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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
September 30, 2001
Commission file number 1-14536
PartnerRe Ltd.
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(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.)
96 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 _____
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The number of the Registrant's common shares (par value $1.00 per share)
outstanding as of November 6, 2001 was 50,134,380.
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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
September 30, 2001 (unaudited) and December 31, 2000 (audited)........................ 4
Unaudited Consolidated Statements of Operations and Comprehensive Income
Three and Nine Months Ended September 30, 2001 and 2000 .............................. 5
Unaudited Consolidated Statements of Shareholders' Equity
Nine Months Ended September 30, 2001 and 2000......................................... 6
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 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......................................... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk (see Part I, Item 2)
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings........................................................................ 25
ITEM 2. Changes in Securities.................................................................... 25
ITEM 3. Defaults upon Senior Securities.......................................................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 25
ITEM 5. Other Information........................................................................ 25
ITEM 6. Exhibits and Reports on Form 8-K......................................................... 26
Signatures ....................................................................................... 27
Exhibit Index .................................................................................... 28
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 September 30, 2001 and the related consolidated
statements of operations and comprehensive income for the three and nine-month
periods ended September 30, 2001 and 2000, and shareholders' equity and cash
flows for the nine-month periods ended September 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
November 6, 2001
3
PartnerRe Ltd.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except share data)
September 30, December 31,
2001 2000
(Unaudited) (Audited)
Assets
Investments and cash
Fixed maturities, at fair value
(amortized cost: 2001, $3,004,376; 2000, $3,047,090) $ 3,071,177 $ 3,053,790
Short-term investments, at fair value
(amortized cost: 2001, $18,638; 2000, $24,972) 18,693 24,853
Equities, at fair value
(cost: 2001, $425,452; 2000, $ 327,965) 396,518 354,801
Cash and cash equivalents, at fair value, which approximates
amortized cost 446,997 434,033
Other invested assets 20,640 14,594
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Total investments and cash 3,954,025 3,882,071
Accrued investment income 66,206 54,876
Reinsurance balances receivable (current and future installments) 648,956 440,550
Reinsurance recoverable on paid and unpaid losses 280,274 249,569
Funds held by reinsured companies 672,228 653,260
Deferred acquisition costs 276,869 245,981
Taxes recoverable 68,538 22,996
Goodwill 436,028 455,554
Other 96,513 86,437
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Total Assets $ 6,499,637 $ 6,091,294
============= =============
Liabilities
Unpaid losses and loss expenses $ 2,931,486 $ 2,386,032
Policy benefits for life and annuity contracts 743,375 673,096
Unearned premiums 627,507 424,487
Funds held under reinsurance treaties 38,755 26,924
Long term debt 220,000 220,000
Payable for securities purchased 109,819 201,881
Accounts payable, accrued expenses and other 69,687 72,868
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Total Liabilities 4,740,629 4,005,288
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Shareholders' Equity
Common shares (issued and outstanding: 2001, 50,112,268;
2000, 50,113,311) 50,112 50,113
Preferred shares (issued and outstanding: 2001, 10,000,000;
2000, 10,000,000) 10,000 10,000
Additional paid-in capital 892,227 892,310
Deferred compensation (431) (534)
Accumulated other comprehensive (loss) gain:
Net unrealized gains on investments, net of tax 33,737 107,511
Currency translation adjustment (53,410) (45,710)
Retained earnings 826,773 1,072,316
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Total Shareholders' Equity 1,759,008 2,086,006
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Total Liabilities and Shareholders' Equity $ 6,499,637 $ 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 nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
Revenues
Gross premiums written $ 412,209 $ 317,591 $ 1,449,293 $ 1,141,437
=========== ========== ============ ============
Net premiums written $ 394,249 $ 304,732 $ 1,402,971 $ 1,090,235
Decrease (increase) in unearned premiums 21,221 8,606 (211,807) (107,269)
----------- ---------- ------------ ------------
Net premiums earned 415,470 313,338 1,191,164 982,966
Net investment income 60,276 62,085 181,052 218,512
Net realized investment (losses) gains (389) (6,471) 14,179 (51,891)
Other income 27 191 105 198
----------- ---------- ------------ ------------
Total Revenues 475,384 369,143 1,386,500 1,149,785
----------- ---------- ------------ ------------
Expenses
Losses and loss expenses and life policy benefits 710,713 222,125 1,268,967 733,602
Acquisition costs 96,840 73,896 268,171 230,367
Other operating expenses 29,355 23,187 86,407 70,130
Interest expense 3,267 3,267 9,694 9,764
Amortization of goodwill 6,508 6,509 19,526 19,526
Net foreign exchange gains (8,223) (3,301) (8,437) (3,467)
----------- ---------- ------------ ------------
Total Expenses 838,460 325,683 1,644,328 1,059,922
----------- ---------- ------------ ------------
(Loss) income before taxes (363,076) 43,460 (257,828) 89,863
Income tax benefit (24,545) (7,420) (40,585) (35,854)
----------- ---------- ------------ ------------
Net (loss) income before cumulative effect of adopting
new accounting standard, net of tax (338,531) 50,880 (217,243) 125,717
Cumulative effect of adopting new accounting
