Form 10-Q

 

 

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 MARCH 31, 2014

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 April 29, 2014 was 50,517,202.

 

 

 


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—March 31, 2014 (Unaudited) and December 31, 2013      4   
  

Condensed Consolidated Statements of Operations and Comprehensive Income—Three Months Ended March  31, 2014 and 2013 (Unaudited)

     5   
  

Condensed Consolidated Statements of Shareholders’ Equity—Three Months Ended March 31, 2014 and 2013 (Unaudited)

     6   
  

Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2014 and 2013 (Unaudited)

     7   
   Notes to Condensed Consolidated Financial Statements (Unaudited)      8   

ITEM 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk      65   

ITEM 4.

   Controls and Procedures      68   
PART II—OTHER INFORMATION   

ITEM 1.

   Legal Proceedings      68   

ITEM 1A.

   Risk Factors      68   

ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      69   

ITEM 3.

   Defaults upon Senior Securities      69   

ITEM 4.

   Mine Safety Disclosures      69   

ITEM 5.

   Other Information      69   

ITEM 6.

   Exhibits      69   
   Signatures      70   
   Exhibit Index      71   


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 March 31, 2014, and the related condensed consolidated statements of operations and comprehensive income for the three-month periods ended March 31, 2014 and 2013, and of shareholders’ equity, and of cash flows for the three-month periods ended March 31, 2014 and 2013. These condensed consolidated interim 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, 2013, 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 27, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of December 31, 2013 is fairly stated, in all material respects, in relation to the consolidated balance sheets from which it has been derived.

 

/s/ Deloitte & Touche Ltd.

Deloitte & Touche Ltd.
Hamilton, Bermuda
May 2, 2014


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PartnerRe Ltd.

Condensed Consolidated Balance Sheets

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

 

     March 31,
2014
    December 31,
2013
 
     (Unaudited)     (Audited)  

Assets

    

Investments:

    

Fixed maturities, at fair value (amortized cost: 2014, $13,562,765; 2013, $13,376,455)

   $ 13,898,401     $ 13,593,303  

Short-term investments, at fair value (amortized cost: 2014, $28,820; 2013, $13,543)

     28,821       13,546  

Equities, at fair value (cost: 2014, $1,027,732; 2013, $1,009,286)

     1,249,744       1,221,053  

Other invested assets

     302,495       320,981  
  

 

 

   

 

 

 

Total investments

     15,479,461       15,148,883  

Funds held – directly managed (cost: 2014, $756,498; 2013, $778,569)

     764,386       785,768  

Cash and cash equivalents

     1,269,037       1,496,485  

Accrued investment income

     190,169       185,717  

Reinsurance balances receivable

     3,064,301       2,465,713  

Reinsurance recoverable on paid and unpaid losses

     362,149       308,892  

Funds held by reinsured companies

     849,256       843,081  

Deferred acquisition costs

     725,584       644,952  

Deposit assets

     112,338       351,905  

Net tax assets

     11,217       14,133  

Goodwill

     456,380       456,380  

Intangible assets

     180,088       187,090  

Other assets

     53,137       149,296  
  

 

 

   

 

 

 

Total assets

   $ 23,517,503     $ 23,038,295  
  

 

 

   

 

 

 

Liabilities

    

Unpaid losses and loss expenses

   $ 10,529,717     $ 10,646,318  

Policy benefits for life and annuity contracts

     2,118,479       1,974,133  

Unearned premiums

     2,299,250       1,723,767  

Other reinsurance balances payable

     269,487       202,549  

Deposit liabilities

     92,099       328,588  

Net tax liabilities

     247,503       284,442  

Accounts payable, accrued expenses and other

     299,380       291,350  

Debt related to senior notes

     750,000       750,000  

Debt related to capital efficient notes

     70,989       70,989  
  

 

 

   

 

 

 

Total liabilities

     16,676,904       16,272,136  
  

 

 

   

 

 

 

Shareholders’ Equity

    

Common shares (par value $1.00; issued: 2014, 86,879,432 shares; 2013, 86,657,045 shares)

     86,879       86,657  

Preferred shares (par value $1.00; issued and outstanding: 2014 and 2013, 34,150,000 shares; aggregate liquidation value: 2014 and 2013, $853,750)

     34,150       34,150  

Additional paid-in capital

     3,907,347       3,901,627  

Accumulated other comprehensive loss

     (27,687     (12,238

Retained earnings

     5,667,868       5,406,797  

Common shares held in treasury, at cost (2014, 36,019,611 shares; 2013, 34,213,611 shares)

     (2,887,629     (2,707,461
  

 

 

   

 

 

 

Total shareholders’ equity attributable to PartnerRe Ltd.

     6,780,928       6,709,532  

Noncontrolling interests

     59,671       56,627  
  

 

 

   

 

 

 

Total shareholders’ equity

     6,840,599       6,766,159  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 23,517,503     $ 23,038,295  
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


PartnerRe Ltd.

Condensed Consolidated Statements of Operations and Comprehensive Income

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

(Unaudited)

 

     For the three
months ended
March 31,
2014
    For the three
months ended
March 31,
2013
 

Revenues

    

Gross premiums written

   $ 1,871,740     $ 1,756,886  
  

 

 

   

 

 

 

Net premiums written

   $ 1,738,494     $ 1,636,431  

Increase in unearned premiums

     (484,712     (489,751
  

 

 

   

 

 

 

Net premiums earned

     1,253,782       1,146,680  

Net investment income

     116,867       123,704  

Net realized and unrealized investment gains

     142,172       22,943  

Other income

     404       3,927  
  

 

 

   

 

 

 

Total revenues

     1,513,225       1,297,254  

Expenses

    

Losses and loss expenses and life policy benefits

     749,457       660,952  

Acquisition costs

     264,608       234,200  

Other operating expenses

     111,462       116,040  

Interest expense

     12,238       12,229  

Amortization of intangible assets

     7,002       7,046  

Net foreign exchange gains

     (670     (2,043
  

 

 

   

 

 

 

Total expenses

     1,144,097       1,028,424  

Income before taxes and interest in earnings of equity method investments

     369,128       268,830  

Income tax expense

     62,305       41,675  

Interest in earnings of equity method investments

     6,064       7,215  
  

 

 

   

 

 

 

Net income

     312,887       234,370  

Net income attributable to noncontrolling interests

     (3,044     —    
  

 

 

   

 

 

 

Net income attributable to PartnerRe Ltd.

     309,843       234,370  

Preferred dividends

     14,184       14,699  

Loss on redemption of preferred shares

     —         9,135  
  

 

 

   

 

 

 

Net income attributable to PartnerRe Ltd. common shareholders

   $ 295,659     $ 210,536  
  

 

 

   

 

 

 

Comprehensive income

    

Net income attributable to PartnerRe Ltd.

   $ 309,843     $ 234,370  

Change in currency translation adjustment

     (15,223     (19,830

Change in unfunded pension obligation, net of tax

     (1     996  

Change in unrealized losses on investments, net of tax

     (225     (233
  

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (15,449     (19,067
  

 

 

   

 

 

 

Comprehensive income attributable to PartnerRe Ltd.

   $ 294,394     $ 215,303  
  

 

 

   

 

 

 

Per share data attributable to PartnerRe Ltd. common shareholders

    

Net income per common share:

    

Basic net income

   $ 5.72     $ 3.60  

Diluted net income

   $ 5.61     $ 3.53  

Weighted average number of common shares outstanding

     51,652,177       58,423,898  

Weighted average number of common shares and common share equivalents outstanding

     52,727,573       59,590,044  

Dividends declared per common share

   $ 0.67     $ 0.64  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


PartnerRe Ltd.

Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

     For the three
months ended
March 31,
2014
    For the three
months ended
March 31,
2013
 

Common shares

    

Balance at beginning of period

   $ 86,657     $ 85,460  

Issuance of common shares

     222       552  
  

 

 

   

 

 

 

Balance at end of period

     86,879       86,012  

Preferred shares

    

Balance at beginning of period

     34,150       35,750  

Issuance of preferred shares

     —         10,000  

Redemption of preferred shares

     —         (11,600
  

 

 

   

 

 

 

Balance at end of period

     34,150       34,150  

Additional paid-in capital

    

Balance at beginning of period

     3,901,627       3,861,844  

Issuance of common shares

     5,720       21,937  

Issuance of preferred shares

     —         231,265  

Redemption of preferred shares

     —         (269,265
  

 

 

   

 

 

 

Balance at end of period

     3,907,347       3,845,781  

Accumulated other comprehensive loss

    

Balance at beginning of period

     (12,238     10,597  

Currency translation adjustment

    

Balance at beginning of period

     977       32,755  

Change in currency translation adjustment

     (15,223     (19,830
  

 

 

   

 

 

 

Balance at end of period

     (14,246     12,925  

Unfunded pension obligation

    

Balance at beginning of period

     (17,509     (27,370

Change in unfunded pension obligation, net of tax

     (1     996  
  

 

 

   

 

 

 

Balance at end of period (net of tax: 2014, $5,023; 2013, $7,468)

     (17,510     (26,374

Unrealized gain on investments

    

Balance at beginning of period

     4,294       5,212  

Change in unrealized losses on investments, net of tax

     (225     (233
  

 

 

   

 

 

 

Balance at end of period (net of tax: 2014 and 2013: $nil)

     4,069       4,979  
  

 

 

   

 

 

 

Balance at end of period

     (27,687     (8,470

Retained earnings

    

Balance at beginning of period

     5,406,797       4,952,002  

Net income

     312,887       234,370  

Net income attributable to noncontrolling interests

     (3,044     —    

Dividends on common shares

     (34,588     (37,365

Dividends on preferred shares

     (14,184     (14,699

Loss on redemption of preferred shares

     —         (9,135
  

 

 

   

 

 

 

Balance at end of period

     5,667,868       5,125,173  

Common shares held in treasury

    

Balance at beginning of period

     (2,707,461     (2,012,157

Repurchase of common shares

     (180,168     (159,775
  

 

 

   

 

 

 

Balance at end of period

     (2,887,629     (2,171,932
  

 

 

   

 

 

 

Total shareholders’ equity attributable to PartnerRe Ltd.

   $ 6,780,928     $ 6,910,714  

Noncontrolling interests

     59,671       36,844  
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 6,840,599     $ 6,947,558  
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


PartnerRe Ltd.

Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

     For the three
months ended
March 31,
2014
    For the three
months ended
March 31,
2013
 

Cash flows from operating activities

    

Net income

   $ 312,887     $ 234,370  

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

    

Amortization of net premium on investments

     29,366       42,769  

Amortization of intangible assets

     7,002       7,046  

Net realized and unrealized investment gains

     (142,172     (22,943

Changes in:

    

Reinsurance balances, net

     (581,275     (396,018

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

     86,002       91,287  

Funds held by reinsured companies and funds held – directly managed

     17,627       6,240  

Deferred acquisition costs

     (79,315     (92,334

Net tax assets and liabilities

     (33,973     (4,928

Unpaid losses and loss expenses including life policy benefits

     13,732       (242,409

Unearned premiums

     484,712       489,751  

Other net changes in operating assets and liabilities

     (35,852     1,831  
  

 

 

   

 

 

 

Net cash provided by operating activities

     78,741       114,662  

Cash flows from investing activities

    

Sales of fixed maturities

     1,734,246       1,788,507  

Redemptions of fixed maturities

     180,311       259,798  

Purchases of fixed maturities

     (1,963,428     (1,849,579

Sales and redemptions of short-term investments

     15,830       99,769  

Purchases of short-term investments

     (31,141     (64,147

Sales of equities

     9,094       156,123  

Purchases of equities

     (29,421     (144,865

Other, net

     13,295       43,337  
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (71,214     288,943  

Cash flows from financing activities

    

Dividends paid to common and preferred shareholders

     (48,772     (52,064

Repurchase of common shares

     (180,383     (175,211

Issuance of common shares, net of taxes paid

     (2,581     15,193  

Net proceeds from issuance of preferred shares

     —         241,265  

Repurchase of preferred shares

     —         (290,000

Sale of shares to noncontrolling interests

     —         36,844  
  

 

 

   

 

 

 

Net cash used in financing activities

     (231,736     (223,973

Effect of foreign exchange rate changes on cash

     (3,239     (14,439

(Decrease) increase in cash and cash equivalents

     (227,448     165,193  

Cash and cash equivalents—beginning of period

     1,496,485       1,121,705  
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 1,269,037     $ 1,286,898  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Taxes paid

   $ 95,871     $ 46,525  

Interest paid

   $ —       $ —    

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7


PartnerRe Ltd.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

PartnerRe Ltd. (PartnerRe or 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. (PartnerRe Bermuda), 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. (subsequently renamed and referred to as PartnerRe Health), a California-based U.S. specialty accident and health reinsurance and insurance writer. The Condensed Consolidated Statements of Operations and Cash Flows include PartnerRe Health’s results 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.

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, 2013.

3. Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board issued updated guidance on the accounting for investments in affordable housing projects that qualify for low-income housing tax credits by entities that manage or invest in such projects. The update modifies the conditions that an entity must meet to elect the effective yield or proportional amortization method to account for such investments. The guidance is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements or disclosures.

4. 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

 

8


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.

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.

