UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2001
Commission file number 1-14536
PartnerRe Ltd.
--------------
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
106 Pitts Bay Road
Pembroke, Bermuda HM 08
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(Address of principal executive offices) (Zip Code)
(441) 292-0888
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Registrant's telephone number, including area code
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 (the
Exchange Act) 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
------- -----
The number of the Registrant's common shares (par value $1.00 per share)
outstanding as of August 6, 2001 was 50,163,268.
PartnerRe Ltd.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Unaudited Consolidated Financial Statements.
Independent Accountants' Review Report........................................................... 3
Consolidated Balance Sheets
June 30, 2001 (unaudited) and December 31, 2000 (audited)..................................... 4
Unaudited Consolidated Statements of Operations and Comprehensive Income
Three and Six Months Ended June 30, 2001 and 2000 ............................................ 5
Unaudited Consolidated Statements of Shareholders' Equity
Six Months Ended June 30, 2001 and 2000....................................................... 6
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000....................................................... 7
Notes to Unaudited Consolidated Financial Statements............................................. 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................................. 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk (see Part I, Item 2)
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................ 24
ITEM 2. Changes in Securities............................................................................ 24
ITEM 3. Defaults upon Senior Securities.................................................................. 24
ITEM 4. Submission of Matters to a Vote of
Security Holders.............................................................................. 24
ITEM 5. Other Information................................................................................ 24
ITEM 6. Exhibits and Reports on Form 8-K................................................................. 25
Signatures .............................................................................................. 26
Exhibit Index .............................................................................................. 27
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders
of PartnerRe Ltd.
We have reviewed the accompanying consolidated balance sheet of PartnerRe Ltd.
and subsidiaries as of June 30, 2001 and the related consolidated statements of
operations and comprehensive income for the three and six-month periods ended
June 30, 2001 and 2000, and shareholders' equity and cash flows for the
six-month periods ended June 30, 2001 and 2000. These financial statements are
the responsibility of the Company's Management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, 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 review, we are not aware of any material modifications that should
be made to such consolidated 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 auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
PartnerRe Ltd. and subsidiaries as of December 31, 2000 and the related
consolidated statements of operations and comprehensive income, shareholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated February 12, 2001, we expressed an unqualified opinion on those
consolidated financial statements.
/s/DELOITTE & TOUCHE
Hamilton, Bermuda
August 6, 2001
3
PartnerRe Ltd.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except share data)
June 30, December 31,
2001 2000
(Unaudited) (Audited)
----------- -----------
Assets
Investments and cash
Fixed maturities, at fair value
(amortized cost: 2001, $3,072,368; 2000, $3,047,090) $ 3,080,292 $ 3,053,790
Short-term investments, at fair value
(amortized cost: 2001, $21,063; 2000, $24,972) 21,109 24,853
Equities, at fair value
(cost: 2001, $402,660; 2000, $327,965) 415,031 354,801
Cash and cash equivalents, at fair value, which approximates
amortized cost 199,534 434,033
Other invested assets 26,986 14,594
----------- -----------
Total investments and cash 3,742,952 3,882,071
Accrued investment income 83,391 54,876
Reinsurance balances receivable (current and future installments) 638,253 440,550
Reinsurance recoverable on paid and unpaid losses 232,893 249,569
Funds held by reinsured companies 669,288 653,260
Deferred acquisition costs 271,565 245,981
Taxes recoverable 34,892 22,996
Goodwill 442,537 455,554
Other 88,815 86,437
----------- -----------
Total Assets $ 6,204,586 $ 6,091,294
=========== ===========
Liabilities
Unpaid losses and loss expenses $ 2,337,746 $ 2,386,032
Policy benefits for life and annuity contracts 704,742 673,096
Unearned premiums 637,264 424,487
Funds held under reinsurance treaties 37,741 26,924
Long term debt 220,000 220,000
Payable for securities purchased 126,788 201,881
Accounts payable, accrued expenses and other 60,916 72,868
----------- -----------
Total Liabilities 4,125,197 4,005,288
=========== ===========
Shareholders' Equity
Common shares (issued and outstanding: 2001, 50,162,072;
2000, 50,113,311) 50,162 50,113
Preferred shares (issued and outstanding: 2001, 10,000,000;
2000, 10,000,000) 10,000 10,000
Additional paid-in capital 893,854 892,310
Deferred compensation (465) (534)
Accumulated other comprehensive gain (loss):
Net unrealized gains on investments, net of tax 10,625 107,511
Currency translation adjustment (69,136) (45,710)
Retained earnings 1,184,349 1,072,316
----------- -----------
Total Shareholders' Equity 2,079,389 2,086,006
=========== ===========
Total Liabilities and Shareholders' Equity $ 6,204,586 $ 6,091,294
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
4
PartnerRe Ltd.
Consolidated Statements of Operations and Comprehensive Income
(Expressed in thousands, except per share data)
(Unaudited)
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Gross premiums written $ 421,317 $ 355,622 $ 1,037,084 $ 823,846
=========== =========== =========== ===========
Net premiums written $ 410,943 $ 345,415 $ 1,008,722 $ 785,502
(Increase) Decrease in unearned premiums (24,667) 5,895 (233,028) (115,875)
----------- ----------- ----------- -----------
Net premiums earned 386,276 351,310 775,694 669,627
Net investment income 60,819 78,901 120,776 156,427
Net realized investment gains (losses) 5,462 (7,691) 14,568 (45,419)
Other income 56 97 78 7
----------- ----------- ----------- -----------
Total Revenues 452,613 422,617 911,116 780,642
----------- ----------- ----------- -----------
Expenses
Losses and loss expenses and life policy benefits 285,858 264,139 558,254 511,477
Acquisition costs 85,064 88,475 171,331 156,471
Other operating expenses 29,394 22,416 57,052 46,943
Interest expense 3,231 3,231 6,427 6,497
Amortization of goodwill 6,509 6,509 13,018 13,017
Net foreign exchange (gains) losses (3,107) 146 (214) (166)
----------- ----------- ----------- -----------
Total Expenses 406,949 384,916 805,868 734,239
----------- ----------- ----------- -----------
Income before taxes 45,664 37,701 105,248 46,403
Income tax benefit (7,490) (13,848) (16,040) (28,434)
----------- ----------- ----------- -----------
Net income before cumulative effect of adopting
new accounting standard 53,154 51,549 121,288 74,837
Cumulative effect of adopting new accounting
standard, net of tax -- -- 27,812 --
----------- ----------- ----------- -----------
Net income $ 53,154 $ 51,549 $ 149,100 $ 74,837
=========== =========== =========== ===========
Preferred dividends $ 5,000 $ 5,000 $ 10,000 $ 10,000
=========== =========== =========== ===========
Net income available to common shareholders $ 48,154 $ 46,549 $ 139,100 $ 64,837
=========== =========== =========== ===========
Calculation of comprehensive income, net of tax:
Net income as reported $ 53,154 $ 51,549 $ 149,100 $ 74,837
Change in net unrealized gains or losses on investments,
net of tax (30,390) (12,299) (96,886) 53,752
Change in currency translation adjustment (10,257) (47) (23,426) (15,614)
----------- ----------- ----------- -----------
Comprehensive income $ 12,507 $ 39,203 $ 28,788 $ 112,975
=========== =========== =========== ===========
Per share data:
Earnings per common share:
Basic operating earnings $ 0.95 $ 1.09 $ 2.06 $ 2.25
Net realized investment gains (losses), net of tax 0.01 (0.14) 0.16 (0.93)
----------- ----------- ----------- -----------
Basic net income before cumulative effect of
adopting new accounting standard 0.96 0.95 2.22 1.32
Cumulative effect of adopting new accounting standard -- -- 0.55 --
----------- ----------- ----------- -----------
Basic net income $ 0.96 $ 0.95 $ 2.77 $ 1.32
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 50,134.8 49,172.8 50,127.4 49,238.7
Diluted operating earnings $ 0.92 $ 1.07 $ 2.00 $ 2.20
Net realized investment gains (losses), net of tax 0.01 (0.15) 0.16 (0.91)
----------- ----------- ----------- -----------
Diluted net income before cumulative effect of
adopting new accounting standard 0.93 0.92 2.16 1.29
Cumulative effect of adopting new accounting standard -- -- 0.54 --
----------- ----------- ----------- -----------
Diluted net income $ 0.93 $ 0.92 $ 2.70 $ 1.29
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 51,651.3 50,527.8 51,601.7 50,466.5
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
5
PartnerRe Ltd.
