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PRE > SEC Filings for PRE > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for PARTNERRE LTD

Form 10-K for PARTNERRE LTD


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis reflects the consolidated results of the Company and its subsidiaries for the years ended December 31, 2013, 2012 and 2011.

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. For further discussion of the Company's risk management framework, see Risk Management in Item 1 of Part I of this report.

The Company's economic objective is to manage a portfolio of risks that will create total shareholder value and uses annual diluted tangible book value per share and share equivalents outstanding plus dividends to measure its success. Management assesses this economic objective over the reinsurance cycle, rather than any particular quarterly or annual period, given the Company's profitability is significantly affected by the level of large catastrophic losses that it incurs each period. The Company uses a number of other metrics to monitor its performance in meeting its economic objective, which are discussed further below under Key Financial Measures.

As described in more detail below, the Company is facing a challenging and limited growth environment, which is driven by price decreases in most markets and lines of business, reflecting increased competition and excess capacity in the industry, relatively low loss experience and a prolonged period of low interest rates. However, the Company's strong global franchise and geographical footprint position the Company well for the future as does the acquisition of Paris Re in 2009, which provided enhanced strategic and financial flexibility, and the recent acquisition of PartnerRe Health in 2012, which provided additional diversification into the U.S. accident and health market. While the Company continues to face this challenging business environment, Management has also focused on implementing cost saving initiatives. In 2013, Management announced the restructuring of its business support operations into a single integrated worldwide support platform and changes to the structure of certain of its Non-life operations, both of which are expected to provide greater operational efficiency. Regarding capital management, and as a result of the challenging business environment described above, during 2013 the Company returned approximately $840 million to its common shareholders through share repurchases and dividends. As the Company looks to 2014 and beyond, despite the challenging environment, Management remains confident in the Company's strong global franchise, geographical footprint and technical underwriting skills and is focused on continuing to maintain its strong relationships with clients and actively managing its capital resources.

The following discussion provides an overview of the Company's business and trends and commentary regarding the outlook for 2014 in each business.

Non-life reinsurance and insurance business, trends and 2014 outlook

The Company generates its Non-life reinsurance and insurance revenue from premiums. Premium rates and terms and conditions vary by line of business depending on market conditions. Pricing cycles are driven by supply of capital in the industry and demand for reinsurance and insurance and other risk transfer products. The


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reinsurance and insurance business is also influenced by several other factors, including variations in interest rates and financial markets, changes in legal, regulatory and judicial environments, loss trends, inflation and general economic conditions.

In its reinsurance portfolio, the Company writes all lines of business in virtually all markets worldwide. In addition, the Company provides certain specialty insurance lines of business. The Company differentiates itself through its risk management strategy, its financial strength and its strong global franchise. In assuming its clients' risks, the Company removes the volatility associated with those risks from the client, and then manages those risks and the risk-related volatility. Through its broad product and geographic diversification, its execution capabilities and its local presence in most major markets, the Company is able to stabilize returns, respond quickly to market needs, and capitalize on business opportunities virtually anywhere in the world.

A key challenge facing the Company is to successfully manage risk through all phases of the reinsurance cycle. The Company believes that its long-term strategy of closely monitoring the progression of each line of business, being selective in the business that it writes, and maintaining the diversification and balance of its portfolio, will optimize returns over the reinsurance cycle. Individual lines of business and markets have their own unique characteristics and are at different stages of the reinsurance pricing cycle at any given point in time. Management believes it has achieved appropriate portfolio diversification by product, geography, line and type of business, length of tail, and distribution channel. Further, Management believes that this diversification, in addition to the financial strength of the Company and its strong global franchise, will help to mitigate cyclical declines in underwriting profitability and achieve a more stable return over the reinsurance cycle.

The Non-life reinsurance market has historically been highly cyclical in nature. The reinsurance cycle is driven by competition, the amount of capital and capacity in the industry, loss events and investment returns. The Company's long-term strategy to generate total shareholder value focuses on broad product, asset and geographic diversification of risks.