 

9


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 March 31, 2014 and December 31, 2013, 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):

 

March 31, 2014

   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

   $ —       $ 1,866,135     $ —       $ 1,866,135  

U.S. states, territories and municipalities

     —         16,438       113,467       129,905  

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

     —         2,332,066       —         2,332,066  

Corporate

     —         5,989,320       —         5,989,320  

Asset-backed securities

     —         703,750       447,701       1,151,451  

Residential mortgage-backed securities

     —         2,384,629       —         2,384,629  

Other mortgage-backed securities

     —         44,895       —         44,895  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —       $ 13,337,233     $ 561,168     $ 13,898,401  

Short-term investments

   $ —       $ 28,821     $ —       $ 28,821  

Equities

        

Real estate investment trusts

   $ 196,661     $ —       $ —       $ 196,661  

Energy

     160,093       —         —         160,093  

Insurance

     136,040       —         —         136,040  

Finance

     97,863       9,569       22,706       130,138  

Consumer noncyclical

     112,721       —         —         112,721  

Communications

     83,724       —         2,111       85,835  

Technology

     55,263       —         7,400       62,663  

Industrials

     47,622       —         —         47,622  

Consumer cyclical

     45,709       —         —         45,709  

Utilities

     38,605       —         —         38,605  

Other

     20,929       —         —         20,929  

Mutual funds and exchange traded funds

     25,170       179,505       8,053       212,728  
  

 

 

   

 

 

   

 

 

   

 

 

 

Equities

   $ 1,020,400     $ 189,074     $ 40,270     $ 1,249,744  

Other invested assets

        

Derivative assets

        

Foreign exchange forward contracts

   $ —       $ 4,404     $ —       $ 4,404  

Foreign currency option contracts

     —         398       —         398  

Futures contracts

     18,814       —         —         18,814  

Total return swaps

     —         —         181       181  

Other

        

Notes and loan receivables and notes securitization

     —         —         42,243       42,243  

Annuities and residuals

     —         —         18,945       18,945  

Private equities

     —         —         42,655       42,655  

Derivative liabilities

        

Foreign exchange forward contracts

     —         (5,888     —         (5,888

Futures contracts

     (5     —         —         (5

Insurance-linked securities

     —         —         (740     (740

Total return swaps

     —         —         (483     (483

Interest rate swaps

     —         (5,797     —         (5,797

TBAs

     —         (1,388     —         (1,388
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 18,809     $ (8,271   $ 102,801     $ 113,339  

Funds held – directly managed

        

U.S. government and government sponsored enterprises

   $ —       $ 153,426     $ —       $ 153,426  

U.S. states, territories and municipalities

     —         —         301       301  

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

     —         178,839       —         178,839  

Corporate

     —         245,067       —         245,067  

Short-term investments

     —         3,477       —         3,477  

Other invested assets

     —         —         15,223       15,223  
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —       $ 580,809     $ 15,524     $ 596,333  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,039,209     $ 14,127,666     $ 719,763     $ 15,886,638  

 

10


December 31, 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

   $ —        $ 1,623,859     $ —       $ 1,623,859  

U.S. states, territories and municipalities

     —          16,207       108,380       124,587  

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

     —          2,353,699       —         2,353,699  

Corporate

     —          6,048,663       —         6,048,663  

Asset-backed securities

     —          691,654       446,577       1,138,231  

Residential mortgage-backed securities

     —          2,268,517       —         2,268,517  

Other mortgage-backed securities

     —          35,747       —         35,747  
  

 

 

    

 

 

   

 

 

   

 

 

 

Fixed maturities

   $ —        $ 13,038,346     $ 554,957     $ 13,593,303  

Short-term investments

   $ —        $ 13,546     $ —       $ 13,546  

Equities

         

Real estate investment trusts

   $ 175,796      $ —       $ —       $ 175,796  

Energy

     159,509        —         —         159,509  

Insurance

     144,020        —         —         144,020  

Finance

     108,944        9,556       20,207       138,707  

Consumer noncyclical

     108,663        —         —         108,663  

Communications

     70,792        —         2,199       72,991  

Technology

     53,768        —         7,752       61,520  

Industrials

     47,677        —         —         47,677  

Consumer cyclical

     45,915        —         —         45,915  

Utilities

     37,151        —         —         37,151  

Other

     19,993        —         —         19,993  

Mutual funds and exchange traded funds

     61,902        139,322       7,887       209,111  
  

 

 

    

 

 

   

 

 

   

 

 

 

Equities

   $ 1,034,130      $ 148,878     $ 38,045     $ 1,221,053  

Other invested assets

         

Derivative assets

         

Foreign exchange forward contracts

   $ —        $ 1,249     $ —       $ 1,249  

Futures contracts

     41,031        —         —         41,031  

Total return swaps

     —          —         79       79  

Interest rate swaps

     —          2,147       —         2,147  

TBAs

     —          2       —         2  

Other

         

Notes and loan receivables and notes securitization

     —          —         41,446       41,446  

Annuities and residuals

     —          —         24,064       24,064  

Private equities

     —          —         39,131       39,131  

Derivative liabilities

         

Foreign exchange forward contracts

     —          (8,648     —         (8,648

Foreign currency option contracts

     —          (535     —         (535

Credit default swaps (protection purchased)

     —          (71     —         (71

Insurance-linked securities

     —          —         (268     (268

Total return swaps

     —          —         (599     (599

Interest rate swaps

     —          (2,558     —         (2,558

TBAs

     —          (1,331     —         (1,331
  

 

 

    

 

 

   

 

 

   

 

 

 

Other invested assets

   $ 41,031      $ (9,745   $ 103,853     $ 135,139  

Funds held – directly managed

         

U.S. government and government sponsored enterprises

   $ —        $ 157,296     $ —       $ 157,296  

U.S. states, territories and municipalities

     —          —         286       286  

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

     —          137,186       —         137,186  

Corporate

     —          248,947       —         248,947  

Short-term investments

     —          2,426       —         2,426  

Other invested assets

     —          —         15,165       15,165  
  

 

 

    

 

 

   

 

 

   

 

 

 

Funds held – directly managed

   $ —        $ 545,855     $ 15,451     $ 561,306  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,075,161      $ 13,736,880     $ 712,306     $ 15,524,347  

 

11


At March 31, 2014 and December 31, 2013, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $189.2 million and $185.8 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting or equity method of accounting.

In addition to the investments underlying the funds held – directly managed account held at fair value of $596.3 million and $561.3 million at March 31, 2014 and December 31, 2013, respectively, the funds held – directly managed account also included cash and cash equivalents, carried at fair value, of $37.1 million and $84.8 million, respectively, and accrued investment income of $7.5 million and $6.7 million, respectively. At March 31, 2014 and December 31, 2013, the aggregate carrying amounts of items included in the funds held – directly managed account that the Company did not measure at fair value were $123.5 million and $133.0 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, 2013).

At March 31, 2014 and December 31, 2013, substantially all of the accrued investment income in the Condensed Consolidated Balance Sheets relate 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 ended March 31, 2014 and 2013, there were no transfers between Level 1 and Level 2.

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 March 31, 2014 and December 31, 2013, the fair values of financial instrument assets recorded in the Condensed Consolidated Balance Sheets not described above, approximate their carrying values.

The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended March 31, 2014 and 2013, were as follows (in thousands of U.S. dollars):

 

For the three months ended March 31, 2014

   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

   $ 108,380     $ 892     $ 4,265     $ (70   $ —        $ 113,467     $ 890  

Asset-backed securities

     446,577       5,996       59,418       (64,290     —          447,701       6,259  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturities

   $ 554,957     $ 6,888     $ 63,683     $ (64,360   $ —        $ 561,168     $ 7,149  

Equities

               

Finance

   $ 20,207     $ 2,499     $ —       $ —       $ —        $ 22,706     $ 2,499  

Communications

     2,199       (88     —         —         —          2,111       (88

Technology

     7,752       (352     —         —         —          7,400       (352

Mutual funds and exchange traded funds

     7,887       166       —         —         —          8,053       166  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equities

   $ 38,045     $ 2,225     $ —       $ —       $ —        $ 40,270     $ 2,225  

Other invested assets

               

Derivatives, net

   $ (788   $ 466     $ (720   $ —       $ —        $ (1,042   $ 466  

Notes and loan receivables and notes securitization

     41,446       600       720       (523     —          42,243       600  

Annuities and residuals

     24,064       89       —         (5,208     —          18,945       128  

Private equities

     39,131       433       5,066       (1,975     —          42,655       401  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other invested assets

   $ 103,853     $ 1,588     $ 5,066     $ (7,706   $ —        $ 102,801     $ 1,595  

Funds held – directly managed

               

U.S. states, territories and municipalities

   $ 286     $ 15     $ —       $ —       $ —        $ 301     $ 15  

Other invested assets

     15,165       (197     255       —         —          15,223       (197
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Funds held – directly managed

   $ 15,451     $ (182   $ 255     $ —       $ —        $ 15,524     $ (182
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 712,306     $ 10,519     $ 69,004     $ (72,066   $ —        $ 719,763     $ 10,787  

 

(1) Purchases and issuances of derivatives include issuances of $0.7 million.

 

12


For the three months ended March 31, 2013

   Balance at
beginning
of period
     Realized and
unrealized
investment
(losses) gains
included in
net income
    Purchases
and
issuances
     Settlements
and
sales (1)
    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      $ (849   $ —        $ (94   $ —        $ 232,292      $ (849

Corporate

     100,904        (188     —          —         —          100,716        (188

Asset-backed securities

     323,134        1,741       27,156        (26,372     —          325,659        1,781  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Fixed maturities

   $ 657,273      $ 704     $ 27,156      $ (26,466   $ —        $ 658,667      $ 744  

Equities

                  

Finance

   $ 13,477      $ (924   $ —        $ —       $ —        $ 12,553      $ (924

Technology

     6,987        660       —          —         —          7,647        660  

Mutual funds and exchange traded funds

     7,264        178       —          —         —          7,442        178  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Equities

   $ 27,728      $ (86   $ —        $ —       $ —        $ 27,642      $ (86

Other invested assets

                  

Derivatives, net

   $ 3,911      $ (3,679   $ —        $ 2,500     $ —        $ 2,732      $ (3,679

Notes and loan receivables and notes securitization

     34,902        (61     1,360        (2,143     —          34,058        (61

Annuities and residuals

     46,882        336       —          (11,562     —          35,656        826  

Private equities

     1,404        (3,065     19,425        —         —          17,764        (3,065
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other invested assets

   $ 87,099      $ (6,469   $ 20,785      $ (11,205   $ —        $ 90,210      $ (5,979

Funds held – directly managed

                  

U.S. states, territories and municipalities

   $ 345      $ (4   $ —        $ —       $ —        $ 341      $ (4

Other invested assets

     17,976        (2,437     —          (71     —          15,468        (1,373
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Funds held – directly managed

   $ 18,321      $ (2,441   $ —        $ (71   $ —        $ 15,809      $ (1,377
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 790,421      $ (8,292   $ 47,941      $ (37,742   $ —        $ 792,328      $ (6,698

 

(1) Settlements and sales of annuities and residuals include sales of $6.3 million.

The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at March 31, 2014 and December 31, 2013 were as follows (fair value in thousands of U.S. dollars):

 

March 31, 2014

   Fair value    

Valuation techniques

  

Unobservable inputs

  

Range (Weighted average)

Fixed maturities

          

U.S. states, territories and municipalities

   $ 113,467     Discounted cash flow    Credit spreads    2.7% – 10.1%(5.4%)

Asset-backed securities – interest only

     20     Discounted cash flow    Credit spreads    5.2% – 10.3%(8.5%)

Asset-backed securities – other

     447,681     Discounted cash flow    Credit spreads    3.9% – 12.1%(6.9%)

Equities

          

Finance

     17,316    

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    12.0%(12.0%)

Finance

     5,390    

Profitability analysis

   Projected return on equity    14.0%(14.0%)

Communications

     2,111    

Weighted market comparables

   Adjusted earnings multiple    9.4(9.4)
        Comparable return    -4.0%(-4.0%)

Technology

     7,400    

Weighted market comparables

   Revenue multiple    1.5(1.5)
        Adjusted earnings multiple    8.4(8.4)

Other invested assets

          

Total return swaps

     (302   Discounted cash flow    Credit spreads    3.5% – 18.3%(14.3%)

Notes and loan receivables

     22,038     Discounted cash flow    Credit spreads    17.5%(17.5%)
        Gross revenue/fair value    1.3 – 1.5(1.5)

Notes securitization

     20,205     Discounted cash flow    Credit spreads    6.1%(6.1%)

Annuities and residuals

     18,945     Discounted cash flow    Credit spreads    4.0% – 7.5%(5.8%)
        Prepayment speed    0% – 15.0% (6.1%)
        Constant default rate    0.3% – 23.0%(8.8%)

Private equity – direct

     12,040    

Discounted cash flow and weighted market comparables

   Net income multiple    9.1(9.1)
        Tangible book value multiple    1.7(1.7)
        Recoverability of intangible assets    0%(0%)

Private equity funds

     12,653     Lag reported market value    Net asset value, as reported    100.0%(100.0%)
        Market adjustments    -1.9% – 2.2%(1.2%)

Private equity – other

     17,962     Discounted cash flow    Effective yield    5.8%(5.8%)

Funds held – directly managed

          

Other invested assets

     15,223     Lag reported market value    Net asset value, as reported    100.0%(100.0%)
        Market adjustments    -15.7% – 0%(-13.6%)

 

13


December 31, 2013

   Fair value    

Valuation techniques

  

Unobservable inputs

  

Range
(Weighted average)

Fixed maturities

          

U.S. states, territories and municipalities

   $ 108,380     Discounted cash flow    Credit spreads    2.9% – 9.9%(5.3%)

Asset-backed securities – interest only

     21     Discounted cash flow    Credit spreads    5.5% – 10.7%(8.8%)

Asset-backed securities – other

     446,556     Discounted cash flow    Credit spreads    4.0% – 12.2%(7.1%)

Equities

          

Finance

     15,483    

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    8.5%(8.5%)

Finance

     4,724     Profitability analysis    Projected return on equity    14.0%(14.0%)

Communications

     2,199    

Weighted market comparables

   Adjusted earnings multiple    9.4(9.4)
        Comparable return    0%(0%)

Technology

     7,752    

Weighted market comparables

   Revenue multiple    0.9(0.9)
        Adjusted earnings multiple    4.4(4.4)

Other invested assets

          

Total return swaps

     (520   Discounted cash flow    Credit spreads    2.8% – 18.9%(17.0%)

Notes and loan receivables

     21,280     Discounted cash flow    Credit spreads    17.5%(17.5%)
        Gross revenue/fair value    1.5(1.5)

Notes securitization

     20,166     Discounted cash flow    Credit spreads    6.2%(6.2%)

Annuities and residuals

     24,064     Discounted cash flow    Credit spreads    4.0% – 7.9%(5.8%)
        Prepayment speed    0% – 15.0%(6.4%)
        Constant default rate    0.3% – 35.0%(12.4%)

Private equity – direct

     11,742    

Discounted cash flow and weighted market comparables

   Net income multiple    8.3(8.3)
        Tangible book value multiple    1.6(1.6)
        Recoverability of intangible assets    0%(0%)

Private equity funds

     8,993     Lag reported market value    Net asset value, as reported    100.0%(100.0%)
        Market adjustments    1.8% – 9.8%(8.3%)

Private equity – other

     18,396     Discounted cash flow    Credit spreads    3.8%(3.8%)

Funds held – directly managed Other invested assets

     15,165     Lag reported market value    Net asset value, as reported    100.0%(100.0%)
        Market adjustments    -22.9% – 0%(-15.5%)

 

14


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 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 significant 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.

Changes in the fair value of the Company’s financial instruments subject to the fair value option during the three months ended March 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):

 

     For the three
months ended
March 31, 2014
     For the three
months ended
March 31, 2013
 

Fixed maturities and short-term investments

   $ 119,799      $ (71,670

Equities

     10,325        50,066  

Other invested assets

     1,042        (4,834

Funds held – directly managed

     736        (6,043
  

 

 

    

 

 

 

Total

   $ 131,902      $ (32,481

Substantially 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 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 Mortgage Corporation, 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 and the Federal Home Loan Mortgage Corporation. 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 and the Federal Home Loan Mortgage Corporation 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.