Consolidated Statements of Shareholders' Equity
(Expressed in thousands of U.S. dollars)
(Unaudited)
Net
Unrealized
Gains
(Losses) Total
Additional Deferred on Currency Share-
Common Preferred Paid-In Compen- Investments, Translation Retained holders'
Shares Shares Capital sation Net of tax Adjustment Earnings Equity
Balance at December 31, 1999 $49,265 $10,000 $879,603 $ -- $(76,125) $(23,264) $ 1,001,232 $ 1,840,711
Repurchase of common shares
and warrants (110) -- (3,177) -- -- -- -- (3,287)
Issue of common shares 57 1,113 1,170
Net unrealized gains for period -- -- -- -- 53,752 -- -- 53,752
Currency translation adjustment -- -- -- -- -- (15,614) -- (15,614)
Net income -- -- -- -- -- -- 74,837 74,837
Dividends on common shares -- -- -- -- -- -- (25,561) (25,561)
Dividends on preferred shares -- -- -- -- -- -- (10,000) (10,000)
---------------------------------------------------------------------------------------------
Balance at June 30, 2000 $49,212 $10,000 $877,539 $ -- $(22,373) $(38,878) $ 1,040,508 $ 1,916,008
=============================================================================================
Balance at December 31, 2000 $50,113 $10,000 $892,310 $ (534) $107,511 $(45,710) $ 1,072,316 $ 2,086,006
Issue of common shares 49 -- 1,544 -- -- -- -- 1,593
Amortization of deferred
compensation -- -- -- 69 -- -- -- 69
Net unrealized losses for period -- -- -- -- (96,886) -- -- (96,886)
Currency translation adjustment -- -- -- -- -- (23,426) -- (23,426)
Net income -- -- -- -- -- -- 149,100 149,100
Dividends on common shares -- -- -- -- -- -- (27,067) (27,067)
Dividends on preferred shares -- -- -- -- -- -- (10,000) (10,000)
---------------------------------------------------------------------------------------------
Balance at June 30, 2001 $50,162 $10,000 $893,854 $ (465) $ 10,625 $(69,136) $ 1,184,349 $ 2,079,389
=============================================================================================
See Accompanying Notes to Consolidated Financial Statements
6
PartnerRe Ltd.
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
For the six For the six
months ended months ended
June 30, June 30,
2001 2000
----------- -----------
Cash Flows From Operating Activities
Net income $ 149,100 $ 74,837
Adjustments to reconcile net income to net cash provided by
operating activities:
Accrual of discount on investments, net of amortization of premium (10,035) (6,477)
Amortization of goodwill 13,018 13,017
Net realized investment (gains) losses (14,568) 45,419
Cumulative effect of adopting new accounting standard (27,812) --
Changes in:
Unearned premiums 233,029 116,354
Reinsurance balances receivable (254,753) (64,156)
Unpaid losses and loss expenses including life policy benefits 111,579 (182,213)
Income taxes payable (12,345) (7,165)
Other changes in assets and liabilities (93,607) (8,163)
Other items, net 6,266 2,428
----------- -----------
Net cash provided by (used in) operating activities 99,872 (16,119)
----------- -----------
Cash Flows From Investing Activities
Sales of fixed maturities 1,560,362 2,786,885
Redemptions of fixed maturities 58,520 103,528
Purchases of fixed maturities (1,814,094) (2,788,973)
Net changes in short term investments (814) 24,657
Sales of equities 47,909 82,907
Purchases of equities (134,991) (197,466)
Other (10,026) 4,916
---------- ----------
Net cash (used in) provided by investing activities (293,134) 16,454
---------- ----------
Cash Flows from Financing Activities
Cash dividends paid to shareholders (37,067) (35,561)
Repurchase of common shares and warrants -- (3,287)
Issuance of common shares 1,593 1,170
----------- -----------
Net cash used in financing activities (35,474) (37,678)
----------- -----------
Effect of exchange rate changes on cash (5,763) (2,144)
Decrease in cash and cash equivalents (234,499) (39,487)
Cash and cash equivalents - beginning of period 434,033 438,183
----------- -----------
Cash and cash equivalents - end of period $ 199,534 $ 398,696
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
7
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
1. General
PartnerRe Ltd. (the "Company") is a leading global reinsurer, providing
multi-line reinsurance to insurance companies through its wholly owned
subsidiaries, Partner Reinsurance Company, PartnerRe U.S., and PartnerRe SA.
Risks reinsured include property, catastrophe, agriculture, automobile,
casualty, marine, aviation and space, credit and surety, technical and
miscellaneous lines, life/annuity and health.
The accompanying unaudited consolidated financial statements have been
prepared on the basis of United States generally accepted accounting principles.
In the opinion of Management, these financial statements reflect all the normal
recurring adjustments necessary for a fair presentation of the Company's
financial position at June 30, 2001 and its results of operations for the three
and six- month periods then ended and shareholders' equity and cash flows for
the six months then ended. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
contained in the Company's 2000 Annual Report to Shareholders.
2. New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as
amended by SFAS No. 138, on January 1, 2001. In accordance with the transition
provisions of SFAS 133, the Company recorded a positive cumulative-effect
adjustment of $27.8 million, after tax, or $0.54 per diluted share, in earnings
of the first quarter to recognize the net gains and losses associated with its
fair value currency hedging activities that were previously recorded in
"accumulated other comprehensive income." The transition provision did not
affect the book value of the Company.
Additionally, in response to the accounting implications of SFAS 133,
the Company reclassified approximately $89.2 million of available for sale
convertible debt and equity securities to a "trading" portfolio at January 1,
2001. Such reclassifications were to reduce the administrative burden associated
with separately valuing the conversion features (embedded derivatives under SFAS
133). This reclassification resulted in a $4.6 million net loss, after tax, or
$0.09 per diluted share, being recognized in earnings of the first quarter.
