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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
March 31, 2002
Commission file number 0-2253
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 May 6, 2002 was 50,244,900.
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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
March 31, 2002 (unaudited) and December 31, 2001 (audited) ................................. 4
Unaudited Consolidated Statements of Operations and Comprehensive Income
Three Months Ended March 31, 2002 and 2001 ................................................. 5
Unaudited Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 2002 and 2001 ................................................. 6
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 ................................................. 7
Notes to Unaudited Consolidated Financial Statements .......................................... 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................................ 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk (see Part I, Item 2)
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................................................. 22
ITEM 2. Changes in Securities ......................................................................... 22
ITEM 3. Defaults upon Senior Securities ............................................................... 22
ITEM 4. Submission of Matters to a Vote of Security Holders ........................................... 22
ITEM 5. Other Information ............................................................................. 22
ITEM 6. Exhibits and Reports on Form 8-K .............................................................. 23
Signatures ................................................................................................. 24
Exhibit Index .............................................................................................. 25
2
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 March 31, 2002 and the related consolidated statements of
operations and comprehensive income, shareholders' equity and cash flows for the
three month periods ended March 31, 2002 and 2001. 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 auditing standards generally accepted in the United States of America, 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, 2001 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 11, 2002, we expressed an unqualified opinion on those
consolidated financial statements.
May 6, 2002
Hamilton, Bermuda
3
PartnerRe Ltd.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except share data)
March 31, December 31,
2002 2001
(Unaudited) (Audited)
Assets
Investments and cash
Fixed maturities, available for sale, at fair value
(amortized cost: 2002, $3,563,087; 2001, $3,382,768) $ 3,557,268 $ 3,420,759
Short-term investments, available for sale, at fair value
(amortized cost: 2002, $40,148; 2001, $39,547) 40,126 39,564
Equities, available for sale, at fair value
(cost: 2002, $437,804; 2001, $408,879) 444,651 400,825
Trading securities, at fair value (cost: 2002, $79,392; 2001, $79,973) 80,878 77,452
Cash and cash equivalents, at fair value, which approximates
amortized cost 343,237 451,614
Other invested assets 21,084 20,500
------------------ -------------------
Total investments and cash 4,487,244 4,410,714
Accrued investment income 80,923 74,536
Reinsurance balances receivable 932,328 654,900
Reinsurance recoverable on paid and unpaid losses 229,074 245,279
Funds held by reinsured companies 643,441 641,203
Deferred acquisition costs 321,791 274,152
Deposit assets 245,345 241,845
Taxes recoverable 91,949 95,336
Goodwill 429,519 429,519
Other 105,865 97,942
------------------ -------------------
Total Assets $ 7,567,479 $ 7,165,426
================== ===================
Liabilities
Unpaid losses and loss expenses $ 3,046,713 $ 3,005,628
Policy benefits for life and annuity contracts 704,588 693,250
Unearned premiums 950,383 597,529
Funds held under reinsurance treaties 30,822 31,371
Deposit liabilities 242,432 239,208
Long term debt 220,000 220,000
Payable for securities purchased 119,535 143,535
Accounts payable, accrued expenses and other 90,667 86,796
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Total Liabilities 5,405,140 5,017,317
================== ===================
Trust Preferred and Mandatorily Redeemable Preferred Securities 400,000 400,000
------------------ -------------------
Shareholders' Equity
Common shares ( issued and outstanding: 2002, 50,240,990;
2001, 50,164,211) 50,241 50,164
Preferred shares ( issued and outstanding: 2002, 10,000,000;
2001, 10,000,000) 10,000 10,000
Additional paid-in capital 886,952 885,678
Deferred compensation (363) (397)
Accumulated other comprehensive (loss) gain:
Net unrealized (losses) gains on investments, net of income taxes (4,643) 24,023
Currency translation adjustment (60,738) (58,043)
Retained earnings 880,890 836,684
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Total Shareholders' Equity 1,762,339 1,748,109
================== ===================
Total Liabilities, Trust Preferred and Mandatorily Redeemable Preferred
Securities and Shareholders' Equity $ 7,567,479 $ 7,165,426
================== ===================
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
months ended months ended
March 31, March 31,
2002 2001
Revenues
Gross premiums written $ 846,852 $ 615,767
============ ===========
Net premiums written $ 824,473 $ 597,779
Increase in unearned premiums (344,999) (208,361)
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Net premiums earned 479,474 389,418
Net investment income 58,704 59,957
Net realized investment (losses) gains (7,881) 9,106
Other income 675 22
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Total Revenues 530,972 458,503
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Expenses
Losses and loss expenses and life policy benefits 311,854 272,396
Acquisition costs 104,047 86,267
Other operating expenses 36,936 27,658
Interest expense 3,196 3,196
Amortization of goodwill - 6,509
Net foreign exchange losses 3,603 2,893
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Total Expenses 459,636 398,919
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Income before distributions related to Trust Preferred
and Mandatorily Redeemable Preferred Securities and taxes 71,336 59,584
Distributions related to Trust Preferred and Mandatorily
Redeemable Preferred Securities 6,815 -
Income tax expense (benefit) 1,266 (8,550)
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Net income before cumulative effect of adopting
new accounting standard, net of tax 63,255 68,134
Cumulative effect of adopting new accounting
standard, net of tax - 27,812
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Net income $ 63,255 $ 95,946
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Preferred dividends $ 5,000 $ 5,000
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Net income available to common shareholders $ 58,255 $ 90,946
============ ===========
Calculation of comprehensive income, net of tax:
Net income as reported $ 63,255 $ 95,946
Net unrealized gains or losses on investments (28,666) (66,496)
