premiums written

   $ 343     8 %   $ 317     $ 1,262     (1 )%   $ 1,273  

Net premiums written

     336     5       319       1,231     (2 )     1,251  

Net premiums earned

   $ 406     2     $ 397     $ 1,086     (3 )   $ 1,122  

Losses and loss expenses

     (633 )   181       (225 )     (1,018 )   78       (571 )

Acquisition costs

     (92 )   17       (79 )     (233 )   (2 )     (239 )
    


       


 


       


Technical result

   $ (319 )   NM     $ 93     $ (165 )   NM     $ 312  

Loss ratio

     155.8 %           56.7 %     93.7 %           50.9 %

Acquisition ratio

     22.6             19.7       21.5             21.3  
    


       


 


       


Technical ratio

     178.4 %           76.4 %     115.2 %           72.2 %

NM: not meaningful

 

Premiums

 

The Worldwide Specialty sub-segment represented 44% and 41% of total net premiums written in the third quarter and the first nine months of 2005, respectively.

 

Three-month results

 

Gross and net premiums written increased by 8% and 5%, respectively in 2005 compared to the same period in 2004. All lines in this sub-segment had a decrease in net premiums written, except for the catastrophe line, which doubled the net premiums written in the third quarter of 2005 compared to the same period in 2004, due to $39 million of reinstatement premiums related to hurricane Katrina. Specialty casualty had an increase compared to 2004, while marine and aviation were relatively flat. During the third quarter of 2005, the Company saw an increase in competition in most lines of business. In response to the increased competition prevailing in this sub-segment, the Company has remained selective in pursuing business that met its profitability objectives and has declined treaties where terms and conditions did not meet the Company’s standards. The weakening of the U.S. dollar in 2005 compared to 2004 contributed approximately 1 point to the growth in net premiums written in this sub-segment.

 

Nine-month results

 

Gross and net premiums written decreased by 1% and 2%, respectively in 2005 compared to the same period in 2004. All lines in this sub-segment had a decrease in net premiums written, except for the catastrophe line, due to $39 million of reinstatement premiums related to hurricane Katrina in the third quarter of 2005. Specialty casualty, marine and credit/surety also had an increase relative to 2004. The weakening of the U.S. dollar in 2005 compared to 2004 offset approximately 3 points of the decrease in net premiums written in this sub-segment.

 

37


Throughout 2004, the Company saw a decline in the pricing for the most profitable lines of business in this sub-segment and a slow but orderly reduction in the rate of price increases for the other lines as a result of increasing competition. During the first nine months of 2005, the Company saw an increase in competition in all lines, increased retentions by cedants, and an acceleration in the rate of decline in pricing in all lines except for certain lines in aviation and agriculture where price trends are stable, and in certain markets that were affected by the 2004 catastrophic events, such as the Atlantic hurricanes, where prices have increased in 2005. In response to the increased competition prevailing in this sub-segment, the Company has remained selective in pursuing business that met its profitability objectives and has declined treaties where terms and conditions did not meet the Company’s standards.

 

Based on pricing indications and renewal information received from cedants and brokers, and assuming constant foreign exchange rates, gross and net premiums written and net premiums earned are expected to continue to decline in 2005 for this sub-segment. The Company is expecting a potential market reaction in 2006 to the third quarter losses and expects pricing deterioration to slow down for this sub-segment, specifically the markets and lines affected (catastrophe, energy, marine and specialty property lines).

 

Losses and loss expenses

 

Three-month results

 

The losses and loss expenses and loss ratio reported in the third quarter of 2005 included losses in the amount of $453 million related to hurricane Katrina, $26 million related to hurricane Rita and $58 million related to the Central European floods for a total impact of 129.6 points on the loss ratio for this sub-segment (adjusted for related reinstatement premiums). The comparable period for 2004 included losses in the amount of $66 million or 16.6 points on the loss ratio related to the Atlantic hurricanes.