Prior to this reclassification, this net unrealized loss was included as a
component of "accumulated other comprehensive income" and, accordingly, the
reclassification did not affect the book value of the Company. Under the
provisions of SFAS 133, such a reclassification does not impact the Company's
ability to classify other debt securities as available-for-sale.
On July 20, 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations," (SFAS 141) and SFAS No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142). The statements will change the accounting
for business combinations and goodwill in two significant ways. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of that statement, which for the Company, will be January 1, 2002.
The Company will be required to complete a transitional goodwill impairment test
six months from the date of adoption and impairment valuations annually or more
frequently if certain indicators are encountered. In connection with the
transitional adjustment, the Company will (i) identify its reporting units, (ii)
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets to those
reporting units, and (iii) determine the fair value of each reporting unit. If
the carrying value of any reporting unit exceeds its fair value, then detailed
fair values for each of the assigned assets (excluding goodwill) and liabilities
will be determined to calculate the amount of goodwill impairment, if any. Any
transitional impairment loss resulting from the adoption will be recognized as
the effect of a change in accounting principle in the Company's statement of
operations.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements. The Company estimates that the
adoption of SFAS 142 will result in the elimination of an annual amortization
expense related to goodwill in the amount of $22.4 million, after tax. The
Company is currently assessing but has not yet determined the impact of related
impairment, if any, on its financial position and results of operations.
8
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
3. Accounting for Derivatives and Hedging Activities
SFAS 133 requires the recognition of all derivative financial
instruments, including embedded derivative instruments, as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The accounting for gains and losses associated with
changes in the fair value of a derivative and the effect on the consolidated
financial statements will depend on its hedge designation and whether the hedge
is highly effective in achieving offsetting changes in the fair value or cash
flows of the asset or liability hedged. If the derivative is designated as a
fair value hedge, the changes in the fair value of the derivative and the hedged
item will be recognized in earnings. If the derivative is designated as a cash
flow hedge, changes in the fair value of the derivative will be recorded in
other comprehensive income and will be recognized in the income statement when
the hedged item affects earnings. A derivative that is not designated or does
not qualify as an effective hedge will be marked to fair value through earnings.
The Company does not currently designate any derivative financial instruments as
cash flow hedges.
The Company utilizes derivative financial instruments as part of an
overall currency risk management strategy. As part of its overall strategy to
manage the level of currency exposure, the Company uses currency derivatives to
hedge the fair value of certain available for sale fixed income securities
related to the Company's "liability funds" (funds corresponding to the Company's
net reinsurance liabilities). These derivatives have been designated as "fair
value hedges" under SFAS 133, and accordingly, the changes in fair value of the
derivative and the hedged item related to foreign exchange rates will be
recognized in earnings. Derivatives employed by the Company to hedge currency
exposure related to other reinsurance assets and liabilities are not designated
as hedges under SFAS 133. On the date the Company enters into a derivative
contract, Management designates the derivative as a hedge of the identified
underlying exposure (a "designated hedge") or as a "no hedge designation"
derivative. If a derivative does not qualify or is not designated in a hedging
relationship, the derivative is recorded at fair value and changes in its fair
value are reported currently in earnings. For the three and six months ended
June 30, 2001, the Company recorded net gains (losses) of $1.2 million and
($0.8) million, respectively, in "net realized investment gains (losses)" in the
Consolidated Statement of Operations, representing the ineffectiveness of its
fair value hedging activities.
The Company's investment strategy allows for the use of derivative
securities, subject to strict limitations. Derivative instruments may be used to
hedge a variety of market risks, or to replicate investment positions or market
exposures that would be allowed under Company investment policy if implemented
in other ways. The Company does not designate these derivatives as hedges for
accounting purposes. Accordingly, these derivatives are recorded at fair value
and changes in the fair value of the derivatives are reported currently in
earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy.
The Company will discontinue hedge accounting prospectively if it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item. To the extent that the Company in
the future chooses to discontinue hedge accounting related to its fair-value
hedge of currency risk related to its available for sale fixed income securities
(liability funds) because, based on Management's assessment, the derivative(s)
no longer qualifies as an effective fair-value hedge, the derivative(s) will
continue to be carried on the balance sheet at its fair value with changes in
its fair value recognized in current period net realized investment gains
(losses) and changes in the fair value of the underlying available for sale
fixed income securities due to currency movements will be recorded as a
component of "other comprehensive income".
9
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
4. Segment Information
The determination of the Company's reportable segments is based on how
the Company is managed. The Company employs a matrix organization whereby the
core underwriting operations are managed by teams of "Client Partners", which
generally are responsible for geographic zones, and "Technical Partners", which
are responsible for specialty lines or classes of business. Management believes
measuring underwriting results by lines of business is the most relevant
representation of the segmentation of the Company's underwriting operations.
Because the Company does not manage its assets by segment, investment
income is not allocated to the segments of the property and casualty reinsurance
operations. However, because of the interest sensitive nature of some of the
Company's Life products, investment income is considered in Management's
assessment of the profitability of the Life reinsurance operations. The
following items are not considered in evaluating the results of each segment:
other operating expenses, net realized investment gains/losses, other income,
goodwill amortization, interest expense, net foreign exchange gains/losses,
income tax expense and preferred share dividends. Segment revenues and profits
(or losses) are shown net of intercompany transactions.
