10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

OR

 

¨ 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 1-14536

 

 

PartnerRe Ltd.

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   Not Applicable
(State of incorporation)  

(I.R.S. Employer

Identification No.)

90 Pitts Bay Road, Pembroke, HM08, Bermuda

(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 such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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, net of treasury shares, as of July 29, 2013 was 54,097,067.

 

 

 


Table of Contents

PartnerRe Ltd.

INDEX TO FORM 10-Q

 

     Page  
PART I – FINANCIAL INFORMATION   

ITEM 1.

 

Financial Statements

  
 

Report of Independent Registered Public Accounting Firm

     3   
 

Condensed Consolidated Balance Sheets – June 30, 2013 (Unaudited) and December 31, 2012

     4   
 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income – Three Months and Six Months Ended June 30, 2013 and 2012 (Unaudited)

     5   
 

Condensed Consolidated Statements of Shareholders’ Equity – Six Months Ended June 30, 2013 and 2012 (Unaudited)

     6   
 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2013 and 2012 (Unaudited)

     7   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

ITEM 2.

 

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

     31   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     81   

ITEM 4.

 

Controls and Procedures

     84   
PART II – OTHER INFORMATION   

ITEM 1.

 

Legal Proceedings

     84   

ITEM 1A.

 

Risk Factors

     84   

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     85   

ITEM 3.

 

Defaults upon Senior Securities

     85   

ITEM 4.

 

Mine Safety Disclosures

     85   

ITEM 5.

 

Other Information

     85   

ITEM 6.

 

Exhibits

     85   
 

Signatures

     86   
 

Exhibit Index

     87   


Table of Contents

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 (the “Company”) as of June 30, 2013, and the related condensed consolidated statements of operations and comprehensive (loss) income for the three-month and six-month periods ended June 30, 2013 and 2012, and of shareholders’ equity, and of cash flows for the six-month periods ended June 30, 2013 and 2012. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the 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 the 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2012 and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and of cash flows for the year then ended (not presented herein); and in our report dated February 26, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche Ltd.

Deloitte & Touche Ltd.
Hamilton, Bermuda
August 1, 2013

 

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Table of Contents

PartnerRe Ltd.

Condensed Consolidated Balance Sheets

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

 

     June 30,
2013
    December 31,
2012
 
     (Unaudited)     (Audited)  

Assets

    

Investments:

    

Fixed maturities, trading securities, at fair value (amortized cost: 2013, $13,110,735; 2012, $13,653,615)

   $ 13,379,611      $ 14,395,315   

Short-term investments, trading securities, at fair value (amortized cost: 2013, $29,392; 2012, $150,634)

     29,379        150,552   

Equities, trading securities, at fair value (cost: 2013, $1,086,846; 2012, $1,000,326)

     1,172,855        1,094,002   

Other invested assets

     386,807        333,361   
  

 

 

   

 

 

 

Total investments

     14,968,652        15,973,230   

Funds held – directly managed (cost: 2013, $828,646; 2012, $895,261)

     842,415        930,741   

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

     1,261,540        1,121,705   

Accrued investment income

     172,794        184,315   

Reinsurance balances receivable

     2,477,340        1,991,991   

Reinsurance recoverable on paid and unpaid losses

     356,011        348,086   

Funds held by reinsured companies

     782,992        805,489   

Deferred acquisition costs

     676,084        568,391   

Deposit assets

     253,602        257,208   

Net tax assets

     54,346        25,098   

Goodwill

     456,380        456,380   

Intangible assets

     200,179        214,270   

Other assets

     68,245        103,528   
  

 

 

   

 

 

 

Total assets

   $ 22,570,580      $ 22,980,432   
  

 

 

   

 

 

 

Liabilities

    

Unpaid losses and loss expenses

   $ 10,336,368      $ 10,709,371   

Policy benefits for life and annuity contracts

     1,799,332        1,813,244   

Unearned premiums

     2,162,112        1,534,625   

Other reinsurance balances payable

     244,583        238,578   

Deposit liabilities

     247,960        252,217   

Net tax liabilities

     265,331        387,647   

Accounts payable, accrued expenses and other

     278,629        290,265   

Debt related to senior notes

     750,000        750,000   

Debt related to capital efficient notes

     70,989        70,989   
  

 

 

   

 

 

 

Total liabilities

     16,155,304        16,046,936   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Common shares (par value $1.00; issued: 2013, 86,364,643 shares; 2012, 85,459,905 shares)

     86,365        85,460   

Preferred shares (par value $1.00; issued and outstanding: 2013, 34,150,000 shares and 2012, 35,750,000 shares; aggregate liquidation value: 2013, $853,750 and 2012, $893,750)

     34,150        35,750   

Additional paid-in capital

     3,872,122        3,861,844   

Accumulated other comprehensive (loss) income

     (20,344     10,597   

Retained earnings

     4,898,372        4,952,002   

Common shares held in treasury, at cost (2013, 32,042,911 shares; 2012, 26,550,530 shares)

     (2,503,708     (2,012,157
  

 

 

   

 

 

 

Total shareholders’ equity attributable to PartnerRe Ltd.

     6,366,957        6,933,496   

Noncontrolling interests

     48,319        —    
  

 

 

   

 

 

 

Total shareholders’ equity

     6,415,276        6,933,496   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 22,570,580      $ 22,980,432   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

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

 

     For the three
months ended
June  30,
2013
    For the three
months ended
June  30,
2012
    For the six
months ended
June  30,
2013
    For the six
months ended
June  30,
2012
 

Revenues

        

Gross premiums written

   $ 1,340,582      $ 1,163,243      $ 3,097,467      $ 2,730,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums written

   $ 1,309,318      $ 1,136,046      $ 2,945,750      $ 2,609,331   

Increase in unearned premiums

     (100,682     (45,168     (590,434     (528,623
  

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     1,208,636        1,090,878        2,355,316        2,080,708   

Net investment income

     124,503        153,506        248,207        300,402   

Net realized and unrealized investment (losses) gains

     (299,215     38,132        (276,272     230,867   

Other income

     3,878        2,654        7,805        5,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,037,802        1,285,170        2,335,056        2,617,377   

Expenses

        

Losses and loss expenses and life policy benefits

     866,843        706,137        1,527,794        1,282,623   

Acquisition costs

     241,743        232,723        475,942        444,330   

Other operating expenses

     144,833        106,184        260,874        204,358   

Interest expense

     12,232        12,223        24,460        24,443   

Amortization of intangible assets

     7,045        8,893        14,091        17,786   

Net foreign exchange losses (gains)

     10,584        (7,770     8,543        (5,181
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,283,280        1,058,390        2,311,704        1,968,359   

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

     (245,478     226,780        23,352        649,018   

Income tax (benefit) expense

     (74,569     50,136        (32,894     117,310   

Interest in (losses) earnings of equity investments

     (3,479     (498     3,736        4,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (174,388     176,146        59,982        536,287   

Net income attributable to noncontrolling interests

     (1,183     —         (1,183     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to PartnerRe Ltd.

     (175,571     176,146        58,799        536,287   

Preferred dividends

     14,796        15,405        29,494        30,811   

Loss on redemption of preferred shares

     —         —         9,135        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to PartnerRe Ltd. common shareholders

   $ (190,367   $ 160,741      $ 20,170      $ 505,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

        

Net (loss) income attributable to PartnerRe Ltd.

   $ (175,571   $ 176,146      $ 58,799      $ 536,287   

Change in currency translation adjustment

     (11,514     (19,157     (31,344     (1,950

Change in unfunded pension obligation, net of tax

     (130     1,294        866        425   

Change in unrealized losses on investments

     (230     (239     (463     (481
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (11,874     (18,102     (30,941     (2,006
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to PartnerRe Ltd.