The cyclicality of the Non-life reinsurance market is characterized by cycles of growth and decline, known as hard and soft insurance cycles. Since late 2003, the Company began to see the emergence of a soft market across most lines of business with general decreases in pricing and profitability. With the exception of lines and markets impacted by specific catastrophic or large loss events, this trend continued throughout the decade. From 2011 to 2013, the Company experienced increases in pricing in certain loss affected lines of business and markets, which were primarily related to the increased catastrophic and large loss activity during 2011 and from the impact of Superstorm Sandy in 2012. During 2013, in lines of business and markets that have not been specifically impacted by any large losses in recent years, the terms and conditions continued to be mainly static and soft in most markets, with price deteriorations observed in some markets as a result of increased competition and excess capacity in the industry.

During the January 1, 2014 renewals the Company experienced an increase of approximately 3% in renewable Non-life treaty business, on a constant foreign exchange basis. The increase in expected premium volume was driven primarily by the Company's diversifying lines, and was mainly attributable to certain contracts negotiated earlier in 2013 and incepting on January 1, 2014. As a result, the North America and Global Specialty sub-segments experienced increases in renewable premium base, while the Catastrophe and Global (Non-U.S.) P&C sub-segments experienced declines driven by declining pricing and pressure on terms and conditions in most markets that were not loss affected. The Company writes a large majority of its business on a treaty basis and renews approximately 65% of its total annual Non-life treaty business on January 1. The remainder of the Non-life treaty business renews at other times during the year.

During the January 1, 2014 renewals, all Non-life sub-segments experienced increased cedant retentions and increased competition, which resulted in further declines in pricing and deterioration in terms and conditions. The excess capacity in the industry, which results in cedants retaining more business and decreasing the available premium in the global industry, combined with the growth in insurance-linked securities and other alternative


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capital flows into the industry, continue to provide a challenge to writing business meeting our profitability requirements. Despite these persistent challenging market conditions, the Company believes that its strong global franchise and geographic footprint, long track record and broad yet highly technical capabilities over many lines of business, position the Company well. The Company expects to continue with its initiatives to find new diversifying risks and expand relationships with existing clients.

Life and Health reinsurance business, trends and 2014 outlook

The Company's Life and Health segment derives revenues primarily from renewal premiums from existing reinsurance treaties and new premiums from existing or new reinsurance treaties. Within the Life and Health segment, the Company writes mortality (including disability), longevity and, following the acquisition of PartnerRe Health, U.S. accident and health products. The acquisition of the PartnerRe Health business on December 31, 2012 provides additional specialty risks not previously written by the Company. Management believes the existing life business and PartnerRe Health business provide the Company with diversification benefits and balance to its portfolio as they are generally not correlated to the Company's Non-life business.

For the years ended December 31, 2012 and 2011, the Company did not write any new life business in the U.S., however, following the acquisition of PartnerRe Health, from January 1, 2013 the Company began writing accident and health business in the U.S.

The long-term profitability of the life business (including the mortality and longevity lines of business) mainly depends on the volume and amount of death claims incurred and the ability to adequately price the risk the Company assumes. The life reinsurance policies are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. The volume of the business may be reduced each year by terminations of the underlying treaties related to lapses, voluntary surrenders, death of insureds and recaptures by ceding companies. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and can fluctuate significantly from quarter to quarter or from year to year.

The long-term profitability of the accident and health business mainly depends on the volume and amount of medical claims and expenses. While the volume of medical claims can be predicted to a certain extent, the amount of claims and expenses depends on various factors, primarily health care inflation rates, driven by a shift towards the older population, reliance on expensive medical equipment and technology, and changes in demand for health care services over time.

In 2013, PartnerRe Health principally 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. The third party insurance companies then ceded a portion of the original business written through quota-share reinsurance agreements to the Company's reinsurance subsidiary, such that PartnerRe Health participated in the original premiums and losses incurred related to the business it has produced and ensuring an alignment of interests with the third party insurance companies. 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 such, PartnerRe Health's premiums are expected to grow in 2014 and the MGA fees will be substantially reduced.

The acquisition of the PartnerRe Health business resulted in substantial overall premium growth in the Company's Life and Health segment in 2013 and more modest growth is expected in 2014 as a result of the transition described above. At the January 1, 2014 renewals, opportunities in managed care and specialty lines of the PartnerRe Health business were observed as a result of the implementation of the Patient Protection and Affordable Care Act. In terms of the Company's Life portfolio, the majority of the premium arises from long-term in-force contracts. The active January 1 renewals impact a relatively limited portion of the short-term in-force premium in the mortality line. For those treaties that actively renewed, pricing conditions and terms were


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modestly softer from the January 1, 2013 renewals. Management expects moderate continued growth in the Company's existing Life portfolio in 2014, assuming constant foreign exchange rates.