standard, net of tax -- -- 27,812 --
----------- ---------- ------------ ------------
Net (loss) income $ (338,531) $ 50,880 $ (189,431) $ 125,717
=========== ========== ============ ============
Preferred dividends $ 5,000 $ 5,000 $ 15,000 $ 15,000
=========== ========== ============ ============
Net (loss) income available to common shareholders $ (343,531) $ 45,880 $ (204,431) $ 110,717
=========== ========== ============ ============
Calculation of comprehensive (loss) income, net of tax:
Net (loss) income as reported $ (338,531) $ 50,880 $ (189,431) $ 125,717
Change in net unrealized gains or losses on investments,
net of tax 23,112 59,258 (73,774) 113,010
Change in currency translation adjustment 15,727 (24,555) (7,700) (40,169)
----------- ---------- ------------ ------------
Comprehensive (loss) income $ (299,692) $ 85,583 $ (270,905) $ 198,558
=========== ========== ============ ============
Per share data:
Earnings per common share:
Basic operating (loss) earnings $ (6.83) $ 1.09 $ (4.78) $ 3.34
Net realized investment (losses) gains, net of tax (0.02) (0.16) 0.15 (1.09)
----------- ---------- ------------ ------------
Basic net (loss) income before cumulative effect of
adopting new accounting standard (6.85) 0.93 (4.63) 2.25
Cumulative effect of adopting new accounting standard -- -- 0.55 --
----------- ---------- ------------ ------------
Basic net (loss) income $ (6.85) $ 0.93 $ (4.08) $ 2.25
=========== ========== ============ ============
Weighted average number of common shares
outstanding 50,157.7 49,229.l 50,137.6 49,194.0
Diluted operating (loss) earnings $ (6.83) $ 1.06 $ (4.78) $ 3.26
Net realized investment (losses) gains, net of tax (0.02) (0.16) 0.15 (1.07)
----------- ---------- ------------ ------------
Diluted net (loss) income before cumulative effect of
adopting new accounting standard (6.85) 0.90 (4.63) 2.19
Cumulative effect of adopting new accounting standard -- -- 0.55 --
----------- ---------- ------------ ------------
Diluted net (loss) income $ (6.85) $ 0.90 $ (4.08) $ 2.19
=========== ========== ============ ============
Weighted average number of common and
common equivalent shares outstanding 50,157.7 50,784.3 50,137.6 50,530.9
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 (136) -- (4,177) -- -- -- -- (4,313)
Issue of common shares 112 2,368 2,480
Net unrealized gains for period -- -- -- -- 113,010 -- -- 113,010
Currency translation adjustment -- -- -- -- -- (40,169) -- (40,169)
Net income -- -- -- -- -- -- 125,717 125,717
Dividends on common shares -- -- -- -- -- -- (38,362) (38,362)
Dividends on preferred shares -- -- -- -- -- -- (15,000) (15,000)
------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $ 49,241 $ 10,000 $ 877,794 $ -- $ 36,885 $ (63,433) $ 1,073,587 $ 1,984,074
================================================================================================
Balance at December 31, 2000 $ 50,113 $ 10,000 $ 892,310 $ (534) $ 107,511 $ (45,710) $ 1,072,316 $ 2,086,006
Repurchase of common shares
and warrants (52) -- (1,706) -- -- -- -- (1,758)
Issue of common shares 51 -- 1,623 -- -- -- -- 1,674
Amortization of deferred
compensation -- -- -- 103 -- -- -- 103
Net unrealized losses for period -- -- -- -- (73,774) -- -- (73,774)
Currency translation adjustment -- -- -- -- -- (7,700) -- (7,700)
Net loss -- -- -- -- -- -- (189,431) (189,431)
Dividends on common shares -- -- -- -- -- -- (41,112) (41,112)
Dividends on preferred shares -- -- -- -- -- -- (15,000) (15,000)
------------------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 50,112 $ 10,000 $ 892,227 $ (431) $ 33,737 $ (53,410) $ 826,773 $ 1,759,008
================================================================================================
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 nine For the nine
months ended months ended
September 30, September 30,
2001 2000
Cash Flows From Operating Activities
Net (loss) income $ (189,431) $ 125,717
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Accrual of discount on investments, net of amortization of premium (14,136) (10,911)
Amortization of goodwill 19,526 19,526
Net realized investment (gains) losses (14,179) 51,891
Cumulative effect of adopting new accounting standard (27,812) -
Changes in:
Unearned premiums 211,807 101,547
Reinsurance balances receivable (266,466) (70,940)
Unpaid losses and loss expenses including life policy benefits 667,750 281,848
Income taxes payable (44,871) (1,132)
Other changes in assets and liabilities (65,106) (522,045)
Other items, net 307 (6,339)
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Net cash provided by (used in) operating activities 277,389 (30,838)
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Cash Flows From Investing Activities
Sales of fixed maturities 2,203,138 3,773,164
Redemptions of fixed maturities 95,883 141,147
Purchases of fixed maturities (2,402,714) (3,778,731)
Net changes in short term investments (1,960) (23,400)
Sales of equities 120,021 -
Purchases of equities (225,495) (118,781)
Other 6,053 78,122
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Net cash (used in) provided by investing activities (205,074) 71,521
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Cash Flows from Financing Activities
Cash dividends paid to shareholders (56,116) (53,362)
Repurchase of common shares and warrants (1,758) (3,287)
Issuance of common shares 1,674 1,454
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Net cash used in financing activities (56,200) (55,195)
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Effect of exchange rate changes on cash (3,151) (6,342)
Increase (decrease) in cash and cash equivalents 12,964 (20,854)
Cash and cash equivalents - beginning of period 434,033 438,183
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Cash and cash equivalents - end of period $ 446,997 $ 417,329
============= =============
See Accompanying Notes to Consolidated Financial Statements
7
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
1. 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 but are not limited to 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 September 30, 2001 and its results of operations for the
three and nine-month periods then ended and shareholders' equity and cash flows
for the nine 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.