Management measures segment results for the property, casualty and
specialty segments on the basis of the "technical ratio", which is obtained by
dividing the sum of the loss and loss adjustment expenses and acquisition costs
by net premiums earned. Management measures segment results for the Life segment
on the basis of "technical result" which is defined as net premiums earned less
loss and loss adjustment expenses and acquisition costs. The following table
provides a summary of the segment revenues and results for the three-month and
six-month periods ended June 30, 2001 and 2000 ($ millions):
10
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Property (including Catastrophe)
Net premiums written $ 141.3 $ 109.6 $ 393.4 $ 285.4
Net premiums earned 139.4 111.3 282.1 222.5
Technical ratio (1) 83.0% 90.3% 78.7% 85.1%
Casualty (including Automobile)
Net premiums written $ 127.6 $ 93.5 $ 297.1 $ 213.8
Net premiums earned 108.9 95.3 219.0 181.8
Technical ratio (1) 98.6% 111.8% 99.1% 114.1%
Specialty (Agriculture, Marine,
Aviation/Space, Credit/Surety,
Miscellaneous)
Net premiums written $ 103.1 $ 75.6 $ 231.3 $ 159.9
Net premiums earned 99.2 78.3 190.6 141.7
Technical ratio (1) 100.5% 78.1% 101.2% 78.5%
- ----------------------------------------------------------------------------------------------------------
Total Non-life
Net premiums written $ 372.0 $ 278.7 $ 921.8 $ 659.1
Net premiums earned 347.5 284.9 691.7 546.0
Technical ratio (1) 92.8% 94.1% 91.4% 93.0%
- ----------------------------------------------------------------------------------------------------------
Life, Annuity & Health
Net premiums written $ 38.9 $ 66.7 $ 86.9 $ 126.4
Net premiums earned 38.8 66.4 84.0 123.6
Technical result (2) $ (9.2) $ (18.0) $ (13.4) $ (36.3)
Allocated investment income 7.2 28.7 13.5 55.8
- ----------------------------------------------------------------------------------------------------------
Net technical result $ (2.0) $ 10.7 $ 0.1 $ 19.5
- ----------------------------------------------------------------------------------------------------------
1) Technical ratio is obtained by dividing the sum of losses and loss
adjustment expenses and acquisition costs by net premiums earned
2) Technical result is defined as net premiums earned less loss and loss
adjustment expenses and acquisition costs
11
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
Reconciliation to Net Income:
Technical result $ 15.4 $ (1.3) $ 46.1 $ 1.7
Other operating expenses (29.4) (22.4) (57.1) (46.9)
Net investment income 60.8 78.9 120.8 156.4
Other income 0.1 0.1 0.1 --
Interest expense (3.2) (3.2) (6.4) (6.5)
Amortization of goodwill (6.5) (6.5) (13.0) (13.0)
Net foreign exchange gains (losses) 3.1 (0.2) 0.2 0.1
Income tax benefits on operating
income 12.2 13.4 22.4 29.1
- ------------------------------------------------------------------------------------------------
Operating income 52.5 58.8 113.1 120.9
- ------------------------------------------------------------------------------------------------
Net realized investment gains
(losses), net of taxes 0.7 (7.3) 8.2 (46.1)
Cumulative effect of adopting new
accounting standard, net of tax -- -- 27.8 --
- ------------------------------------------------------------------------------------------------
Net income $ 53.2 $ 51.5 $ 149.1 $ 74.8
- ------------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of the financial condition
at June 30, 2001 and results of operations of PartnerRe Ltd. (the "Company") for
the three and six-month periods ended June 30, 2001 and 2000. This discussion
and analysis should be read in conjunction with the attached unaudited
consolidated financial statements and notes thereto and the audited consolidated
financial statements of the Company at and for the year ended December 31, 2000
and notes thereto included in the Company's 2000 Annual Report to Shareholders.
The unaudited consolidated financial statements at and for the three and
six-months periods ended June 30, 2001 and notes thereto have been reviewed by
independent accountants in accordance with standards established by the American
Institute of Certified Public Accountants.
General
The Company is a leading global reinsurer, providing multi-line
reinsurance to insurance companies through its wholly owned subsidiaries,
Partner Reinsurance Company Ltd. ("Partner Reinsurance Company"), Partner
Reinsurance Company of the U.S. ("PartnerRe U.S.") and PartnerRe SA (previously
SAFR PartnerRe). Risks reinsured include property, catastrophe, agriculture,
automobile, casualty, marine, aviation and space, credit and surety, technical
and miscellaneous lines, life/annuity and health. On July 10, 1997, the Company
acquired PartnerRe SA. On December 23, 1998, the Company completed the
acquisition of Winterthur Re and on August 4, 2000 (effective July 1, 2000), the
Company sold PartnerRe Life U.S., the life operations obtained in the Winterthur
Re acquisition.
Because of the inherent volatility of some of the business the Company
underwrites, such as catastrophe reinsurance, the operating results and
financial condition of the Company can be adversely affected by catastrophes and
other large losses that may give rise to claims under reinsurance coverages
provided by the Company. The Company endeavors to manage this exposure by (i)
attempting to limit its aggregate exposure in any particular geographic zone,
(ii) selective underwriting practices, (iii) diversification by geographic area
and by lines and classes of business, and (iv) to a certain extent by purchasing
retrocessional reinsurance.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Business Environment
The reinsurance industry is cyclical and is influenced by such factors
as the frequency and/or severity of claims and losses, including natural
disasters or other catastrophic events, variations in interest rates and
financial markets, changes in the legal, regulatory and judicial environments,
inflationary pressures and general economic conditions. These factors influence
the demand for reinsurance by primary insurers, the supply (or capacity) of
which is generally represented by the total capital of reinsurers in the market,
and pricing (premium rates). Over most of the past several years, primary
insurers have reduced their dependence on reinsurers by increasing the amount of
risk they retain.
The reinsurance industry is highly competitive. Management believes the
absence of large losses affecting the industry in the last several years until
the second quarter of 1999, combined with a favorable investment environment,
have created excess capacity in the market. Prior to the first quarter of 2001,
reinsurance premium rates had declined in major reinsurance markets over each of
the last several years. This environment has also resulted in significant
consolidation in the industry.
Management believes unsatisfactory insurance and reinsurance results
and continued industry consolidation have begun to have an effect on pricing and
available capacity within the industry. During the first seven months of 2001,
Management has observed signs of improved pricing and reinsurance terms and
conditions. However, it believes further pricing improvements are needed in
certain markets to return the industry, as a whole, to profitability. Although
Management has seen signs of improved pricing and reinsurance terms and
conditions in renewals negotiations thus far in 2001, it believes the market
recovery will continue to be a gradual process. Consequently, Management
considers it prudent to pursue growth only in those areas it perceives will
generate acceptable returns. Management believes that, through dedication to
client service and a disciplined approach to underwriting, the Company provides
a stable and reliable source of underwriting capacity to its clients.
Results of Operations - for the Six Months ended June 30, 2001 and 2000
Results of operations for the six months ended June 30, 2001 and 2000
were as follows ($ millions, except per share data):
2001 2000
- -------------------------------------------------------------------------------------------------
Operating earnings available to common shareholders $ 103.1 $ 110.9
Net realized investment gains (losses), net of tax 8.2 (46.1)
- -------------------------------------------------------------------------------------------------
Net income available to common shareholders before cumulative
effect of adopting new accounting standard 111.3 64.8
- -------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax 27.8 --
- -------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 139.1 $ 64.8
- -------------------------------------------------------------------------------------------------
Diluted operating earnings per common share $ 2.00 $ 2.20
Net realized investment gains (losses) per common share, net of tax 0.16 (0.91)
- -------------------------------------------------------------------------------------------------
Diluted net income per common share before cumulative
effect of adopting new accounting standard 2.16 1.29
- -------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax 0.54 --
- -------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 2.70 $ 1.29
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Operating earnings available to common shareholders for the six months
ended June 30, 2001 decreased by 7.0% compared to the six months ended June 30,
2000, and net income available to common shareholders before the cumulative
effect of adopting a new accounting standard for the six months ended June 30,
2001 increased 71.6% compared to the six months ended June 30, 2000. Operating
earnings available to common shareholders for the 2001 period were impacted by
the high frequency of storms in the U.S., including Tropical Storm Allison,
which generated losses for the Company of approximately $10 million, before tax,
or $0.15 per share, net of tax, above expected levels. In addition, the Company
was impacted by incremental claims of approximately $5 million, before tax or
$0.06 per share, net of tax, in life reinsurance, primarily due to a late notice
of loss for a contract that was previously cancelled. While the first six months
of 2000 were free of major catastrophe losses, the operating results of the
Company were impacted by a high frequency of non-catastrophe losses in the $1
million to $5 million range, as well as additional reserves for the late 1999
European Storms. As a result of these losses, which occurred principally in
taxable jurisdictions, the first six months of 2000 also benefited from a higher
tax benefit when compared to the first six months of 2001. Net realized
investment gains and losses on sales of investments resulted from the timing of
disposition of available for sale fixed maturities and equity securities as part
of the ongoing management of the investment portfolio within the investment
guidelines and objectives set out by Management.