   $ (187,445   $ 158,044      $ 27,858      $ 534,281   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data attributable to PartnerRe Ltd. common shareholders

        

Net (loss) income per common share:

        

Basic net (loss) income

   $ (3.37   $ 2.52      $ 0.35      $ 7.82   

Diluted net (loss) income

   $ (3.37   $ 2.50      $ 0.34      $ 7.76   

Weighted average number of common shares outstanding

     56,485,882        63,816,027        57,449,528        64,610,127   

Weighted average number of common shares and common share equivalents outstanding

     56,485,882        64,423,036        58,534,526        65,132,928   

Dividends declared per common share

   $ 0.64      $ 0.62      $ 1.28      $ 1.24   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(Expressed in thousands of U.S. dollars)

 

     For the six
months ended
June  30,
2013
    For the six
months ended
June  30,
2012
 

Common shares

    

Balance at beginning of period

   $ 85,460      $ 84,767   

Issuance of common shares

     905        375   
  

 

 

   

 

 

 

Balance at end of period

     86,365        85,142   

Preferred shares

    

Balance at beginning of period

     35,750        35,750   

Issuance of preferred shares

     10,000        —    

Redemption of preferred shares

     (11,600     —    
  

 

 

   

 

 

 

Balance at end of period

     34,150        35,750   

Additional paid-in capital

    

Balance at beginning of period

     3,861,844        3,803,796   

Issuance of common shares

     48,278        28,125   

Issuance of preferred shares

     231,265        —    

Redemption of preferred shares

     (269,265     —    
  

 

 

   

 

 

 

Balance at end of period

     3,872,122        3,831,921   

Accumulated other comprehensive loss

    

Balance at beginning of period

     10,597        (12,644

Currency translation adjustment

    

Balance at beginning of period

     32,755        4,267   

Change in currency translation adjustment

     (31,344     (1,950
  

 

 

   

 

 

 

Balance at end of period

     1,411        2,317   

Unfunded pension obligation

    

Balance at beginning of period

     (27,370     (23,076

Change in unfunded pension obligation

     866        425   
  

 

 

   

 

 

 

Balance at end of period (net of tax: 2013, $7,494; 2012, $6,449)

     (26,504     (22,651

Unrealized gain on investments

    

Balance at beginning of period

     5,212        6,165   

Change in unrealized losses on investments

     (463     (481
  

 

 

   

 

 

 

Balance at end of period (net of tax: 2013 and 2012: $nil)

     4,749        5,684   
  

 

 

   

 

 

 

Balance at end of period

     (20,344     (14,650

Retained earnings

    

Balance at beginning of period

     4,952,002        4,035,103   

Net income

     59,982        536,287   

Net income attributable to noncontrolling interests

     (1,183     —    

Dividends on common shares

     (73,800     (79,924

Dividends on preferred shares

     (29,494     (30,811

Loss on redemption of preferred shares

     (9,135     —    
  

 

 

   

 

 

 

Balance at end of period

     4,898,372        4,460,655   

Common shares held in treasury

    

Balance at beginning of period

     (2,012,157     (1,479,230

Repurchase of common shares

     (491,551     (221,995
  

 

 

   

 

 

 

Balance at end of period

     (2,503,708     (1,701,225
  

 

 

   

 

 

 

Total shareholders’ equity attributable to PartnerRe Ltd.

   $ 6,366,957      $ 6,697,593   

Noncontrolling interests

     48,319        —    
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 6,415,276      $ 6,697,593   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Expressed in thousands of U.S. dollars)

 

     For the six
months ended
June  30,
2013
    For the six
months ended
June  30,
2012
 

Cash flows from operating activities

    

Net income

   $ 59,982      $ 536,287   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of net premium on investments

     82,147        64,054   

Amortization of intangible assets

     14,091        17,786   

Net realized and unrealized investment losses (gains)

     276,272        (230,867

Changes in:

    

Reinsurance balances, net

     (555,356     (281,652

Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable

     101,696        33,925   

Funds held by reinsured companies and funds held – directly managed

     62,440        36,609   

Deferred acquisition costs

     (121,359     (81,990

Net tax assets and liabilities

     (144,342     50,431   

Unpaid losses and loss expenses including life policy benefits

     (181,198     (494,083

Unearned premiums

     590,434        528,623   

Other net changes in operating assets and liabilities

     45,951        3,445   
  

 

 

   

 

 

 

Net cash provided by operating activities

     230,758        182,568   

Cash flows from investing activities

    

Sales of fixed maturities

     3,844,517        3,624,663   

Redemptions of fixed maturities

     772,227        512,544   

Purchases of fixed maturities

     (4,198,801     (3,797,073

Sales and redemptions of short-term investments

     226,390        52,804   

Purchases of short-term investments

     (105,446     (42,046

Sales of equities

     539,498        428,226   

Purchases of equities

     (582,231     (471,158

Other, net

     (7,122     16,116   
  

 

 

   

 

 

 

Net cash provided by investing activities

     489,032        324,076   

Cash flows from financing activities

    

Dividends paid to shareholders

     (103,294     (110,735

Repurchase of common shares

     (496,023     (221,995

Issuance of common shares

     34,416        16,036   

Net proceeds from issuance of preferred shares

     241,265        —    

Repurchase of preferred shares

     (290,000     —    

Sale of shares to noncontrolling interests

     47,136        —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (566,500     (316,694

Effect of foreign exchange rate changes on cash

     (13,455     (19,789

Increase in cash and cash equivalents

     139,835        170,161   

Cash and cash equivalents – beginning of period

     1,121,705        1,342,257   
  

 

 

   

 

 

 

Cash and cash equivalents – end of period

   $ 1,261,540      $ 1,512,418   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Taxes paid

   $ 112,671      $ 77,278   

Interest paid

   $ 24,630      $ 24,630   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization

PartnerRe Ltd. (the Company) predominantly provides reinsurance and certain specialty insurance lines on a worldwide basis through its principal wholly-owned subsidiaries, including Partner Reinsurance Company Ltd., Partner Reinsurance Europe SE and Partner Reinsurance Company of the U.S. Risks reinsured include, but are not limited to, property, casualty, motor, agriculture, aviation/space, catastrophe, credit/surety, engineering, energy, marine, specialty property, specialty casualty, multiline and other lines, mortality, longevity, accident and health and alternative risk products. The Company’s alternative risk products include weather and credit protection to financial, industrial and service companies on a worldwide basis.

Effective December 31, 2012, the Company completed the acquisition of Presidio Reinsurance Group, Inc. (Presidio), a California-based U.S. specialty accident and health reinsurance and insurance writer. The Condensed Consolidated Statements of Operations and Cash Flows include the results of Presidio from January 1, 2013.

2. Significant Accounting Policies

The Company’s Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

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 its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

 

   

Unpaid losses and loss expenses;

 

   

Policy benefits for life and annuity contracts;

 

   

Gross and net premiums written and net premiums earned;

 

   

Recoverability of deferred acquisition costs;

 

   

Recoverability of deferred tax assets;

 

   

Valuation of goodwill and intangible assets; and

 

   

Valuation of certain assets and derivative financial instruments that are measured using significant unobservable inputs.

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. As the Company’s reinsurance operations are exposed to low-frequency, high-severity risk events, some of which are seasonal, results for certain interim periods may include unusually low loss experience, while results for other interim periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods are not necessarily indicative of results for the full 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, 2012.

3. Fair Value

(a) Fair Value of Financial Instrument Assets

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement.

 

8


Table of Contents

The Company determines the appropriate level in the hierarchy for each financial instrument that it measures at fair value. In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches. The hierarchy is broken down into three levels based on the observability of inputs as follows:

 

   

Level 1 inputs – Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

The Company’s financial instruments that it measures at fair value using Level 1 inputs generally include: equities and real estate investment trusts listed on a major exchange, exchange traded funds and exchange traded derivatives, including futures that are actively traded.

 

   

Level 2 inputs – Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and significant directly or indirectly observable inputs, other than quoted prices, used in industry accepted models.

The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. government issued bonds; U.S. government sponsored enterprises bonds; U.S. state, territory and municipal entities bonds; Non-U.S. sovereign government, supranational and government related bonds consisting primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations; investment grade and high yield corporate bonds; catastrophe bonds; mortality bonds; asset-backed securities; mortgage-backed securities; certain equities traded on foreign exchanges; certain fixed income mutual funds; foreign exchange forward contracts; over-the-counter derivatives such as foreign currency option contracts, credit default swaps, interest rate swaps and to-be-announced mortgage-backed securities (TBAs).

 

   

Level 3 inputs – Unobservable inputs.

The Company’s financial instruments that it measures at fair value using Level 3 inputs generally include: inactively traded fixed maturities including U.S. state, territory and municipal bonds; privately issued corporate securities; special purpose financing asset-backed bonds; unlisted equities; real estate and certain other mutual fund investments; inactively traded weather derivatives; notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps.

The Company’s policy is to recognize transfers between the hierarchy levels at the beginning of the period.