8
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
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.
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 nine months ended
September 30, 2001, the Company recorded net losses of $0.4 million and $1.2
million, respectively, in "net realized investment (losses) gains" 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
nine-month periods ended September 30, 2001 and 2000 ($ millions):
10
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Property (including Catastrophe)
Net premiums written $ 135.4 $ 106.8 $ 528.8 $ 392.2
Net premiums earned 152.1 112.1 434.2 334.6
Technical ratio/(1)/ 271.6% 67.2% 146.4% 79.1%
Casualty (including Automobile)
Net premiums written $ 117.7 $ 100.2 $ 414.8 $ 314.1
Net premiums earned 121.2 106.3 340.2 288.2
Technical ratio/(1)/ 131.8% 107.6% 110.8% 111.7%
Specialty (Agriculture, Marine,
Aviation/Space, Credit/Surety,
Miscellaneous)
Net premiums written $ 108.0 $ 80.4 $ 339.4 $ 240.3
Net premiums earned 108.1 76.5 298.7 218.1
Technical ratio/(1)/ 181.3% 108.3% 130.2% 89.0%
- ------------------------------------------------------------------------------------------------------------------------
Total Non-life
Net premiums written $ 361.1 $ 287.4 $ 1,283.0 $ 946.6
Net premiums earned 381.4 294.9 1,073.1 840.9
Technical ratio/(1)/ 201.6% 92.4% 130.6% 92.8%
- ------------------------------------------------------------------------------------------------------------------------
Life, Annuity & Health
Net premiums written $ 33.1 $ 17.3 $ 120.0 $ 143.7
Net premiums earned 34.0 18.4 118.0 142.1
Technical result/(2)/ $ (4.5) $ (5.0) $ (17.9) $ (41.2)
Allocated investment income 7.3 9.8 20.8 65.6
- ------------------------------------------------------------------------------------------------------------------------
Net technical result $ 2.8 $ 4.8 $ 2.9 $ 24.4
- ------------------------------------------------------------------------------------------------------------------------
/(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 nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
Reconciliation to Net (Loss) Income:
Technical result $ (392.1) $ 17.3 $ (346.0) $ 19.0
Other operating expenses (29.4) (23.2) (86.4) (70.1)
Net investment income 60.3 62.1 181.1 218.5
Other income - 0.2 0.1 0.2
Interest expense (3.3) (3.3) (9.7) (9.8)
Amortization of goodwill (6.5) (6.5) (19.5) (19.5)
Net foreign exchange gains 8.2 3.3 8.4 3.4
Income tax benefits on operating
income 25.0 8.7 47.3 37.8
- -----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) income (337.8) 58.6 (224.7) 179.5
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized investment gains
(losses), net of taxes (0.7) (7.7) 7.5 (53.8)
Cumulative effect of adopting new
accounting standard, net of tax - - 27.8 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (338.5) $ 50.9 $ (189.4) $ 125.7
- -----------------------------------------------------------------------------------------------------------------------------------
5. Credit Agreements
On July 27, 2001, the Company increased its unsecured credit facilities
by $100 million bringing the aggregate unsecured committed credit facilities to
$350 million. The change in the credit facilities was effected in anticipation
of increased letter of credit utilization in support of new business
opportunities.
6. Ceded Reinsurance
On September 21, 2001, the Company entered into a final settlement of
the guaranty agreement with the Assurances Generales de France ("AGF") which
covered adverse loss development for pre-1992 business written by certain
companies that were part of the AGF group and which are currently part of
PartnerRe S.A. The guaranty agreement was due to expire on December 31, 2001.