Change in currency translation adjustment (2,695) (13,169)
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Comprehensive income $ 31,894 $ 16,281
============ ===========
Per share data:
Earnings per common share:
Basic net income before cumulative effect of
adopting new accounting standard 1.16 1.26
Cumulative effect of adopting new accounting standard - 0.55
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Basic net income $ 1.16 $ 1.81
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Weighted average number of common shares outstanding 50,202.6 50,121.5
Diluted net income before cumulative effect of
adopting new accounting standard 1.13 1.22
Cumulative effect of adopting new accounting standard - 0.54
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Diluted net income $ 1.13 $ 1.76
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Weighted average number of common and
common equivalent shares outstanding 51,687.5 51,553.6
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, 2000 $ 50,113 $ 10,000 $ 892,310 $ (534) $ 107,511 $ (45,710) $ 1,072,316 $ 2,086,006
Issue of common shares 8 - 294 - - - - 302
Amortization of deferred
compensation - - - 34 - - - 34
Net unrealized losses for period - - - - (66,496) - - (66,496)
Currency translation adjustment - - - - - (13,169) - (13,169)
Net income - - - - - - 95,946 95,946
Dividends on common shares - - - - - - (13,032) (13,032)
Dividends on preferred shares - - - - - - (5,000) (5,000)
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Balance at March 31, 2001 $ 50,121 $ 10,000 $ 892,604 $ (500) $ 41,015 $ (58,879) $ 1,150,230 $ 2,084,591
===============================================================================================
Balance at December 31, 2001 $ 50,164 $ 10,000 $ 885,678 $ (397) $ 24,023 $ (58,043) $ 836,684 $ 1,748,109
Issue of common shares 77 - 2,285 - - - - 2,362
Adjustment on purchase contract
for common shares - - (1,011) - - - - (1,011)
Amortization of deferred
compensation - - - 34 - - - 34
Net unrealized losses for period - - - - (28,666) - - (28,666)
Currency translation adjustment - - - - - (2,695) - (2,695)
Net income - - - - - - 63,255 63,255
Dividends on common shares - - - - - - (14,049) (14,049)
Dividends on preferred shares - - - - - - (5,000) (5,000)
-----------------------------------------------------------------------------------------------
Balance at March 31, 2002 $ 50,241 $ 10,000 $ 886,952 $ (363) $ (4,643) $ (60,738) $ 880,890 $ 1,762,339
===============================================================================================
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 For the
three months three months
ended ended
March 31, March 31,
2002 2001
Cash Flows From Operating Activities
Net income $ 63,255 $ 95,946
Adjustments to reconcile net income to net cash provided by
operating activities:
Accrual of discount on investments, net of amortization of premium (365) (5,966)
Amortization of goodwill - 6,509
Effect of adopting new accounting standard - (27,812)
Net realized investment losses (gains) 7,881 (9,106)
Changes in:
Unearned premiums 345,000 208,361
Reinsurance balances receivable (286,310) (201,172)
Unpaid losses and loss expenses including life policy benefits 72,913 58,697
Taxes recoverable 1,325 (8,640)
Other changes in assets and liabilities (27,968) (53,450)
Other items, net 641 (2,739)
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Net cash provided by operating activities 176,372 60,628
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Cash Flows From Investing Activities
Sales of fixed maturities 624,701 916,469
Redemptions of fixed maturities 62,316 16,608
Purchases of fixed maturities (857,366) (1,087,154)
Net purchases of short term investments (713) (8,127)
Sales of equities 33,742 25,192
Purchases of equities (119,370) (65,288)
Other (9,503) (19,400)
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Net cash used in investing activities (266,193) (221,700)
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Cash Flows from Financing Activities
Cash dividends paid to shareholders (19,049) (18,032)
Issue of common shares 2,362 302
Adjustment on purchase contract for common shares (1,011) -
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Net cash used in financing activities (17,698) (17,730)
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Effect of exchange rate changes on cash (858) (2,703)
Decrease in cash and cash equivalents (108,377) (181,505)
Cash and cash equivalents - beginning of period 451,614 434,033
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Cash and cash equivalents - end of period $ 343,237 $ 252,528
========== ===========
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 Ltd. ( "Partner Reinsurance Company"),
Partner Reinsurance Company of the U.S. ("PartnerRe U.S.") and PartnerRe SA
(formerly known as SAFR PartnerRe or SAFR). Risks reinsured include, but are not
limited to, property, catastrophe, agriculture, motor, 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 March 31, 2002 and 2001 and its results of operations,
shareholders' equity and cash flows for the three months ended March 31, 2002
and 2001. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's 2001 Annual Report to Shareholders.
2. New Accounting Pronouncements
On January 1, 2002 the Company adopted SFAS No. 141, "Business
Combinations," (SFAS 141) and SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). The statements 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, ceases upon adoption of that statement.
The Company will complete a transitional goodwill impairment test by June 30,
2002 and impairment valuations annually or more frequently if certain indicators
are encountered. In connection with the transitional goodwill impairment test,
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 adoption of SFAS 141 did not have a significant impact on the
Company's financial statements. The adoption of SFAS 142 has resulted in the
elimination of a quarterly amortization expense related to goodwill in the
amount of $6.5 million, before-tax, in the first quarter of 2002. On a pro-forma
basis, diluted net income before cumulative effect of new accounting standard
for the first quarter of 2001 would have been $1.09 per share rather than $1.22
as reported. The Company is currently assessing but has not yet determined the
impact of goodwill impairment, if any, on its financial position and results of
operations.
8
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
3. Segment Information
Following a realignment of its Global operations effective January 1,
2002, the Company changed its reporting segments to reflect the way its business
will be managed going forward. The Company monitors the performance of its
underwriting operations in two major segments, Non-Life and Life. The Non-Life
segment is further divided into three sub-segments, US Property and Casualty,
Non-US Property and Casualty and Worldwide Specialty. The Life segment includes
Life, Health and Annuity business. Segments represent markets that are
reasonably homogeneous in terms of geography, client types, buying patterns,
underlying risk patterns and approach to risk management.