 

15


    Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are predominantly 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. 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.

 

    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, real estate investment trusts, mutual funds and exchange traded funds. Equities, real estate investment trusts 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, comparable returns, revenue multiples, adjusted earnings multiples and projected return on equity ratios. 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.

 

16


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) develop an internal discounted cash flow model to measure fair value; or (iii) 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, net income multiples, effective yields, tangible book value multiples and other valuation 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 March 31, 2014 and December 31, 2013, 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 methods and assumptions 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 were as follows:

 

    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 March 31, 2014 and December 31, 2013; and

 

17


    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 of $63 million from PartnerRe Finance II Inc. at March 31, 2014 and December 31, 2013.

The carrying values and fair values of the Senior Notes and CENts at March 31, 2014 and December 31, 2013 were as follows (in thousands of U.S. dollars):

 

     March 31, 2014      December 31, 2013  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Debt related to senior notes (1)

   $ 750,000      $ 868,989      $ 750,000      $ 844,331  

Debt related to capital efficient notes (2)

     63,384        62,780        63,384        61,094  

 

(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 March 31, 2014 and December 31, 2013.
(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 March 31, 2014 and December 31, 2013.

At March 31, 2014 and December 31, 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.

5. Derivatives

The Company’s derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value 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 equity futures to hedge certain investments.

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. 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 and certain fixed maturity investments. The Company also uses other interest rate derivatives to mitigate exposure to interest rate volatility.

 

18


To-Be-Announced Mortgage-Backed Securities

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

The net fair values and the related net notional values of derivatives included in the Company’s Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013 were as follows (in thousands of U.S. dollars):

 

     Asset
derivatives
at fair value
     Liability
derivatives
at fair value
    Net derivatives  

March 31, 2014

        Net notional
exposure
     Fair value  

Foreign exchange forward contracts

   $ 4,404      $ (5,888   $ 2,270,300      $ (1,484

Foreign currency option contracts

     398        —         103,887        398  

Futures contracts

     18,814        (5     3,271,970        18,809  

Insurance-linked securities (1)

     —          (740     170,252        (740

Total return swaps

     181        (483     42,736        (302

Interest rate swaps (2)

     —          (5,797     202,481        (5,797

TBAs

     —          (1,388     143,110        (1,388
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 23,797      $ (14,301      $ 9,496  

 

     Asset
derivatives
at fair value
     Liability
derivatives
at fair value
    Net derivatives  

December 31, 2013

        Net notional
exposure
     Fair value  

Foreign exchange forward contracts

   $ 1,249      $ (8,648   $ 1,957,409      $ (7,399

Foreign currency option contracts

     —          (535     87,620        (535

Futures contracts

     41,031        —         3,266,004        41,031  

Credit default swaps (protection purchased)

     —          (71     14,000        (71

Insurance-linked securities (1)

     —          (268     168,724        (268

Total return swaps

     79        (599     31,740        (520

Interest rate swaps (2)

     2,147        (2,558     202,859        (411

TBAs

     2        (1,331     183,835        (1,329
  

 

 

    

 

 

      

 

 

 

Total derivatives

   $ 44,508      $ (14,010      $ 30,498  

 

(1) At March 31, 2014 and December 31, 2013, 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 and certain fixed maturities. Only the notional value of interest rate swaps on fixed maturities is presented separately in the table.

The fair value of all derivatives at March 31, 2014 and December 31, 2013 is recorded in Other invested assets in the Company’s Condensed Consolidated Balance Sheets. At March 31, 2014 and December 31, 2013, none of the Company’s derivatives were designated as hedges.

The gains and losses in the Condensed Consolidated Statements of Operations for derivatives not designated as hedges for the three months ended March 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):

 

19


     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Foreign exchange forward contracts

   $ 8,255     $ 17,530  

Foreign currency option contracts

     395       (565
  

 

 

   

 

 

 

Total included in net foreign exchange gains and losses

   $ 8,650     $ 16,965  

Futures contracts

   $ (16,073   $ (6,303

Credit default swaps (protection purchased)

     (3     (98

Credit default swaps (assumed risks)

     —         107  

Insurance-linked securities

     243       (3,019

Total return swaps

     218       (671

Interest rate swaps

     (5,385     777  

TBAs

     3,747       (1,334
  

 

 

   

 

 

 

Total included in net realized and unrealized investment gains and losses

   $ (17,253   $ (10,541

Total derivatives

   $ (8,603   $ 6,424  

Offsetting of Derivatives

The gross and net fair values of derivatives that are subject to offsetting in the Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013 were as follows (in thousands of U.S. dollars):

 

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

March 31, 2014

   Gross
amounts
recognized (1)
         Financial
instruments
    Cash collateral
received/pledged
     Net amount  

Total derivative assets

   $ 23,797     $ —        $ 23,797     $ (5   $ —        $ 23,792  

Total derivative liabilities

   $ (14,301   $ —         $ (14,301   $ 5     $ 1,806      $ (12,490

December 31, 2013

                                      

Total derivative assets

   $ 44,508     $ —        $ 44,508     $ (2   $ —        $ 44,506  

Total derivative liabilities

   $ (14,010   $ —        $ (14,010   $ 2     $ 4,341      $ (9,667

 

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

6. Net Income per Share

The reconciliation of basic and diluted net income per share for the three months ended March 31, 2014 and 2013 is as follows (in thousands of U.S. dollars, except share and per share data):

 

     For the three
months ended
March 31, 2014
     For the three
months ended
March 31, 2013
 

Numerator:

     

Net income attributable to PartnerRe Ltd.

   $ 309,843      $ 234,370  

Less: preferred dividends

     14,184        14,699  

Less: loss on redemption of preferred shares

     —          9,135  
  

 

 

    

 

 

 

Net income attributable to PartnerRe Ltd. common shareholders

   $ 295,659      $ 210,536  

Denominator:

     

Weighted number of common shares outstanding – basic

     51,652,177        58,423,898  

Share options and other (1)

     1,075,396        1,166,146  
  

 

 

    

 

 

 

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

     52,727,573        59,590,044  

Basic net income per share

   $ 5.72      $ 3.60  

Diluted net income per share(1)

   $ 5.61      $ 3.53  

 

20


 

(1) For the three months ended March 31, 2014 and 2013, share based awards to purchase 69.1 thousand and 103.0 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.

7. Noncontrolling Interests

In March 2013, the Company formed with other third party investors, 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.

Lorenz Re’s non-voting redeemable preferred share capital is redeemable at the option of the Company and is expected to be redeemed following the commutation of the portfolio back to the Company on or before June 1, 2016.

At March 31, 2014 and December 31, 2013, the total assets of Lorenz Re were $99.1 million and $99.6 million, respectively, primarily consisting of cash and investments. At March 31, 2014 and December 31, 2013, the total liabilities were $5.8 million and $11.1 million, respectively, primarily consisting of unpaid losses and loss expenses and other reinsurance balances payable for 2014 and unearned premiums and unpaid losses and loss expenses for 2013. 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 three months ended March 31, 2014 and 2013 was as follows (in thousands of U.S. dollars):

 

     For the three
months ended
March 31, 2014
     For the three
months ended
March 31, 2013
 

Balance at beginning of period

   $ 56,627      $ —    

Net income attributable to noncontrolling interests

     3,044        —    

Sale of shares to noncontrolling interests

     —          36,844  
  

 

 

    

 

 

 

Balance at end of period

   $ 59,671      $ 36,844  

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 March 31, 2014 and December 31, 2013, based on the latest available information, the Company recorded an allowance for credit losses related to these notes receivable of $2.4 million and $2.8 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 March 31, 2014, the Company’s notes receivable of $19.3 million were all performing and were collateralized by residential property and commercial property of $15.7 million and $3.6 million, respectively. At December 31, 2013, the Company’s notes receivable of $24.5 million were all performing and were collateralized by residential property and commercial property of $19.8 million and $4.7 million, respectively.

There were no significant purchases or sales of financing receivables during the three months ended March 31, 2014 and 2013, however, the outstanding balances were reduced by settlements of the underlying debt.

(b) Legal Proceedings

There has been no significant change in legal proceedings at March 31, 2014 compared to December 31, 2013. See Note 18(f) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

(c) Other

At March 31, 2014, there were no restrictions on the Company’s ability to pay common and preferred shareholders’ dividends from retained earnings. The declaration of dividends by PartnerRe Bermuda is subject to prior regulatory approval through December 31, 2014.

 

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9. 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 21 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Non-life segment is further divided into four sub-segments: North America, Global (Non-U.S.) P&C, Global Specialty and Catastrophe.

The North America sub-segment includes agriculture, casualty, credit/surety, motor, multiline, property and other risks generally originating in the United States. The Global (Non-U.S.) P&C sub-segment includes casualty, motor and property business generally originating outside of the United States. The Global Specialty sub-segment is comprised of business that is generally considered to be specialized due to the sophisticated technical underwriting required to analyze risks, and is global in nature. This sub-segment consists of several lines of business for which the Company believes it has developed specialized knowledge and underwriting capabilities. These lines of business include agriculture, aviation/space, credit/surety, energy, engineering, marine, specialty casualty, specialty property and other lines. The Catastrophe sub-segment is comprised of the Company’s catastrophe line of business. The Life and Health segment includes mortality, longevity and accident and health lines of business. Corporate and Other is comprised of the capital markets and investment related activities of the Company, including principal finance transactions, insurance-linked securities and strategic investments, and its corporate activities, including other operating expenses.

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 method 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 ended March 31, 2014 and 2013 (in millions of U.S. dollars, except ratios):

 

22


Segment Information

For the three months ended March 31, 2014

 

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

Gross premiums written

  $ 530     $ 364     $ 479     $ 210     $ 1,583     $ 289     $ —       $ 1,872  

Net premiums written

  $ 527     $ 361     $ 389     $ 179     $ 1,456     $ 282     $ —       $ 1,738  

Increase in unearned premiums

    (148     (182     (34     (100     (464     (20     —         (484
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

  $ 379     $ 179     $ 355     $ 79     $ 992     $ 262     $ —       $ 1,254  

Losses and loss expenses and life policy benefits

    (260     (94     (201     21       (534     (215     —         (749

Acquisition costs

    (92     (54     (79     (8     (233     (32     —         (265
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

  $ 27     $ 31     $ 75     $ 92     $ 225     $ 15     $ —       $ 240  

Other income

            1       1       (2     —    

Other operating expenses

            (65     (17     (29     (111
         

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

          $ 161     $ (1     n/a      $ 129  

Net investment income

              15       102       117  
           

 

 

   

 

 

   

 

 

 

Allocated underwriting result (1)

            $ 14       n/a        n/a   

Net realized and unrealized investment gains

                142       142  

Interest expense

                (12     (12

Amortization of intangible assets

                (7     (7

Net foreign exchange gains

                —         —    

Income tax expense

                (62     (62

Interest in earnings of equity method investments

                6       6  
             

 

 

   

 

 

 

Net income

                n/a      $ 313  
             

 

 

   

 

 

 

Loss ratio (2)

    68.6 %     52.4 %     56.6 %     (26.5 )%     53.8 %      

Acquisition ratio (3)

    24.3       30.1       22.4       10.1       23.6        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio (4)

    92.9 %     82.5 %     79.0 %     (16.4 )%     77.4 %      

Other operating expense ratio (5)

            6.5        
         

 

 

       

Combined ratio (6)

            83.9 %      
         

 

 

       

 

(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.

 

23


Segment Information

For the three months ended March 31, 2013

 

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

Gross premiums written

   $ 447     $ 372     $ 445     $ 238     $ 1,502     $ 254     $ 1     $ 1,757  

Net premiums written

   $ 446     $ 368     $ 361     $ 211     $ 1,386     $ 249     $ 1     $ 1,636  

Increase in unearned premiums

     (113     (202     (24     (124     (463     (25     (1     (489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 333     $ 166     $ 337     $ 87     $ 923     $ 224     $ —       $ 1,147  

Losses and loss expenses and life policy benefits

     (240     (67     (184     11       (480     (182     1       (661

Acquisition costs

     (72     (50     (75     (11     (208     (27     —         (235
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Technical result

   $ 21     $ 49     $ 78     $ 87     $ 235     $ 15     $ 1     $ 251  

Other income

             —         3       1       4  

Other operating expenses

             (66     (18     (32     (116
          

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result

           $ 169     $ —         n/a      $ 139  

Net investment income

               16       108       124  
            

 

 

   

 

 

   

 

 

 

Allocated underwriting result

             $ 16       n/a        n/a   

Net realized and unrealized investment gains

                 23       23  

Interest expense

                 (12     (12

Amortization of intangible assets

                 (7     (7

Net foreign exchange gains

                 2       2  

Income tax expense

                 (42     (42

Interest in earnings of equity method investments

                 7       7  
              

 

 

   

 

 

 

Net income

                 n/a      $ 234  
              

 

 

   

 

 

 

Loss ratio

     72.0 %     40.4 %     54.6 %     (12.8 )%     52.0 %      

Acquisition ratio

     21.6       30.1       22.4       12.3       22.6        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

Technical ratio

     93.6 %     70.5 %     77.0 %     (0.5 )%     74.6 %      

Other operating expense ratio

             7.1        
          

 

 

       

Combined ratio

             81.7 %      
          

 

 

       

 

24


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

Executive Overview

The Company is a leading global reinsurer and insurer, with a broadly diversified and balanced portfolio of traditional reinsurance and insurance risks and capital markets risks.

Successful risk management is the foundation of the Company’s value proposition, with diversification of risks at the core of its risk management strategy. The Company’s ability to succeed in the risk assumption and management business is dependent on its ability to accurately analyze and quantify risk, to understand volatility and how risks aggregate or correlate, and to establish the appropriate capital requirements and limits for the risks assumed. All risks, whether they are reinsurance related risks or capital market risks, are managed by the Company within an integrated framework of policies and processes to ensure the intelligent and consistent evaluation and valuation of risk, and to ultimately provide an appropriate return to shareholders. The Company’s Risk Management framework is discussed in Risk Management in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

For a discussion of the Company’s long-term objective and annualized growth in Diluted Tangible Book Value per Share plus dividends, the metric that Management uses to measure its success in achieving its long-term objective, see below in Key Financial Measures.