After review of the liabilities covered by the guaranty agreement, the Company
concluded that no change was necessary to the reserves previously established
for those liabilities. There can be no assurances that the reserves established
by the Company will not be adversely affected by development of other latent
exposures, and further there can be no assurances that the reserves established
by the Company will be adequate. The Company believes that it has previously
made a reasonable provision for these exposures and is unaware of any specific
issues which would materially affect its loss and loss expense estimates.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of the consolidated financial
condition at September 30, 2001 and results of operations of PartnerRe Ltd. (the
"Company") for the three and nine-month periods ended September 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 nine-month periods ended September 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 but are not limited to 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, including 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.
13
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 industy consolidation have begun to have an effect on pricing and
available capacity within the industry. Although Management had observed signs
of improved pricing and reinsurance terms and conditions in renewals
negotiations in the first nine months of 2001, it continued to believe that
further improvement would be required in certain lines and markets for the
industry as a whole to return to acceptable profitability. The terrorist attack
of September 11, 2001 has generated the largest loss event in the history of the
industry and has led to a significant reduction of capacity. A number of
competitors have withdrawn from the marketplace, which further reduced available
capacity. This reduction in capacity is occurring at a time where there is
increased demand for insurance and reinsurance protection. As a result of the
foregoing, management expects that the pace of improvements in terms and
conditions will accelerate significantly. Nevertheless not all lines of business
or markets will offer opportunities for profitable business. It is also likely
that new entrants or the injection of new capital into the industry may create
new competitors. 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 Nine Months ended September 30, 2001 and 2000
In accordance with Statement of Financial Accounting Standard No. 128, the
anti-dilutive effect of the exercise of in-the-money options and warrants should
not be shown. This procedure is followed in the presentation of the Company's
financial statements. However, Management believes that to facilitate comparison
of results of current and prior periods, including the per share impact of the
September 11 terrorist attack, the effects of stock options and warrants should
be included in all periods.
The following table shows diluted results per share for all periods as if
in-the-money options and warrants were exercised (including 2001 in which the
assumed exercise is anti-dilutive). In a press release dated November 6, 2001,
Management also referred to the following per share amounts as results on a
fully diluted basis. Amounts are shown in $ million, except per share data:
2001 2000
----------------------------------------------------------------------------------------------------------------
Operating result available to common shareholders $ (239.7) $ 164.5
Net realized investment gains (losses), net of tax 7.5 (53.8)
----------------------------------------------------------------------------------------------------------------
Net result available to common shareholders before cumulative
effect of adopting new accounting standard (232.2) 110.7
----------------------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax 27.8 -
----------------------------------------------------------------------------------------------------------------
Net result available to common shareholders $ (204.4) $ 110.7
----------------------------------------------------------------------------------------------------------------
Impact of September 11 terrorist attack, net of tax $ (382.0) $ -
----------------------------------------------------------------------------------------------------------------
Operating earnings available to common shareholders adjusted for September 11 142.3 -
----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders adjusted for September 11 177.6 -
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Operating result per common share assuming effect of anti-dilutive
securities in 2001 (4.65) 3.26
Net realized investment gains (losses) per common share, net of tax 0.15 (1.07)
----------------------------------------------------------------------------------------------------------------
Net result per common share before cumulative
effect of adopting new accounting standard (4.50) 2.19
----------------------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax 0.54 -
----------------------------------------------------------------------------------------------------------------
Net result per common share $ (3.96) $ 2.19
----------------------------------------------------------------------------------------------------------------
Impact of September 11 terrorist attack, net of tax $ (7.41) -
----------------------------------------------------------------------------------------------------------------
Operating earnings per common share adjusted for September 11 $ 2.76 -
----------------------------------------------------------------------------------------------------------------
Net income per common share adjusted for September 11 3.45 -
----------------------------------------------------------------------------------------------------------------
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Operating earnings available to common shareholders for the nine months
ended September 30, 2001 decreased by 246% compared to the nine months ended
September 30, 2000, and net income available to common shareholders before the
cumulative effect of adopting a new accounting standard for the nine months
ended September 30, 2001 decreased 310% compared to the nine months ended
September 30, 2000. Operating earnings available to common shareholders for the
2001 period were significantly adversely impacted by the attack of September 11.
The Company incurred net losses relating to the terrorist attack of $400
million, $382 million after tax. In addition the Company's results were impacted
by a high frequency of large events not related to the September 11 attack.
While the first nine months of 2000 were free of major catastrophe losses, the
operating results of the Company were impacted in that period by additional
reserves for the late 1999 European Storms.
Net realized investment gains and losses on sales of investments resulted
from the timing of disposition of available for sale fixed maturities and equity
securities as part of the ongoing management of the investment portfolio within
the investment guidelines and objectives set out by Management.