 

The losses and loss expenses and loss ratio reported in the three months ended September 30, 2005 and 2004 included $89 million, or 21.8 points on the loss ratio, and $45 million or 11.3 points on the loss ratio of net favorable loss development, respectively, for this sub-segment. In the third quarter of 2005, the net favorable loss development of $89 million included favorable loss development of $102 million in all lines, except for the agriculture and specialty casualty lines that were affected by adverse loss development of $13 million. The net favorable loss development is primarily due to a reassessment of the loss development assumptions used by the Company to estimate future liabilities due to what it believes are favorable experience trends in these lines of business, as losses reported by cedants during the third quarter of 2005 for prior accident years, and for treaties where the risk period expired, were lower (higher for agriculture and specialty casualty) than the Company expected. Loss information provided by cedants in the third quarter of 2005 for all lines in this sub-segment for prior years included no individually significant losses or reductions but a series of attritional losses or reductions. The net favorable loss development of $45 million recorded in the third quarter of 2004 included favorable loss development of $51 million in all lines, except for the energy and specialty casualty lines that were affected by adverse loss development of $6 million.

 

Nine-month results

 

The losses and loss expenses and loss ratio reported in the first nine months of 2005 included losses in the amount of $453 million related to hurricane Katrina, $26 million related to hurricane Rita, $58 million related to the Central European floods, $61 million related to Winterstorm Erwin and $20 million on a single loss in the energy line in Canada for a total of 55.5 points on the loss ratio for this sub-segment (adjusted for related reinstatement premiums). The comparable period for 2004 included losses in the amount of $66 million related to the Atlantic hurricanes for a total impact of 5.9 points on the loss ratio of this sub-segment and large losses in the marine and energy lines, including $30 million or 2.8 points related to the explosion of an Algerian gas plant.

 

38


The losses and loss expenses and loss ratio reported in the nine months ended September 30, 2005 and 2004 included $177 million, or 16.3 points on the loss ratio, and $159 million or 14.2 points on the loss ratio of net favorable loss development, respectively, for this sub-segment. In the first nine months of 2005, the net favorable loss development of $177 million included favorable loss development of $197 million in all lines, except for the agriculture and specialty casualty lines that were affected by adverse loss development of $20 million. The net favorable loss development is primarily due to a reassessment of the loss development assumptions used by the Company to estimate future liabilities due to what it believes are favorable experience trends in these lines of business, as losses reported by cedants during 2005 for prior accident years, and for treaties where the risk period expired, were lower (higher for agriculture and specialty casualty) than the Company expected. Loss information provided by cedants in 2005 for all lines in this sub-segment for prior years included no individually significant losses or reductions but a series of attritional losses or reductions. The net favorable loss development of $159 million recorded in the first nine months of 2004 included favorable loss development of $168 million in every line except for the engineering, marine and specialty casualty lines, which were affected by adverse loss development of $9 million.

 

Acquisition costs

 

Three-month results

 

Acquisition costs increased from 2004 to 2005 due to the increase in the Company’s book of business and exposure as evidenced by the increase in net premiums earned but acquisition costs increased at a faster pace than net premiums earned due to realignment of expenses in certain treaties where reduced loss expectations led to higher acquisition costs.

 

Nine-month results

 

Acquisition costs decreased from 2004 to 2005 due to the decrease in the Company’s book of business and exposure as evidenced by the decrease in net premiums earned. The acquisition ratio for the 2005 period did not change significantly compared to the acquisition ratio for the same period of 2004.