Overview of the Results of Operations for the Three Months Ended March 31, 2014

The Company measures its performance in several ways. Among the performance measures accepted under U.S. GAAP is diluted net income or loss per share, a measure that focuses on the return provided to the Company’s common shareholders. Diluted net income or loss per share is obtained by dividing net income or loss attributable to PartnerRe Ltd. common shareholders by the weighted average number of common shares and common share equivalents outstanding. Net income or loss attributable to PartnerRe Ltd. common shareholders is defined as net income or loss less preferred dividends and loss on redemption of preferred shares. The Company also utilizes certain non-GAAP measures to assess performance (see the discussion of these non-GAAP measures and the reconciliation of those non-GAAP measures to the most directly comparable GAAP measures in Key Financial Measures below).

Key Factors Affecting Period over Period Comparability

The following key factors affected the period over period comparison of the Company’s results and may continue to affect our results of operations and financial condition in the future. These factors are discussed in more detail in Review of Net Income below.

As the Company’s reinsurance operations are exposed to low frequency and high severity risk events, some of which are seasonal, results for certain periods may include unusually low loss experience, while results for other periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods may be volatile from period to period and are not necessarily indicative of results for the full year. The results for the three months ended March 31, 2014 and 2013 include no significant catastrophic losses.

The results for the three months ended March 31, 2014 and 2013 were impacted by the volatility in the capital markets, primarily as a result of modest decreases in longer-term risk-free interest rates and a slight narrowing of credit spreads during 2014 and modest increases in risk-free interest rates during 2013.

 

25


Overview of Net Income

Net income, net income attributable to noncontrolling interests, preferred dividends, loss on redemption of preferred shares, net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars, except per share data):

 

     For the three
months ended
March 31, 2014
     % Change     For the three
months ended
March 31, 2013
 

Net income

   $ 313        34 %   $ 234  

Less: net income attributable to noncontrolling interests

     3        NM       —    
  

 

 

      

 

 

 

Net income attributable to PartnerRe Ltd.

   $ 310        32     $ 234  

Less: preferred dividends

     14        (4     15  

Less: loss on redemption of preferred shares

     —          (100     9  
  

 

 

      

 

 

 

Net income attributable to PartnerRe Ltd. common shareholders

   $ 296        40     $ 210  

Diluted net income per share attributable to PartnerRe Ltd. common shareholders

   $ 5.61        59     $ 3.53  

The increase in net income of $79 million, from $234 million in the three months ended March 31, 2013 to $313 million in the same period of 2014 resulted primarily from:

 

    an increase of $119 million in pre-tax net realized and unrealized investment gains, mainly as a result of modest decreases in longer-term risk-free interest rates and a slight narrowing of credit spreads in the three months ended March 31, 2014 compared to modest increases in risk-free interest rates in the same period of 2013; partially offset by

 

    an increase of $20 million in income tax expense, primarily resulting from a higher pre-tax net income;

 

    a decrease of $8 million in the Non-life underwriting result, which was mainly driven by a decrease in favorable prior year loss development, partially offset by a modestly lower level of mid-sized loss activity; and

 

    a decrease of $7 million in net investment income, driven by lower reinvestment rates.

The increase in net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share for the three months ended March 31, 2014 compared to the same period of 2013 was primarily due to the above factors. For diluted net income per share specifically, the increase was also due to the accretive impact of a reduction in the diluted number of common shares and common share equivalents outstanding as a result of share repurchases.

Key Financial Measures

In addition to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and Comprehensive Income, Management uses certain other key measures, some of which are non-GAAP financial measures within the meaning of Regulation G (see below), to evaluate its financial performance and the overall growth in value generated for the Company’s common shareholders.

The Company’s long-term objective is to manage a portfolio of diversified risks that will create total shareholder value. The Company measures its success in achieving its long-term objective by targeting a return, which is variable and can be adjusted by Management, in excess of a referenced risk-free rate over the reinsurance cycle. The return, which is currently targeted to exceed 700 basis points in excess of the referenced risk-free rate, is calculated using compound annual growth in diluted tangible book value per common share and common share equivalents outstanding plus dividends per common share (annualized growth in Diluted Tangible Book Value per Share plus dividends). Management uses annualized growth in Diluted Tangible Book Value per Share plus dividends as its prime measure of long-term financial performance and believes this measure aligns the Company’s stated long-term objective with the measure most investors use to evaluate total shareholder value creation given that it focuses on the tangible value of total shareholder returns, excluding the impact of goodwill and intangibles. Given the Company’s profitability in any particular quarterly or annual period can be significantly affected by the level of large catastrophic losses, Management assesses this long-term objective over the reinsurance cycle as the Company’s performance during any particular quarterly or annual period is not necessarily indicative of its performance over the longer-term reinsurance cycle.

 

26


While annualized growth in Diluted Tangible Book Value per Share plus dividends is the Company’s prime financial measure, Management also uses other key financial measures to monitor performance. At March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 these were as follows:

 

     March 31, 2014     December 31, 2013  

Diluted tangible book value per common share and common share equivalents outstanding (1)

   $ 103.10     $ 98.49  

Annualized growth in diluted tangible book value per common share and common share equivalents outstanding plus dividends (2)

     21.4  
     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Operating earnings attributable to PartnerRe Ltd. common shareholders (in millions of U.S. dollars) (3)

   $ 177     $ 202  

Diluted operating earnings per common share and common share equivalents outstanding (3)

   $ 3.36     $ 3.39  

Annualized operating return on beginning diluted book value per common share and common share equivalents outstanding (4)

     12.3 %     13.5

Combined ratio (5)

     83.9 %     81.7

 

(1) Diluted tangible book value per common share and common share equivalents outstanding (Diluted Tangible Book Value per Share) is calculated using common shareholders’ equity attributable to PartnerRe Ltd. (total shareholders’ equity less noncontrolling interests and the aggregate liquidation value of preferred shares) less goodwill and intangible assets, net of tax, divided by the weighted average number of common shares and common share equivalents outstanding (assuming exercise of all stock-based awards and other dilutive securities). The presentation of Diluted Tangible Book Value per Share is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(2) Annualized growth in diluted tangible book value per common share and common share equivalents outstanding plus dividends (annualized growth in Diluted Tangible Book Value per Share plus dividends) is calculated using Diluted Tangible Book Value per Share plus dividends per common share divided by Diluted Tangible Book Value per Share at the beginning of the year and annualizing. The presentation of annualized growth in Diluted Tangible Book Value per Share plus dividends is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(3) Operating earnings or loss attributable to PartnerRe Ltd. common shareholders (operating earnings or loss) is calculated as net income or loss available to PartnerRe Ltd. common shareholders excluding net realized and unrealized gains or losses on investments, net of tax (except where the Company has made a strategic investment in an insurance or reinsurance related investee), net foreign exchange gains or losses, net of tax, loss on redemption of preferred shares and the interest in earnings or losses of equity method investments, net of tax (except where the Company has made a strategic investment in an insurance or reinsurance related investee and where the Company does not control the investee’s activities), and is calculated after preferred dividends. Operating earnings or loss per common share and common share equivalent outstanding (diluted operating earnings or loss per share) are calculated using operating earnings or loss for the period divided by the weighted average number of common shares and common share equivalents outstanding. The presentation of operating earnings or loss and diluted operating earnings or loss per share are non-GAAP financial measures within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and are reconciled to the most directly comparable GAAP financial measure below.
(4) Annualized operating return on beginning diluted book value per common share and common share equivalents outstanding (Operating ROE) is calculated using annualized operating earnings or loss, as defined above, per diluted common share and common share equivalents outstanding, divided by diluted book value per common share and common share equivalents outstanding as of the beginning of the year, as defined above. The presentation of Operating ROE is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
(5) The combined ratio of the Non-life segment is calculated as the sum of the technical ratio (losses and loss expenses and acquisition costs divided by net premiums earned) and the other operating expense ratio (other operating expenses divided by net premiums earned).

Diluted Tangible Book Value per Share: Diluted Tangible Book Value per Share focuses on the underlying fundamentals of the Company’s financial position and performance without the impact of goodwill or intangible assets. As discussed above, the Company uses this measure as the basis for its prime measure of long-term shareholder value creation, growth in Diluted Tangible Book Value per Share plus dividends. Management believes that Diluted Tangible Book Value per Share aligns the Company’s stated long-term objectives with the measure most investors use to evaluate total shareholder value creation and that it focuses on the tangible value of shareholder returns, excluding the impact of goodwill and intangibles. Diluted Tangible Book Value per Share is impacted by the Company’s net income or loss, capital resources management and external factors such as foreign exchange, interest rates, credit spreads and equity markets, which can drive changes in realized and unrealized gains or losses on its investment portfolio.

 

27


Diluted Tangible Book Value per Share at March 31, 2014 and December 31, 2013 and the calculation of the annualized growth in Diluted Tangible Book Value per Share plus dividends for the three months ended March 31, 2014 were as follows. As described above, this metric is a long-term performance measure, however, the below table shows the annualized total shareholder value creation for the current period in order for the shareholders to monitor performance.

 

     March 31, 2014     December 31, 2013  

Diluted tangible book value per common share and share equivalents outstanding

   $ 103.10     $ 98.49  

Dividends per common share for the three months ended March 31, 2014

     0.67    
  

 

 

   

Diluted tangible book value per share plus dividends

   $ 103.77    

Annualized growth in diluted tangible book value per share plus dividends

     21.4 %  

The Company’s Diluted Tangible Book Value per Share increased by 4.7%, from $98.49 at December 31, 2013 to $103.10 at March 31, 2014, primarily due to net income attributable to PartnerRe Ltd., which was partially offset by dividends on the common and preferred shares. The annualized growth in Diluted Tangible Book Value per Share plus dividends was 21.4% during the three months ended March 31, 2014. This growth was driven by net income attributable to PartnerRe Ltd. and dividends on the common shares.

Over the past five years, since March 31, 2009, the Company has generated a compound annualized growth in Diluted Tangible Book Value per Share plus dividends in excess of 15%.

The presentation of Diluted Tangible Book Value per Share is a non-GAAP financial measure within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures). The reconciliation of Diluted Tangible Book Value per Share to the most directly comparable GAAP financial measure, diluted book value per common share and common share equivalents outstanding, at March 31, 2014 and December 31, 2013 was as follows (in millions of U.S. dollars):

 

     March 31, 2014      December 31, 2013  

Diluted book value per common share and common share equivalents outstanding (1)

   $ 114.13      $ 109.26  

Less: goodwill and other intangible assets, net of tax, per share

     11.03        10.77  
  

 

 

    

 

 

 

Diluted tangible book value per share

   $ 103.10      $ 98.49  

 

(1) Diluted book value per common share and common share equivalents outstanding (Diluted Book Value per Share) is calculated using common shareholders’ equity attributable to PartnerRe Ltd. (total shareholders’ equity less noncontrolling interests and the aggregate liquidation value of preferred shares) divided by the weighted average number of common shares and common share equivalents outstanding (assuming exercise of all stock-based awards and other dilutive securities).

Operating earnings or loss attributable to PartnerRe Ltd. common shareholders (operating earnings or loss) and operating earnings or loss per common share and common share equivalent outstanding (diluted operating earnings or loss per share): Management uses operating earnings or loss and diluted operating earnings or loss per share to measure its financial performance as these measures focus on the underlying fundamentals of the Company’s operations by excluding net realized and unrealized gains or losses on investments (except where the Company has made a strategic investment in an investee whose operations are insurance or reinsurance related and where the Company does not control the investee’s activities), net foreign exchange gains or losses, loss on redemption of preferred shares and certain interest in earnings or losses of equity method investments (except where the Company has made a strategic investment in an investee whose operations are insurance or reinsurance related and where the Company does not control the investee’s activities). Net realized and unrealized gains or losses on investments in any particular period are not indicative of the performance of, and distort trends in, the Company’s business as they predominantly result from general economic and financial market conditions, and the timing of realized gains or losses on investments is largely opportunistic. Net foreign exchange gains or losses are not indicative of the performance of, and distort trends in, the Company’s business as they predominantly result from general economic and foreign exchange market conditions. Loss on the redemption of preferred shares is not indicative of the performance of, and distorts trends in, the Company’s business as it resulted from general economic and financial market conditions, and the timing of the loss on redemption was largely opportunistic. Interest in earnings or losses of equity method investments are also not indicative of the performance of, or trends in, the Company’s business where the investee’s operations are not insurance or reinsurance related and where the Company does not control the investee companies’ activities. Management believes that the use of operating earnings or loss and diluted operating earnings or loss per share enables investors and other users of the Company’s financial information to analyze its performance in a manner similar to how Management analyzes performance. Management also believes that these measures follow industry practice and, therefore, allow the users of financial information to compare the Company’s performance with its industry peer group, and that the equity analysts and certain rating agencies which follow the Company, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons.

 

28


Operating earnings decreased by $25 million, from $202 million in the three months ended March 31, 2013 to $177 million in the same period of 2014. The decrease in operating earnings was primarily due to:

 

    an increase in income tax expense on pre-tax operating earnings, driven by the distribution of the pre-tax operating earnings, with a relatively higher proportion recorded in taxable jurisdictions;

 

    a deterioration in the Non-life underwriting result, resulting primarily from a lower level of favorable prior year loss development, which was partially offset by a modestly lower level of mid-sized loss activity; and

 

    a decrease in net investment income, driven by lower reinvestment rates.

Diluted operating earnings per share decreased modestly, from $3.39 in the three months ended March 31, 2013 to $3.36 in the same period of 2014, primarily due to the decrease in operating earnings, partially offset by the accretive impact of the share repurchases.

The other lesser factors contributing to the increases or decreases in operating earnings and diluted operating earnings per share in the three months ended March 31, 2014 compared to the same period of 2013 are further described in Review of Net Income below.

Operating earnings or loss attributable to PartnerRe Ltd. common shareholders and diluted operating earnings or loss per share are non-GAAP financial measures within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures). The reconciliation of operating earnings and diluted operating earnings per share to the most directly comparable GAAP financial measure for the three months ended March 31, 2014 and 2013 was as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Net income attributable to PartnerRe Ltd.