The US and Non-US Property and Casualty sub-segments include property
and casualty business as well as motor business. These lines are generally
written in local markets. The US Property and Casualty sub-segment is comprised
of property, casualty and motor risks originating in the United States,
generally written by PartnerRe U.S. The Non-US Property and Casualty sub-segment
is comprised of property, casualty and motor business originating outside of the
United States, generally written by Partner Reinsurance Company and PartnerRe
SA. The Worldwide Specialty sub-segment is comprised of that business which is
generally considered to be specialized due to the sophisticated technical
underwriting required to analyze risks, and global in nature, inasmuch as
appropriate risk management for these lines require a globally diversified
portfolio of risks. This segment consists of several lines of business for which
the Company believes it has developed specialized knowledge and underwriting
capabilities. These lines of business include catastrophe, aviation and space,
marine, agriculture, credit and surety, special risks and miscellaneous lines.
The corresponding information for the prior period has been restated to conform
to the current period presentation.
Because the Company does not manage its assets by segment, investment
income is not allocated to the Non-Life sub-segments of the 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 segment of the reinsurance
operations. The following items are not considered in evaluating the results of
each segment: net realized investment gains/losses, other income, amortization
of goodwill, interest expense, distributions related to Trust Preferred and
Mandatorily Redeemable Preferred Securities, net foreign exchange gains or
losses, income tax expense or benefit and preferred share dividends. Segment
revenues and profits or losses are shown net of intercompany transactions.
Management measures segment results for the Property and Casualty
segments and Worldwide Specialty segment 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 periods ended March 31, 2002 and 2001 ($ millions
except ratios):
9
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2002 2001
- -----------------------------------------------------------------------------------------------------------
NON-LIFE SEGMENT
US Property and Casualty
Net premiums written $ 174.2 $ 116.3
Net premiums earned 120.5 70.8
Loss and loss expense ratio 66.3 % 73.0 %
Acquisition expense ratio 27.0 24.4
----------- -----------
Technical ratio /(1)/ 93.3 97.4
Non-US Property and Casualty
Net premiums written $ 200.8 $ 166.6
Net premiums earned 121.2 116.6
Loss and loss expense ratio 73.9 % 77.2 %
Acquisition expense ratio 23.5 24.3
----------- -----------
Technical ratio /(1)/ 97.4 101.5
Worldwide Specialty
Net premiums written $ 409.1 $ 266.9
Net premiums earned 205.3 156.8
Loss and loss expense ratio 55.9 % 57.1 %
Acquisition expense ratio 16.8 20.6
----------- -----------
Technical ratio /(1)/ 72.7 77.7
TOTAL NON-LIFE SEGMENT
Gross premiums written $ 803.4 $ 564.9
Net premiums written 784.1 549.8
Net premiums earned 447.0 344.2
Loss and loss expense ratio 63.6 % 67.2 %
----------- -----------
Acquisition expense ratio 21.4 22.7
Other overhead expense ratio 7.6 7.3
----------- -----------
Expense ratio 29.0 30.0
----------- -----------
Combined ratio /(2)/ 92.6 % 97.2 %
- -----------------------------------------------------------------------------------------------------------
LIFE SEGMENT
Gross premiums written $ 43.4 $ 50.8
Net premiums written 40.4 48.0
Net premiums earned 32.6 45.2
Technical result /(3)/ $ (3.5) $ (4.2)
Allocated investment income 6.4 6.3
----------- -----------
Net technical result $ 2.9 $ 2.1
- ----------------------------------------------------------------------------------------------------------------------
/(1)/ Technical ratio is obtained by dividing the sum of losses and loss
adjustment expenses and acquisition costs by net premiums earned
/(2)/ Combined ratio is obtained by dividing the sum of losses and loss
adjustment expenses, acquisition costs and other overhead expenses
by net premiums earned
/(3)/ Technical result is defined as net premiums earned, less losses and
loss adjustment expenses and acquisition costs
10
PartnerRe Ltd.
Notes to Consolidated Financial Statements
(Unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2002 2001
---------------------------------------------------------------------------------------------
Reconciliation to Net Income:
Technical result $ 63.6 $ 30.8
Other operating expenses (36.9) (27.7)
Net investment income 58.7 60.0
Other income 0.7 -
Interest expense (3.2) (3.2)
Amortization of goodwill - (6.5)
Net foreign exchange losses (3.6) (2.9)
Income tax (expense) benefits on operating
income (0.7) 10.1
Distribution related to Trust
Preferred and Mandatorily Redeemable
Preferred Shares (6.8) -
---------------------------------------------------------------------------------------------
Operating income 71.8 60.6
---------------------------------------------------------------------------------------------
Net realized investment (losses)
gains, after taxes (8.5) 7.5
Cumulative effect of adopting new
accounting standard, net of tax - 27.8
---------------------------------------------------------------------------------------------
Net income $ 63.3 $ 95.9
---------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of the unaudited consolidated
financial condition at March 31, 2002 and results of operations of PartnerRe
Ltd. (the "Company") for the three months ended March 31, 2002 and 2001. 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, 2001 and notes thereto included in the Company's 2001 Annual Report
to Shareholders. The unaudited consolidated financial statements at and for the
three months ended March 31, 2002 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 provides multi-line reinsurance to insurance companies on a
worldwide basis 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 or SAFR).
Risks reinsured include, but are not limited to, property, catastrophe,
agriculture, motor, casualty, marine, aviation and space, credit and surety,
technical and miscellaneous lines, life/annuity and health.
Because of the inherent volatility of some of the lines of business the
Company underwrites, the operating results and financial condition of the
Company can be adversely impacted by catastrophes and other large losses that
may give rise to claims under reinsurance coverages provided by the Company.
Catastrophe reinsurance comprises a material portion of the Company's business.
Catastrophe losses result from events such as windstorms, earthquakes, floods,
hail, tornadoes, severe winter weather, fires, explosions and other man-made or
natural disasters, the incidence and severity of which are inherently
unpredictable. Because catastrophe reinsurance accumulates large aggregate
exposures to man-made and natural disasters, the Company's loss experience in
this line of business could be characterized by low frequency and high severity,
particularly since it usually writes treaties with high attachment points. This
is likely to result in substantial volatility in the Company's financial results
for any fiscal quarter or year and could have a material adverse effect on the
Company's financial condition or results of operations.
