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PRE > SEC Filings for PRE > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for PARTNERRE LTD

Form 10-Q for PARTNERRE LTD


1-Aug-2014

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 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 and Six Months Ended June 30, 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 (Loss) below.
The results for the three months and six months ended June 30, 2014 and 2013 were primarily impacted by the volatility in the capital markets, mainly as a result of decreases in U.S. and European longer-term risk-free interest rates during 2014 and increases in risk-free interest rates during 2013. 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 and six months ended June 30, 2014 and 2013 demonstrate this volatility. While the results for the three months and six months ended June 30, 2014 included no significant catastrophic losses, during the three months and six months ended June 30, 2013 the Company incurred losses of $112 million, net of retrocession, reinstatement premiums and profit commissions, related to the combined impact of the floods that impacted large areas of Central Europe in June 2013 (European Floods) and the extensive flooding in Alberta, Canada (Alberta Floods) in June 2013.


The combined impact of the European and Alberta Floods on the Company's technical result, pre-tax net loss (income), loss ratio, technical ratio and combined ratio by segment and sub-segment, and the large catastrophic losses by event for the three months and six months ended June 30, 2013 was as follows (in millions of U.S. dollars):

Three months and six                                                                                                                    Life and
months ended June 30,                                                                                               Total Non-life       Health
2013                          North America       Global (Non-U.S.) P&C      Global Specialty      Catastrophe          segment          segment       Corporate and Other       Total
Gross losses and loss
expenses and life policy
benefits                    $         8         $               14          $          23        $        89       $       134         $       -     $                   -     $    134
Reinsurance recoverable               -                          -                      -                 (7 )              (7 )               -                         -           (7 )
Net losses and loss
expenses and life policy
benefits                    $         8         $               14          $          23        $        82       $       127         $       -     $                   -     $    127
Reinstatement premiums                -                          -                      -                (15 )             (15 )               -                         -          (15 )
Impact on technical
result and pre-tax net
(loss) income               $         8         $               14          $          23        $        67       $       112         $       -     $                   -     $    112

Three months ended June
30, 2013
Impact on the loss ratio            2.2 %                      8.3 %                  6.2 %            111.8 %            11.8 %
Impact on the technical
ratio                               2.2 %                      8.3 %                  6.2 %            111.8 %            11.8 %
Impact on the combined
ratio                                                                                                                     11.7 %

Six months ended June 30,
2013
Impact on the loss ratio            1.2 %                      4.2 %                  3.2 %             51.2 %             6.1 %
Impact on the technical
ratio                               1.2 %                      4.2 %                  3.2 %             51.2 %             6.1 %
Impact on the combined
ratio                                                                                                                      6.0 %

Three months and six months ended June 30, 2013                                                                                                                                 Total(1)
European Floods                                                                                                                                                                $     57
Alberta Floods                                                                                                                                                                       55
Impact on pre-tax net (loss) income                                                                                                                                            $    112

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

The results for the three months and six months ended June 30, 2013 were also impacted by the restructuring of the Company's business support operations into a single integrated worldwide support platform and changes to the structure of its Global Non-life Operations (the restructuring) announced in April 2013. The restructuring included involuntary and voluntary employee termination plans in certain jurisdictions (collectively, termination plans) and certain real estate related costs. During the three months and six months ended June 30, 2013, the Company recorded a pre-tax charge of $43 million related to the costs of the restructuring, which was primarily related to the termination plans, within Other operating expenses. During the three months and six months ended June 30, 2014, the Company recorded a pre-tax charge of $2 million related to the restructuring.
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 three months and six months ended June 30, 2014 and 2013 were as follows (in millions of U.S. dollars, except per share data):


                                              For the
                                               three                                                      For the
                                              months                                                     six months
                                            ended June    For the three months     For the six months    ended June
                                             30, 2014      ended June 30, 2013    ended June 30, 2014     30, 2013
Net income (loss)                           $     274     $         (174 )        $         587          $     60
Net income attributable to noncontrolling
interests                                          (2 )               (1 )                   (5 )              (1 )
Net income (loss) attributable to PartnerRe
Ltd.                                        $     272     $         (175 )        $         582          $     59
Less: preferred dividends                          14                 15                     29                30
Less: loss on redemption of preferred
shares                                              -                  -                      -                 9
Net income (loss) attributable to PartnerRe
Ltd. common shareholders                    $     258     $         (190 )        $         553          $     20
Diluted net income (loss) per share
attributable to PartnerRe Ltd. common
shareholders                                $    5.02     $        (3.37 )        $       10.64          $   0.34