   $ 310     $ 234  

Less:

    

Net realized and unrealized investment gains, net of tax

     116       12  

Net foreign exchange losses, net of tax

     (1     (1

Interest in earnings of equity method investments, net of tax

     4       6  

Dividends to preferred shareholders

     14       15  
  

 

 

   

 

 

 

Operating earnings attributable to PartnerRe Ltd. common shareholders

   $ 177     $ 202  

Per diluted share:

    

Net income attributable to PartnerRe Ltd. common shareholders

   $ 5.61     $ 3.53  

Less:

    

Net realized and unrealized investment gains, net of tax

     2.20       0.20  

Net foreign exchange losses, net of tax

     (0.02     (0.01

Loss on redemption of preferred shares

     —         (0.15

Interest in earnings of equity method investments, net of tax

     0.07       0.10  
  

 

 

   

 

 

 

Operating earnings attributable to PartnerRe Ltd. common shareholders

   $ 3.36     $ 3.39  

Operating ROE: Management uses annualized Operating ROE as a measure of profitability that focuses on the return to common shareholders on an annual basis. To support the Company’s growth objectives, most economic decisions, including capital attribution and underwriting pricing decisions, incorporate an Operating ROE impact analysis. For the purpose of that analysis, an appropriate amount of capital (equity) is attributed to each transaction for determining the transaction’s priced return on attributed capital. Subject to an adequate return for the risk level as well as other factors, such as the contribution of each risk to the overall risk level and risk diversification, capital is attributed to the transactions generating the highest priced return on deployed capital. Management’s challenge consists of (i) attributing an appropriate amount of capital to each transaction based on the risk created by the transaction, (ii) properly estimating the Company’s overall risk level and the impact of each transaction on the overall risk level, (iii) assessing the diversification benefit, if any, of each transaction, and (iv) deploying available capital. The risk for the Company lies in mis-estimating any one of these factors, which are critical in calculating a meaningful priced return on deployed capital, and entering into transactions that do not contribute to the Company’s growth objectives. The Company’s Operating ROE’s for quarterly periods are annualized.

Annualized Operating ROE decreased from 13.5% in the three months ended March 31, 2013 to 12.3% in the same period of 2014. The decrease in annualized Operating ROE was primarily due to a higher beginning diluted book value per share at January 1, 2014 compared to January 1, 2013. The factors contributing to increases or decreases in operating earnings are described further in Review of Net Income below.

 

29


The presentation of Operating ROE is a non-GAAP financial measure within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures). The reconciliation of Operating ROE to the most directly comparable GAAP financial measure for the three months ended March 31, 2014 and 2013 was as follows:

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Annualized return on beginning diluted book value per common share calculated with net income per share attributable to common shareholders

     20.5 %     14.0 %

Less:

    

Annualized net realized and unrealized investment gains, net of tax, on beginning diluted book value per common share

     8.0       0.8  

Annualized net foreign exchange losses, net of tax, on beginning diluted book value per common share

     (0.1     (0.1

Annualized net interest in earnings of equity method investments, net of tax, on beginning diluted book value per common share

     0.3       0.4  

Annualized loss on redemption of preferred shares, on beginning diluted book value per common share

     —         (0.6
  

 

 

   

 

 

 

Annualized operating return on beginning diluted book value per common share

     12.3 %     13.5 %

Combined ratio: The combined ratio is used industry-wide as a measure of underwriting profitability for Non-life business. A combined ratio under 100% indicates underwriting profitability, as the total losses and loss expenses, acquisition costs and other operating expenses are less than the premiums earned on that business. While an important metric of underwriting profitability, the combined ratio does not reflect all components of profitability, as it does not recognize the impact of investment income earned on premiums between the time premiums are received and the time loss payments are ultimately made to clients. The key challenges in managing the combined ratio metric consist of (i) focusing on underwriting profitable business even in the weaker part of the reinsurance cycle, as opposed to growing the book of business at the cost of profitability, (ii) diversifying the portfolio to achieve a good balance of business, with the expectation that underwriting losses in certain lines or markets may potentially be offset by underwriting profits in other lines or markets, and (iii) maintaining control over expenses.

The Non-life combined ratio increased by 2.2 points, from 81.7% in the three months ended March 31, 2013 to 83.9% in the same period of 2014. The increase in the combined ratio for the three months ended March 31, 2014 compared to the same period of 2013 primarily reflected the decrease in net favorable prior year loss development, partially offset by a modestly lower level of mid-sized loss activity and an increase in net premiums earned which reduced the other operating expense ratio.

The other lesser factors contributing to increases or decreases in the combined ratio are described further in Review of Net Income below.

The Company uses the combined ratio to measure its overall underwriting profitability for its Non-life segment as a whole. Given the Company does not allocate operating expenses to its Non-life sub-segments, Management measures the underwriting profitability of the Non-life sub-segments by using the technical result and technical ratio as described in Results by Segment below.

Other Key Financial Measures

In addition to using the annualized growth in Diluted Tangible Book Value per Share plus dividends as the Company’s prime financial long-term measure, and diluted tangible book value per common share and common share equivalents outstanding (Diluted Tangible Book Value per Share) as the basis for this measure, the Company uses other metrics to monitor its financial performance and to measure total shareholder value. Other such metrics used by Management include, but are not limited to, diluted book value per common share and common share equivalents outstanding (Diluted Book Value per Share) and Diluted Tangible Book Value per Share plus the discount in Non-life loss reserves per common share and common share equivalents outstanding (Diluted Tangible Book Value plus the discount in Non-life reserves). Diluted Book Value per Share is a similar metric to Diluted Tangible Book Value per Share, except that it includes the impact on book value of goodwill and intangible assets. Diluted Tangible Book Value plus the discount in Non-life loss reserves is a shorter-term metric that adjusts the Company’s Diluted Tangible Book Value per Share for the impact that changes in interest rates have on the time value of money that is embedded in the Company’s Non-life loss reserves.

Comment on Non-GAAP Measures

Throughout this filing, the Company’s results of operations have been presented in the way that Management believes will be the most meaningful and useful to investors, analysts, rating agencies and others who use financial information in evaluating the performance of the Company. This presentation includes the use of Diluted Tangible Book Value per Share, Diluted Tangible Book Value per Share plus dividends, operating earnings or loss, diluted operating earnings or loss per share and Operating ROE that are not calculated under standards or rules that comprise U.S. GAAP. These measures are referred to as non-GAAP financial measures within the meaning of Regulation G. Management believes that these non-GAAP financial measures are important to investors, analysts, rating agencies and others who use the Company’s financial information and will help provide a consistent basis for comparison between years and for comparison with the Company’s peer group, although non-GAAP measures may be defined or calculated differently by other companies. Investors should consider these non-GAAP measures in addition to, and not as a substitute for,

 

30


measures of financial performance prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable U.S. GAAP financial measures, diluted book value per share, net income or loss and return on beginning common shareholders’ equity calculated with net income or loss attributable to common shareholders, is presented above.

Risk Management

In the reinsurance industry, the core of the business model is the assumption and management of risk. A key challenge is to create total shareholder value through the intelligent and optimal assumption and management of reinsurance, insurance and investment risks while limiting and mitigating those risks that can destroy tangible as well as intangible value, those risks for which the organization is not sufficiently compensated, and those risks that could threaten the ability of the Company to achieve its objectives. While many companies start with a return goal and then attempt to shed risks that may derail that goal, the Company starts with a capital-based risk appetite and then looks for risks that meet its return targets within that framework. Management believes that this construct allows the Company to balance the cedants’ need for certainty of claims payment with the shareholders’ need for an adequate total return.

All business decisions entail a risk/return trade-off, and these decisions are applicable to the Company’s risks. In the context of assumed business risks, this requires an accurate evaluation of risks to be assumed, and a determination of the appropriate economic returns required as fair compensation for such risks.

The Company’s results are primarily determined by how well the Company understands, prices and manages assumed risk. Management also believes that every organization faces numerous risks that could threaten the successful achievement of a company’s goals and objectives. These include choice of strategy and markets, economic and business cycles, competition, changes in regulation, data quality and security, fraud, business interruption and management continuity; all factors which can be viewed as either strategic, financial, or operational risks that are common to any industry. See Risk Factors in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

For additional information related to the Company’s risk management approach, see Business—Risk Management in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Assumed Risks

Central to the Company’s assumed risk framework is its risk appetite. The Company’s risk appetite is a statement of how much and how often the Company will tolerate operating losses and economic losses during an annual period. The Company’s risk appetite is expressed as the maximum operating loss and the maximum economic loss that the Board of Directors (Board) is willing to incur. The Company’s risk appetite is approved by the Board on an annual basis.

The Company manages exposure levels from multiple risk sources to provide reasonable assurance that modeled operating or economic losses are contained within the risk appetite approved by the Board. Definitions for operating and economic losses in the context of the Company’s risk management framework are included in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Company establishes key risk limits for any risk source deemed by Management to have the potential to cause operating losses or economic losses greater than the Company’s risk appetite. The Risk and Finance Committee of the Board (Risk and Finance Committee) approves the key risk limits. Executive and Business and Support Unit Management may set additional specific and aggregate risk limits within the key risk limits approved by the Risk and Finance Committee. The actual level of risk is dependent on current market conditions and the need for balance in the Company’s portfolio of risks. On a quarterly basis, Management reviews and reports to the Risk and Finance Committee the actual limits deployed against the approved limits.

 

31


Management established key risk limits that are approved by the Risk and Finance Committee for ten risk sources at March 31, 2014. For a detailed discussion of these ten risk sources see Business—Risk Management in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The limits approved by the Risk and Finance Committee and the actual limits deployed at March 31, 2014 and December 31, 2013 were as follows:

 

     March 31, 2014 (2)      December 31, 2013 (2)  
     Limit
approved
     Actual
deployed
     Limit
approved
     Actual
deployed
 

Natural Catastrophe Risk

   $ 2.3 billion      $ 1.4 billion      $ 2.3 billion      $ 1.5 billion  

Long Tail Reinsurance Risk

   $ 1.2 billion      $ 0.8 billion      $ 1.2 billion      $ 0.8 billion  

Market Risk

   $ 3.4 billion      $ 2.6 billion      $ 3.4 billion      $ 2.6 billion  

Equity and equity-like sublimit

   $ 2.8 billion      $ 2.0 billion      $ 2.8 billion      $ 1.8 billion  

Interest Rate Risk (duration)—excess fixed income investment portfolio (1)

     6.0 years        2.4 years        6.0 years        1.5 years  

Default and Credit Spread Risk

   $ 9.5 billion      $ 6.8 billion      $ 9.5 billion      $ 6.8 billion  

Trade Credit Underwriting Risk

   $ 0.9 billion      $ 0.8 billion      $ 0.9 billion      $ 0.7 billion  

Longevity Risk

   $ 2.0 billion      $ 1.3 billion      $ 2.0 billion      $ 1.2 billion  

Pandemic Risk

   $ 1.3 billion      $ 0.7 billion      $ 1.3 billion      $ 0.6 billion  

Agriculture Risk

   $ 0.3 billion      $ 0.1 billion      $ 0.3 billion      $ 0.1 billion  

Mortgage Reinsurance Risk

   $ 0.7 billion      $ 0.4 billion      $ 0.7 billion      $ 0.2 billion  

Any one country sub-limit

   $ 0.5 billion      $ 0.2 billion      $ 0.5 billion      $ 0.2 billion  

 

(1) The excess fixed income investment portfolio relates to fixed income securities included in the Company’s capital funds, which are in excess of those included in the Company’s liability funds and which support the net reinsurance liabilities.
(2) The limits approved and the actual limits deployed in the table above are shown net of retrocession.

Natural Catastrophe Probable Maximum Loss (PML)

The following discussion of the Company’s natural catastrophe probable maximum loss (PML) information contains forward-looking statements based upon assumptions and expectations concerning the potential effect of future events that are subject to uncertainties. See Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a list of the Company’s risk factors. Any of these risk factors could result in actual losses that are materially different from the Company’s PML estimates below.

Natural catastrophe risk is a source of significant aggregate exposure for the Company and is managed by setting risk appetite and limits, as discussed above. The peril zones in the disclosure below are major peril zones for the industry. The Company has exposures in other peril zones that can potentially generate losses greater than the PML estimates below. The Company’s PMLs represent an estimate of loss for a single event for a given return period. The table below discloses the Company’s 1-in-250 and 1-in-500 year return period estimated loss for a single occurrence of a natural catastrophe event in a one-year period. In other words, the 1-in-250 and 1-in-500 year return period PMLs mean that there is a 0.4% and 0.2% chance, respectively, in any given year that an occurrence of a natural catastrophe in a specific peril zone will lead to losses exceeding the stated estimate.

The PML estimates below include all significant exposure from our Non-life and Life and Health business operations. This includes coverage for property, marine, energy, aviation, engineering, workers’ compensation and mortality and exposure to catastrophe from insurance-linked securities. The PML estimates do not include casualty coverage that could be exposed as a result of a catastrophic event. In addition, they do not include estimates for contingent losses to insureds that are not directly impacted by the event (e.g. loss of earnings due to disruption in supply lines).

For additional information related to the Company’s natural catastrophe PML information and definitions, see Business—Natural Catastrophe Probable Maximum Loss (PML) in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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The Company’s single occurrence estimated net PML exposures (pre-tax and net of retrocession and reinstatement premiums) for certain selected peak industry natural catastrophe perils at January 1, 2014 were as follows (in millions of U.S. dollars):

 

          Single Occurrence
Estimated Net PML Exposure
 

Zone

  

Peril

   1-in-250 year PML      1-in-500 year PML
(Earthquake Perils Only)
 

U.S. Southeast

   Hurricane    $ 908        —    

U.S. Northeast

   Hurricane      1,008        —    

U.S. Gulf Coast

   Hurricane      960        —    

Caribbean

   Hurricane      192        —    

Europe

   Windstorm      626        —    

Japan

   Typhoon      128        —    

California

   Earthquake      589      $ 668  

British Columbia

   Earthquake      214        378  

Japan

   Earthquake      432        466  

Australia

   Earthquake      332        426  

New Zealand

   Earthquake      203        223  

The Company estimates that the incremental loss at the 1-in-250 year return period from a U.S. hurricane impacting more than one of the three hurricane risk zones in the U.S. would be 20% higher than the PML of the largest zone impacted. In addition, there is the potential for a hurricane to impact the Caribbean peril zone and one or more U.S. hurricane peril zones.

Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates of the Company at March 31, 2014 have not changed materially compared to December 31, 2013. The following discussion updates specific information related to the Company’s estimates for losses and loss expenses and life policy benefits and valuation of investments and funds held – directly managed, including certain derivative financial instruments. See Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the Company’s other critical accounting policies which are not specifically updated in this report given they have not changed materially compared to December 31, 2013.

Losses and Loss Expenses and Life Policy Benefits

Losses and Loss Expenses

Because a significant amount of time can elapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company (the reinsurer) and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid losses and loss expenses (loss reserves) is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (case reserves), additional case reserves (ACRs) and incurred but not reported (IBNR) reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses (ULAE) associated with the loss reserves and these form part of the Company’s loss adjustment expense reserves. The Company’s Non-life loss reserves for each category and sub-segment are reported in the table included later in this section.

The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the reporting tail. For all lines, the Company’s objective is to estimate ultimate losses and loss expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total loss reserves.