The Company’s financial instruments measured at fair value include investments classified as trading securities, certain other invested assets and the segregated investment portfolio underlying the funds held – directly managed account. At June 30, 2013 and December 31, 2012, the Company’s financial instruments measured at fair value were classified between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

 

9


Table of Contents

June 30, 2013

   Quoted prices in
active markets for
identical assets
(Level 1)
    Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
    Total  

Fixed maturities

        

U.S. government and government sponsored enterprises

   $ —       $ 990,738      $ —       $ 990,738   

U.S. states, territories and municipalities

     —         17,446        219,163        236,609   

Non-U.S. sovereign government, supranational and government related

     —         2,139,831        —         2,139,831   

Corporate

     —         6,146,284        99,896        6,246,180   

Asset-backed securities

     —         424,429        426,288        850,717   

Residential mortgage-backed securities

     —         2,873,669        —         2,873,669   

Other mortgage-backed securities

     —         41,867        —         41,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —       $ 12,634,264      $ 745,347      $ 13,379,611   

Short-term investments

   $ —       $ 29,379      $ —       $ 29,379   

Equities

        

Real estate investment trusts

   $ 173,606      $ —       $ —       $ 173,606   

Energy

     161,676        —         —         161,676   

Finance

     110,869        12,152        13,000        136,021   

Consumer noncyclical

     126,009        —         —         126,009   

Communications

     72,282        —         2,040        74,322   

Technology

     55,364        —         8,012        63,376   

Industrials

     47,066        —         —         47,066   

Consumer cyclical

     44,455        —         —         44,455   

Utilities

     38,004        —         —         38,004   

Insurance

     37,891        —         —         37,891   

Other

     21,165        —         —         21,165   

Mutual funds and exchange traded funds

     40,190        201,525        7,549        249,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 928,577      $ 213,677      $ 30,601      $ 1,172,855   

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —       $ 7,486      $ —       $ 7,486   

Futures contracts

     55,879        —         —         55,879   

Credit default swaps (assumed risks)

     —         157        —         157   

Insurance-linked securities

     —         —         814        814   

Total return swaps

     —         —         3,328        3,328   

Interest rate swaps

     —         215        —         215   

TBAs

     —         1        —         1   

Other

        

Notes and loan receivables and notes securitization

     —         —         44,224        44,224   

Annuities and residuals

     —         —         30,555        30,555   

Private equities

     —         —         21,100        21,100   

Derivative liabilities

        

Foreign exchange forward contracts

     —         (4,656     —         (4,656

Foreign currency option contracts

     —         (3,280     —         (3,280

Futures contracts

     (9     —         —         (9

Credit default swaps (protection purchased)

     —         (404     —         (404

Insurance-linked securities

     —         —         (906     (906

Total return swaps

     —         —         (903     (903

Interest rate swaps

     —         (4,919     —         (4,919

TBAs

     —         (3,805     —         (3,805
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 55,870      $ (9,205   $ 98,212      $ 144,877   

Funds held – directly managed

        

U.S. government and government sponsored enterprises

   $ —       $ 171,265      $ —       $ 171,265   

U.S. states, territories and municipalities

     —         —         337        337   

Non-U.S. sovereign government, supranational and government related

     —         195,914        —         195,914   

Corporate

     —         287,183        —         287,183   

Short-term investments

     —         293        —         293   

Other invested assets

     —         —         15,207        15,207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —       $ 654,655      $ 15,544      $ 670,199   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 984,447      $ 13,522,770      $ 889,704      $ 15,396,921   

 

10


Table of Contents

December 31, 2012

   Quoted prices in
active markets for
identical assets
(Level 1)
    Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
    Total  

Fixed maturities

        

U.S. government and government sponsored enterprises

   $ —       $ 1,130,924      $ —       $ 1,130,924   

U.S. states, territories and municipalities

     —         10,151        233,235        243,386   

Non-U.S. sovereign government, supranational and government related

     —         2,375,673        —         2,375,673   

Corporate

     —         6,554,934        100,904        6,655,838   

Asset-backed securities

     —         400,336        323,134        723,470   

Residential mortgage-backed securities

     —         3,199,924        —         3,199,924   

Other mortgage-backed securities

     —         66,100        —         66,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —       $ 13,738,042      $ 657,273      $ 14,395,315   

Short-term investments

   $ —       $ 150,552      $ —       $ 150,552   

Equities

        

Consumer noncyclical

   $ 130,526      $ —       $ —       $ 130,526   

Energy

     118,213        —         —         118,213   

Finance

     79,456        7,472        13,477        100,405   

Technology

     71,927        —         6,987        78,914   

Real estate investment trusts

     66,846        —         —         66,846   

Communications

     65,722        —         —         65,722   

Consumer cyclical

     62,526        —         —         62,526   

Industrials

     59,242        —         —         59,242   

Insurance

     39,132        —         —         39,132   

Other

     60,913        —         —         60,913   

Mutual funds and exchange traded funds

     34,053        270,246        7,264        311,563   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 788,556      $ 277,718      $ 27,728      $ 1,094,002   

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —       $ 7,889      $ —       $ 7,889   

Foreign currency option contracts

     —         1,410        —         1,410   

Futures contracts

     1,956        —         —         1,956   

Credit default swaps (protection purchased)

     —         6        —         6   

Credit default swaps (assumed risks)

     —         512        —         512   

Total return swaps

     —         —         6,630        6,630   

TBAs

     —         115        —         115   

Other

        

Notes and loan receivables and notes securitization

     —         —         34,902        34,902   

Annuities and residuals

     —         —         46,882        46,882   

Private equities

     —         —         1,404        1,404   

Derivative liabilities

        

Foreign exchange forward contracts

     —         (17,395     —         (17,395

Foreign currency option contracts

     —         (186     —         (186

Futures contracts

     (1,352     —         —         (1,352

Credit default swaps (protection purchased)

     —         (807     —         (807

Insurance-linked securities

     —         —         (2,173     (2,173

Total return swaps

     —         —         (546     (546

Interest rate swaps

     —         (7,880     —         (7,880

TBAs

     —         (163     —         (163
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 604      $ (16,499   $ 87,099      $ 71,204   

Funds held – directly managed

        

U.S. government and government sponsored enterprises

   $ —       $ 218,696      $ —       $ 218,696   

U.S. states, territories and municipalities

     —         —         345        345   

Non-U.S. sovereign government, supranational and government related

     —         233,987        —         233,987   

Corporate

     —         362,243        —         362,243   

Other invested assets

     —         —         17,976        17,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —       $ 814,926      $ 18,321      $ 833,247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 789,160      $ 14,964,739      $ 790,421      $ 16,544,320   

 

11


Table of Contents

At June 30, 2013 and December 31, 2012, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $241.9 million and $262.2 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting, equity method of accounting or investment company accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $670.2 million and $833.2 million at June 30, 2013 and December 31, 2012, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $20.2 million and $53.7 million, respectively, and accrued investment income of $8.3 million and $10.2 million, respectively. At June 30, 2013 and December 31, 2012, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $143.7 million and $33.6 million, respectively, which primarily related to other assets and liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012).

At June 30, 2013 and December 31, 2012, substantially all of the accrued investment income in the Condensed Consolidated Balance Sheets related to the Company’s investments and the investments underlying the funds held – directly managed account for which the fair value option was elected.

During the three months and six months ended June 30, 2013, there were no transfers between Level 1 and Level 2. During the three months and six months ended June 30, 2012, certain equities traded on foreign exchanges with a fair value of $1.1 million were transferred from Level 2 to Level 1 given they were trading in an active market at June 30, 2012.

Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial instruments. At June 30, 2013 and December 31, 2012, the fair values of financial instrument assets recorded in the Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

 

12


Table of Contents

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended June 30, 2013 and 2012 (in thousands of U.S. dollars):

 

For the three months ended June 30, 2013

   Balance at
beginning
of period
     Realized and
unrealized
investment
(losses) gains
included in
net  loss
    Purchases
and
issuances  (1)
     Settlements
and
sales
    Net
transfers
into/ (out of)
Level 3
     Balance
at end
of period
     Change in
unrealized
investment
(losses) gains
relating to
assets  held at
end of period
 

Fixed maturities

                  

U.S. states, territories and municipalities

   $ 232,292       $ (13,009   $ —        $ (120   $ —        $ 219,163       $ (13,009

Corporate

     100,716         (820     —          —         —          99,896         (820

Asset-backed securities

     325,659         (6,063     128,009         (21,317     —          426,288         (5,921
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Fixed maturities

   $ 658,667       $ (19,892   $ 128,009       $ (21,437   $ —        $ 745,347       $ (19,750

Equities

                  

Finance

   $ 12,553       $ 447      $ —        $ —       $ —        $ 13,000       $ 447   

Technology

     7,647         365        —          —         —          8,012         365   

Communications

     —          —         2,040         —         —          2,040         —    

Mutual funds and exchange traded funds

     7,442         107        —          —         —          7,549         107   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Equities

   $ 27,642       $ 919      $ 2,040       $ —       $ —        $ 30,601       $ 919   

Other invested assets

                  

Derivatives, net

   $ 2,732       $ (520   $ 121       $ —       $ —        $ 2,333       $ (3,020

Notes and loan receivables and notes securitization

     34,058         (1,322     11,990         (502     —          44,224         (1,322

Annuities and residuals

     35,656         (243     —          (4,858     —          30,555         (510

Private equities

     17,764         (447     3,783         —         —          21,100         (447
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other invested assets

   $ 90,210       $ (2,532   $ 15,894       $ (5,360   $ —        $ 98,212       $ (5,299

Funds held – directly managed

                  

U.S. states, territories and municipalities

   $ 341       $ (4   $ —        $ —       $ —        $ 337       $ (4

Other invested assets

     15,468         (261     —          —         —          15,207         (261
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Funds held – directly managed

   $ 15,809       $ (265   $ —        $ —       $ —        $ 15,544       $ (265
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 792,328       $ (21,770   $ 145,943       $ (26,797   $ —        $ 889,704       $ (24,395

 

(1) Purchases and issuances of derivatives includes issuances of $0.8 million.

 

13


Table of Contents

For the three months ended June 30, 2012

   Balance at
beginning
of period
     Realized and
unrealized
investment
gains (losses)
included in
net income
    Purchases
and
issuances  (1)
    Settlements
and
sales
    Net
transfers
into/ (out of)
Level 3
     Balance
at end of
period
     Change in
unrealized
investment gains
(losses) relating
to assets held

at end of period
 

Fixed maturities

                 

U.S. states, territories and municipalities

   $ 115,580       $ 1,744      $ —       $ (89   $ —        $ 117,235       $ 1,744   

Corporate

     111,951         (897     16        —         —          111,070         (897

Asset-backed securities

     264,456         9,512        32,470        (16,067     —          290,371         9,296   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Fixed maturities

   $ 491,987       $ 10,359      $ 32,486      $ (16,156   $ —        $ 518,676       $ 10,143   

Equities

                 

Finance

   $ 12,730       $ (108   $ 6,800      $ —       $ —        $ 19,422       $ (108

Technology

     —          —         7,192        —         —          7,192         —    

Mutual funds and exchange traded funds

     6,649         111        —         —         —          6,760         111   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Equities

   $ 19,379       $ 3      $ 13,992      $ —       $ —        $ 33,374       $ 3   

Other invested assets

                 

Derivatives, net

   $ 2,585       $ 742      $ (2,120   $ —       $ —        $ 1,207       $ (99

Notes and loan receivables and notes securitization

     58,127         4,077        7,319        (25,219     —          44,304         (3,126

Annuities and residuals

     28,408         912        —         (2,095     —          27,225         509   

Private equities

     —          —         1,000        —         —          1,000         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other invested assets

   $ 89,120       $ 5,731      $ 6,199      $ (27,314   $ —        $ 73,736       $ (2,716

Funds held – directly managed

                 

U.S. states, territories and municipalities

   $ 329       $ (8   $ —       $ —       $ —        $ 321       $ (8

Other invested assets

     17,683         (2,607     —         —         —          15,076         (2,607
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Funds held – directly managed

   $ 18,012       $ (2,615   $ —       $ —       $ —        $ 15,397       $ (2,615
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 618,498       $ 13,478      $ 52,677      $ (43,470   $ —        $ 641,183       $ 4,815   

 

(1) Purchases and issuances of derivatives includes issuances of $2.4 million.

 

14


Table of Contents

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the six months ended June 30, 2013 and 2012 (in thousands of U.S. dollars):

 

For the six months ended June 30, 2013

   Balance at
beginning
of period
     Realized and
unrealized
investment
(losses) gains
included in
net income
    Purchases
and
issuances  (1)
     Settlements
and

sales (2)
    Net
transfers
into/ (out of)
Level 3
     Balance
at end
of period
     Change in
unrealized
investment
(losses) gains
relating to
assets held at
end of period
 

Fixed maturities

                  

U.S. states, territories and municipalities

   $ 233,235       $ (13,858   $ —        $ (214   $ —        $ 219,163       $ (13,858

Corporate

     100,904         (1,008     —          —         —          99,896         (1,008

Asset-backed securities

     323,134         (4,322     155,165         (47,689     —          426,288         (4,140
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Fixed maturities

   $ 657,273       $ (19,188   $ 155,165       $ (47,903   $ —        $ 745,347       $ (19,006

Equities

                  

Finance

   $ 13,477       $ (477   $ —        $ —       $ —        $ 13,000       $ (477

Technology

     6,987         1,025        —          —         —          8,012         1,025   

Communications

     —          —         2,040         —         —          2,040         —    

Mutual funds and exchange traded funds

     7,264         285        —          —         —          7,549         285   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Equities

   $ 27,728       $ 833      $ 2,040       $ —       $ —        $ 30,601       $ 833   

Other invested assets

                  

Derivatives, net

   $ 3,911       $ (4,199   $ 121       $ 2,500      $ —        $ 2,333       $ (3,698

Notes and loan receivables and notes securitization

     34,902         (1,383     13,350         (2,645     —          44,224         (1,383

Annuities and residuals

     46,882         93        —          (16,420     —          30,555         316   

Private equities

     1,404         (3,512     23,208         —         —          21,100         (3,512
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other invested assets

   $ 87,099       $ (9,001   $ 36,679       $ (16,565   $ —        $ 98,212       $ (8,277

Funds held – directly managed

                  

U.S. states, territories and municipalities

   $ 345       $ (8   $ —        $ —       $ —        $ 337       $ (8

Other invested assets

     17,976         (2,698     —          (71     —          15,207         (1,634
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Funds held – directly managed

   $ 18,321       $ (2,706   $ —        $ (71   $ —        $ 15,544       $ (1,642
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 790,421       $ (30,062   $ 193,884       $ (64,539   $ —        $ 889,704       $ (28,092

 

(1) Purchases and issuances of derivatives includes issuances of $0.8 million.
(2) Settlements and sales of annuities and residuals include sales of $6.3 million.

 

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Table of Contents

For the six months ended June 30, 2012

   Balance at
beginning
of period
     Realized and
unrealized
investment
gains (losses)
included in
net income
    Purchases
and
issuances  (1)
    Settlements
and

sales
    Net
transfers
into/ (out of)
Level 3
     Balance
at end
of period
     Change in
unrealized
investment
gains (losses)
relating to
assets held at
end of period
 

Fixed maturities

                 

U.S. states, territories and municipalities

   $ 111,415       $ 1,282      $ 4,700      $ (162   $ —        $ 117,235       $ 1,282   

Corporate

     111,700         (570     64        (124     —          111,070         (570

Asset-backed securities

     257,415         8,193        82,590        (57,827     —          290,371         8,032   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Fixed maturities

   $ 480,530       $ 8,905      $ 87,354      $ (58,113   $ —        $ 518,676       $ 8,744   

Equities

                 

Finance

   $ 9,670       $ 2,952      $ 6,800      $ —       $ —        $ 19,422       $ 2,952   

Technology

     —          —         7,192        —         —          7,192         —    

Mutual funds and exchange traded funds

     6,495         265        —         —         —          6,760         265   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Equities

   $ 16,165       $ 3,217      $ 13,992      $ —       $ —        $ 33,374       $ 3,217   

Other invested assets

                 

Derivatives, net

   $ 5,622       $ 1,005      $ (5,420   $ —       $ —        $ 1,207       $ 164   

Notes and loan receivables and notes securitization

     63,565         6,471        35,625        (61,357     —          44,304         1,474   

Annuities and residuals

     27,840         2,347        1,423        (4,385     —          27,225         1,633   

Private equities

     —          —         1,000        —         —          1,000         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other invested assets

   $ 97,027       $ 9,823      $ 32,628      $ (65,742   $ —        $ 73,736       $ 3,271   

Funds held – directly managed

                 

U.S. states, territories and municipalities

   $ 334       $ (13   $ —       $ —       $ —        $ 321       $ (13

Other invested assets

     15,433         (357     —         —         —          15,076         (357
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Funds held – directly managed

   $ 15,767       $ (370   $ —       $ —       $ —        $ 15,397       $ (370
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 609,489       $ 21,575      $ 133,974      $ (123,855   $ —        $ 641,183       $ 14,862   

 

(1) Purchases and issuances of derivatives includes issuances of $5.7 million.