Reinsurance Operations - Underwriting Results
Non-life multi-line business represents the majority of the business
written by the Company. The underwriting results of the Life business are shown
separately in Note 4 to the Consolidated Financial Statements included in this
report. The following analysis includes Life business unless otherwise noted.
Gross and net premiums written and net premiums earned for the nine months
ended September 30, 2001 and 2000 were as follows ($ millions):
2001 2000
-----------------------------------------------------------------------
Gross premiums written $ 1,449.3 $ 1,141.4
Net premiums written 1,403.0 1,090.2
Net premiums earned 1,191.2 983.0
-----------------------------------------------------------------------
The increases in gross and net premiums written were primarily related to
the combination of improved pricing conditions and further penetration 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. Written premiums were
also impacted by the recognition of reinstatement premiums on certain treaties
that were impacted by the attack of September 11. Reinstatement premiums totaled
$10 million after allowing for the possibility of uncollectible amounts. 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 variable 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 are
one to two years.
15
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 nine
months ended September 30, 2001 and 2000 was as follows:
2001 2000
---------------------------------------------------------------------
% %
Catastrophe 15 13
Property 23 23
Casualty 15 13
Automobile 15 16
Aviation/Space 5 3
Marine 2 2
Agriculture 7 7
Credit/Surety 6 7
Life 8 13
Other 4 3
---------------------------------------------------------------------
The distribution of gross premiums written is affected by seasonal
patterns. In 2001, the Company has begun focusing on increasing its casualty
business in selected markets, principally in the U.S., 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 nine months ended September 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 nine months ended September 30, 2001 and
2000 was as follows:
2001 2000
---------------------------------------------------------------------
% %
Non-life
Proportional 48 52
Non-Proportional 35 26
Facultative 8 8
Life
Proportional 8 13
Non-Proportional 1 1
---------------------------------------------------------------------
The geographic distribution of gross premiums written for the nine months
ended September 30, 2001 and 2000 was as follows:
2001 2000
---------------------------------------------------------------------
% %
North America 43 48
Europe 40 38
Asia, Australia, New Zealand 10 10
Latin America and the Caribbean 6 3
Africa 1 1
---------------------------------------------------------------------
This above distribution shows that although premiums have grown in every
area, the growth was more pronounced in Europe and Latin America and the
Caribbean. Growth in the percentage of gross premiums written in Europe is
almost fully offset by a decrease of the relative value of the Euro and other
European currencies against the U.S. dollar.
16
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
nine months ended September 30, 2001 and 2000 were as follows ($ millions):
2001 2000
------------------------------------------------------------------------
Losses and loss expenses (Non-life only) $ 1,153.8 $ 578.2
------------------------------------------------------------------------
Loss ratio (Non-life only) 107.5 68.8%
------------------------------------------------------------------------
------------------------------------------------------------------------
Life policy benefits $ 115.2 $ 155.4
------------------------------------------------------------------------
The increase in losses and loss expenses for the first nine months of
2001 compared to the first nine months of 2000 resulted primarily from growth in
the business earned by the Company and the attack of September 11. The Company
incurred net losses relating to the terrorist attack of $400 million, $382
million after tax. In addition the Company's results were impacted by a high
frequency of large events not related to the September 11 attack, including
Tropical Storm Nari, a chemical plant explosion in Toulouse, France, a large
surety loss and an oil refinery fire. These events resulted in incremental
losses of $25 million, pre tax, for the quarter. In the first six months of
2001, the Company's results were impacted by the high frequency of storms in the
U.S., including Tropical Storm Allison, which generated losses of approximately
$10 million, before tax, above expected levels. In addition, the Company was
impacted by incremental claims of approximately $5 million, before tax, in life
reinsurance, primarily due to a late notice of loss for a contract that was
previously cancelled. While the first nine months of 2000 were free of major
catastrophe losses, the operating results of the Company were impacted by
additional reserves for the late 1999 European Storms. The decrease in life
policy benefits resulted primarily from the sale of PartnerRe Life U.S.
effective July 1, 2000.
Underwriting expenses include acquisition costs (primarily brokerage,
commissions, excise taxes and other costs directly related to underwriting
reinsurance contracts) and other operating expenses. Underwriting expenses (and
the corresponding expense ratios for the Non-life business) for the nine-month
periods ended September 30, 2001 and 2000 were as follows ($ millions):
2001 2000
------------------------------------------------------------------------
Acquisition costs $ 268.2 $ 230.4
Other operating expenses 86.4 70.1
------------------------------------------------------------------------
Total underwriting expenses $ 354.6 $ 300.5
------------------------------------------------------------------------
------------------------------------------------------------------------
Acquisition expense ratio 23.1 % 24.1 %
Other operating expense ratio 7.3 7.2
------------------------------------------------------------------------
Expense ratio (Non-life only) 30.4 % 31.3 %
------------------------------------------------------------------------
The increase in the acquisition costs for the nine months ended September
30, 2001 compared to the nine months ended September 30, 2000 resulted primarily
from growth in the Company's 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 nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000 resulted primarily from investments in infrastructure and information
systems to support the Company's growth.