The Company analyzes its ultimate losses and loss expenses after consideration of the loss experience of various reserving cells. The Company assigns treaties to reserving cells and allocates losses from the treaty to the reserving cell. The reserving cells are selected in order to ensure that the underlying treaties have homogeneous loss development characteristics (e.g., reporting tail) but are large enough to make estimation of trends credible. The selection of reserving cells is reviewed annually and changes over time as the business of the Company evolves. For each reserving cell, the Company’s estimates of loss reserves are reached after a review of the results of several commonly accepted actuarial projection methodologies. In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the reserving cell and underwriting year for which the projection is made.

See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information on the reserving methodologies employed by the Company, the principal reserving methods used for the reserving lines, the principal parameter assumptions underlying the methods and the main underlying factors upon which the estimates of reserving parameters are predicated.

 

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The Company’s best estimate of total loss reserves is typically in excess of the midpoint of the actuarial ultimate liability estimate. The Company believes that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature underwriting years that may not be adequately captured through traditional actuarial projection methodologies as these methodologies usually rely heavily on projections of prior year trends into the future. In selecting its best estimate of future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by a reasonable range of actuarial liability estimates. The selected best estimates of reserves are always within the reasonable range of estimates indicated by the Company’s actuaries.

During the three months ended March 31, 2014 and 2013, the Company reviewed its estimate for prior year losses for the Non-life segment (defined below in Results by Segment) and, in light of developing data, adjusted its ultimate loss ratios for prior accident years. The net prior year favorable loss development for each sub-segment of the Company’s Non-life segment for the three months ended March 31, 2014 and 2013 was as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
     For the three
months ended
March 31, 2013
 

Net Non-life prior year favorable loss development:

     

North America

   $ 24      $ 30  

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

     47        58  

Global Specialty

     59        60  

Catastrophe

     34        35  
  

 

 

    

 

 

 

Total net Non-life prior year favorable loss development

   $ 164      $ 183  

The net Non-life prior year favorable loss development for the three months ended March 31, 2014 and 2013 was driven by the following factors (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Net Non-life prior year (adverse) favorable loss development:

    

Net prior year loss development due to changes in premiums (1)

   $ (10   $ (11

Net prior year loss development due to all other factors (2)

     174       194  
  

 

 

   

 

 

 

Total net Non-life prior year favorable loss development

   $ 164     $ 183  

 

(1) Net prior year loss development due to changes in premiums includes, but it is not limited to, the impact to prior years’ reserves associated with (increases) decreases in the estimated or actual premium exposure reported by cedants.
(2) Net prior year loss development due to all other factors includes, but is not limited to, loss experience, changes in assumptions and changes in methodology.

For a discussion of net prior year favorable loss development by Non-life sub-segment, see Results by Segment below. See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information by reserving lines.

The gross reserves reported by cedants (case reserves), those estimated by the Company (ACRs and IBNR reserves) and the total gross, ceded and net loss reserves recorded at March 31, 2014 for each Non-life sub-segment were as follows (in millions of U.S. dollars):

 

     Case
reserves
     ACRs      IBNR
reserves
     Total gross
loss reserves
recorded
     Ceded loss
reserves
    Total net
loss reserves
recorded
 

North America

   $ 959      $ 137      $ 2,454      $ 3,550      $ (18   $ 3,532  

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

     1,336        13        1,080        2,429        (17     2,412  

Global Specialty

     1,887        47        1,986        3,920        (173     3,747  

Catastrophe

     370        136        125        631        (44     587  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Non-life reserves

   $ 4,552      $ 333      $ 5,645      $ 10,530      $ (252   $ 10,278  

The net loss reserves represent the Company’s best estimate of future losses and loss expense amounts based on the information available at March 31, 2014. Loss reserves rely upon estimates involving actuarial and statistical projections at a given time that reflect the Company’s expectations of the costs of the ultimate settlement and administration of claims. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different from the assumptions underlying the reserve estimates. In the event that the business environment and social trends diverge from historical trends, the Company may have to adjust its loss reserves to amounts falling significantly outside its current estimate. These estimates are regularly reviewed and the ultimate liability may be in excess of, or less than, the amounts provided, for which any adjustments will be reflected in the period in which the need for an adjustment is determined.

 

34


The Company’s best estimates are point estimates within a reasonable range of actuarial liability estimates. These ranges are developed using stochastic simulations and techniques and provide an indication as to the degree of variability of the loss reserves. The Company interprets the ranges produced by these techniques as confidence intervals around the point estimates for each Non-life sub-segment. However, due to the inherent volatility in the business written by the Company, there can be no assurance that the final settlement of the loss reserves will fall within these ranges.

The point estimates related to net loss reserves recorded by the Company and the range of actuarial estimates at March 31, 2014 for each Non-life sub-segment were as follows (in millions of U.S. dollars):

 

     Recorded Point
Estimate
     High      Low  

Net Non-life sub-segment loss reserves:

        

North America

   $ 3,532      $ 3,671      $ 2,900  

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

     2,412        2,621        2,024  

Global Specialty

     3,747        3,963        3,230  

Catastrophe

     587        597        475  

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

Of the Company’s $10,278 million of net Non-life loss reserves at March 31, 2014, net loss reserves for accident years 2005 and prior of $705 million are guaranteed by Colisée Re, pursuant to the Reserve Agreement. The Company is not subject to any loss reserve variability associated with the guaranteed reserves. See Business—Reserves in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the Reserve Agreement.

A significant amount of judgment was used to estimate the range of potential losses related to the New Zealand Earthquakes and the Japan Earthquake, and there remains a considerable degree of uncertainty related to the range of possible ultimate losses associated with the New Zealand Earthquakes. Loss estimates arising from earthquakes are inherently more uncertain than those from other catastrophic events and the Company believes the ultimate losses arising from the New Zealand Earthquakes and the Japan Earthquake may be materially in excess of, or less than, the amounts provided for in the Condensed Consolidated Balance Sheet at March 31, 2014.

The remaining significant risks and uncertainties related to the New Zealand Earthquakes include the ongoing cedant revisions of loss estimates for each of these events, the degree to which inflation impacts construction materials required to rebuild affected properties, the characteristics of the Company’s program participation for certain affected cedants and potentially affected cedants, and the expected length of the claims settlement period. In addition, there is additional complexity related to the New Zealand Earthquakes given multiple earthquakes occurred in the same region in a relatively short period of time, resulting in cedants continuing to revise their allocation of losses between the various events and between different treaties, under which the Company may provide different amounts of coverage.

While the Company remains cautious regarding the estimated ultimate losses from the Japan Earthquake, as time has passed the estimates received from the Company’s cedants have stabilized, paid losses have increased and the remaining complexities have been reduced.

In addition to the sum of the point estimates originally recorded for each of the New Zealand Earthquakes and Japan Earthquake, at December 31, 2011 the Company recorded additional gross reserves of $50 million (net reserves of $48 million after the impact of retrocession) specifically related to these events within its Catastrophe sub-segment. The additional gross reserves recorded were in consideration of the number of events, the complexity of certain events and the continuing uncertainties in estimating the ultimate losses for these events in the aggregate. The Company continues to evaluate the additional gross reserves that were recorded as part of its periodic reserving process and changes to the amounts recorded may either result in: (i) the reallocation of some or all of the additional reserves to one or more of the these events; or (ii) the release of some or all of the additional reserves to net income in future periods; or (iii) an increase in additional reserves recorded.

During the year ended December 31, 2013, the Company cautiously reduced the additional gross reserves by $10 million to $40 million, primarily reflecting the reduced level of uncertainty associated with the Japan Earthquake in the first half of 2013. As a result of further cedant revisions to loss estimates and cedants reallocating their losses between the different New Zealand Earthquakes during the latter half of 2013, the Company determined to maintain the additional gross reserves of $40 million at March 31, 2014 and December 31, 2013 and has primarily allocated this remaining reserve to the New Zealand Earthquakes to reflect the continuing uncertainty related to these events described above. Based upon information currently available and the estimated range of potential ultimate liabilities, the Company believes that unpaid loss and loss expense reserves contemplate a reasonable provision for the remaining exposure related to the New Zealand Earthquakes and Japan Earthquake.

 

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Life Policy Benefits

Policy benefits for life and annuity contracts relate to the business in the Company’s Life and Health segment, which predominantly includes:

 

    reinsurance of longevity, subdivided into standard and non-standard annuities;

 

    mortality business, which includes death and disability covers (with various riders) primarily written in Continental Europe, term assurance and critical illness primarily written in the United Kingdom and Ireland, and guaranteed minimum death benefit (GMDB) business primarily written in Continental Europe; and

 

    specialty accident and health business written by PartnerRe Health, including Health Maintenance Organizations (HMO) reinsurance, medical reinsurance and provider and employer excess of loss programs.

The Company categorizes life reserves into three types of reserves: case reserves, IBNR reserves and reserves for future policy benefits. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Principal assumptions used in the establishment of reserves for future policy benefits have been determined based upon information reported by ceding companies, supplemented by the Company’s actuarial estimates of mortality, critical illness, persistency and future investment income, with appropriate provision to reflect uncertainty. Case reserves, IBNR reserves and reserves for future policy benefits are generally calculated at the treaty level. The Company updates its estimates for each of the aforementioned categories on a periodic basis using information received from its cedants.

The Company’s reserving practices begin with the categorization of the contracts written as short duration, long duration, or universal life business for U.S. GAAP reserving purposes. This categorization determines the Company’s reserving methodology. See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits—Life Policy Benefits in Item 7 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional information on the reserving methodologies employed by the Company for its longevity, mortality and accident and health lines.

The Company’s gross and net policy benefits for life and annuity contracts by reserving line at March 31, 2014 were as follows (in millions of U.S. dollars):

 

     Case
reserves
     IBNR
reserves
     Reserves for
future policy
benefits
     Total gross Life
and Health
reserves recorded
     Ceded
reserves
    Total net Life and
Health reserves
recorded
 

Accident and Health

   $ 8      $ 101      $ —        $ 109      $ (3   $ 106  

Longevity

     1        219        418        638        (4     634  

Mortality

     209        592        570        1,371        —         1,371  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total policy benefits for life and annuity contracts

   $ 218      $ 912      $ 988      $ 2,118      $ (7   $ 2,111  

Valuation of Investments and Funds Held – Directly Managed, including certain Derivative Financial Instruments

The Company defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures the fair value of its financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels.

Under the fair value hierarchy, Management uses certain assumptions and judgments to derive the fair value of its investments, particularly for those assets with significant unobservable inputs, commonly referred to as Level 3 assets. At March 31, 2014, the Company’s financial instruments that were measured at fair value and categorized as Level 3 were as follows (in millions of U.S. dollars):

 

     March 31, 2014  

Fixed maturities

   $ 561  

Equities

     40  

Other invested assets (including certain derivatives)

     103  

Funds held – directly managed account

     16  
  

 

 

 

Total

   $ 720  

For additional information on the valuation techniques, methods and assumptions that were used by the Company to estimate the fair value of its fixed maturities, short-term investments, equities, other invested assets and investments underlying the funds held – directly managed account, see Note 4 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report. For information on the Company’s use of derivative financial instruments, see Note 5 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Results of Operations—for the Three Months Ended March 31, 2014 and 2013

The following discussion of Results of Operations contains forward-looking statements based upon assumptions and expectations concerning the potential effect of future events that are subject to uncertainties. See Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a complete list of the Company’s risk factors. Any of these risk factors could cause actual results to differ materially from those reflected in such forward-looking statements.

 

36


The Company’s reporting currency is the U.S. dollar. The Company’s significant subsidiaries and branches have one of the following functional currencies: U.S. dollar, euro or Canadian dollar. As a significant portion of the Company’s operations is transacted in foreign currencies, fluctuations in foreign exchange rates may affect year over year comparisons. To the extent that fluctuations in foreign exchange rates affect comparisons, their impact has been quantified, when possible, and discussed in each of the relevant sections. See Note 2(m) to Consolidated Financial Statements in Item 8 of Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of translation of foreign currencies.

The foreign exchange fluctuations for the principal currencies in which the Company transacts business were as follows:

 

    the U.S. dollar average exchange rate was weaker against most currencies, except the Japanese yen and Canadian dollar, in the three months ended March 31, 2014 compared to the same period of 2013; and

 

    the U.S. dollar ending exchange rate weakened against most currencies, except the Canadian dollar, at March 31, 2014 compared to December 31, 2013.

Review of Net Income

Management analyzes the Company’s net income or loss in three parts: underwriting result, investment result and other components of net income or loss. Underwriting result consists of net premiums earned and other income or loss less losses and loss expenses and life policy benefits, acquisition costs and other operating expenses. Investment result consists of net investment income, net realized and unrealized investment gains or losses and interest in earnings or losses of equity method investments. Net investment income includes interest and dividends, net of investment expenses, generated by the Company’s investment activities, as well as interest income generated on funds held assets. Net realized and unrealized investment gains or losses include sales of the Company’s fixed income, equity and other invested assets and investments underlying the funds held – directly managed account and changes in net unrealized gains or losses. Interest in earnings or losses of equity method investments includes the Company’s strategic investments. Other components of net income or loss include technical result and other income or loss, other operating expenses, interest expense, amortization of intangible assets, net foreign exchange gains or losses and income tax expense or benefit.

The components of net income for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Underwriting result:

      

Non-life

   $ 161       (5 )%   $ 169  

Life and Health

     (1     NM       —    

Investment result:

      

Net investment income

     117       (6     124  

Net realized and unrealized investment gains

     142       520       23  

Interest in earnings of equity method investments (1)

     6       (16     7  

Corporate and Other:

      

Technical result (2)

     —         NM       1  

Other income (2)

     (2     NM       1  

Other operating expenses

     (29     (10     (32

Interest expense

     (12     —         (12

Amortization of intangible assets (3)

     (7     (1     (7

Net foreign exchange gains

     —         (67     2  

Income tax expense

     (62     50       (42
  

 

 

     

 

 

 

Net income

   $ 313       34     $ 234  

 

NM: not meaningful
(1) Interest in earnings or losses of equity method investments represents the Company’s aggregate share of earnings or losses related to several private placement investments and limited partnerships within the Corporate and Other segment.
(2) Technical result and other income primarily relate to income on insurance-linked securities and principal finance transactions within the Corporate and Other segment.
(3) Amortization of intangible assets relates to intangible assets acquired in the acquisition of Paris Re in 2009 and PartnerRe Health in 2012.