The following tables show the significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at June 30, 2013 and December 31, 2012 (in thousands of U.S. dollars):

 

June 30, 2013

   Fair value     

Valuation techniques

  

Unobservable inputs

   Range
(Weighted average)

Fixed maturities

           

U.S. states, territories and municipalities

   $ 219,163       Discounted cash flow    Credit spreads    3.1% - 4.6%(3.9%)

Asset-backed securities – interest only

     11,489       Discounted cash flow    Credit spreads    7.0% - 12.1%(9.5%)
         Prepayment speed    20.0%(20.0%)

Asset-backed securities – other

     414,799       Discounted cash flow    Credit spreads    4.0% - 12.3%(7.5%)

Equities

           

Finance

     13,000       Weighted market comparables    Net income multiple    14.6(14.6)
         Tangible book value multiple    1.1(1.1)
         Liquidity discount    25.0%(25.0%)
         Comparable return    3.6%(3.6%)

Technology

     8,012       Weighted market comparables    Revenue multiple    2.0(2.0)
         Adjusted earnings multiple    12.9(12.9)
         Liquidity discount    25.0%(25.0%)
         Comparable return    4.8%(4.8%)

Communications

     2,040       Weighted market comparables    Adjusted earnings multiple    10.0(10.0)
         Comparable return    0%(0%)

Other invested assets

           

Total return swaps

     2,425       Discounted cash flow    Credit spreads    3.1% - 4.6%(3.6%)

Notes and loan receivables

     24,265       Discounted cash flow    Credit spreads    17.5%(17.5%)
         Gross revenue/fair value    1.6 - 1.7(1.6)

Notes securitization

     19,959       Discounted cash flow    Credit spreads    6.7% (6.7%)

Annuities and residuals

     30,555       Discounted cash flow    Credit spreads    6.2% - 8.7%(7.2%)
         Prepayment speed    0% - 15.0%(7.4%)
         Constant default rate    0.3% - 35.0%(13.5%)

Private equity

     15,635       Liquidation analysis    Net assets, as reported    100.0%(100.0%)
         Recoverability of intangible assets    0%(0%)

Private equity fund

     5,465       Lag reported market value    Net asset value, as reported    100.0%(100.0%)
         Market adjustments    -13.0% - 0%(-4.0%)

Funds held – directly managed Other invested assets

     15,207       Lag reported market value    Net asset value, as reported    100.0%(100.0%)
         Market adjustments    -20.1% -  0%(-15.1%)

 

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Table of Contents

December 31, 2012

   Fair value     

Valuation techniques

  

Unobservable inputs

   Range
(Weighted average)

Fixed maturities

           

U.S. states, territories and municipalities

   $ 233,235       Discounted cash flow    Credit spreads    2.8% - 4.5%(3.7%)

Asset-backed securities – interest only

     12,625       Discounted cash flow    Credit spreads    6.8% - 11.7%(9.1%)
         Prepayment speed    20.0%(20.0%)

Asset-backed securities – other

     310,509       Discounted cash flow    Credit spreads    4.0% - 12.2%(7.6%)

Equities

           

Finance

     13,477       Weighted market comparables    Comparable return    0.8%(0.8%)

Technology

     6,987       Weighted market comparables    Comparable return    -1.5%(-1.5%)

Other invested assets

           

Total return swaps

     6,084       Discounted cash flow    Credit spreads    2.6% - 4.6%(3.2%)

Notes and loan receivables

     24,902       Discounted cash flow    Credit spreads    17.5%(17.5%)
         Gross revenue/fair value    1.7 - 2.1(1.8)

Notes securitization

     10,000       Discounted cash flow    Credit spreads    6.5%(6.5%)

Annuities and residuals

     46,882       Discounted cash flow    Credit spreads    4.7% - 9.9%(7.2%)
         Prepayment speed    0% - 15.0%(7.6%)
         Constant default rate    2.3% - 35.0%(13.2%)

Private equity fund

     1,404       Lag reported market value    Net asset value, as reported    100.0%(100.0%)
         Market adjustments    7.3%(7.3%)

Funds held – directly managed

           

Other invested assets

     17,976       Lag reported market value    Net asset value, as reported    100.0%(100.0%)
         Market adjustments    -38.1% - 0%(-12.1%)

The tables above do not include financial instruments that are measured using unobservable inputs (Level 3) where the unobservable inputs were obtained from external sources and used without adjustment. These financial instruments include mortality bonds (included within corporate fixed maturities), mutual fund investments (included within equities), and certain insurance-linked securities (included within other invested assets).

The Company has established a Valuation Committee which is responsible for determining the Company’s invested asset valuation policy and related procedures, for reviewing significant changes in the fair value measurements of securities classified as Level 3 from period to period, and for reviewing in accordance with the invested asset valuation policy an independent internal peer analysis that is performed on the fair value measurements of all securities that are classified as Level 3. The Valuation Committee is comprised of members of the Company’s senior management team and meets on a quarterly basis. The Company’s invested asset valuation policy is monitored by the Company’s Audit Committee of the Board of Directors (Board) and approved annually by the Company’s Risk and Finance Committee of the Board.

 

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Table of Contents

Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months and six months ended June 30, 2013 and 2012 were as follows (in thousands of U.S. dollars):

 

     For the three
months ended
June 30, 2013
    For the three
months ended
June 30, 2012
    For the six
months ended
June 30, 2013
    For the six
months ended
June 30, 2012
 

Fixed maturities and short-term investments

   $ (395,757   $ 32,995      $ (467,427   $ 80,815   

Equities

     (57,715     (32,963     (7,649     17,808   

Other invested assets

     (2,234     13,610        (7,068     18,160   

Funds held – directly managed

     (15,372     1,675        (21,415     8,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (471,078   $ 15,317      $ (503,559   $ 125,574   

All of the above changes in fair value are included in the Condensed Consolidated Statements of Operations under the caption Net realized and unrealized investment (losses) gains.

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument recorded in the Condensed Consolidated Balance Sheets. There have been no material changes in the Company’s valuation techniques during the periods presented.

Fixed maturities

 

   

U.S. government and government sponsored enterprises – U.S. government and government sponsored enterprises securities consist primarily of bonds issued by the U.S. Treasury, corporate debt securities issued by the Federal National Mortgage Association, the Federal Home Loan Bank and the Private Export Funding Corporation. These securities are generally priced by independent pricing services. The independent pricing services may use actual transaction prices for securities that have been actively traded. For securities that have not been actively traded, each pricing source has its own proprietary method to determine the fair value, which may incorporate option adjusted spreads (OAS), interest rate data and market news. The Company generally classifies these securities in Level 2.

 

   

U.S. states, territories and municipalities – U.S. states, territories and municipalities securities consist primarily of bonds issued by U.S. states, territories and municipalities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2. Certain of the bonds that are issued by municipal housing authorities are not actively traded and are priced based on internal models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these U.S. states, territories and municipalities securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

 

   

Non-U.S. sovereign government, supranational and government related – Non-U.S. sovereign government, supranational and government related securities consist primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2.

 

   

Corporate – Corporate securities consist primarily of bonds issued by U.S. and foreign corporations covering a variety of industries and issuing countries. These securities are generally priced by independent pricing services and brokers. The pricing provider incorporates information including credit spreads, interest rate data and market news into the valuation of each security. The Company generally classifies these securities in Level 2. When a corporate security is inactively traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.

 

   

Asset-backed securities – Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are backed by student loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing, these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs. The Company generally classifies these securities in Level 3. The significant unobservable inputs used in the fair value measurement of these asset-backed securities classified as Level 3 are prepayment speeds and credit spreads. Significant increases (decreases) in these prepayment speeds and credit spreads in isolation could result in a significantly lower (higher) fair value measurement.

 

   

Residential mortgage-backed securities – Residential mortgage-backed securities primarily consist of bonds issued by the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, as well as private, non-agency issuers. With the exception of private, non-agency issuers, these residential mortgage-backed securities are generally priced by independent pricing services and brokers. When current market trades are not available, the pricing provider or the Company will employ proprietary models with observable inputs including other trade information, prepayment speeds, yield curves and credit spreads. The Company generally classifies these securities in Level 2.