Three-month result
The increase in net income of $448 million, from a loss of $174 million in the three months ended June 30, 2013 to an income of $274 million in the same period of 2014 resulted primarily from:

           an increase of $465 million in pre-tax net realized and unrealized
            investment gains, mainly as a result of decreases in U.S. and
            European longer-term risk-free interest rates in the three months
            ended June 30, 2014 compared to modest increases in risk-free
            interest rates in the same period of 2013;


           an increase of $68 million in the Non-life underwriting result, which
            was mainly driven by a decrease in large catastrophic losses and an
            increase in favorable prior year loss development, partially offset
            by a decrease in the current accident year technical result which was
            primarily related to the North America sub-segment and an increase in
            adverse prior quarter loss development; and


           a decrease of $38 million in other operating expenses included in
            Corporate and Other, primarily driven by the charge related to the
            restructuring in 2013, described above; partially offset by


           an increase of $153 million in income tax expense, primarily due to
            an increase in the Company's pre-tax net income.

The increase in net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share for the three months ended June 30, 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. Six-month result
The increase in net income of $527 million, from $60 million in the six months ended June 30, 2013 to $587 million in the same period of 2014 resulted primarily from:

           an increase of $584 million in pre-tax net realized and unrealized
            investment gains, mainly as a result of modest decreases in U.S. and
            European longer-term risk-free interest rates in the six months ended
            June 30, 2014 compared to increases in risk-free interest rates in
            the same period of 2013;


           an increase of $61 million in the Non-life underwriting result, which
            was mainly driven by a decrease in large catastrophic losses,
            partially offset by an increase in the acquisition cost ratio in the
            North America and Global (Non-U.S.) P&C sub-segments and a modestly
            higher level of mid-sized loss activity in the Global Specialty
            sub-segment; and


           a decrease of $41 million in other operating expenses included in
            Corporate and Other, driven by the charge related to the
            restructuring in 2013; partially offset by


           an increase of $174 million in income tax expense, primarily due to
            an increase in the Company's pre-tax net income.

The increase in net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share for the six months ended June 30, 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 (Loss), 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.
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 June 30, 2014 and December 31, 2013 and for the three months and six months ended June 30, 2014 and 2013 these were as follows:

                                                                    June 30, 2014        December 31, 2013
Diluted tangible book value per common share and common share
equivalents outstanding(1)                                       $         107.80       $           98.49
Annualized growth in diluted tangible book value per common
share and common share equivalents outstanding plus
dividends (2)                                                                21.6 %

                                 For the three   For the three
                                 months ended    months ended     For the six months    For the six months
                                 June 30, 2014   June 30, 2013   ended June 30, 2014    ended June 30, 2013
Operating earnings attributable
to PartnerRe Ltd. common
shareholders (in millions of
U.S. dollars) (3)                $       134     $        51     $            310       $             253
Diluted operating earnings per
common share and common share
equivalents outstanding (3)      $      2.60     $      0.90     $           5.97       $            4.32
Annualized operating return on
beginning diluted book value per
common share and common share
equivalents outstanding (4)              9.5 %           3.6 %               10.9 %                   8.6 %
Combined ratio (5)                      91.5 %          97.8 %               87.8 %                  90.0 %

(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.
Diluted Tangible Book Value per Share at June 30, 2014 and December 31, 2013 and the calculation of the annualized growth in Diluted Tangible Book Value per Share plus dividends for the six months ended June 30, 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.

                                                                            December 31,
                                                          June 30, 2014         2013
Diluted tangible book value per share                    $      107.80     $       98.49
Dividends per common share for the six months ended June
30, 2014                                                          1.34
Diluted tangible book value per share plus dividends     $      109.14
Annualized growth in diluted tangible book value per
share plus dividends                                              21.6 %

The Company's Diluted Tangible Book Value per Share increased by 9.5%, from $98.49 at December 31, 2013 to $107.80 at June 30, 2014, primarily due to net income attributable to PartnerRe Ltd. and the accretive impact of share repurchases, 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 21.6% during the six months ended June 30, 2014. This growth was driven by net income attributable to PartnerRe Ltd. and dividends on the common shares.
Over the past five years, since June 30, 2009, the Company has generated a compound annualized growth in Diluted Tangible Book Value per Share plus dividends in excess of 13%.
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 June 30, 2014 and December 31, 2013 was as follows (in millions of U.S. dollars):

                                                                              December 31,
                                                           June 30, 2014          2013
Diluted book value per common share and common share
equivalents outstanding(1)                               $        118.96     $      109.26
Less: goodwill and other intangible assets, net of tax,
per share                                                          11.16             10.77
Diluted tangible book value per share                    $        107.80     $       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 . . .

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