 

37


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

The components of the underwriting result and combined ratio for the Non-life segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Current accident year technical result and ratio

   $ 61       94.0   $ 52       94.4

Prior accident years technical result and ratio

        

Net favorable prior year loss development

     164       (16.6     183       (19.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Technical result and ratio, as reported

   $ 225       77.4   $ 235       74.6

Other income

     1       —         —         —    

Other operating expenses

     (65     6.5       (66     7.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting result and combined ratio, as reported

   $ 161       83.9   $ 169       81.7

The underwriting result for the Non-life segment decreased by $8 million (corresponding to an increase of 2.2 points in the combined ratio), from $169 million (81.7 points on the combined ratio) in the three months ended March 31, 2013 to $161 million (83.9 points on the combined ratio) in the same period of 2014. The decrease in the Non-life underwriting result and the corresponding increase in the combined ratio in the three months ended March 31, 2014 compared to the same period of 2013 was primarily attributable to:

 

    Net favorable prior year loss development—a decrease of $19 million (increase of 3.2 points in the technical ratio) from $183 million (19.8 points on the technical ratio) in the three months ended March 31, 2013 to $164 million (16.6 points on the technical ratio) in the same period of 2014. The decrease in net favorable prior year loss development was due to decreases in all of the Company’s Non-life sub-segments. The components of the net favorable prior year loss development are described in more detail in the discussion of individual sub-segments in Results by Segment below.

This factor driving the decrease in the Non-life underwriting result and the corresponding increase in the combined ratio in the three months ended March 31, 2014 compared to the same period of 2013 was partially offset by:

 

    The current accident year technical result—an increase in the technical result primarily due to a modestly lower level of mid-sized loss activity in the North America and Catastrophe sub-segments, partially offset by an increase in the acquisition cost ratio related to new business written in the North America sub-segment.

The underwriting result for the Life and Health segment, which does not include allocated investment income, decreased by $1 million, from breakeven in the three months ended March 31, 2013 to a loss of $1 million in the same period of 2014. The decrease in the Life and Health underwriting result was primarily driven by a lower level of net favorable prior year loss development, partially offset by improved profitability from the PartnerRe Health and longevity business. See Results by Segment below.

Net investment income decreased by $7 million, from $124 million in the three months ended March 31, 2013 to $117 million in the same period of 2014. The decrease in net investment income was primarily attributable to a decrease in net investment income from fixed maturities due to lower reinvestment rates. See Corporate and Other – Net Investment Income below for more details.

Net realized and unrealized investment gains increased by $119 million, from $23 million in the three months ended March 31, 2013 to $142 million in the same period of 2014. The net realized and unrealized investment gains of $142 million in the three months ended March 31, 2014 were primarily due to modest decreases in longer-term risk-free interest rates and slightly narrowing credit spreads. See Corporate and Other – Net Realized and Unrealized Investment Gains below for more details.

Other operating expenses included in Corporate and Other decreased by $3 million, from $32 million in the three months ended March 31, 2013 to $29 million in the same period of 2014. The decrease was primarily due to lower personnel expenses.

Interest expense in the three months ended March 31, 2014 was comparable to the same period of 2013.

        Net foreign exchange gains decreased modestly from $2 million in the three months ended March 31, 2013 to breakeven in the same period of 2014. The net foreign exchange gain for the three months ended March 31, 2014 resulted primarily from the difference in the forward points embedded in the Company’s hedges, partially offset by losses arising from the impact of the Company’s hedging program. The Company hedges a significant portion of its currency risk exposure as discussed in Quantitative and Qualitative Disclosures about Market Risk in Item 3 of Part I of this report.

 

38


Income tax expense increased by $20 million, from $42 million in the three months ended March 31, 2013 to $62 million in the same period of 2014, primarily reflecting an increase in the Company’s pre-tax net income in the three months ended March 31, 2014 compared to the same period of 2013. See Corporate and Other—Income Taxes below for more details.

Results by Segment

The Company monitors the performance of its operations in three segments, Non-life, Life and Health and Corporate and Other. The Non-life segment is further divided into four sub-segments, North America, Global (Non-U.S.) Property and Casualty (Global (Non-U.S.) P&C), Global Specialty and Catastrophe. Segments and sub-segments represent markets that are reasonably homogeneous in terms of geography, client types, buying patterns, underlying risk patterns and approach to risk management. See the description of the Company’s segments and sub-segments as well as a discussion of how the Company measures its segment results in Note 21 to Consolidated Financial Statements included in Item 8 of Part II of Form 10-K for the year ended December 31, 2013 and in Note 9 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Non-life Segment

North America

The North America sub-segment is comprised of lines of business that are considered to be either short, medium or long-tail. The short-tail lines consist primarily of agriculture, property and motor business. Casualty is considered to be long-tail, while credit/surety and multiline are considered to have a medium tail. The casualty line typically tends to have a higher loss ratio and a lower technical result due to the long-tail nature of the risks involved. Casualty treaties typically provide for investment income on premiums invested over a longer period as losses are typically paid later than for other lines. Investment income, however, is not considered in the calculation of technical result.

The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Gross premiums written

   $ 530       19   $ 447  

Net premiums written

     527       18       446  

Net premiums earned

   $ 379       13     $ 333  

Losses and loss expenses

     (260     8       (240

Acquisition costs

     (92     28       (72
  

 

 

     

 

 

 

Technical result (1)

   $ 27       26     $ 21  

Loss ratio (2)

     68.6       72.0

Acquisition ratio (3)

     24.3         21.6  
  

 

 

     

 

 

 

Technical ratio (4)

     92.9       93.6

 

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

 

39


Premiums

The North America sub-segment represented 30% and 27% of total net premiums written in the three months ended March 31, 2014 and 2013, respectively. The net premiums written and net premiums earned by line of business for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three months ended
March 31, 2014
    For the three months ended
March 31, 2013
 
     Net premiums
written
    Net premiums
earned
    Net premiums
written
    Net premiums
earned
 

Agriculture

   $ 162        31 %   $ 104        28 %   $ 101        23 %   $ 99        30 %

Casualty

     174        33       148        39       178        40       138        41  

Credit/Surety

     42        8       27        7       10        2       7        2  

Motor

     22        4       19        5       17        4       10        3  

Multiline

     46        9       24        6       44        10       22        7  

Property

     72        14       48        13       72        16       47        14  

Other

     9        1       9        2       24        5       10        3  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 527        100 %   $ 379        100 %   $ 446        100 %   $ 333        100 %

Business reported in this sub-segment is, to an extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2014 compared to the same period of 2013 was as follows:

 

     Gross premiums
written
    Net premiums
written
    Net premiums
earned
 

Increase in original currency

     19     19     14

Foreign exchange effect

     —         (1     (1
  

 

 

   

 

 

   

 

 

 

Increase as reported in U.S. dollars

     19     18     13

Gross and net premiums written increased by 19% and net premiums earned increased by 14% on a constant foreign exchange basis in the three months ended March 31, 2014 compared to the same period of 2013. The increases in gross and net premiums written were primarily attributable to the agriculture and credit/surety lines of business. The increase in the agriculture line was driven by the restructuring of a significant treaty, which resulted in the full annual premium being written in the three months ended March 31, 2014 compared to being written ratably over four quarters in 2013, and new business written, while the credit/surety line benefitted from new mortgage guaranty business. The increase in net premiums written was higher than the increase in net premiums earned due to the effect of the restructuring of the significant agriculture treaty, which was partially offset by the earning of new business written in 2013.

Technical result and technical ratio

The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Current accident year technical result and ratio

   $ 3        99.4   $ (9     102.6

Prior accident years technical result and ratio

         

Net favorable prior year loss development

     24        (6.5     30       (9.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Technical result and ratio, as reported

   $ 27        92.9   $ 21       93.6

The increase of $6 million in the technical result (and the corresponding decrease of 0.7 points in the technical ratio) in the three months ended March 31, 2014 compared to the same period of 2013 was primarily attributable to:

 

    The current accident year technical result—an increase in the technical result (and corresponding decrease in the technical ratio) primarily due to a lower level of mid-sized loss activity and normal fluctuations in profitability between periods. These increases in the technical result were partially offset by a higher acquisition cost ratio, which was driven by new business written in the credit/surety and property lines of business and generally increased pressure on terms and conditions during the recent January 1 renewals.

This factor driving the increase in the technical result in the three months ended March 31, 2014 compared to the same period of 2013 was partially offset by:

 

   

Net favorable prior year loss development—a decrease of $6 million (increase of 2.5 points in the technical ratio) from $30 million (9.0 points on the technical ratio) in the three months ended March 31, 2013 to $24 million (6.5 points on the technical ratio) in the same period of 2014. The net favorable loss development for prior accident years in the three months ended March 31, 2014 was driven primarily by the casualty line, while the multiline, motor and agriculture lines

 

40


 

experienced combined adverse loss development for prior accident years of $17 million. The net favorable loss development for prior accident years in the three months ended March 31, 2013 was driven by most lines of business, with the casualty line being the most pronounced, while the agriculture and multiline lines experienced combined adverse loss development for prior accident years of $16 million.

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

The Global (Non-U.S.) P&C sub-segment is composed of short-tail business, in the form of property and proportional motor business, that represented approximately 77% of net premiums written in the three months ended March 31, 2014 and 2013, and long-tail business, in the form of casualty and non-proportional motor business, that represented the balance of net premiums written.

The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Gross premiums written

   $ 364       (2 )%    $ 372  

Net premiums written

     361       (2     368  

Net premiums earned

   $ 179       8     $ 166  

Losses and loss expenses

     (94     41       (67

Acquisition costs

     (54     8       (50
  

 

 

     

 

 

 

Technical result

   $ 31       (36   $ 49  

Loss ratio

     52.4       40.4

Acquisition ratio

     30.1         30.1  
  

 

 

     

 

 

 

Technical ratio

     82.5       70.5

Premiums

The Global (Non-U.S.) P&C sub-segment represented 21% and 23% of total net premiums written in the three months ended March 31, 2014 and 2013, respectively. The net premiums written and net premiums earned by line of business for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three months ended
March 31, 2014
    For the three months ended
March 31, 2013
 
     Net premiums
written
    Net premiums
earned
    Net premiums
written
    Net premiums
earned
 

Casualty

   $ 35        10 %   $ 15        9 %   $ 39        10 %   $ 18        10 %

Motor

     133        37       74        41       125        34       48        29  

Property

     193        53       90        50       204        56       100        61  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 361        100 %   $ 179        100 %   $ 368        100 %   $ 166        100 %

Business reported in this sub-segment is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2014 compared to the same period of 2013 was as follows:

 

     Gross premiums
written
    Net premiums
written
    Net premiums
earned
 

(Decrease) increase in original currency

     (3 )%      (3 )%      10

Foreign exchange effect

     1       1       (2
  

 

 

   

 

 

   

 

 

 

(Decrease) increase as reported in U.S. dollars

     (2 )%      (2 )%      8

Gross and net premiums written decreased by 3% and net premiums earned increased by 10% on a constant foreign exchange basis in the three months ended March 31, 2014 compared to the same period of 2013. The decreases in gross and net premiums written resulted primarily from increased retentions and share decreases by cedants and cancellations due to reductions in pricing in the property line, and were partially offset by new business written in the motor line. The increase in net premiums earned compared to the decreases in gross and net premiums written was driven by the earning of the new motor business written in 2013.

 

41


Technical result and technical ratio

The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Current accident year technical result and ratio

   $ (16     108.5   $ (9     105.3

Prior accident years technical result and ratio

        

Net favorable prior year loss development

     47       (26.0     58       (34.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Technical result and ratio, as reported

   $ 31       82.5   $ 49       70.5

The decrease of $18 million in the technical result (and the corresponding increase of 12.0 points in the technical ratio) in the three months ended March 31, 2014 compared to the same period of 2013 was primarily attributable to:

 

    Net favorable prior year loss development—a decrease of $11 million (increase of 8.8 points in the technical ratio) from $58 million (34.8 points on the technical ratio) in the three months ended March 31, 2013 to $47 million (26.0 points on the technical ratio) in the same period of 2014. The net favorable loss development for prior accident years in the three months ended March 31, 2014 was driven by all lines of business, with the property line being the most pronounced. The net favorable loss development for prior accident years in the three months ended March 31, 2013 was driven by all lines of business, with the property line being the most pronounced and included favorable loss emergence related to certain catastrophic and large loss events.

 

    The current accident year technical result—a decrease in the technical result (and a corresponding increase in the technical ratio) due to higher downward premium adjustments and a modestly higher level of mid-sized loss activity in the three months ended March 31, 2014 compared to the same period of 2013, partially offset by normal fluctuations in profitability between periods.

Global Specialty

The Global Specialty sub-segment is primarily comprised of lines of business that are considered to be either short, medium or long-tail. The short-tail lines consist of agriculture, energy and specialty property. Aviation/space, credit/surety, engineering, marine and multiline are considered to have a medium tail, while specialty casualty is considered to be long-tail.

The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Gross premiums written

   $ 479       8   $ 445  

Net premiums written

     389       8       361  

Net premiums earned

   $ 355       5     $ 337  

Losses and loss expenses

     (201     9       (184

Acquisition costs

     (79     5       (75
  

 

 

     

 

 

 

Technical result

   $ 75       (4   $ 78  

Loss ratio

     56.6       54.6

Acquisition ratio

     22.4         22.4  
  

 

 

     

 

 

 

Technical ratio

     79.0       77.0

 

42


Premiums

The Global Specialty sub-segment represented 23% and 22% of total net premiums written in the three months ended March 31, 2014 and 2013, respectively. The net premiums written and net premiums earned by line of business for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three months ended
March 31, 2014
    For the three months ended
March 31, 2013
 
     Net premiums
written
    Net premiums
earned
    Net premiums
written
    Net premiums
earned
 

Agriculture

   $ 49        13 %   $ 26        8 %   $ 35        10 %   $ 19       6 %

Aviation/Space

     32        8       46        13       37        10       46       14  

Credit/Surety

     76        19       69        19       76        21       67       20  

Energy

     11        3       19        5       15        4       25       7  

Engineering

     40        10       46        13       44        12       48       14  

Marine

     63        16       67        19       73        20       72       21  

Multiline

     38        10       15        4       11        3       1       —    

Specialty casualty

     52        14       31        9       50        14       24       7  

Specialty property

     24        6       36        10       20        6       36       11  

Other

     4        1       —          —         —          —         (1     —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 389        100 %   $ 355        100 %   $ 361        100 %   $ 337       100 %

Business reported in this sub-segment is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2014 compared to the same period of 2013 was as follows:

 

     Gross premiums
written
    Net premiums
written
    Net premiums
earned
 

Increase in original currency

     8     8     6

Foreign exchange effect

     —         —         (1
  

 

 

   

 

 

   

 

 

 

Increase as reported in U.S. dollars

     8     8     5

Gross and net premiums written increased by 8% and net premiums earned increased by 6% on a constant foreign exchange basis in the three months ended March 31, 2014 compared to the same period of 2013. The increases in gross and net premiums written were primarily driven by new business written and share increases in the multiline line of business and new business and timing differences between periods in the agriculture line of business. These increases in gross and net premiums written were partially offset by decreases in various other lines of business due to increased retentions by cedants and cancellations due to reductions in pricing. The increase in net premiums earned was primarily driven by the earning of new business written in 2013.