Reinsurance Operations - Underwriting Results
Non-life multi-line business represents the majority of the business
written by the Company. The underwriting results of the Life business are shown
separately in Note 4 to the Consolidated Financial Statements included in this
report. The following analysis includes Life business unless otherwise noted.
Gross and net premiums written and net premiums earned for the six
months ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------
Gross premiums written $ 1,037.1 $ 823.8
Net premiums written 1,008.7 785.5
Net premiums earned 775.7 669.6
- --------------------------------------------------
The increases in gross and net premiums written were primarily related
to the combination of improved pricing conditions and premium growth in certain
markets, particularly catastrophe and non-proportional business, and timing
differences in the recognition of certain renewals and was mitigated by the sale
of PartnerRe Life U.S., effective July 1, 2000. Since a large portion of the
Company's catastrophe and non-proportional business renews during the first two
quarters, the growth rate observed in the first six months of 2001 is unlikely
to continue over the remainder of the year. The first six months of 2000
included gross and net premiums written and net premiums earned of $95.4
million, $85.9 million and $85.9 million, respectively, related to PartnerRe
Life U.S.
Because of continuing competitive market conditions in the reinsurance
industry, the Company pursued premium growth only where market conditions met
the Company's selective standards. The difference between gross and net premiums
written was attributable to the cost of retrocession protection. The Company
selectively purchases retrocession protection as part of its overall risk
management process. Premiums written are earned on a basis that is consistent
with the risks covered under the terms of the reinsurance contracts, which
generally is one to two years.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The distribution of net premiums written by line of business for the
six months ended June 30, 2001 and 2000 were as follows:
2001 2000
- --------------------------------------------------------------------------------------------
% %
Catastrophe 16 16
Property 23 21
Casualty 15 12
Automobile 14 15
Aviation/Space 5 3
Marine 2 1
Agriculture 6 6
Credit/Surety 6 7
Life 9 16
Other 4 3
- --------------------------------------------------------------------------------------------
The distribution of gross premiums written is affected by seasonal
patterns. The above percentage of net premiums written for the catastrophe line
of business was higher than what can be expected for the year because a
significant portion of the year's catastrophe premiums are written in the first
and second quarters. In 2001, the Company, principally in the U.S., has begun
focusing on increasing its casualty business in selected markets where
Management feels there has been significant improvement in rates and terms. The
disposition of PartnerRe Life U.S., effective July 1, 2000, resulted in a
decrease in the proportion of the Life line of business in the six months ended
June 30, 2001 compared to the same period last year.
The Company produces its business both through brokers and through
direct relationships with insurance company clients. The distribution of gross
premiums written by type of business for the six months ended June 30, 2001 and
2000 were as follows:
2001 2000
- ------------------------------------------------------------------------------------------------
% %
Non-life
Proportional 41 46
Non-Proportional 41 29
Facultative 9 8
Life
Proportional 8 16
Non-Proportional 1 1
- -------------------------------------------------------------------------------------------------
The geographic distribution of gross premiums written for the six
months ended June 30, 2001 and 2000 were as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------------
% %
North America 43 49
Europe 41 38
Asia, Australia, New Zealand 10 10
Latin America and the Caribbean 5 2
Africa 1 1
- -----------------------------------------------------------------------------------------------------------------
The growth in the percentage of gross premiums written in Europe was
partially mitigated by a decrease of the relative value of the Euro and other
European currencies against the U.S. dollar while the growth in the percentage
of gross premiums written in North America was fully offset by the sale of
PartnerRe Life U.S. and timing differences in the recognition of renewals.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Losses and loss expenses incurred (and the corresponding ratios as a
percentage of net premiums earned) and Life policy benefits incurred for the six
months ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------------------------------------
Losses and loss expenses (Non-life only) $ 474.2 $ 374.7
- --------------------------------------------------------------------------------
Loss ratio (Non-life only) 68.6% 68.6%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Life policy benefits $ 84.1 $ 136.8
- --------------------------------------------------------------------------------
The increase in losses and loss expenses for the first six months of
2001 compared to the first six months of 2000 resulted primarily from the growth
in the business earned by the Company. The loss ratio for both the first half of
2001 and 2000 was 68.6%. As previously discussed, the first six months of 2001
were impacted by the high frequency of storms in the U.S. while the first six
months of 2000 were impacted by a high frequency of non-catastrophe claims and
as well as additional reserves for the late 1999 European Storms. The decrease
in life policy benefits resulted primarily from the sale of PartnerRe Life U.S.
effective July 1, 2000.
Underwriting expenses include acquisition costs (primarily brokerage,
commissions, excise taxes and other costs directly related to underwriting
reinsurance contracts) and other operating expenses. Underwriting expenses (and
the corresponding expense ratios for the Non-life business) for the six-month
periods ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------------------------------------
Acquisition costs $ 171.3 $ 156.5
Other operating expenses 57.1 46.9
- --------------------------------------------------------------------------------
Total underwriting expenses $ 228.4 $ 203.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acquisition expense ratio 22.8% 24.4%
Other operating expense ratio 7.4 7.3
- --------------------------------------------------------------------------------
Expense ratio (Non-life only) 30.2% 31.7%
- --------------------------------------------------------------------------------
The increase in the acquisition costs for the six months ended June 30,
2001 compared to the six months ended June 30, 2000 resulted primarily from the
growth in the business earned and was mitigated by the sale of PartnerRe Life
U.S. and a shift in the mix of business from proportional to non-proportional
business which has a lower acquisition expense ratio. The decrease in the
Non-life acquisition expense ratio was due, principally, to the shift from
proportional business to non-proportional business. The increase in other
operating expenses and the other operating expense ratio for the six months
ended June 30, 2001 compared to the six months ended June 30, 2000 resulted
primarily from investments in the infrastructure and information systems to
support the Company's growth.
Net foreign exchange gains amounted to $0.2 million for both the
six-month periods ended June 30, 2001 and 2000. Foreign exchange gains and
losses are a function of the relative value between the U.S. dollar and other
currencies in which the Company does business. To the extent the Company employs
derivatives designated as "fair value hedges" or as "no hedge designation", the
Company records foreign exchange gains and losses on the underlying hedged
assets or liabilities and the related derivative instruments in net realized
investment gains (losses).
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Investment Results
Net investment income and net realized investment gains (losses), for
the six-month periods ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- -------------------------------------------------------------------
Net investment income $ 120.8 $ 156.4
Net realized investment gains (losses) 14.6 (45.4)
- -------------------------------------------------------------------
Net investment income for the six months ended June 30, 2001 decreased
by 22.8% compared to the 2000 period primarily due to the sale of PartnerRe Life
U.S. and the negative influence of the weakening of the Euro against the US
dollar. This decrease was partially offset by the investment income earned on
the proceeds of sale. Net realized investment losses on sales of investments are
a function of the timing of disposition of available for sale fixed maturities
and equity securities, changes in market values of trading securities and the
net ineffectiveness of the Company's hedging activity discussed above.