The Company writes other lines of business, which can be affected by large
losses, including property, agriculture, motor, casualty, marine, aviation and
space, credit and surety, technical and miscellaneous lines, life/annuity and
health. The Company endeavors to manage its exposure to catastrophe and other
large losses by (i) attempting to limit its aggregate exposure on catastrophe
reinsurance in any particular geographic zone defined by the Company and
attempting to limit its exposure to per risk reinsurance, (ii) selective
underwriting practices, (iii) diversification of risks by geographic area and by
lines and classes of business, and (iv) to a certain extent by purchasing
retrocessional reinsurance. Despite the Company's efforts to manage its exposure
to catastrophe and other large losses, the effect of a single catastrophic event
or series of events affecting one or more geographic zones or changes in the
relative frequency or severity of catastrophic or other large loss events could
have a material adverse effect on the Company's financial condition or results
of operations. Should the Company incur a substantial catastrophe loss, its
ability to write future business may be impacted.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Business Environment
Reinsurance is a highly competitive and cyclical industry. The industry
is influenced by several factors including variations in interest rates and
financial markets, changes in legal, regulatory and judicial environments,
inflation and general economic conditions. Throughout the late 1990's, the
industry's operating profitability declined due to the deterioration of pricing,
terms and conditions and increasing loss costs. Offsetting these trends were
high investment returns, which led to continued growth in capital - a prime
determinant of capacity and competition.
The cumulative impact of large European storm losses in December 1999,
continued increases in loss costs, negative cash flow, declining market returns
and adverse developments of reserves ultimately led to tightening of terms and
conditions, and improved pricing during the January 2001 renewals. The cyclical
trends were significantly accelerated by the large loss events of 2001. The
terrorist attacks of September 11 and Enron bankruptcy represent the largest
catastrophe loss and largest surety loss, respectively, in the history of the
industry. In addition a number of companies posted large increases to reserves
for prior years. Several companies exited the industry, while others were
financially weakened. The reduction in capacity caused by the large losses,
reserve increases and exiting capital accelerated the improvement in pricing,
terms and conditions. The January 2002 renewals were the strongest in over five
years.
While the cumulative impact of the foregoing factors have led to
increased pricing and improved terms and conditions, there is no certainty as to
how long these conditions will last. Since September 11, it is estimated that
over $25 billion in capital has been raised by industry participants, helping to
offset the estimated $35 billion to $50 billion in September 11 losses. Although
management has seen improved pricing and terms and conditions in 2002, there are
no guarantees of improved industry profitability as the industry remains subject
to further catastrophes and other large losses. Management continues to pursue
those opportunities that it perceives will generate acceptable returns.
Management believes that through dedication to client service and its
disciplined approach to underwriting, the Company provides a stable and reliable
source of underwriting capacity to its clients.
Results of Operations - for the Three Months ended March 31, 2002 and 2001
Results of operations for the three months ended March 31, 2002 and
2001 were as follows ($ millions, except per share data):
2002 2001
-----------------------------------------------------------------------------------------------------------------
Operating earnings available to common shareholders $ 66.8 $ 55.6
Net realized investment (losses) gains, net of tax (8.5) 7.5
-----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders before cumulative
effect of adopting new accounting standard 58.3 63.1
-----------------------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax - 27.8
-----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 58.3 $ 90.9
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
Diluted operating earnings per common share $ 1.29 $ 1.08
Net realized investment (losses) gains per common share, net of tax (0.16) 0.14
-----------------------------------------------------------------------------------------------------------------
Diluted net income per common share before cumulative effect
adopting new accounting standard $ 1.13 $ 1.22
-----------------------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting standard, net of tax - 0.54
-----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 1.13 $ 1.76
-----------------------------------------------------------------------------------------------------------------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Management follows the industry practice of considering both net income
and operating earnings in the analysis of results and performance. Operating
earnings available to common shareholders exclude net realized investment gains
or losses on investments and preferred dividends. Operating earnings available
to common shareholders for the three months ended March 31, 2002 increased by
20.1% compared to the three months ended March 31, 2001, and net income
available to common shareholders before cumulative effect of adopting new
accounting standard for the three months ended March 31, 2002 decreased by 7.7%
compared to the three months ended March 31, 2001. The increase in operating
earnings available to common shareholders resulted primarily from an increase in
underwriting profitability fueled by improved pricing and better terms and
conditions obtained during the January 2002 renewals, the absence of catastrophe
or other large losses during the first quarter of 2002 and the adoption of SFAS
142 which resulted in discontinuation of goodwill amortization effective January
1, 2002. The decrease in net income available to common shareholders before
effect of adopting new accounting standard is due to the increase in net
realized investment losses, net of tax, that resulted from the timing of
disposition of 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 Segment
US Property and Casualty
Gross and net premiums written and net premiums earned for the three
months ended March 31, 2002 and 2001 were as follows ($ millions):
2002 2001
-------------------------------------------------------------------------------------------------
Gross premiums written $ 175.5 $ 116.4
Net premiums written 174.2 116.3
Net premiums earned 120.5 70.8
-------------------------------------------------------------------------------------------------
The Company observed a combination of original rate increases and
improved terms and conditions in the property, casualty and motor lines during
the January 2002 renewals. Despite this improvement in terms and conditions in
the industry, the Company pursued premium growth when market conditions met the
Company's selective standards. In addition, business that no longer met the
Company's standards was not renewed. Gross and net premiums written and net
premiums earned for the three months ended March 31, 2002 increased by 50.8%,
49.8% and 70.2%, respectively, compared to the three months ended March 31,
2001. This growth resulted from a combination of increased participations,
pricing and exposures as well as new business opportunities in all lines but
more predominantly in the casualty and motor lines and more modestly in the
property line. The increase in net premiums earned reflects the increase in net
written premiums during the first quarter of 2002 as well as the growth in net
premiums written during the latter half of 2001. 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.