Technical result and technical ratio

The following table provides the components of the technical result and ratio for this sub-segment for the three months ended March 31, 2014 and 2013 (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Current accident year technical result and ratio

   $ 16        95.7   $ 18        94.9

Prior accident years technical result and ratio

          

Net favorable prior year loss development

     59        (16.7     60        (17.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Technical result and ratio, as reported

   $ 75        79.0   $ 78        77.0

The decrease of $3 million in the technical result (and the corresponding increase of 2.0 points in the technical ratio) in the three months ended March 31, 2014 compared to the same period of 2013 was primarily attributable to a modest decrease in the current accident year technical result (and corresponding increase in the technical ratio) due to normal fluctuations in profitability between periods.

Net favorable prior year loss development of $59 million (16.7 points on the technical ratio) in the three months ended March 31, 2014 was comparable to $60 million (17.9 points on the technical ratio) in the three months ended March 31, 2013. The net favorable loss development for prior accident years in the three months ended March 31, 2014 was driven by most lines of business, predominantly the marine and aviation/space lines, while the credit/surety line experienced adverse loss development of $15 million. The net favorable loss development for prior accident years in the three months ended March 31, 2013 was driven by most lines of business, predominantly the credit/surety and aviation/space lines, while the energy, agriculture and engineering lines experienced combined adverse loss development for prior accident years of $13 million.

 

43


Catastrophe

The Catastrophe sub-segment writes business predominantly on a non-proportional basis and is exposed to volatility resulting from catastrophic losses. The varying amounts of catastrophic losses from period to period can significantly impact the technical result and ratio of this sub-segment and affect period over period comparisons and as a result, profitability in any one quarter is not necessarily predictive of future profitability. The sub-segment’s results for both the three months ended March 31, 2014 and 2013 included no catastrophic loss activity.

The Catastrophe sub-segment results are presented before the inter-company quota share of a diversified portfolio of catastrophe treaties to the Company’s fully collateralized reinsurance vehicle, Lorenz Re Ltd. (see Note 9 to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this report).

The components of the technical result and the corresponding ratios for this sub-segment for the three months ended March 31, 2014 and 2013 (in millions of U.S. dollars) were as follows:

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Gross premiums written

   $ 210       (12 )%    $ 238  

Net premiums written

     179       (15     211  

Net premiums earned

   $ 79       (9   $ 87  

Losses and loss expenses

     21       89       11  

Acquisition costs

     (8     (25     (11
  

 

 

     

 

 

 

Technical result

   $ 92       5     $ 87  

Loss ratio

     (26.5 )%        (12.8 )% 

Acquisition ratio

     10.1         12.3  
  

 

 

     

 

 

 

Technical ratio

     (16.4 )%        (0.5 )% 

Premiums

The Catastrophe sub-segment represented 10% and 13% of total net premiums written in the three months ended March 31, 2014 and 2013, respectively.

Business reported in this sub-segment is, to an extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2014 compared to the same period of 2013 was as follows:

 

     Gross premiums
written
    Net premiums
written
    Net premiums
earned
 

Decrease in original currency

     (11 )%      (14 )%      (6 )% 

Foreign exchange effect

     (1     (1     (3
  

 

 

   

 

 

   

 

 

 

Decrease as reported in U.S. dollars

     (12 )%      (15 )%      (9 )% 

Gross and net premiums written and net premiums earned decreased by 11%, 14% and 6% on a constant foreign exchange basis, respectively, in the three months ended March 31, 2014 compared to the same period of 2013. The decreases in gross and net premiums written and net premiums earned were primarily driven by cancellations and non-renewals due to reductions in pricing and the restructuring of certain treaties, which were partially offset by new business written. The decrease in net premiums earned was lower than the decrease in net premiums written as the reduction in net premiums written is yet to be reflected in net premiums earned.

Technical result and technical ratio

The components of the technical result and ratio for this sub-segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Current accident year technical result and ratio

   $ 58        26.6   $ 52        39.6

Prior accident years technical result and ratio

          

Net favorable prior year loss development

     34        (43.0     35        (40.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Technical result and ratio, as reported

   $ 92        (16.4 )%    $ 87        (0.5 )% 

 

44


The increase of $5 million in the technical result (and the corresponding decrease of 15.9 points in the technical ratio) in the three months ended March 31, 2014 compared to the same period of 2013 was primarily attributable to an increase in the current accident year technical result (and the corresponding decrease in the technical ratio) due to a modestly lower level of mid-sized loss activity and normal fluctuations in profitability.

Net favorable prior year loss development of $34 million (43.0 points on the technical ratio) in the three months ended March 31, 2014 was comparable to $35 million (40.1 points on the technical ratio) in the three months ended March 31, 2013. The net favorable loss development for prior accident years in the three months ended March 31, 2014 and 2013 was primarily due to favorable loss emergence.

Life and Health Segment

The Company’s Life and Health segment includes the mortality, longevity and health lines of business written primarily in the U.K., Ireland and France and, following the acquisition of PartnerRe Health on December 31, 2012, accident and health business written in the U.S. At the time of the acquisition, PartnerRe Health operated as a Managing General Agent (MGA), writing all of its business on behalf of third party insurance companies and earning a fee for producing the business, as well as participating in a portion of the original business that was ceded to PartnerRe Health by these third parties based on quota share agreements. During 2013, the Company obtained the necessary licenses and approvals and began transitioning the portfolio to PartnerRe carriers. As of January 1, 2014, virtually all of the PartnerRe Health business is originated directly, without the use of third party insurance companies. As a result, this transition affects the period over period comparability with increased gross and net premiums written and net premiums earned and reduced MGA fee income, which is recorded in Other income, in the three months ended March 31, 2014 compared to the same period of 2013.

The components of the allocated underwriting result for this segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Gross premiums written

   $ 289       14   $ 254  

Net premiums written

     282       13       249  

Net premiums earned

   $ 262       17     $ 224  

Life policy benefits

     (215     18       (182

Acquisition costs

     (32     19       (27
  

 

 

     

 

 

 

Technical result

   $ 15       (3   $ 15  

Other income

     1       (55     3  

Other operating expenses

     (17     1       (18

Net investment income

     15       (4     16  
  

 

 

     

 

 

 

Allocated underwriting result (1)

   $ 14       (17   $ 16  

 

(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.

Premiums

The Life and Health segment represented 16% and 15% of total net premiums written in the three months ended March 31, 2014 and 2013, respectively. The net premiums written and net premiums earned by line of business for this segment for the three months ended March 31, 2014 and 2013 were as follows (in millions of U.S. dollars):

 

     For the three months ended
            March 31, 2014            
    For the three months ended
March 31, 2013
 
     Net premiums
      written      
    Net premiums
      earned      
    Net premiums
      written      
    Net premiums
      earned      
 

Accident and Health

   $ 46        16 %   $ 45        17 %   $ 30        12 %   $ 30        13 %

Longevity

     69        25       70        27       63        25       63        28  

Mortality

     167        59       147        56       156        63       131        59  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 282        100 %   $ 262        100 %   $ 249        100 %   $ 224        100 %

 

45


Business reported in this segment is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this should be considered when making period to period comparisons. The effect of foreign exchange fluctuations, described in the Results of Operations above, on gross and net premiums written and net premiums earned in the three months ended March 31, 2014 compared to the same period of 2013 was as follows:

 

     Gross premiums
written
    Net premiums
written
    Net premiums
earned
 

Increase in original currency

     12     12     15

Foreign exchange effect

     2       1       2  
  

 

 

   

 

 

   

 

 

 

Increase as reported in U.S. dollars

     14     13     17

Gross and net premiums written increased by 12% and net premiums earned increased by 15% on a constant foreign exchange basis in the three months ended March 31, 2014 compared to the same period of 2013. The increases in gross and net premiums written and net premiums earned were due to increases in all lines of business, most notably in the accident and health and mortality lines. The increase in the accident and health line was primarily driven by PartnerRe Health’s business, due to its continuing transition from an MGA to a carrier, as described above, and new opportunities arising from the implementation of the Patient Protection and Affordable Care Act. The increase in the mortality line was driven by new business.

Allocated underwriting result

The allocated underwriting result decreased by $2 million, from $16 million in the three months ended March 31, 2013 to $14 million in the same period of 2014. The decrease was primarily driven by a lower level of net favorable prior year loss development in the three months ended March 31, 2014 compared to the same period of 2013. These factors driving the decrease in the allocated underwriting result were partially offset by improved profitability from the PartnerRe Health and longevity business.

The decrease in net favorable prior year loss development of $5 million resulted from net favorable loss development of $3 million in the three months ended March 31, 2014 compared to net favorable loss development of $8 million in the same period of 2013. The net favorable prior year loss development of $3 million during the three months ended March 31, 2014 was primarily related to the GMDB business, driven by improvements in the capital markets and favorable actual versus expected claims paid experience, and PartnerRe Health’s business. This favorable prior year loss development was partially offset by increased claims activity reported by cedants related to certain short-term mortality business. The net favorable prior year loss development of $8 million in the three months ended March 31, 2013 was primarily related to the GMDB business due to an improvement in the capital markets, and certain other short-term treaties in the mortality line of business.

Premium Distribution by Line of Business

The distribution of net premiums written by line of business for the three months ended March 31, 2014 and 2013 was as follows:

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Non-life

    

Property and casualty

    

Casualty

     12     13

Motor

     9       9  

Multiline and other

     5       5  

Property

     15       17  

Specialty

    

Agriculture

     12       8  

Aviation / Space

     2       2  

Catastrophe

     10       13  

Credit / Surety

     7       5  

Energy

     1       1  

Engineering

     2       3  

Marine

     4       5  

Specialty casualty

     3       3  

Specialty property

     2       1  

Life and Health

     16       15  
  

 

 

   

 

 

 

Total

     100     100

 

46


The changes in the distribution of net premiums written by line of business between the three months ended March 31, 2014 and the same period of 2013 reflected the Company’s response to existing market conditions and may also be affected by the timing of renewals of treaties, a change in treaty structure, premium adjustments reported by cedants and significant increases or decreases in other lines of business. In addition, foreign exchange fluctuations affected the comparison for all lines.

 

    Property: the decrease in the distribution of net premiums written in the three months ended March 31, 2014 compared to the same period of 2013 was primarily driven by more significant increases in other lines of business relative to property premiums, which decreased modestly.

 

    Agriculture: the increase in the distribution of net premiums written in the three months ended March 31, 2014 compared to the same period of 2013 was primarily driven by a restructuring of a significant treaty and new business written in the North America sub-segment and new business and timing differences between periods in the agriculture line of business in the Global Specialty sub-segment.

 

    Catastrophe: the decrease in the distribution of net premiums written in the three months ended March 31, 2014 compared to the same period of 2013 was driven by cancellations and non-renewals due to reductions in pricing and the restructuring of certain treaties, which were partially offset by new business written.

 

    Credit/Surety: the increase in the distribution of net premiums written in the three months ended March 31, 2014 compared to the same period of 2013 was driven by new mortgage guaranty business written in the North America sub-segment.

Premium Distribution by Reinsurance Type

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

The distribution of gross premiums written by reinsurance type for the three months ended March 31, 2014 and 2013 was as follows:

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Non-life segment

    

Proportional

     50     46

Non-proportional

     30       35  

Facultative

     5       4  

Life and Health segment

    

Proportional

     12       11  

Non-proportional

     3       4  
  

 

 

   

 

 

 

Total

     100     100

The distribution of gross premiums written by reinsurance type is affected by changes in the allocation of capacity among lines of business, the timing of receipt by the Company of cedant accounts and premium adjustments reported by cedants. In addition, foreign exchange fluctuations affected the comparison for all treaty types.

The changes in the distribution of gross premiums written by reinsurance type between the three months ended March 31, 2014 and the same period of 2013 primarily reflect a shift from non-proportional business to proportional business in the Non-life segment. This shift was mainly driven by an increase in gross premiums written in the agriculture line of business in the North America sub-segment, which is predominantly written on a proportional basis, related to the restructuring of a significant treaty, and new proportional business written in the multiline line of business in the Global Specialty sub-segment.

 

47


Premium Distribution by Geographic Region

The geographic distribution of gross premiums written based on the location of the underlying risk for the three months ended March 31, 2014 and 2013 was as follows:

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Asia, Australia and New Zealand

     9 %     9

Europe

     45       46  

Latin America, Caribbean and Africa

     8       9  

North America

     38       36  
  

 

 

   

 

 

 

Total

     100 %     100

The increase in the distribution of gross premiums written in North America during the three months ended March 31, 2014 compared to the same period of 2013 was primarily due to an increase in gross premiums written in the Company’s North America Non-life sub-segment, mainly driven by the agriculture line, as described above.

Premium Distribution by Production Source

The Company generates its gross premiums written both through brokers and through direct relationships with cedants. The percentage of gross premiums written by production source for the three months ended March 31, 2014 and 2013 was as follows:

 

     For the three
months ended
March 31, 2014
    For the three
months ended
March 31, 2013
 

Broker

     71 %     71

Direct

     29       29  
  

 

 

   

 

 

 

Total

     100 %     100

The percentage of gross premiums written through brokers in the three months ended March 31, 2014 was comparable to the same period of 2013.

Corporate and Other

Corporate and Other is comprised of the Company’s investment related activities, including principal finance transactions, insurance-linked securities and strategic investments, and its corporate activities, including other operating expenses.

Net Investment Income

Net investment income by asset source for the three months ended March 31, 2014 and 2013 was as follows (in millions of U.S. dollars):

 

     For the three
months ended
March 31, 2014
    % Change     For the three
months ended
March 31, 2013
 

Fixed maturities

   $ 111       (4 )%    $ 116  

Short-term investments, cash and cash equivalents

     —         (69     1  

Equities

     7       49       5  

Funds held and other

     8       (10     9  

Funds held – directly managed

     4       (32     6  

Investment expenses

     (13     6       (13
  

 

 

     

 

 

 

Net investment income

   $ 117       (6   $ 124  

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 (see Life and Health segment above). The following discussion includes net investment income from all investment activities, including the net investment income allocated to the Life and Health segment.

Net investment income decreased in the three months ended March 31, 2014 compared to the same period of 2013 due to:

 

    a decrease in net investment income from fixed maturities primarily as a result of lower reinvestment rates and, to a lesser extent, cash outflows from the fixed maturity portfolio primarily to finance the Company’s share repurchase activity; and