 

39


ART (Alternative Risk Transfer) Segment

 

The ART segment, the Company’s newest segment, was reported for the first time as a separate segment in 2004. This segment comprises structured risk transfer, structured finance, weather related products and the results of the Company’s investment in Channel Re. As reinsurance accounting does not apply for much of the business in this segment, premiums alone are not a representative measure of activity in ART. This segment is very transaction driven, and revenues and profit trends will be uneven, especially given the relatively small size of this segment. Accordingly, profitability or growth in any year or quarter is not necessarily predictive of future profitability or growth. The Company expects the ART segment to remain flat for the remainder of 2005, however, due to the growth in business during the first nine months of 2005, the annual results are likely to grow when compared to 2004. The following table provides the components of the underwriting result for this segment for the three months and nine months ended September 30, 2005 and 2004 (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


 

Gross premiums written

   $ 8     $ 1     $ 21     $ 4  

Net premiums written

     8       1       21       4  

Net premiums earned

   $ 10     $ 2     $ 16     $ 5  

Losses and loss expenses

     (13 )     (8 )     (14 )     (8 )

Acquisition costs

     (1 )     —         (2 )     (1 )
    


 


 


 


Technical result

   $ (4 )   $ (6 )   $ —       $ (4 )

Other income

     9       7       20       13  

Other operating expenses

     (3 )     (3 )     (10 )     (11 )
    


 


 


 


Underwriting result

   $ 2     $ (2 )   $ 10     $ (2 )

Interest in earnings of equity investment

   $ 2     $ 3     $ 7     $ 4  

 

The ART segment had good growth in business and good results during the third quarter and the first nine months of 2005 compared to the same periods in 2004 despite low interest rates, which tend to reduce the attractiveness of structured risk business for clients, and low credit spreads, which tend to reduce the opportunities in the structured finance business.

 

Three-month results

 

For the three months ended September 30, 2005, structured risk transfer reported a loss as this line of business incurred a loss in the amount of $13 million, before additional premium earned of $7 million, related to hurricane Katrina. Except for structured risk transfer, all other lines of business were profitable in the third quarter of 2005. Structured finance and weather related products generated the largest contributions to pre-tax profit.

 

For the three months ended September 30, 2004, structured risk transfer business reported a loss as this line of business incurred a loss in the amount of $8 million related to the Atlantic hurricanes. Results in the structured finance line included gains due to improved valuations on certain securities while results in the weather line included losses resulting from higher than normal temperatures in Japan.

 

Nine-month results

 

For the nine months ended September 30, 2005, except for the structured risk transfer line which was impacted by hurricane Katrina in the third quarter, all other lines of business were profitable and the Company’s interest in the earnings of its equity investment in Channel Re and weather products generated the largest contribution to pre-tax profit.

 

For the nine months ended September 30, 2004, structured risk transfer business had positive results due to the commutation of two large treaties, which accelerated the recognition of the margin on the treaties. This was partially offset by a loss in the third quarter of 2004 related to the Atlantic hurricanes. Results in the structured finance line included gains arising due to improved valuations on certain securities while results in the weather line included losses resulting from higher than normal temperatures in Japan.

 

40


Life Segment

 

The following table summarizes the underwriting result for this segment (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


    % Change
2005 over
2004


   

For the

nine months

ended
September 30,

2004


 

Gross premiums written

   $ 105     7 %   $ 99     $ 336     14 %   $ 293  

Net premiums written

     103     6       97       325     15       284  

Net premiums earned

   $ 108     4     $ 104     $ 319     13     $ 281  

Life policy benefits

     (82 )   47       (56 )     (244 )   25       (195 )

Acquisition costs

     (30 )   (45 )     (55 )     (86 )   (19 )     (106 )
    


       


 


       


Technical result

   $ (4 )   (44 )   $ (7 )   $ (11 )   (45 )   $ (20 )

Other operating expenses

     (6 )   12       (5 )     (18 )   4       (17 )

Net investment income

     13     11       12       38     15       33  
    


       


 


       


Allocated underwriting result(1)

   $ 3     NM     $ —       $ 9     NM     $ (4 )

NM: not meaningful

(1) Allocated underwriting result is defined as net premiums earned and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.

 

Premiums

 

The Life segment represented 13% and 11% of total net premiums written in the third quarter and the first nine months of 2005, respectively.