Losses and loss expenses incurred and the corresponding ratio as a
percentage of net premiums earned ("loss and loss expense ratio"), and
acquisition costs (primarily brokerage expenses, commissions, excise taxes and
other costs directly related to underwriting reinsurance contracts), and the
corresponding ratio as a percentage of net premiums earned ("acquisition expense
ratio"), were as follows for the three-month periods ended March 31, 2002 and
2001 ($ millions except ratios):
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
2002 2001
- ----------------------------------------------------------------------------------------------------------
Losses and loss expenses $ 79.9 $ 51.7
- ----------------------------------------------------------------------------------------------------------
Acquisition expenses 32.5 17.3
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Loss and loss expense ratio 66.3% 73.0%
- ----------------------------------------------------------------------------------------------------------
Acquisition expense ratio 27.0 24.4
- ----------------------------------------------------------------------------------------------------------
Technical ratio 93.3 97.4
- ----------------------------------------------------------------------------------------------------------
The increase in losses and loss expenses for the first three months of
2002 compared to the first three months of 2001 resulted primarily from the
growth in exposure due to a growing book of business. The decrease in the
corresponding loss and loss expense ratio reflects improved pricing and
conditions seen in the January 2002 renewals in addition to improved loss
experience in every line.
The increase in acquisition expenses compared to the three months ended
March 31, 2001 resulted primarily from an increase in the volume of business
earned in the three months ended March 31, 2002. The increase in the acquisition
expense ratio during the first quarter of 2002 resulted from an increase in the
business earned related to non-proportional treaties written on a cession basis
which carries acquisition costs similar to proportional treaties.
Non-US Property and Casualty
Gross and net premiums written and net premiums earned for the three
months ended March 31, 2002 and 2001 were as follows ($ millions):
2002 2001
-------------------------------------------------------------------------------------------------------------------
Gross premiums written $ 207.3 $ 170.6
Net premiums written 200.8 166.6
Net premiums earned 121.2 116.6
-------------------------------------------------------------------------------------------------------------------
During the January 2002 renewals, the Company observed a combination
of original rate increases and improved conditions in the property and casualty
markets in most countries and observed improvements in the motor lines in
certain geographic markets. There were broad variations by country and type of
business; and improvements, while significant, were generally less than in the
US Property and Casualty segment. Despite the overall improvement in terms and
conditions in the industry, the Company pursued premium growth when market
conditions met the Company's selective standards. In addition, business that no
longer met the Company's standards was not renewed, particularly in the casualty
and motor lines. Gross and net premiums written and net premiums earned for the
three months ended March 31, 2002 increased by 21.5%, 20.5% and 3.9%,
respectively, compared to the three months ended March 31, 2001. Similar to the
US Property and Casualty segment, this growth resulted from a combination of
increased participations, pricing and exposures as well as new business
opportunities in all lines but more predominantly in the property line. During
the first quarter of 2002, a number of proportional treaties were renewed on a
non-proportional basis and this resulted in smaller gross and net premiums
written and net premiums earned figures for those treaties. This mitigated the
Non-US Property and Casualty segment growth trends in the first quarter of 2002.
Growth is smaller for net premiums earned than net premiums written primarily
because the net earned premiums in the first quarter of 2002 still reflect the
lower volume of net premiums written during the 2001 calendar year, particularly
in the motor line. 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)
Losses and loss expenses incurred and the corresponding ratio as a
percentage of net premiums earned ("loss and loss expense ratio"), and
acquisition costs (primarily brokerage expenses, commissions, excise taxes and
other costs directly related to underwriting reinsurance contracts), and the
corresponding ratio as a percentage of net premiums earned ("acquisition expense
ratio"), were as follows for the three-month periods ended March 31, 2002 and
2001 ($ millions except ratios):
2002 2001
----------------------------------------------------------------------------------------------------------
Losses and loss expenses $ 89.6 $ 90.0
----------------------------------------------------------------------------------------------------------
Acquisition expenses 28.5 28.4
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Loss and loss expense ratio 73.9% 77.2%
----------------------------------------------------------------------------------------------------------
Acquisition expense ratio 23.5 24.3
----------------------------------------------------------------------------------------------------------
Technical ratio 97.4 101.5
----------------------------------------------------------------------------------------------------------
The decrease in losses and loss expenses and the corresponding ratio
for the first three months of 2002 compared to the first three months of 2001
results from an improvement in the loss experience and is reflective of the
improved market conditions seen by the Company during the January 2002 renewals.
There was no significant change in the acquisition expenses or corresponding
ratio during the first three months of 2002 compared to the same period during
2001.
Worldwide Specialty
Gross and net premiums written and net premiums earned for the three
months ended March 31, 2002 and 2001 were as follows ($ millions):
2002 2001
----------------------------------------------------------------------------------------------------------------
Gross premiums written $ 420.6 $ 277.9
Net premiums written 409.1 266.9
Net premiums earned 205.2 156.8
----------------------------------------------------------------------------------------------------------------
During the January 2002 renewals, the Company saw a market focus on
rates, terms and conditions rather than market share. In addition, several
reinsurers withdrew from many markets, especially the aviation market. The
Company took advantage of considerable rate increases and improved terms and
conditions in the specialty lines. Improvements were more forceful in this
sub-segment than in both the US and Non-US Property and Casualty sub-segments.