 

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Table of Contents
   

Other mortgage-backed securities – Other mortgage-backed securities primarily consist of commercial mortgage-backed securities. These securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2.

In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not been actively traded involve the use of “matrix pricing” in which the independent pricing source applies the credit spread for a comparable security that has traded recently to the current yield curve to determine a reasonable fair value. The Company uses a pricing service ranking to consistently select the most appropriate pricing service in instances where it receives multiple quotes on the same security. When fair values are unavailable from these independent pricing sources, quotes are obtained directly from broker-dealers who are active in the corresponding markets. Most of the Company’s fixed maturities are priced from the pricing services or dealer quotes. The Company will typically not make adjustments to prices received from pricing services or dealer quotes; however, in instances where the quoted external price for a security uses significant unobservable inputs, the Company will classify that security as Level 3. The methods used to develop and substantiate the unobservable inputs used are based on the Company’s valuation policy and are dependent upon the facts and circumstances surrounding the individual investments which are generally transaction specific. The Company’s inactively traded fixed maturities are classified as Level 3. For all fixed maturity investments, the bid price is used for estimating fair value.

To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be representative of fair value. The Company also reviews an internally generated fixed maturity price validation report which converts prices received for fixed maturity investments from the independent pricing sources and from broker-dealers quotes and plots OAS and duration on a sector and rating basis. The OAS is calculated using established algorithms developed by an independent risk analytics platform vendor. The OAS on the fixed maturity price validation report are compared for securities in a similar sector and having a similar rating, and outliers are identified and investigated for price reasonableness. In addition, the Company completes quantitative analyses to compare the performance of each fixed maturity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

Short term investments

Short term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.

Equities

Equity securities include U.S. and foreign common and preferred stocks, mutual funds and exchange traded funds. Equities and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis, and common stocks traded in inactive markets. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable inputs used in the fair value measurement of inactively traded common stocks classified as Level 3 include market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size, including net income multiples, tangible book value multiples, revenue multiples and adjusted earnings multiples. Significant increases (decreases) in any of these inputs could result in a significantly higher (lower) fair value measurement. Significant unobservable inputs used in measuring the fair value measurement of inactively traded common stocks also include a liquidity discount. A significant increase (decrease) in the liquidity discount could result in a significantly lower (higher) fair value measurement.

To validate prices, the Company completes quantitative analyses to compare the performance of each equity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.

Other invested assets

The Company’s exchange traded derivatives, such as futures are generally classified as Level 1 as their fair values are quoted prices in active markets. The Company’s foreign exchange forward contracts, foreign currency option contracts, credit default swaps, interest rate swaps and TBAs are generally classified as Level 2 within the fair value hierarchy and are priced by independent pricing services.

Included in the Company’s Level 3 classification, in general, are certain inactively traded weather derivatives; notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps. For Level 3 instruments, the Company will generally (i) receive a price based on a manager’s or trustee’s valuation for the asset; (ii) perform a

 

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liquidation analysis using investee company financial statements, that are generally audited on an annual basis, adjusted if necessary for the recoverability of intangible assets, (iii) develop an internal discounted cash flow model to measure fair value; or (iv) use market return information, adjusted if necessary and weighted using management’s judgment, from comparable selected publicly traded equity funds, in a similar region and of a similar size. Where the Company receives prices from the manager or trustee, these prices are based on the manager’s or trustee’s estimate of fair value for the assets and are generally audited on an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate historical information, adjusted as necessary, and using appropriate discount rates. The significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 include credit spreads, prepayment speeds, constant default rates, gross revenue to fair value ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value measurement. Significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 also include an assessment of the recoverability of intangible assets and market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size. Significant increase (decrease) in these inputs in isolation could result in a significantly higher (lower) fair value measurement. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model, however, the majority of the Company’s counterparties are investment grade rated institutions and the failure of any one counterparty would not have a significant impact on the Company’s consolidated financial statements.

To validate prices, the Company will compare them to benchmarks, where appropriate, or to the business results generally within that asset class and specifically to those particular assets.

Funds held – directly managed

The segregated investment portfolio underlying the funds held – directly managed account is comprised of fixed maturities and other invested assets which are fair valued on a basis consistent with the methods described above. Substantially all fixed maturities and short-term investments within the funds held – directly managed account are classified as Level 2 within the fair value hierarchy.

The other invested assets within the segregated investment portfolio underlying the funds held – directly managed account, which are classified as Level 3 investments, are primarily real estate mutual fund investments carried at fair value. For the real estate mutual fund investments, the Company receives a price based on the real estate fund manager’s valuation for the asset and further adjusts the price, if necessary, based on appropriate current information on the real estate market. Significant increases (decreases) to the adjustment to the real estate fund manager’s valuation could result in a significantly lower (higher) fair value measurement.

To validate prices within the segregated investment portfolio underlying the funds held – directly managed account, the Company utilizes the methods described above.

(b) Fair Value of Financial Instrument Liabilities

At June 30, 2013 and December 31, 2012, the fair values of financial instrument liabilities recorded in the Condensed Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to capital efficient notes (CENts).

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument liability recorded in the Condensed Consolidated Balance Sheets for which the Company does not measure that instrument at fair value:

 

   

the fair value of the Senior Notes was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $250 million from PartnerRe Finance A LLC and $500 million from PartnerRe Finance B LLC at June 30, 2013 and December 31, 2012; and

 

   

the fair value of the CENts was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding from PartnerRe Finance II Inc. of $63 million at June 30, 2013 and December 31, 2012.

The carrying values and fair values of the Senior Notes and CENts at June 30, 2013 and December 31, 2012 were as follows (in thousands of U.S. dollars):

 

     June 30, 2013      December 31, 2012  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Debt related to senior notes (1)

   $ 750,000       $ 836,101       $ 750,000       $ 859,367   

Debt related to capital efficient notes (2)

     63,384         65,929         63,384         66,990   

 

(1) PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the Senior Notes, do not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $750 million in its Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012.
(2) PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related intercompany debt of $71 million in its Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012.

 

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Table of Contents

At June 30, 2013, the Company’s debt related to the Senior Notes and CENts was classified as Level 2 in the fair value hierarchy.

Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments.

4. Derivatives

The Company’s derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value mainly recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Condensed Consolidated Statements of Operations or accumulated other comprehensive income or loss in the Condensed Consolidated Balance Sheets, depending on the nature of the derivative instrument. The Company’s objectives for holding or issuing these derivatives are as follows:

Foreign Exchange Forward Contracts

The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. From time to time, the Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.

Foreign Currency Option Contracts and Futures Contracts

The Company utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts to manage portfolio duration and commodity and equity futures to hedge certain investments. The Company also uses commodities futures to replicate the investment return on certain benchmarked commodities.

Credit Default Swaps

The Company purchases protection through credit default swaps to mitigate the risk associated with its underwriting operations, most notably in the credit/surety line, and to manage market exposures.

The Company also assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at June 30, 2013. The counterparties on the Company’s assumed credit default swaps are all investment grade rated financial institutions.

Insurance-Linked Securities

The Company enters into various weather derivatives and longevity total return swaps for which the underlying risks reference parametric weather risks for the weather derivatives and longevity risk for the longevity total return swaps.

Total Return and Interest Rate Swaps and Interest Rate Derivatives

The Company enters into total return swaps referencing various project, investments and principal finance obligations. The Company enters into interest rate swaps to mitigate the interest rate risk on certain of the total return swaps. The Company also uses other interest rate derivatives to mitigate exposure to interest rate volatility.

To-Be-Announced Mortgage-Backed Securities

The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance.

