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PRE > SEC Filings for PRE > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for PARTNERRE LTD


3-May-2013

Quarterly Report


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

Executive Overview

The Company is a leading global reinsurer, with a broadly diversified and balanced portfolio of traditional reinsurance 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, 2012.

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, are described and defined below in Key Financial Measures.

Overview of the Results of Operations for the Three Months Ended March 31, 2013

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 available to common shareholders by the weighted average number of common shares and common share equivalents outstanding. Net income or loss available to common shareholders is defined as net income or loss less preferred dividends and loss on redemption of preferred shares. See the discussion of the non-GAAP performance measures that the Company uses (operating earnings or loss and Operating ROE) and the reconciliation of those non-GAAP performance measures to the most directly comparable GAAP measures in Key Financial Measures 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, 2013 and 2012 include no significant catastrophic losses.

The results for the three months ended March 31, 2013 and 2012 were impacted by the volatility in the capital markets primarily as a result of modest increases in risk-free interest rates during 2013 compared to narrowing spreads in 2012.

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

Net income, preferred dividends, loss on redemption of preferred shares, net income available to common shareholders and diluted net income per share for the three months ended March 31, 2013 and 2012 were as follows (in millions of U.S. dollars, except per share data):

                                          For the three                                For the three
                                           months ended                                 months ended
                                          March 31, 2013          % Change             March 31, 2012
Net income                               $            234               (35 )%        $            360
Less: preferred dividends                              15                (5 )                       15
Less: loss on redemption of
preferred shares                                        9                NM                         -

Net income available to common
shareholders                             $            210               (39 )         $            345
Diluted net income per share             $           3.53               (33 )         $           5.24

NM: not meaningful


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The decrease in net income of $126 million, from $360 million in the three months ended March 31, 2012 to $234 million in the same period of 2013 resulted primarily from:

a decrease of $170 million in pre-tax net realized and unrealized investment gains, primarily as a result of modest increases in risk-free interest rates during 2013 compared to narrowing spreads in 2012; and

a decrease of $23 million in net investment income, driven by lower reinvestment rates; partially offset by

an increase of $46 million in the Non-life underwriting result, which was mainly driven by an increase in favorable prior year loss development and lower loss picks in certain of the Company's sub-segments; and

a decrease of $25 million in income tax expense, resulting from a lower pre-tax net income.

The decrease in net income available to common shareholders and diluted net income per share for the three months ended March 31, 2013 compared to the same period of 2012 was primarily due to the above factors. For diluted net income per share specifically, the decrease was partially offset by a decrease in the diluted number of common shares and common share equivalents outstanding as a result of share repurchases.

These factors affecting the year over year comparison of the Company's results are discussed below in Review of Net Income, Results by Segment and Financial Condition, Liquidity and Capital Resources, and may continue to affect our results of operations and financial condition in the future.

In April 2013, the Company announced the restructuring of its business support operations into a single integrated worldwide support platform and changes to the structure of its Global Non-life Operations. The restructuring includes involuntary and voluntary employee termination plans in certain jurisdictions (collectively, termination plans). Employees affected by the termination plans have varying leaving dates, largely through to mid 2014. The continuing salary and other employment benefits costs related to the affected employees will be expensed as the employee provides service and remains with the Company. The Company expects to incur a charge, totalling between $60 and $70 million related to the restructuring and certain real estate costs primarily in the second and third quarters of 2013 with the remainder expected to be incurred during 2014. No charges were recorded in the Company's results for the three months ended March 31, 2013.

Key Financial Measures

In addition to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and Comprehensive Income, Management uses certain key measures 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 at 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.


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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 as set forth below, together with definitions of their calculations, at March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012:

                                                    March 31, 2013            December 31, 2012
Diluted tangible book value per common share
and common share equivalents outstanding(1)        $          92.91          $             90.86
Annualized growth in diluted tangible book
value per common share and common share
equivalents outstanding plus dividends(2)                      11.8 %

                                                    For the three               For the three
                                                     months ended               months ended
                                                    March 31, 2013             March 31, 2012
Operating earnings available to common
shareholders (in millions of U.S.
dollars)(3)                                        $            202          $               182
Annualized operating return on beginning
diluted book value per common share and
common share equivalents outstanding(4)                        13.5 %                       13.0 %
Combined ratio(5)                                              81.7 %                       84.7 %

(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. (shareholders' equity less 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 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 available to common shareholders (operating earnings) is calculated as net income available to 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 of equity investments, net of tax and interest in earnings or losses of equity 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. The presentation of operating earnings or loss 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.