Net foreign exchange gains amounted to $8.4 million for the nine-month
period ended September 30, 2001 compared to $3.5 million in the comparable
period of 2000. Foreign exchange gains and losses are a function of the relative
value between the U.S. dollar and other currencies in which the Company does
business. The Company hedges the five primary currencies in which it conducts
business. The first nine months of 2001 were impacted by the movement in the
relative value of the non-hedged currencies in which the Company transacts
business. The majority of these currencies decreased in value relative to the
dollar during the first nine months resulting in a gain for the period. To the
extent the Company employs derivatives designated as "fair value hedges" or as
"no hedge designation", the Company records foreign exchange gains and losses on
the underlying hedged assets or liabilities and the related derivative
instruments in net realized investment gains (losses).
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Investment Results
Net investment income and net realized investment gains (losses), for
the nine-month periods ended September 30, 2001 and 2000 were as follows ($
millions):
2001 2000
------------------------------------------------------------------------------------------------------
Net investment income $ 181.1 $ 218.5
Net realized investment gains (losses) 14.2 (51.9)
------------------------------------------------------------------------------------------------------
Net investment income for the nine months ended September 30, 2001
decreased by 17% compared to the 2000 period primarily due to the sale of
PartnerRe Life U.S., the negative influence of the weakening of the Euro against
the US dollar, and a general decrease in interest rates accompanied by an
acceleration of prepayments on callable debt instruments that resulted in the
reinvestment of proceeds at lower interest rates. The decrease due to the sale
of PartnerRe Life U.S. was partially offset by the investment income earned on
the proceeds of the 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.
Results of Operations - for the Three months ended September 30, 2001 and 2000
In accordance with Statement of Financial Accounting Standard No. 128,
the anti-dilutive effect of the exercise of in-the-money options and warrants
should not be shown. This procedure is followed in the presentation of the
Company's financial statements. However, Management believes that to facilitate
comparison of results of current and prior periods, including the per share
impact of the September 11 terrorist attack, the effects of stock options and
warrants should be included in all periods.
The following table shows diluted results per share for all periods as
if in-the-money options and warrants were exercised (including 2001 in which the
assumed exercise is anti-dilutive). In a press release dated November 6, 2001,
Management also referred to the following per share amounts as results on a
fully diluted basis. Amounts are shown in $ millions, except per share data:
2001 2000
------------------------------------------------------------------------------------------------------------
Operating result available to common shareholders $ (342.8) $ 53.6
Net realized investment losses, net of tax (0.7) (7.7)
------------------------------------------------------------------------------------------------------------
Net result available to common shareholders $ (343.5) 45.9
------------------------------------------------------------------------------------------------------------
Impact of September 11 terrorist attack, net of tax (382.0) -
------------------------------------------------------------------------------------------------------------
Operating earnings available to common shareholders adjusted for September 11 39.2 -
------------------------------------------------------------------------------------------------------------
Net income available to common shareholders adjusted for September 11 38.5 -
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Operating result per common share assuming effect
of anti-dilutive securities in 2001 $ (6.65) $ 1.06
Net realized investment losses per common share, net of tax (0.02) (0.16)
------------------------------------------------------------------------------------------------------------
Net result per common share $ (6.67) $ 0.90
------------------------------------------------------------------------------------------------------------
Impact of September 11 terrorist attack, net of tax (7.41) -
------------------------------------------------------------------------------------------------------------
Operating earnings per common share adjusted for September 11 0.76 -
------------------------------------------------------------------------------------------------------------
Net income per common share adjusted for September 11 0.75 -
------------------------------------------------------------------------------------------------------------
The third quarter of 2001 was significantly adversely affected by the
attack of September 11. The Company incurred net losses relating to the
terrorist attack of $400 million, $382 million after tax. In addition, the
Company's results were impacted by a high frequency of large events not related
to the September 11 attack. While the three months ended September 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 $5
million range.
Net realized investment gains and losses on sales of investments
resulted from the timing of disposition of available for sale fixed maturities
and equity securities as part of the ongoing management of the investment
portfolio within the investment guidelines and objectives set out by Management.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Reinsurance Operations - Underwriting Results
Non-life multi-line business represents the majority of the business
written by the Company. The underwriting results of the Life business are shown
separately in Note 4 to the Consolidated Financial Statements included in this
report. The following analysis includes Life business unless otherwise noted.
Gross and net premiums written and net premiums earned for the three months
ended September 30, 2001 and 2000 were as follows ($ millions):
2001 2000
------------------------------------------------------------------------------------------------------------------
Gross premiums written $ 412.2 $ 317.6
Net premiums written 394.2 304.7
Net premiums earned 415.5 313.3
------------------------------------------------------------------------------------------------------------------
The increases in gross and net premiums written were primarily related to
the combination of improved pricing conditions and further penetration in
certain markets, particularly catastrophe and non-proportional business and
timing differences in the recognition of certain renewals. Written premiums were
also impacted by the recognition of reinstatement premiums on certain treaties
that were impacted by the attack of September 11. Those reinstatement premiums
totaled $10 million after allowing for the possibility of uncollectible amounts.