 

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Table of Contents

The net fair values and the related net notional values of derivatives included in the Company’s Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 were as follows (in thousands of U.S. dollars):

 

     Asset      Liability     Net derivatives  
     derivatives      derivatives     Net notional         

June 30, 2013

   at fair value      at fair value     exposure      Fair value  

Foreign exchange forward contracts

   $ 7,486       $ (4,656   $ 1,924,401       $ 2,830   

Foreign currency option contracts

     —          (3,280     97,113         (3,280

Futures contracts

     55,879         (9     5,022,813         55,870   

Credit default swaps (protection purchased)

     —           (404     34,000         (404

Credit default swaps (assumed risks)

     157         —          10,000         157   

Insurance-linked securities (1)

     814         (906     140,744         (92

Total return swaps

     3,328         (903     68,414         2,425   

Interest rate swaps (2)

     215         (4,919     —           (4,704

TBAs

     1         (3,805     143,466         (3,804
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 67,880       $ (18,882      $ 48,998   
     Asset      Liability     Net derivatives  
     derivatives      derivatives     Net notional         

December 31, 2012

   at fair value      at fair value     exposure      Fair value  

Foreign exchange forward contracts

   $ 7,889       $ (17,395   $ 2,170,914       $ (9,506

Foreign currency option contracts

     1,410         (186     133,377         1,224   

Futures contracts

     1,956         (1,352     3,981,107         604   

Credit default swaps (protection purchased)

     6         (807     55,000         (801

Credit default swaps (assumed risks)

     512         —          17,500         512   

Insurance-linked securities (1)

     —           (2,173     135,964         (2,173

Total return swaps

     6,630         (546     68,730         6,084   

Interest rate swaps (2)

     —           (7,880     —           (7,880

TBAs

     115         (163     155,760         (48
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 18,518       $ (30,502      $ (11,984

 

(1) At June 30, 2013 and December 31, 2012, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional amount.
(2) The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps. Accordingly, the notional value of interest rate swaps is not presented separately in the table.

The fair value of all derivatives at June 30, 2013 and December 31, 2012 is recorded in Other invested assets in the Company’s Condensed Consolidated Balance Sheets. At June 30, 2013 and December 31, 2012, none of the Company’s derivatives were designated as hedges.

 

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The gains and losses in the Condensed Consolidated Statements of Operations for derivatives not designated as hedges for the three months and six months ended June 30, 2013 and 2012 were as follows (in thousands of U.S. dollars):

 

     For the three
months  ended
June 30, 2013
    For the three
months  ended
June 30, 2012
    For the six
months  ended
June 30, 2013
    For the six
months  ended
June 30, 2012
 

Foreign exchange forward contracts

   $ (54,004   $ 15,829      $ (36,474   $ 19,710   

Foreign currency option contracts

     (3,275     (1,829     (3,840     1,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net foreign exchange gains and losses

   $ (57,279   $ 14,000      $ (40,314   $ 21,208   

Futures contracts

   $ 91,679      $ (41,624   $ 85,376      $ (19,779

Credit default swaps (protection purchased)

     (22     (14     (120     (611

Credit default swaps (assumed risks)

     8        235        115        1,311   

Insurance-linked securities

     2,469        4,685        (550     1,226   

Total return swaps

     (2,988     (546     (3,659     (469

Interest rate swaps

     2,399        (1,165     3,176        (202

TBAs

     (8,363     3,808        (9,697     4,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total included in net realized and unrealized investment gains and losses

   $ 85,182      $ (34,621   $ 74,641      $ (13,646

Total derivatives

   $ 27,903      $ (20,621   $ 34,327      $ 7,562   

Offsetting of Derivatives

The gross and net fair values of derivatives that are subject to offsetting in the Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012 were as follows (in thousands of U.S. dollars):

 

           Gross      Net amounts of     Gross amounts not offset         
     Gross     amounts      assets/liabilities     in the balance sheet         
     amounts     offset in the      presented in the     Financial     Cash collateral         

June 30, 2013

   recognized  (1)     balance sheet      balance sheet     instruments     received/pledged      Net amount  

Total derivative assets

   $ 67,880      $ —         $ 67,880      $ (3,459   $ —         $ 64,421   

Total derivative liabilities

   $ (18,882   $ —         $ (18,882   $ 3,459      $ 6,286       $ (9,137

December 31, 2012

                                      

Total derivative assets

   $ 18,518      $ —         $ 18,518      $ (12,051   $ —         $ 6,467   

Total derivative liabilities

   $ (30,502   $ —         $ (30,502   $ 12,051      $ —         $ (18,451

 

(1) Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.

Generally, credit default swaps, total return swaps and interest rate swaps are subject to a master netting or similar agreements as they are entered into using International Swaps and Derivatives Association agreements which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Futures contracts and foreign exchange forward contracts are traded on a regulated exchange which permits netting.

5. Shareholders’ Equity

Series F Non-Cumulative Redeemable Preferred Shares

On February 14, 2013, the Company issued Series F non-cumulative redeemable preferred shares (Series F preferred shares) as follows (in millions of U.S. dollars or shares, except percentage amounts):

 

     Series F  

Date of issuance

     February 2013   

Number of preferred shares issued

     10.0   

Annual dividend rate

     5.875

Total consideration

   $ 242.3   

Underwriting discounts and commissions

   $ 7.7   

Aggregate liquidation value

   $ 250.0   

 

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The net proceeds received were used, together with available cash, to redeem the Series C Cumulative Redeemable Preferred Shares (Series C preferred shares). On or after March 1, 2018, the Company may redeem the Series F preferred shares in whole at any time, or in part from time to time, at $25.00 per share, plus an amount equal to the portion of the quarterly dividend attributable to the then-current dividend period to, but excluding, the redemption date. The Company may also redeem the Series F preferred shares at any time upon the occurrence of a certain “capital disqualification event” or certain changes in tax law. Dividends on the Series F preferred shares are non-cumulative and are payable quarterly.

In the event of liquidation of the Company, the Series F preferred shares rank on parity with each of the other series of preferred shares and would rank senior to the common shares, and holders thereof would receive a distribution of $25.00 per share, or the aggregate liquidation value, plus declared but unpaid dividends, if any.

Series C Cumulative Redeemable Preferred Shares

On March 18, 2013, the Company redeemed the Series C preferred shares for the aggregate liquidation value of $290 million plus accrued dividends. In connection with the redemption, the Company recognized a loss of $9.1 million related to the original issuance costs of the Series C preferred shares and calculated as a difference between the redemption price and the consideration received after underwriting discounts and commissions. The loss was recognized in determining the net income attributable to PartnerRe Ltd. common shareholders.

6. Net (Loss) Income per Share

The reconciliation of basic and diluted net (loss) income per share for the three months and six months ended June 30, 2013 and 2012 is as follows (in thousands of U.S. dollars, except per share amounts):

 

     For the three     For the three     For the six     For the six  
     months ended     months ended     months ended     months ended  
     June 30, 2013     June 30, 2012     June 30, 2013     June 30, 2012  

Numerator:

        

Net (loss) income attributable to PartnerRe Ltd.

   $ (175,571   $ 176,146      $ 58,799      $ 536,287   

Less: preferred dividends

     (14,796     (15,405     (29,494     (30,811

Less: loss on redemption of preferred shares

     —          —          (9,135     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to PartnerRe Ltd. common shareholders

   $ (190,367   $ 160,741      $ 20,170      $ 505,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted number of common shares outstanding – basic

     56,485,882        63,816,027        57,449,528        64,610,127   

Share options and other (1)

     —          607,009        1,084,998        522,801   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and common share equivalents outstanding – diluted

     56,485,882        64,423,036        58,534,526        65,132,928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net (loss) income per share

   $ (3.37   $ 2.52      $ 0.35      $ 7.82   

Diluted net (loss) income per share(1)

   $ (3.37   $ 2.50      $ 0.34      $ 7.76   

 

(1) At June 30, 2013 and 2012, share based awards to purchase 142.5 thousand and 1,512.6 thousand common shares, respectively, were excluded from the calculation of diluted weighted average number of common shares and common share equivalents outstanding because their exercise prices were greater than the average market price of the common shares. In addition, dilutive securities, in the form of share options and other, of 1,003.8 thousand shares were not included in the weighted average number of common shares and common share equivalents outstanding for the purpose of computing the diluted net loss per share because to do so would have been anti-dilutive for the three months ended June 30, 2013.

7. Noncontrolling Interests

During March 2013, the Company formed Lorenz Re Ltd. (Lorenz Re), a Bermuda domiciled special purpose insurer to provide additional capacity to the Company for a diversified portfolio of catastrophe reinsurance treaties over a multi-year period on a fully collateralized reinsurance basis. The original business was written by the Company and was ceded to Lorenz Re effective April 1, 2013.

In conjunction with the formation of Lorenz Re, the Company and third party investors each contributed 50% of Lorenz Re’s non-voting redeemable preferred share capital of approximately $75 million. On May 1, 2013, the Company sold $10.5 million of its original investment in Lorenz Re to third party investors. The Company did not record any gain or loss on the sale of this investment. Lorenz Re’s preferred shares are expected to be redeemed following the commutation of the portfolio back to the Company on or before June 1, 2016.