Despite this improvement in terms and conditions in the industry, the Company
pursued premium growth when market conditions met the Company's selective
standards and allocated capital to lines where prices and conditions were the
most attractive. Business that no longer met the Company's standards was not
renewed. Gross and net premiums written and net premiums earned for the three
months ended March 31, 2002 increased by 51.3%, 53.3% and 30.9%, respectively,
compared to the three months ended March 31, 2001. This growth resulted from a
combination of increased participations, pricing and exposures as well as new
business opportunities across most specialty lines and more predominantly in the
catastrophe, aviation, marine and special risks lines. Growth in the first
quarter of 2002 was mitigated to a small extent by a decrease in the credit and
surety and financial guarantee lines where pricing, terms and conditions were
not as attractive as in other Worldwide Specialty lines. The increase in net
premiums earned reflects the increase in net written premiums during the first
quarter of 2002 as well as the growth in net premiums written during the latter
half of 2001. 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Losses and loss expenses incurred and the corresponding ratio as a
percentage of net premiums earned ("loss and loss expense ratio"), and
acquisition costs (primarily brokerage expenses, commissions, excise taxes and
other costs directly related to underwriting reinsurance contracts), and the
corresponding ratio as a percentage of net premiums earned ("acquisition expense
ratio"), were as follows for the three-month periods ended March 31, 2002 and
2001 ($ millions except ratios):
2002 2001
-----------------------------------------------------------------------------------------------------
Losses and loss expenses $ 114.7 $ 89.5
-----------------------------------------------------------------------------------------------------
Acquisition expenses 34.6 32.4
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Loss and loss expense ratio 55.9% 57.1%
-----------------------------------------------------------------------------------------------------
Acquisition expense ratio 16.8 20.6
-----------------------------------------------------------------------------------------------------
Technical ratio 72.7 77.7
-----------------------------------------------------------------------------------------------------
The increase in losses and loss expenses for the first three months of
2002 compared to the first three months of 2001 resulted primarily from the
growth in exposure due to a growing book of business. The decrease in the
corresponding loss and loss expense ratio for the first three months of 2002
compared to the same period in 2001 is due primarily to an improvement in
pricing and loss experience in all lines except for credit and surety. The
Company experienced a low level of losses in its Catastrophe line, but this was
partially offset by higher losses in the Credit and Surety line, which the
Company attributed to the higher number of bankruptcies typically expected
during a recession period.
The increase in acquisition expenses compared to the three months ended
March 31, 2001 resulted primarily from a larger volume of business earned in the
three months ended March 31, 2002. The decrease in the acquisition expense ratio
resulted from a higher proportion of non-proportional business earned during the
first quarter of 2002.
Life Segment
Gross and net premiums written and net premiums earned for the three
months ended March 31, 2002 and 2001 were as follows ($ millions):
2002 2001
------------------------------------------------------------------------------------------------------
Gross premiums written $ 43.4 $ 50.8
Net premiums written 40.4 48.0
Net premiums earned 32.6 45.2
------------------------------------------------------------------------------------------------------
The decreases in gross and net premiums written and net premiums earned
were primarily related to the restructuring of a large proportional treaty into
a non-proportional treaty during the fourth quarter of 2001. The restructuring
does not affect the overall financial results for the life segment.
Life policy benefits and acquisition costs (primarily brokerage
expenses, commissions, excise taxes and other costs directly related to
underwriting reinsurance contracts) incurred for the three months ended March
31, 2002 and 2001 were as follows ($ millions):
2002 2001
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Life policy benefits $ 27.6 $ 41.2
-----------------------------------------------------------------------------------------------------
Acquisition expenses 8.5 8.2
-----------------------------------------------------------------------------------------------------
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The decrease in life policy benefits for the first three months of 2002
compared to the first three months of 2001 resulted primarily from the
restructuring of a large proportional treaty into a non-proportional treaty
during the fourth quarter of 2001. The restructuring does not affect overall
financial results for the life segment.
Premium distribution by line of business
The distribution of net premiums written by line of business for the
three months ended March 31, 2002 and 2001 was as follows:
2002 2001
-----------------------------------------------------------------------------------------------------------------
% %
Non-Life
Property and Casualty
Property 19 19
Casualty 15 14
Motor 12 14
Worldwide Specialty
Catastrophe 23 21
Aviation/Space 5 4
Marine 3 2
Agriculture 4 4
Special Risk 7 4
Credit/Surety 4 6
Other 3 4
Life 5 8
------------------------------------------------------------------------------------------------------------------
The distribution of premiums is affected by renewal patterns for
non-proportional treaties as premiums for those treaties are written at the
inception of the treaty rather than over the treaty period. The above
percentages of net premiums written for the catastrophe line of business, which
is written predominantly on a non-proportional basis, is higher than what can be
expected for the year because a significant portion of the year's catastrophe
premiums are written in the first quarter. The relative increase in the
catastrophe and special risk lines of business in the first three months of 2002
compared to the same period in 2001 reflects growth in those lines as a result
of better pricing, terms and conditions during the January 2002 renewals. The
relative decrease in the life line of business in the three months ended March
31, 2002 is attributable to the restructuring of a large proportional treaty
into a non-proportional treaty during the fourth quarter of 2001 as well as the
considerable growth seen in the Company's non-life lines.
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 March 31, 2002
and 2001 was as follows:
2002 2001
------------------------------------------------------------------------------------------------------
% %
Non-life Segment
Proportional 36 34
Non-Proportional 50 49
Facultative 9 9
Life Segment
Proportional 4 7
Non-Proportional 1 1
------------------------------------------------------------------------------------------------------
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The geographic distribution of gross premiums written for the three
months ended March 31, 2002 and 2001 was as follows:
2002 2001
-----------------------------------------------------------------------------------------------------
% %
Europe 39 46
North America 45 40
Asia, Australia, New Zealand 10 7
Latin America and the Caribbean 5 6
Africa 1 1
----------------------------------------------------------------------------------------------------
Although the Company experienced growth in absolute value in every
geographic area, growth was more pronounced in North America and Asia,
Australia, New Zealand. This is a seasonal trend that results primarily from the
Company's significant catastrophe renewals that are written predominantly on a
non-proportional basis in the first quarter of the year.
Investment Results
Net investment income and net realized investment (losses) gains for
the three-month periods ended March 31, 2002 and 2001 were as follows ($
millions):
2002 2001
----------------------------------------------------------------------------------------------------------
Net investment income $ 58.7 $ 60.0
Net realized investment (losses) gains (7.9) 9.1
----------------------------------------------------------------------------------------------------------
Net investment income for the three months ended March 31, 2002
decreased by 2.1% compared to the 2001 period. The decrease in net investment
income is primarily due to a large life reinsurance treaty under which all
investment income is transferred to the policyholders through the life policy
benefit expense line. As a result of this transfer, any volatility in net
investment income on this treaty is offset by the same but opposite movement in
life policy benefit expenses with no net impact on net income. The market yield
on the Company's fixed income investment portfolio decreased during the last two
years as proceeds of invested securities that matured or were redeemed have been
reinvested at increasingly lower market rates. The market yield on the fixed
income investment portfolio began to recover modestly during the first quarter
of 2002 and the Company believes the yield will continue to rise in an improving
economy, allowing the Company to invest its cash flows at higher rates and
increase investment income. Net realized investment gains and losses on sales of
investments are a function of the timing of dispositions of available for sale
fixed maturities and equity securities, change in market value of trading
securities and the net ineffectiveness of the Company's hedging activities.