Investment business, trends and 2014 outlook

The Company generates revenue from its high quality investment portfolio, as well as the investments underlying the funds held - directly managed account, through net investment income, including coupon interest on fixed maturities and dividends on equities, and realized and unrealized gains and losses on investments.

For the Company's investment risks, which include both public and private market investments, diversification of risk is critical to achieving the risk and return objectives of the Company. The Company's investment policy distinguishes between liquid, high quality assets that support the Company's liabilities, and the more diversified, higher risk asset classes that make up the Company's capital funds. While there will be years where investment markets risks achieve less than the risk-free rate of return, or potentially even negative results, the Company believes the rewards for assuming these risks in a disciplined and measured way will produce a positive excess return to the Company over time. Additionally, since investment risks are not fully correlated with the Company's reinsurance risks, this increases the overall diversification of the Company's total risk portfolio.

The Company follows prudent investment guidelines through a strategy that seeks to maximize returns while managing investment risk in line with the Company's overall objectives of earnings stability and long-term book value growth. The Company allocates its invested assets into two categories: liability funds and capital funds. See the discussion of liability funds and capital funds in Financial Condition, Liquidity and Capital Resources. A key challenge for the Company is achieving the right balance between current investment income and total returns (that include price appreciation or depreciation) in changing market conditions. The Company regularly reviews the allocation of investments to asset classes within its investment portfolio and its funds held - directly managed account and allocates investments to those asset classes the Company anticipates will outperform in the near future, subject to limits and guidelines. Similarly, the Company reduces its exposure to risk asset classes where returns are underperforming. The Company may also lengthen or shorten the duration of its fixed maturity portfolio in anticipation of changes in interest rates, or increase or decrease the amount of credit risk it assumes, depending on credit spreads and anticipated economic conditions.

The Company's investment operations, including public and private market investments, have experienced volatile market conditions since the middle of 2007. The market conditions remained volatile in 2013, primarily due to increases in risk-free interest rates, improvements in equity markets and narrowing credit spreads, while during 2012 the volatility was due to narrowing spreads and improvements in equity markets.

Assuming constant foreign exchange rates, Management expects net investment income to continue to decrease in 2014 compared to 2013 primarily due to lower reinvestment rates with low yields expected to continue throughout 2014. Management expects this decrease to be partially offset by expected positive cash flow from operations (including net investment income).

Overview of the Results of Operations

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).


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Overview of Net Income (Loss)

Net income (loss), net income attributable to noncontrolling interests,
preferred dividends, loss on redemption of preferred shares, net income (loss)
attributable to PartnerRe Ltd. common shareholders and diluted net income (loss)
per share for the years ended December 31, 2013, 2012 and 2011 were as follows
(in millions of U.S. dollars, except per share data):



                                                         2013           2012           2011
Net income (loss)                                       $   673        $ 1,135        $  (520 )
Less: net income attributable to noncontrolling
interests                                                     9             -              -

Net income (loss) attributable to PartnerRe Ltd.        $   664        $ 1,135        $  (520 )
Less: preferred dividends                                    58             62             47
Less: loss on redemption of preferred shares                  9             -              -

Net income (loss) attributable to PartnerRe Ltd.
common shareholders                                     $   597        $ 1,073        $  (567 )
Diluted net income (loss) per share attributable
to PartnerRe Ltd. common shareholders                   $ 10.58        $ 16.87        $ (8.40 )

2013 compared to 2012

The decrease in net income of $462 million, from $1,135 million in 2012 to $673 million in 2013 resulted primarily from:

an increase of $655 million in pre-tax net realized and unrealized investment losses, mainly as a result of increases in risk-free interest rates during 2013 compared to narrowing spreads and improvements in equity markets in 2012;

a decrease of $87 million in net investment income, primarily driven by lower reinvestment rates; and

an increase of $68 million in other operating expenses, primarily driven by the restructuring charges described below; partially offset by

an increase of $170 million in the Non-life underwriting result, which was mainly driven by a lower level of large catastrophic losses and large losses and an increase in favorable prior year loss development and partially offset by a higher level of mid-sized loss activity;

a decrease of $155 million in income tax expense, primarily resulting from a lower pre-tax net income in 2013 compared to 2012; and

an increase of $28 million in the Life and Health underwriting result, primarily driven by an increase in favorable prior year loss development.