Results of Operations - for the Three months ended June 30, 2001 and 2000
Results of operations for the three months ended June 30, 2001 and 2000
were as follows ($ millions, except per share data):
2001 2000
- ---------------------------------------------------------------------------------------------
Operating earnings available to common shareholders $ 47.5 $ 53.8
Net realized investment gains (losses), net of tax 0.7 (7.3)
- ---------------------------------------------------------------------------------------------
Net income available to common shareholders before cumulative
effect of adopting new accounting standard 48.2 46.5
- ---------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax -- --
- ---------------------------------------------------------------------------------------------
Net income available to common shareholders $ 48.2 $ 46.5
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Diluted operating earnings per common share $ 0.92 $ 1.07
Net realized investment losses per common share, net of tax 0.01 (0.15)
- ---------------------------------------------------------------------------------------------
Diluted net income per common share before cumulative
effect of adopting new accounting standard 0.93 0.92
- ---------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax -- --
- ---------------------------------------------------------------------------------------------
Net income available to common shareholders $ 0.93 $ 0.92
- ---------------------------------------------------------------------------------------------
Operating earnings available to common shareholders for the three
months ended June 30, 2001 decreased by 11.6% compared to the three months ended
June 30, 2000, and net income available to common shareholders for the three
months ended June 30, 2001 increased by 3.5% compared to the three months ended
June 30, 2000. Operating earnings available to common shareholders for the 2001
period were impacted by the high frequency of storms in the U.S., including
Tropical Storm Allison, which generated losses for the Company of approximately
$10 million, before tax, or $0.15 per share, net of tax, above expected levels.
In addition, the Company was impacted by incremental claims of approximately $5
million, before tax or $0.06 per share, net of tax, in life reinsurance,
primarily due to a late notice of loss for a contract that was previously
cancelled. While the three months ended June 30, 2000 were free of major
catastrophe losses, the operating results of the Company were impacted by a high
frequency of non-catastrophe losses in the $1 million to $5 million range, as
well as additional reserves for the late 1999 European Storms. As a result of
these losses, which occurred principally in taxable jurisdictions, the three
months ended June 30, 2000 also benefited from a higher tax benefit when
compared to the three months ended June 30, 2001. Net realized investment gains
and losses on sales of investments resulted from the timing of disposition of
available for sale fixed maturities and equity securities as part of the ongoing
management of the investment portfolio within the investment guidelines and
objectives set out by Management.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Reinsurance Operations - Underwriting Results
Non-life multi-line business represents the majority of the business
written by the Company. The underwriting results of the Life business are shown
separately in Note 4 to the Consolidated Financial Statements included in this
report. The following analysis includes Life business unless otherwise noted.
Gross and net premiums written and net premiums earned for the three
months ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------
Gross premiums written $ 421.3 $ 355.6
Net premiums written 410.9 345.4
Net premiums earned 386.3 351.3
- --------------------------------------------------
The increases in gross and net premiums written were primarily related
to the combination of improved pricing conditions and premium growth in certain
markets, particularly catastrophe and non-proportional business and timing
differences in the recognition of certain renewals, and was mitigated by the
sale of PartnerRe Life U.S., effective July 1, 2000. The three months ended June
30, 2000 included gross and net premiums written and net premiums earned of
$50.8 million, $45.4 million and $45.4 million, respectively, related to
PartnerRe Life U.S.
Because of continuing competitive market conditions in the reinsurance
industry, the Company pursued premium growth only where market conditions met
the Company's selective standards. The difference between gross and net premiums
written was attributable to the cost of retrocession protection. The Company
selectively purchases retrocession protection as part of its overall risk
management process. Premiums written are earned on a basis that is consistent
with the risks covered under the terms of the reinsurance contracts, which
generally is one to two years.
The distribution of net premiums written by line of business for the
three months ended June 30, 2001 and 2000 were as follows:
2001 2000
- ---------------------------------------------------------------------------------------------
% %
Catastrophe 9 10
Property 25 22
Casualty 17 12
Automobile 15 15
Aviation/Space 6 4
Marine 2 2
Agriculture 8 5
Credit/Surety 6 9
Life 9 19
Other 3 2
- ---------------------------------------------------------------------------------------------
The distribution of gross premiums written is affected by seasonal
patterns. In 2001, the Company, principally in the U.S., has begun focusing on
increasing its Casualty business in selected markets where Management feels
there has been significant improvement in rates and terms. The sale of PartnerRe
Life U.S., effective July 1, 2000, resulted in a decrease in the proportion of
the Life line of business in the three months ended June 30, 2001 compared to
the same period last year.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company produces its business both through brokers and through
direct relationships with insurance company clients. The distribution of gross
premiums written by type of business for the three months ended June 30, 2001
and 2000 were as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------------
% %
Non-life
Proportional 53 56
Non-Proportional 29 17
Facultative 9 6
Life
Proportional 9 20
Non-Proportional - 1
- -----------------------------------------------------------------------------------------------------------------
The geographic distribution of gross premiums written for the three months ended
June 30, 2001 and 2000 were as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------------
% %
North America 47 49
Europe 33 34
Asia, Australia, New Zealand 15 14
Latin America and the Caribbean 4 2
Africa 1 1
- -----------------------------------------------------------------------------------------------------------------
The growth in the percentage of gross premiums written in Europe is fully
offset by a decrease of the relative value of the Euro and other European
currencies against the U.S. dollar while the growth in the percentage of gross
premiums written in North America is fully offset by the sale of PartnerRe Life
U.S. and timing differences in the recognition of renewals.
Losses and loss expenses incurred (and the corresponding ratios as a
percentage of net premiums earned) and Life policy benefits incurred for the
three months ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------------------------------------------------------------------
Losses and loss expenses (Non-life only) $ 243.0 $ 195.8
- --------------------------------------------------------------------------------------------------------------
Loss ratio (Non-life only) 69.9% 68.7%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Life policy benefits $ 42.9 $ 68.3
- --------------------------------------------------------------------------------------------------------------
The increase in losses and loss expenses for the three months ended
June 30, 2001 compared to the same period last year resulted primarily from the
growth in the business earned by the Company. As previously discussed, the three
months ended June 30, 2001 were impacted by the high frequency of storms in the
U.S. while the equivalent period of 2000 was impacted by a high frequency of
non-catastrophe claims as well as additional reserves for the late 1999 European
Storms. The decrease in life policy benefits resulted primarily from the sale of
PartnerRe Life U.S. effective July 1, 2000.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Underwriting expenses include acquisition costs (primarily brokerage,
commissions, excise taxes and other costs directly related to underwriting
reinsurance contracts) and other operating expenses. Underwriting expenses (and
the corresponding expense ratios for the Non-life business) for the three-month
periods ended June 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------------------------------------
Acquisition costs $ 85.1 $ 88.5
Other operating expenses 29.4 22.4
- --------------------------------------------------------------------------------
Total underwriting expenses $ 114.5 $ 110.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acquisition expense ratio 22.9% 25.4%
Other operating expense ratio 7.5 6.7
- --------------------------------------------------------------------------------
Expense ratio (Non-life only) 30.4% 32.1%
- --------------------------------------------------------------------------------
The increase in the acquisition costs for the three months ended June
30, 2001 compared to the three months ended June 30, 2000 resulted primarily
from the growth in the business earned and was mitigated by the sale of
PartnerRe Life U.S. and a shift in the mix of business from proportional to
non-proportional business which has a lower acquisition expense ratio. The
decrease in the Non-life acquisition expense ratio was due, primarily, to the
shift from proportional business to non-proportional business. The increase in
other operating expenses and the other operating expense ratio for the three
months ended June 30, 2001 compared to the three months ended June 30, 2000
resulted primarily from investments in the infrastructure and information
systems to support the Company's growth.