 

Three-month results

 

The increases in gross and net premiums written and net premiums earned during 2005 compared to 2004 resulted primarily from growth in mortality lines partially offset by a reduction in longevity, where the renewal terms did not meet the Company’s profitability objective, and health products, in light of low returns for this line of business. Quarterly comparisons are also affected by the timing of writing of this business.

 

Movements in foreign exchange rates since September 30, 2004 did not have a significant impact on the growth in net premiums written in the third quarter of 2005 compared to the same period in 2004.

 

Nine-month results

 

The increases in gross and net premiums written and net premiums earned during 2005 compared to 2004 resulted primarily from three factors. First, the Company signed a few large treaties in the fourth quarter of 2004, which resulted in higher net premiums earned in the first nine months of 2005. Second, the Company experienced further growth in mortality lines, partially offset by a reduction in longevity and health products in this segment in the first nine months of 2005. Finally, the U.S. dollar has weakened since September 30, 2004 and premiums denominated in currencies that have appreciated against the U.S. dollar were converted into U.S. dollars at higher exchange rates. Foreign exchange accounted for approximately 3 points of growth in net premiums written during the first nine months of 2005.

 

41


Based on pricing indications and renewal information received from cedants and brokers, and assuming constant foreign exchange rates, gross and net premiums written and earned are expected to increase for the remainder of 2005 for this segment.

 

Life policy benefits and acquisition costs

 

The increase in life policy benefits for the three months and nine months ended September 30, 2005 compared to the same periods in 2004 results primarily from the growth in the Company’s book of business and exposure, as evidenced by the increase in net premiums earned for this segment and from a reclassification made in the third quarter of 2004 for one large treaty where the cedant reported a reduction in life policy benefits and an equivalent increase in acquisition costs. This reclassification affects the comparison of life policy benefits and acquisition costs for the three months and nine months ended September 30, 2005 and 2004.

 

In addition, the decrease in acquisition costs for the nine months ended September 30, 2005 is also attributable to a $5 million charge in the 2004 period to reduce deferred acquisition costs on annuity treaties retained in the sale of PartnerRe Life Insurance Company of the U.S. The 2004 charge was due to a prolonged period of low interest rates, which had a negative effect on these treaties and resulted in a charge reflecting the actual experience to date as well as a revised projection of future results given updated assumptions.

 

Net investment income

 

The increase in net investment income for this segment for the third quarter and the first nine months of 2005 compared to the same periods in 2004 is attributable to the growth in the book of business and related invested assets since the third quarter of 2004.

 

42


Premium Distribution by Line of Business

 

The distribution of net premiums written by line of business for the three months and nine months ended September 30, 2005 and 2004, was as follows:

 

    

For the

three months

ended
September 30,

2005


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


 

Non-life

                        

Property and Casualty

                        

Property

   16 %   17 %   19 %   19 %

Casualty

   18     22     19     21  

Motor

   8     9     9     11  

Worldwide Specialty

                        

Agriculture

   3     4     3     3  

Aviation/Space

   8     8     6     6  

Catastrophe

   11     5     12     10  

Credit/Surety

   8     8     6     6  

Engineering/Energy

   7     8     5     6  

Marine

   3     3     3     2  

Special risk

   4     4     6     7  

ART

   1     —       1     —    

Life

   13     12     11     9  
    

 

 

 

Total

   100 %   100 %   100 %   100 %

 

As discussed elsewhere in this report, net premiums written declined by 4% and 7% in the third quarter and the first nine months of 2005, respectively, compared to the same periods in 2004. Changes in foreign exchange rates offset approximately 1 point and 3 points in the decrease in net premiums written in the third quarter and the first nine months of 2005, respectively, which affected the comparison for all lines.

 

There were modest shifts in the distribution of net premiums written by line and segment between the 2005 and 2004 periods. The shifts in distribution reflect the Company’s response to existing market conditions. Distributions of net premiums written may also be affected by the timing of renewals or the shift in treaty structure from proportional to non-proportional basis, as well as other treaty terms.