18
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 2% in the first three
months of 2002 (from 0.89 to 0.87 U.S. dollar per Euro) thereby increasing the
aggregate currency translation loss of $58.0 million at December 31, 2001 to
$60.7 million at March 31, 2002.
The value of the U.S. dollar strengthened approximately 2% against the
Euro, 1% against the Swiss Franc, and 2% against the British Pound in the first
three months of 2002 and, since a large 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.
Net foreign exchange losses amounted to $3.6 million and $2.9 million
for the three months ended March 31, 2002 and 2001, 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.
Financial Condition and Liquidity and Capital Resources
Shareholders' Equity and Capital Management
Shareholders' equity at March 31, 2002 was $1,762.3 million compared to
$1,748.1 million at December 31, 2001. The major factors influencing the level
of shareholders' equity in the three-month period ended March 31, 2002 were:
. net income of $63.3 million;
. dividend payments of $19.0 million;
. a net increase in common shares and additional paid-in capital
of $2.4 million, due to the issuance of common shares;
. a payment of $1.0 million under the Purchase Contract for
common shares;
. the $2.7 million negative effect of the currency translation
adjustment resulting from the strengthening of the U.S. dollar
against the Euro; and
. a $28.7 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 three months ended March 31,
2002, the Company did not repurchase common shares. As of March 31, 2002,
approximately 4.2 million common shares remain authorized for repurchase under
the Company's current repurchase program.
Assets
At March 31, 2002, total assets were $7,567.5 million compared to total
assets of $7,165.4 million at December 31, 2001. Total invested assets,
including cash and cash equivalents, were $4,487.2 million as March 31, 2002
compared to $4,410.7 million at December 31, 2001. The major factors influencing
the change in cash and invested assets in the three-month period ended March 31,
2002 were:
. net cash provided by operating activities of $176.4 million;
. decrease in unsettled security trades of $24.0 million;
. dividend and distribution payments on common and preferred
shares and Mandatorily Redeemable Preferred Securities
totaling $23.0 million;
. cash receipt for the issue of common shares aggregating $2.4
million;
. decrease in net unrealized gains on investments of $32.9
million; and
. the negative impact of the stronger U.S. dollar relative to
the Euro as it relates to conversion of PartnerRe SA's
investments and cash balances into U.S. dollars.
At March 31, 2002, fixed maturities, short-term investments and cash
and cash equivalents had an average expected duration of 3.8 years compared to
3.7 years as at December 31, 2001. As at each of March 31, 2002 and December 31,
2001, approximately 92% of the fixed income portfolio was rated investment grade
(BBB- or higher).
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company's investment strategy is unchanged from previous years,
although the continuing evolution of the Company 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 investment grade bonds, common stock, preferred stocks,
convertible and high yield bonds and other asset classes that offer potentially
higher returns.
At March 31, 2002, fixed maturities, short-term investments and cash
and cash equivalents had an average yield to maturity at market of 5.3% compared
to 5.1% as at December 31, 2001. The increase in average yield to maturity was
primarily due to a modest increase in market interest rates during the first
quarter of 2002.
Liabilities
The Company has recorded Non-life reserves for unpaid losses and loss
expenses of $3,046.7 million and $3,005.6 million at March 31, 2002 and December
31, 2001, respectively. Policy benefits reserves for Life and annuity contracts
were $704.6 million and $693.3 million at March 31, 2002 and December 31, 2001,
respectively. The increase in the value of unpaid losses and loss expenses and
policy benefits for Life and annuity contracts between December 31, 2001 and
March 31, 2002 resulted primarily from the increase in the volume of business
earned by the Company during the first quarter of 2002.
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
existing facts that would materially affect its estimates.
Capital and Liquidity
The Company's capital structure includes term debt, Series A perpetual
preferred shares, Series B redeemable preferred shares, 30-year Trust Preferred
securities, as well as common equity. These securities have the following
characteristics:
o The term debt of $220 million has a fixed rate of 5.81% and is fully
collateralized and repayable in 2008 with interest payments due
semi-annually;
o Series A Perpetual Cumulative Preferred securities in the amount of
$250 million have an annual dividend rate of 8% and dividends are
payable on a quarterly basis;
o Trust Preferred securities have an annual dividend rate of 7.90%
payable quarterly, and are redeemable on December 31, 2031, which date
may be extended to a date no later than December 31, 2050. The Trust
Preferred securities are issued by PartnerRe Capital Trust I, a
Delaware statutory business trust and an indirect, wholly-owned
subsidiary of the Company;
o Series B Redeemable Preferred securities were issued as part of the
Premium Equity Participating Security Units ("PEPS units"). Each PEPS
unit comprises i) one of the Company's 5.61% Series B Cumulative
Redeemable Preferred shares and ii) a purchase contract obligating the
holder of the PEPS unit to purchase from the Company, no later than
December 31, 2004, for a price of $50, a number of common shares
ranging between 0.8696 and 1.0638 shares, depending on the price of the
Company's common stock at the time of purchase;
o The remaining capital of the Company's common shareholders' equity is
composed of the common shares, retained earnings and accumulated other
comprehensive income. The Company's common shares have historically
paid a quarterly dividend, currently $0.29 per share per quarter.