Net foreign exchange gains (losses) amounted to $3.1 million and ($0.1)
million for the three months ended June 30, 2001 and 2000, respectively. Foreign
exchange gains and losses are a function of the relative value between the U.S.
dollar and other currencies in which the Company does business. To the extent
the Company employs derivatives designated as "fair value hedges" or as "no
hedge designation", the Company records foreign exchange gains and losses on the
underlying hedged assets or liabilities and the related derivative instruments
in net realized investment gains (losses).
Investment Results
Net investment income and net realized investment gains (losses) for
the three-month periods ended June 30, 2001 and 2000 were as follows ($
millions):
2001 2000
- --------------------------------------------------------------------------------
Net investment income $ 60.8 $ 78.9
Net realized investment gains (losses) 5.5 (7.7)
- --------------------------------------------------------------------------------
Net investment income for the three months ended June 30, 2001
decreased by 22.9% compared to the 2000 period primarily due to the sale of
PartnerRe Life U.S and the negative influence of the weakening of the Euro
against the US dollar. This decrease was partially offset by the investment
income earned on the proceeds of sale. Net realized investment gains (losses) on
sales of investments are a function of the timing of disposition of available
for sale fixed maturities and equity securities, changes in market values of
trading securities and the net ineffectiveness of the Company's hedging activity
discussed above.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Currency
The Company's functional currency is the U.S. dollar. The Company has
exposure to foreign currency risk due to its ownership of PartnerRe SA whose
functional currency is the Euro, and due to PartnerRe SA and Partner Reinsurance
Company (including the Swiss branch) underwriting reinsurance exposures and
collecting premiums in currencies other than the U.S. dollar and holding certain
net assets in such currencies. The Company's most significant foreign currency
exposure is to the Euro. The Euro decreased in value by 11% in the first six
months of 2001 (from .96 to .85 U.S. dollar per Euro) thereby increasing the
aggregate currency translation loss of $45.7 million at December 31, 2000 to
$69.1 million at June 30, 2001.
The value of the U.S. dollar strengthened approximately 11% against the
Euro, 10% against the Swiss Franc, 5% against the British Pound and 8% against
the Japanese Yen in the first six months of 2001 and, since a significant
proportion of the Company's assets and liabilities is expressed in these
currencies, there was a corresponding reduction in the value of these assets and
liabilities expressed in U.S. dollar terms.
Financial Condition and Liquidity and Capital Resources
Shareholders' Equity and Capital Management
Shareholders' equity at June 30, 2001 was $2,079.4 million compared to
$2,086.0 million at December 31, 2000. The major factors influencing the level
of shareholders' equity in the six-month period ended June 30, 2001 were:
o net income of $149.1 million;
o dividend payments of $37.1 million;
o a net increase in common shares and additional paid-in capital
of $1.6 million, due to the issue of common shares;
o the $23.4 million negative effect of the currency translation
adjustment resulting from the strengthening of the U.S. dollar
against the Euro; and
o a $96.9 million decrease in net unrealized gains on
investments, net of deferred taxes, recorded in equity.
The Company continuously evaluates its capital needs to support its
reinsurance and investment operations. During the six-month period ended June
30, 2001, the Company did not repurchase common shares. As of June 30, 2001,
approximately 4.3 million shares remain authorized for repurchase under the
Company's current repurchase program.
Assets
At June 30, 2001, total assets were $6,204.6 million compared to total
assets of $6,091.3 million at December 31, 2000. Total invested assets,
including cash and cash equivalents, were $3,743.0 million as at June 30, 2001
compared to $3,882.1 million at December 31, 2000. The major factors influencing
the change in cash and invested assets in the six-month period ended June 30,
2001 were:
o net cash provided by operating activities of $99.9 million;
o decrease in unsettled security trades of $75.1 million;
o dividend payments totaling $37.1 million;
o net cash received for the issue of common shares aggregating
$1.6 million;
o decrease in net unrealized gains on investments of $47.8
million, net of realized gains or losses on securities sold;
and
o the negative impact of the stronger U.S. dollar relative to
the Euro as it relates to the conversion of PartnerRe SA's
investments and cash balances into U.S. dollars.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
At June 30, 2001, fixed maturities, short-term investments and cash and
cash equivalents had an average expected duration of 3.8 years compared to 3.7
as at December 31, 2000. As at June 30, 2001, approximately 90% of the fixed
income portfolio was rated investment grade (BBB- or higher), compared to 93% as
at December 31, 2000.
The Company's investment strategy is unchanged from previous years,
although the continuing evolution of the Company in the last four years into a
global multi-line reinsurer has affected the construction and composition of the
investment portfolio. The Company's investment philosophy distinguishes between
those assets that are matched against existing liabilities ("liability funds")
and those that are part of shareholders' equity ("capital funds"). Liability
funds are invested in investment grade fixed income securities and are generally
matched in currency and duration to the estimated liabilities in a way that
generally seeks to immunize liabilities against changes in the general level of
interest rates or the relative valuation of currencies. Capital funds are
available for investment in a broadly diversified portfolio, which includes
investments in common stocks, preferred stocks, convertible securities, high
yield debt and other asset classes that offer potentially higher returns.
At June 30, 2001, fixed maturities, short-term investments and cash and
cash equivalents had an average yield to maturity at market of 6.1% compared to
6.2% as at December 31, 2000. The decrease in average yield to maturity was
primarily due to a downward shift of the yield curve both in the U.S. and in
most developed markets. However, the Company has slightly repositioned its
portfolio during the first six months of 2001 to reduce cash, "AAA" and equity
securities and increased "A", "BBB" and less-than-investment-grade securities,
which has mitigated the decrease in the yield to maturity at market.
Liabilities
The Company has recorded Non-life reserves for unpaid losses and loss
expenses of $2,337.7 million and $2,386.0 million at June 30, 2001 and December
31, 2000, respectively. Policy benefits reserves for Life and annuity contracts
were $704.7 million and $673.1 million at June 30, 2001 and December 31, 2000,
respectively. The decrease in the value of unpaid losses and loss expenses and
the increase in the value of policy benefits for Life and annuity contracts as
at June 30, 2001 compared to December 31, 2000, resulted primarily from the
significant influence of exchange rates as discussed above and new product
introductions, respectively.