 

Three-month results

 

The following specific factors contributed to the changes in the distribution of net premiums written in the 2005 period compared to the same period in 2004:

 

    increased competition amongst reinsurers resulted in a decrease in the short-tailed property line;

 

    cedants increased retentions and reported lower premium estimates and the Company elected to non-renew certain treaties primarily in the casualty, motor, agriculture and engineering/energy lines and this resulted in decreases in those four lines;

 

    the increase in the relative percentage in the catastrophe line resulted from $46 million of reinstatement premiums in the third quarter of 2005 related to hurricane Katrina; and

 

    Life premiums written increased by 6% in the third quarter of 2005 compared to 2004 and represented a higher portion of the overall book of business following net decreases in net premiums written in the Non-life segment in 2005.

 

43


Nine-month results

 

In addition to the factors specified in the three-month results, the following factor also contributed to the changes in the distribution of net premium written in the first nine months of 2005 compared to the same period in 2004:

 

    the Company signed a few large Life treaties in the fourth quarter of 2004, which resulted in higher net premiums written in the first nine months of 2005.

 

Based on pricing indications and renewal information from cedants and brokers, and assuming constant foreign exchange rates and minimal changes in premium estimates from cedants, the Company expects that net premiums written for the Non-life segment, more particularly in the short and medium-tailed lines where competition has been most intense, will continue to decline for the remainder of 2005.

 

Premium Distribution by Treaty Type

 

The Company typically writes business on either a proportional or non-proportional basis. On proportional business, the Company shares proportionally in both the premiums and losses of the cedant. In non-proportional business, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio. In both proportional and non-proportional business, the Company typically reinsures a large group of primary insurance contracts written by the ceding company. In addition, the Company writes a small percentage of its business on a facultative basis. Facultative arrangements are generally specific to an individual risk and can be written on either a proportional or non-proportional basis. Generally, the Company has more influence over pricing, as well as terms and conditions, in non-proportional and facultative arrangements.

 

The distribution of gross premiums written by type of treaty for the three months and nine months ended September 30, 2005 and 2004, was as follows (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


 

Non-life Segment

                        

Proportional

   56 %   62 %   49 %   51 %

Non-Proportional

   24     19     34     33  

Facultative

   6     7     5     7  

Life Segment

                        

Proportional

   13     12     10     8  

Non-Proportional

   —       —       1     1  

ART Segment

                        

Proportional

   —       —       —       —    

Non-Proportional

   1     —       1     —    
    

 

 

 

Total

   100 %   100 %   100 %   100 %

 

44


The modest shift in the distribution of gross premiums by treaty type for the non-life segment for the third quarter of 2005 compared to the same period in 2004 resulted from $46 million of non-proportional reinstatement premiums related to hurricane Katrina

 

Based on pricing indications and renewal information from cedants and brokers, and assuming constant foreign exchange rates, the Company expects no significant changes in the distribution of gross premiums written by treaty type in 2005.

 

Premium Distribution by Geographic Region

 

The geographic distribution of gross premiums written for the three months and nine months ended September 30, 2005 and 2004, was as follows (in millions of U.S. dollars):

 

    

For the

three months

ended
September 30,

2005


   

For the

three months

ended
September 30,

2004


   

For the

nine months

ended
September 30,

2005


   

For the

nine months

ended
September 30,

2004


 

Europe

   40 %   41 %   47 %   46 %

North America

   45     46     40     40  

Asia, Australia and New Zealand

   8     6     8     9  

Latin America, Caribbean and Africa

   7     7     5     5  
    

 

 

 

Total

   100 %   100 %   100 %   100 %

 

Based on pricing indications and renewal information from cedants and brokers, and assuming constant foreign exchange rates, the Company expects no significant changes in the premium distribution by geographic region in 2005.

 

Premium Distribution by Production Source

 

The Company generates its business, or gross premiums written, both through brokers and through direct relationships with cedants. The distribution of gross premiums written by production source for the three