However, while it is currently the Company's intention to pay
dividends, there can be no assurance that the Company will continue to
declare and pay dividends on common shares.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Cash flow from operations for the three months ended March 31, 2002
increased to $176.4 million from $60.6 million in the same period in 2001. This
increase is primarily attributable to the significant increase in business
written by the Company during the January 2002 renewals and a first quarter
2002 relatively free from catastrophic or other large loss payments. The Company
paid less than $18 million on the September 11 terrorist attack during the
quarter and less than $27 million to date. Total Non-Life paid losses during the
first quarter of 2002 amounted to $220 million.
The Company's ability to pay common and preferred shareholders'
dividends and its operating expenses is dependent on cash dividends from
Partner Reinsurance Company and PartnerRe SA, including its subsidiary,
PartnerRe U.S. (collectively the "reinsurance subsidiaries"). The payment of
such 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. The restrictions are generally based on net
income and/or certain levels of policyholders' earned surplus as determined in
accordance with the relevant statutory accounting practices. There are
presently no material statutory restrictions, except as noted below, on the
reinsurance subsidiaries' abilities to pay dividends. PartnerRe U.S., a company
licensed in the U.S., may not pay cash dividends without prior regulatory
approval.
The Company has cash outflows in the form of operating expenses,
dividends to both common and preferred shareholders and distributions on
preferred securities. During the three months ended March 31, 2002, the Company
paid $14.0 million in dividends to its common shareholders in the form of a
quarterly dividend of $0.28 a share. Additionally, the Company paid the holders
of its Series A Preferred Stock $5.0 million in dividends during the quarter.
The Company also paid $4.0 million in the first quarter of 2002 on the PEPS
Units.
The operating entities of the Company depend upon cash flow from the
collection of premiums and investment income. Cash outflows are in the form of
claims payments, operating expenses and dividend payments to the holding
Company. In addition, the U.S. operation is responsible for payments under the
Trust Preferred Stock. Historically, the reinsurance subsidiaries of the Company
have generated sufficient cash flow to meet all of their obligations. Because of
the inherent volatility of the business written by the Company, cash flows from
operating activities may vary significantly between periods.
Effects of Inflation
The effects of inflation are considered implicitly in pricing and
estimating reserves for unpaid losses and loss adjustment expenses. The actual
effects of inflation on the results of operations of the Company cannot be
accurately known until claims are ultimately settled.
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 Unites 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 expressed in such
forward-looking statements, including, but not limited to:
(1) the occurrence of catastrophic events with a frequency or severity
exceeding our expectations;
(2) a decrease in the level of demand for reinsurance and/or an increase
in the supply of reinsurance capacity;
(3) increased competitive pressures, including the consolidation and
increased globalization of reinsurance providers;
(4) actual losses and loss expenses exceeding our loss reserves, which are
necessarily based on actuarial and statistical projections of ultimate
losses;
(5) changes in the cost, availability and performance of retrocessional
reinsurance, including the ability to collect reinsurance
recoverables;
(6) concentration risk in dealing with a limited number of brokers;
(7) developments in and risks associated with global financial markets
which could affect our investment portfolio;
(8) changing rates of inflation and other economic conditions;
(9) losses due to foreign currency exchange rate fluctuations;
(10) changes in the legal or regulatory environments in which we operate,
including the passage of federal or state legislation subjecting
Partner Reinsurance Company Ltd. or PartnerRe SA to supervision or
regulation, including additional tax regulation, in the United States
or other jurisdictions in which we operate; or
(11) actions by rating agencies that might impact the Company's ability to
write new business
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. We caution readers not to place undue reliance on these
forward-looking statements, which speak only as of their dates .The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company's insurance subsidiaries, in common with the insurance and
reinsurance industry in general, are subject to litigation and arbitration in
the normal course of their business operations. As of March 31, 2002, the
Company was not a party to any material litigation or arbitration other than as
part of the ordinary course of business in relation to claims activity. Whilst
none of this is expected by management to have a significant adverse effect on
the Company's results of operation, financial condition and liquidity for a
year, it does have the potential to adversely impact the results of a quarter.
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.
The deadline for the submission of Shareholder proposals for the
Company's 2003 Annual Meeting is November 27, 2002.
22
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 B Warrant.
4.3 Specimen Share Certificate for the 8% Series A Cumulative
Preferred Shares.
4.4 Certificate of Designation, Preferences and Rights of 8% Series A
Cumulative Preferred Shares.
4.5 Specimen of Unit Certificate for the PEPS Units.
4.6 Certificate of Designation of the Company's 5.61% Series B
Cumulative Redeemable Preferred Shares.
10.1 Amended and restated PartnerRe Ltd. Employee Incentive Plan, dated
February 26, 2002.
11.1 Statements Regarding Computation of Net Income Per Common and
Common Equivalent Share.
15 Letter Regarding Unaudited Interim Financial Information.
(b) Reports on Form 8-K.
Current report on Form 8-K filed on March 25, 2002.
23
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: May 6, 2002 By: /s/ Patrick A. Thiele
------------------ ---------------------------------
Name: Patrick A. Thiele
Title: President & Chief
Executive Officer
Date: May 6, 2002 By: /s/ Albert A. Benchimol
------------------ ---------------------------------
Name: Albert A. Benchimol
Title: Executive Vice-President &
Chief Financial Officer
(Chief Accounting Officer)
24
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 B Warrant.***
4.3 Specimen Share Certificate for the 8% Series A
Cumulative Preferred Shares.+
4.4 Certificate of Designation, Preferences and Rights of
8% Series A Cumulative Preferred Shares.+
4.5 Specimen of Unit Certificate for the PEPS Units.++
4.6 Certificate of Designation of the Company's 5.61%
Series B Cumulative Redeemable Preferred Shares.++
10.1 Amended and restated PartnerRe Ltd. Employee Incentive
Plan, dated February 26, 2002.
11.1 Statements Regarding Computation of Net Income Per
Common and Common Equivalent Share.
15 Letter Regarding Unaudited Interim Financial Information.
____________________
* 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.
++ Incorporated by reference to the Annual Report on Form 10-K of the Company
for the year ended December 31, 2001, as filed with the Securities and
Exchange Commission on March 29, 2002.
25