(4) 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.


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The following table shows the Diluted Tangible Book Value per Share at March 31, 2013 and December 31, 2012, and the calculation of the annualized growth in Diluted Tangible Book Value per Share plus dividends for the three months ended March 31, 2013. 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 to monitor performance.

                                                    March 31, 2013            December 31, 2012
Diluted tangible book value per common share
and share equivalents outstanding                  $          92.91          $             90.86
Dividends per common share                                     0.64

Diluted tangible book value per share plus
dividends                                          $          93.55

Annualized growth in diluted tangible book
value per share plus dividends                                 11.8 %

The Company's Diluted Tangible Book Value per Share increased by 2% to $92.91 at March 31, 2013 from $90.86 at December 31, 2012 primarily due to comprehensive income of $215 million and was partially offset by dividends on the common and preferred shares. The comprehensive income was mainly driven by net income of $234 million in the three months ended March 31, 2013, which is described in Review of Net Income below. The annualized growth in Diluted Tangible Book Value per Share plus dividends was 11.8% for the three months ended March 31, 2013. The growth was driven by the comprehensive income and was partially offset by preferred dividends.

Over the past five years, since March 31, 2008, the Company has generated a compound annualized growth in Diluted Tangible Book Value per Share plus dividends in excess of 10%.

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 table below provides a 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, 2013 and December 31, 2012 (in millions of U.S. dollars):

                                                    March 31, 2013          December 31, 2012
Diluted book value per common share and common
share equivalents outstanding(1)                    $        102.96        $            100.84
Less: goodwill and other intangible assets,
net of tax                                                    10.05                       9.98

Diluted tangible book value per share               $         92.91        $             90.86

(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. (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 available to common shareholders (operating earnings):
Management uses operating earnings to measure its financial performance as this measure focuses 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 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. Interest in earnings or losses of equity 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. Net foreign exchange gains or losses are not indicative of the performance of, and distort trends in,


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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 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 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 this measure follows industry practice and, therefore, allows 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.

Operating earnings increased by $20 million, from $182 million in the three months ended March 31, 2012 to $202 million in the same period of 2013. The increase was primarily due to an increase in the Non-life underwriting result and a decrease in income tax expense on the lower level of pre-tax net income, as described above. The increases in operating earnings were partially offset by a decrease in net investment income, due to lower reinvestment rates, and an increase in operating expenses.

The other lesser factors contributing to the increases or decreases in operating earnings in the three months ended March 31, 2013 compared to the same period of 2012 are further described in Review of Net Income below.

The presentation of operating earnings or loss available to common shareholders 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 table below provides a reconciliation of operating earnings or loss to the most directly comparable GAAP financial measure for the three months ended March 31, 2013 and 2012 (in millions of U.S. dollars):

                                                     For the three              For the three
                                                     months ended               months ended
                                                    March 31, 2013             March 31, 2012
Net income                                          $           234            $           360
Less:
Net realized and unrealized investment
gains, net of tax                                                12                        159
Net foreign exchange losses, net of tax                          (1 )                       (1 )
Interest in earnings of equity investments,
net of tax                                                        6                          5
Dividends to preferred shareholders                              15                         15

Operating earnings available to common
shareholders                                        $           202            $           182

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 increased from 13.0% in the three months ended March 31, 2012 to 13.5% in the same period of 2013. The increase in annualized Operating ROE was primarily due to the increase in operating earnings in the three months compared to the same period of 2012, as described above. The factors contributing to increases or decreases in operating earnings are described further in Review of Net Income below.


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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 table below provides a reconciliation of Operating ROE to the most directly comparable GAAP financial measure for the three months ended March 31, 2013 and 2012:

                                                      For the three            For the three
                                                      months ended             months ended
                                                     March 31, 2013           March 31, 2012
Annualized return on beginning diluted book
value per common share calculated with net
income per share available to common
shareholders                                                    14.0 %                   24.7 %
Less:
Annualized net realized and unrealized
investment gains, net of tax,
on beginning diluted book value per common
share                                                            0.8                     11.4
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
investments, net of tax,
on beginning diluted book value per common
share                                                            0.4                      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                             13.5 %                   13.0 %

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 . . .

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