The decrease in net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share for the year ended December 31, 2013 compared to 2012 was primarily due to the above factors. For diluted net income per share specifically, the decrease was partially offset by the accretive impact of a reduction in the diluted number of common shares and common share equivalents outstanding as a result of share repurchases.

2012 compared to 2011

The increase in net income of $1,655 million in 2012 compared to 2011 resulted primarily from:

an increase of $1,429 million in the Non-life underwriting result, which was primarily driven by a decrease of $1,417 million in large catastrophic losses and large losses; and


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an increase of $427 million in pre-tax net realized and unrealized investment gains primarily as a result of narrowing credit spreads, improvements in worldwide equity markets and decrease in risk-free rates; partially offset by

an increase of $135 million in income tax expense, resulting from a higher pre-tax net income; and

a decrease of $58 million in net investment income, primarily driven by lower reinvestment rates.

The increase in net income available to PartnerRe Ltd. common shareholders and diluted net income per share in 2012 compared to 2011 was primarily due to the above factors, partially offset by an increase in preferred dividends following the issuance of preferred shares in June 2011. For diluted net income per share specifically, the increase was also due to a decrease in the diluted number of common shares outstanding as a result of share repurchases during 2012.

Key Factors Affecting Year over Year Comparability

The following key factors affected the year over year comparison of the Company's results and are discussed in more detail in Review of Net Income
(Loss) below.

Large catastrophic and large loss events

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. For example, the Company's results for 2013 and 2012 included a comparatively lower level of catastrophic losses, while 2011 included an unusually high frequency of high severity catastrophic events as discussed further below. The total impact of large catastrophic losses and large losses on pre-tax net income (loss) for the years ended December 31, 2013, 2012 and 2011 was as follows (in millions of U.S. dollars):

                      Year ended December 31,    Total (1)
                      2013                      $       142
                      2012                              318
                      2011                            1,790

(1) Large catastrophic losses and large losses are shown net of any reinsurance, reinstatement premiums and profit commissions.

The combined impact of the large catastrophic losses and large losses, the impact on the Company's technical result, net realized and unrealized investment gains or losses, pre-tax net income or loss, loss ratio, technical ratio and combined ratio by segment and sub-segment, and the large catastrophic losses and large losses by event for the years ended December 31, 2013, 2012 and 2011 was as follows (in millions of U.S. dollars):

                                                        Global                                                     Total              Life
                                      North           (Non-U.S.)           Global                                Non-life          and Health        Corporate
2013                                 America             P&C              Specialty          Catastrophe          segment           segment          and Other           Total
Net losses and loss expenses
and life policy benefits            $      14        $         11        $        15        $         115        $     155        $         -        $       -        $     155
Reinstatement premiums                     -                   -                  -                   (13 )            (13 )                -                -              (13 )

Impact on technical result and
pre-tax net income                  $      14        $         11        $        15        $         102        $     142        $         -        $       -        $     142
Impact on the loss ratio                  0.9 %               1.5 %              1.0 %               25.0 %            3.5 %
Impact on the technical ratio             0.9                 1.5                1.0                 25.0              3.4
Impact on the combined ratio                                                                                           3.4 %


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                2013                                                   Total (1)
                German Hailstorm                                      $        58
                Alberta Floods                                                 48
                European Floods                                                36

                Impact on pre-tax net income                          $       142

(1) Large catastrophic losses and large losses are shown net of any reinsurance, reinstatement premiums and profit commissions.

                                                     Global                                                    Total           Life and
                                    North          (Non-U.S.)          Global                                Non-life           Health         Corporate
2012                               America            P&C             Specialty          Catastrophe          segment          segment         and Other        Total
Net losses and loss expenses
and life policy benefits          $     157       $          2       $        87        $          82        $     328        $       -        $       -        $  328
Reinstatement premiums                   -                  -                 (1 )                (11 )            (12 )              -                -           (12 )

Impact on technical result        $     157       $          2       $        86        $          71        $     316        $       -        $       -        $  316
Net realized and unrealized
investment losses                                                                                                   -                 -                 2            2

Impact on pre-tax income                                                                                     $     316        $       -        $        2       $  318
Impact on the loss ratio               13.4 %              0.3 %             6.3 %               17.8 %            8.7 %
. . .
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