Because of variable 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 are
one to two years.
The distribution of net premiums written by line of business for the three
months ended September 30, 2001 and 2000 was as follows:
2001 2000
------------------------------------------------------------------------------------------------------------------
% %
Catastrophe 11 7
Property 23 28
Casualty 14 13
Automobile 16 20
Aviation/Space 5 5
Marine 3 2
Agriculture 9 9
Credit/Surety 7 8
Life 8 6
Other 4 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.
19
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 September 30,
2001 and 2000 was as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------------
% %
Non-life
Proportional 63 67
Non-Proportional 20 19
Facultative 8 8
Life
Proportional 9 6
Non-Proportional - -
- -----------------------------------------------------------------------------------------------------------------
The geographic distribution of gross premiums written for the three months ended
September 30, 2001 and 2000 was as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------------
% %
North America 42 47
Europe 37 36
Asia, Australia, New Zealand 12 13
Latin America and the Caribbean 8 3
Africa 1 1
- -----------------------------------------------------------------------------------------------------------------
This above distribution shows that although premiums have grown in
every area, the growth was more pronounced in Europe and Latin America and the
Caribbean. Growth in the percentage of gross premiums written in Europe is
almost fully offset by a decrease of the relative value of the Euro and other
European currencies against the U.S. dollar.
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 September 30, 2001 and 2000 were as follows ($ millions):
2001 2000
- --------------------------------------------------------------------------------------------------------------
Losses and loss expenses (Non-life only) $ 679.5 $ 203.5
- --------------------------------------------------------------------------------------------------------------
Loss ratio (Non-life only) 178.1 69.0%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Life policy benefits $ 31.2 $ 18.6
- --------------------------------------------------------------------------------------------------------------
The increase in losses and loss expenses for the three months ended
September 30, 2001 compared to the same period last year resulted primarily from
growth in the business earned by the Company and the attack of September 11. The
Company incurred net losses relating to the terrorist attack of $400 million,
$382 million after tax. In addition, the Company's results were impacted by a
high frequency of large events not related to the September 11 attack, including
Tropical Storm Nari, a chemical plant explosion in Toulouse, France, a large
surety loss and an oil refinery fire. These events resulted in incremental
losses of $25 million, pre tax, for the quarter. The three months ended
September 30, 2000 were free of major catastrophe losses.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Underwriting expenses include acquisition costs (primarily brokerage,
commissions, excise taxes and other costs directly related to underwriting
reinsurance contracts) and other operating expenses. Underwriting expenses (and
the corresponding expense ratios for the Non-life business) for the three-month
periods ended September 30, 2001 and 2000 were as follows ($ millions):
2001 2000
------------------------------------------------------------------------------------------------------------------------
Acquisition costs $ 96.8 $ 73.9
Other operating expenses 29.4 23.2
------------------------------------------------------------------------------------------------------------------------
Total underwriting expenses $ 126.2 $ 97.1
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Acquisition expense ratio 23.5% 23.4%
Other operating expense ratio 7.1 7.1
------------------------------------------------------------------------------------------------------------------------
Expense ratio (Non-life only) 30.6% 30.5%
------------------------------------------------------------------------------------------------------------------------
The increase in the acquisition costs for the three months ended
September 30, 2001 compared to the three months ended September 30, 2000
resulted primarily from the growth in the Company's business earned. The
increase in other operating expenses for the three months ended September 30,
2001 compared to the three months ended September 30, 2000 resulted primarily
from investments in the infrastructure and information systems to support the
Company's growth.
Net foreign exchange gains amounted to $8.2 million and $3.3 million
for the three months ended September 30, 2001 and 2000, respectively. Foreign
exchange gains and losses are a function of the relative value between the U.S.
dollar and other currencies in which the Company does business. The Company
hedges the five primary currencies in which it conducts business. The third
quarter of 2001 was impacted by the movement in the relative value of the
non-hedged currencies in which the Company transacts business. The majority of
these currencies decreased in value relative to the dollar during the quarter
resulting in a gain for the quarter. To the extent the Company employs
derivatives designated as "fair value hedges" or as "no hedge designation", the
Company records foreign exchange gains and losses on the underlying hedged
assets or liabilities and the related derivative instruments in net realized
investment gains (losses).