 

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Lorenz Re is considered to be a variable interest entity. The Company has concluded that it is the primary beneficiary, as it has the power to direct, and has more than an insignificant economic interest in, the activities of Lorenz Re. Accordingly, Lorenz Re is consolidated by the Company and all inter-company balances and transactions are eliminated. Net income and shareholders’ equity attributable to Lorenz Re’s third party investors are recorded in the Condensed Consolidated Financial Statements as noncontrolling interests.

At June 30, 2013, the total assets of Lorenz Re were $96.4 million, primarily consisting of cash and investments, and the total liabilities were $21.1 million, primarily consisting of unearned premiums. The assets of Lorenz Re can only be used to settle the liabilities of Lorenz Re and there is no recourse to the Company for any liabilities of Lorenz Re.

The reconciliation of the beginning and ending balance of the noncontrolling interests in Lorenz Re for the six months ended June 30, 2013 is as follows (in thousands of U.S. dollars):

 

     2013  

Balance at January 1

   $ —     

Net income attributable to noncontrolling interests

     1,183   

Sale of shares to noncontrolling interests

     47,136   
  

 

 

 

Balance at June 30

   $ 48,319   

8. Commitments and Contingencies

(a) Concentration of Credit Risk

Financing receivables

Included in the Company’s Other invested assets are certain notes receivable which meet the definition of financing receivables and are accounted for using the cost method of accounting. These notes receivable are collateralized by commercial or residential property. The Company utilizes a third party consultant to determine the initial investment criteria and to monitor the subsequent performance of the notes receivable. The process undertaken prior to the investment in these notes receivable includes an examination of the underlying collateral. The Company reviews its receivable positions on at least a quarterly basis using actual redemption experience. At June 30, 2013 and December 31, 2012, based on the latest available information, the Company recorded an allowance for credit losses related to these notes receivable of $3.2 million and $3.0 million, respectively.

The Company monitors the performance of the notes receivable based on the type of underlying collateral and by assigning a “performing” or a “non-performing” indicator of credit quality to each individual receivable. At June 30, 2013, the Company’s notes receivable of $44.0 million were all performing and were collateralized by residential property and commercial property of $30.1 million and $13.9 million, respectively. At December 31, 2012, the Company’s notes receivable of $46.7 million were all performing and were collateralized by residential property and commercial property of $31.3 million and $15.4 million, respectively.

The Company purchased $27.0 million and $27.2 million of financing receivables during the three months and six months ended June 30, 2013. The Company purchased $37.4 million of financing receivables during the three months and six months ended June 30, 2012. There were no sales of financing receivables during the three months and six months ended June 30, 2013 and 2012, however, the outstanding balances were reduced by settlements of the underlying debt.

(b) Employment Agreements

In April 2013, the Company announced the restructuring of its business support operations into a single integrated worldwide support platform and changes to the structure of its Global Non-life Operations. The restructuring includes involuntary and voluntary employee termination plans in certain jurisdictions (collectively, termination plans). Employees affected by the termination plans have varying leaving dates, largely through to mid-2014.

During the three months and six months ended June 30, 2013, the Company recorded a pre-tax charge of $43.2 million related to the costs of the restructuring, which were primarily related to the termination plans, within other operating expenses. The continuing salary and other employment benefit costs related to the affected employees will be expensed as the employee remains with the Company and provides service.

(c) Legal Proceedings

There has been no significant change in legal proceedings at June 30, 2013 compared to December 31, 2012. See Note 17(e) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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9. Credit Agreements

In the normal course of its operations, the Company enters into agreements with financial institutions to obtain unsecured and secured credit facilities. These facilities are used primarily for the issuance of letters of credit, although a portion of these facilities may also be used for liquidity purposes.

On April 18, 2013, the Company modified its existing three-year syndicated unsecured credit facility to reduce the available facility from $500 million to $50 million and reduce its access to a revolving line of credit from $375 million to $50 million. All other terms remained unchanged.

See Note 18 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for further information related to the credit facilities available to the Company.

10. Segment Information

The Company monitors the performance of its operations in three segments, Non-life, Life and Health and Corporate and Other as described in Note 20 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The Non-life segment is further divided into four sub-segments: North America, Global (Non-U.S.) P&C, Global Specialty and Catastrophe. Following the acquisition of Presidio on December 31, 2012, Presidio’s results are included in the Life and Health segment. Effective January 1, 2013, the Life segment is referred to as Life and Health to reflect the inclusion of Presidio’s results following its acquisition and the Global (Non-U.S.) Specialty sub-segment is referred to as Global Specialty.

Since the Company does not manage its assets by segment, net investment income is not allocated to the Non-life segment. However, because of the interest-sensitive nature of some of the Company’s Life and Health products, net investment income is considered in Management’s assessment of the profitability of the Life and Health segment. The following items are not considered in evaluating the results of the Non-life and Life and Health segments: net realized and unrealized investment gains and losses, interest expense, amortization of intangible assets, net foreign exchange gains and losses, income tax expense or benefit and interest in earnings and losses of equity investments. Segment results are shown before consideration 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 (all defined below). 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 Life and Health segment on the basis of the allocated underwriting result, which includes revenues from net premiums earned, other income or loss and allocated net investment income for Life and Health, and expenses from life policy benefits, acquisition costs and other operating expenses.

The following tables provide a summary of the segment results for the three months and six months ended June 30, 2013 and 2012 (in millions of U.S. dollars, except ratios):

 

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Segment Information

For the three months ended June 30, 2013

 

           Global                 Total     Life              
     North     (Non-U.S.)     Global           Non-life     and Health     Corporate        
     America     P&C     Specialty     Catastrophe     segment     segment     and Other     Total  

Gross premiums written

   $ 372      $ 160      $ 413      $ 161      $ 1,106      $ 233      $ 2      $ 1,341   

Net premiums written

   $ 360      $ 158      $ 409      $ 149      $ 1,076      $ 232      $ 1      $ 1,309   

(Increase) decrease in unearned premiums

     (3     11        (37     (70     (99     —          (1     (100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 357      $ 169      $ 372      $ 79      $ 977      $ 232      $ —        $ 1,209   

Losses and loss expenses and life policy benefits

     (245     (106     (284     (51     (686     (181     —          (867

Acquisition costs

     (79     (34     (90     (6     (209     (33     —          (242
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 33      $ 29      $ (2   $ 22      $ 82      $ 18      $ —        $ 100   

Other income

             —          3        1        4   

Other operating expenses

             (60     (17     (68     (145
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 22      $ 4        n/a      $ (41

Net investment income

               15        110        125   
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result (1)

             $ 19        n/a        n/a   

Net realized and unrealized investment losses

                 (299     (299

Interest expense

                 (12     (12

Amortization of intangible assets

                 (7     (7

Net foreign exchange losses

                 (11     (11

Income tax benefit

                 75        75   

Interest in losses of equity investments

                 (4     (4
              

 

 

   

 

 

 

Net loss

                 n/a      $ (174
              

 

 

   

 

 

 

Loss ratio (2)

     68.6     62.9     76.6     64.1     70.3      

Acquisition ratio (3)

     22.1        19.9        24.1        8.5        21.4         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio (4)

     90.7     82.8     100.7     72.6     91.7      

Other operating expense ratio (5)

             6.1         
          

 

 

       

Combined ratio (6)

             97.8      
          

 

 

       

 

(1) Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.
(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.
(5) Other operating expense ratio is obtained by dividing other operating expenses by net premiums earned.
(6) Combined ratio is defined as the sum of the technical ratio and the other operating expense ratio.

 

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Segment Information

For the three months ended June 30, 2012

 

           Global                 Total     Life              
     North     (Non-U.S.)     Global           Non-life     and Health     Corporate        
     America     P&C     Specialty     Catastrophe     segment     segment     and Other     Total  

Gross premiums written

   $ 271      $ 130      $ 400      $ 159      $ 960      $ 200      $ 3      $ 1,163   

Net premiums written

   $ 270      $ 128      $ 391      $ 145      $ 934      $ 199      $ 3      $ 1,136   

Decrease (increase) in unearned premiums

     20        36        (28     (72     (44     1        (2     (45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 290      $ 164      $ 363      $ 73      $ 890      $ 200      $ 1      $ 1,091   

Losses and loss expenses and life policy benefits

     (185     (119     (213     (16     (533     (173     —          (706

Acquisition costs

     (69     (39     (93     (6     (207     (26     —          (233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 36      $ 6      $ 57      $ 51      $ 150      $ 1      $ 1      $ 152   

Other income

             —          1        2        3   

Other operating expenses

             (66     (13     (27     (106
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 84      $ (11     n/a      $ 49   

Net investment income

               17