The Company's reserves for unpaid losses and loss expenses include an
estimate for its net ultimate liability for asbestos and environmental claims.
Ultimate values for such claims cannot be estimated using traditional reserving
techniques. There are significant uncertainties in estimating the amount of the
Company's potential losses for these claims and these uncertainties are not
likely to be resolved in the near future. The Company actively evaluates
potential exposure to asbestos and environmental claims and establishes
additional reserves as appropriate. The Company believes that it has made a
reasonable provision for these exposures and is unaware of any specific issues
that would materially affect its estimates. Furthermore, the Company has a
guaranty from the AGF Group relating to certain of these exposures whereby AGF
Group has agreed to guarantee adverse loss development for pre-1992 business
written by certain companies which were part of the AGF Group and are currently
part of PartnerRe SA. This guaranty expires on December 31, 2001.
Liquidity
Cash flow from operations for the six months ended June 30, 2001
increased to positive $99.9 million from negative $16.1 million in the same
period in 2000. This increase is primarily attributable to payments related to
large catastrophe losses, particularly on the European Storms, incurred in the
first half of 2000.
The Company relies primarily on cash dividends from Partner Reinsurance
Company and PartnerRe SA, including its subsidiary, PartnerRe U.S. (collectively
the "reinsurance subsidiaries") to pay its operating expenses. Although the
payment of dividends by the reinsurance subsidiaries to the Company is limited
under Bermuda and French law and certain insurance statutes of various U.S.
states in which PartnerRe U.S. is licensed to do business, there are presently
no significant restrictions on the payment of dividends by the reinsurance
subsidiaries.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Forward-Looking Statements
Certain statements contained in this document, including Management's Discussion
and Analysis, may be considered forward-looking statements as defined in section
27A of the United States Securities Act of 1933 and section 21E of the United
States Securities Exchange Act of 1934. Forward-looking statements are made
based upon Management's expectations and beliefs concerning future developments
and their potential effect on the Company. Many factors could cause the
Company's actual results to differ materially from those in the forward-looking
statements, including the following: (i) the occurrence of catastrophic events
with a frequency or severity exceeding the Company's expectations; (ii) a
decrease in the level of demand for reinsurance and or an increase in the supply
of reinsurance capacity; (iii) increased competitive pressures, including the
consolidation and increased globalization of reinsurance providers; (iv) actual
losses and loss expenses exceeding the Company's loss reserves, which is
necessarily based on actuarial and statistical projections of ultimate losses;
(v) changing rates of inflation and other economic conditions; (vi) losses due
to foreign currency exchange rate fluctuations; (vii) changes in the legal or
regulatory environments in which the Company operates; and (viii) integration
risk related to the Company's acquisitions. The foregoing review of important
factors should not be construed as exhaustive and should be read in conjunction
with other cautionary statements that are included herein. The Company
undertakes no obligation to release publicly the results of any future revisions
it may make to forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual General Meeting of shareholders of the Company was held
on May 22, 2001. The shareholders re-elected the existing Class II Directors,
David T. McLaughlin and Lucio Stanca, and newly elected a director to the same
class (John A. Rollwagen) to hold office until the Annual General Meeting of
shareholders in the year 2004 or until their successors are elected or
appointed.
The number of votes cast For and Withheld for each of
the above is set forth below:
For Withheld
---------------------- -----------------------
David T. McLaughlin 47,847,601 8,551
Lucio Stanca 47,847,601 8,551
John A. Rollwagen 47,847,601 8,551
The terms of office of the Company's Class I Directors (Walter B. Kielholz, Jan
Hendrik Holsboer and Robert M. Baylis), and its Class III Directors (Patrick A.
Thiele and Robert B. Horton), continue until the Company's 2003 and 2002 Annual
General Meetings, respectively.
The shareholders voted in favor of increasing the maximum number of Directors
from eight to ten by a vote of 44,603,290 For, 3,247,217 Against, 5,644
Abstaining and 1 Non-vote.
The shareholders also re-appointed Deloitte & Touche to serve as the Company's
auditors until the 2002 Annual General Meeting of shareholders by a vote of
47,764,874 For, 66,732 Against, 24,545 Abstaining and 1 Non-vote.
ITEM 5. OTHER INFORMATION.
None.
24
PART II - OTHER INFORMATION
(continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - The following exhibits are filed as part of this report
on Form 10-Q:
3.1 Amended Memorandum of Association.*
3.2 Amended and Restated Bye-laws. *
4.1 Specimen Common Share Certificate. **
4.2 Specimen Class A Warrant.***
4.3 Specimen Class B Warrant.***
4.4 Specimen Share Certificate for the 8% Series A Cumulative
Preferred Shares.****
4.5 Certificate of Designation, Preferences and Rights of 8%
Series A Cumulative Preferred Shares.****
10.1 Employment Agreement between PartnerRe Ltd. and Mark Pabst,
dated as of July 16, 2001.
11.1 Statements Regarding Computation of Net Income Per Common and
Common Equivalent Share.
15 Letter Regarding Unaudited Interim Financial Information.
23.1 Consent of Deloitte & Touche (included in 15).
(b) Reports on Form 8-K.
None.
- ------------
* Incorporated by reference to the Registration Statement on Form F-3 of the
Company, as filed with the Securities and Exchange Commission on June 20,
1997 (Registration No. 333-7094).
** Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission on March 26, 1997.
*** Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission on March 30, 1999.
**** Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company, as filed with the Securities and Exchange Commission on August
14, 1997.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PartnerRe Ltd.
--------------------------------
(Registrant)
Date: August 6, 2001 By: /s/ Patrick A. Thiele
---------------------------- ----------------------------
Name: Patrick A. Thiele
Title: President & Chief
Executive Officer
Date: August 6, 2001 By: /s/ Albert A. Benchimol
---------------------------- --------------------------------
Name: Albert A. Benchimol
Title: Executive Vice-President &
Chief Financial Officer
(Chief Accounting Officer)
26
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
3.1 Amended Memorandum of Association. *
3.2 Amended and Restated Bye-laws.*
4.1 Specimen Common Share Certificate. **
4.2 Specimen Class A Warrant.***
4.3 Specimen Class B Warrant.***
4.4 Specimen Share Certificate for the 8% Series A Cumulative Preferred
Shares.****
4.5 Certificate of Designation, Preferences and Rights of 8% Series A
Cumulative Preferred Shares.****
10.1 Employment Agreement between PartnerRe Ltd. and Mark Pabst, dated July 16,
2001.
11.1 Statements Regarding Computation of Net Income Per Common and Common
Equivalent Share.
15 Letter Regarding Unaudited Interim Financial Information.
23.1 Consent of Deloitte & Touche (included in 15).
- ---------------
* Incorporated by reference to the Registration Statement on Form F-3 of the
Company, as filed with the Securities and Exchange Commission on June 20,
1997 (Registration No. 333-7094).
** Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission on March 26, 1997.
*** Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission on March 30, 1999.
**** Incorporated by reference to the Quarterly Report on Form 10-Q of the
Company, as filed with the Securities and Exchange Commission on August
14, 1997.
27