Investment Results
Net investment income and net realized investment gains (losses) for
the three-month periods ended September 30, 2001 and 2000 were as follows ($
millions):
2001 2000
-------------------------------------------------------------------------------------------------------------
Net investment income $ 60.3 $ 62.1
Net realized investment losses (0.4) (6.5)
-------------------------------------------------------------------------------------------------------------
Net investment income for the three months ended September 30, 2001
decreased by 3% compared to the 2000 period primarily due to the negative
influence of the weakening of the Euro against the US dollar and a general
decrease in interest rates accompanied by an acceleration of prepayments on
callable debt instruments that resulted in the reinvestment of proceeds at lower
interest rates. Furthermore, investment income attributed to the Life operations
is down by $2.5 million and this was entirely due to one annuity contract where
all the investment income was credited to the policyholders, resulting in a nil
impact on the Company's net income. 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.
21
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 3% in the first nine
months of 2001 (from .94 to .91 U.S. dollar per Euro) thereby increasing the
aggregate currency translation loss of $45.7 million at December 31, 2000 to
$53.4 million at September 30, 2001.
The value of the U.S. dollar strengthened approximately 3% against the
Euro, 5% against the Canadian dollar, and 4% against the Japanese Yen in the
first nine 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 September 30, 2001 was $1,759.0 million
compared to $2,086.0 million at December 31, 2000. The major factors influencing
the level of shareholders' equity in the nine-month period ended September 30,
2001 were:
. net loss of $189.4 million;
. dividend payments of $56.1 million;
. a net decrease in common shares and additional paid-in capital of
$0.1 million, due to the issue and repurchase of common shares;
. the $7.7 million negative effect of the currency translation
adjustment resulting from the strengthening of the U.S.
dollar against the Euro; and
. a $73.8 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 nine-month period ended
September 30, 2001, the Company repurchased 52,000 common shares at an aggregate
purchase price of $1.8 million. As of September 30, 2001, approximately 4.2
million shares remain authorized for repurchase under the Company's current
repurchase program. The Company has filed a shelf registration on form S-3
that became effective November 1, 2001. Under this shelf registration, the
Company can raise up to $600 million of new capital.
Assets
At September 30, 2001, total assets were $6,499.6 million compared to
total assets of $6,091.3 million at December 31, 2000. Total invested assets,
including cash and cash equivalents, were $3,954.0 million as at September 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 nine-month period
ended September 30, 2001 were:
. net cash provided by operating activities of $277.4 million;
. decrease in unsettled security trades of $92.1 million;
. dividend payments totaling $56.1 million;
. net cash paid for the issue and repurchase of common shares
aggregating $0.1 million;
. decrease in net unrealized gains on investments of $48.8 million,
net of realized gains or losses on securities sold; and
. 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.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
At September 30, 2001, fixed maturities, short-term investments and
cash and cash equivalents had an average expected duration of 3.4 years compared
to 3.7 as at December 31, 2000. As at September 30, 2001, approximately 92% 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 or otherwise hedged to the estimated
liabilities in a way that seeks to immunize the Company 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 September 30, 2001, fixed maturities, short-term investments and
cash and cash equivalents had an average yield to maturity at market of 5.2 %
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 nine months of 2001, 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 $2,931.5 million and $2,386.0 million at September 30, 2001 and
December 31, 2000, respectively. The increase is primarily due to the losses
recorded by the Company in relation to the September 11 attack and the
significant influence of exchange rates as discussed above. Policy benefits
reserves for Life and annuity contracts were $743.4 million and $673.1 million
at September 30, 2001 and December 31, 2000, respectively. The increase in the
value of policy benefits for Life and annuity contracts as at September 30, 2001
compared to December 31, 2000, resulted primarily new product introductions.
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.
Liquidity
Cash flow from operations for the nine months ended September 30, 2001
increased to positive $277.4 million from negative $30.8 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 nine months of 2000.
23
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.
24
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.
None.
ITEM 5. OTHER INFORMATION.
None.
25
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. /\
11.1 Statements Regarding Computation of Net Income Per Common and
Common Equivalent Share.
15 Letter Regarding Unaudited Interim Financial Information.
23.1 Awareness letter from Deloitte & Touche (included in 15).
(b) Reports on Form 8-K.
Current Report on Form 8-K Filed on September 25, 2001, under item 5
thereof.
Current Report on Form 8-K Filed on October 3, 2001, under item 5
thereof.
Current Report on Form 8-K Filed on October 29, 2001, under item 5
thereof.
* 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.
26
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: November 6, 2001 By: /s/ Patrick A. Thiele
---------------------------- --------------------------------------
Name: Patrick A. Thiele
Title: President & Chief
Executive Officer
Date: November 6, 2001 By: /s/ Albert A. Benchimol
---------------------------- --------------------------------------
Name: Albert A. Benchimol
Title: Executive Vice-President &
Chief Financial Officer
(Chief Accounting Officer)
27
EXHIBIT INDEX
Exhibit
Number Exhibit
- ------ -------
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./\
11.1 Statements Regarding Computation of Net Income Per
Common and Common Equivalent Share.
15 Letter Regarding Unaudited Interim Financial Information.
23.1 Awareness letter from 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.
28