EXHIBIT 13.1
PartnerRe
Annual Report 2002
31
PartnerRe Ltd.
SELECTED CONSOLIDATED FINANCIAL DATA
(Expressed in millions of U.S. dollars, except share and per share data)
The following Selected Consolidated Financial Data is presented in
accordance with generally accepted accounting principles. This data should
be read in conjunction with the Consolidated Financial Statements and the
accompanying Notes to Consolidated Financial Statements.
For the year
ended
December 31,
1998 1999 2000 2001 2002 Operating Data
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$ 735.8 $ 1,433.0 $ 1,439.5 $ 1,878.3 $ 2,705.7 Gross premiums written
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687.0 1,326.4 1,380.3 1,825.1 2,655.4 Net premiums written
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685.6 1,338.0 1,314.3 1,633.5 2,425.7 Net premiums earned
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169.4 307.6 273.6 239.6 245.2 Net investment income
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23.7 (15.9) (62.7) 20.2 (6.8) Net realized investment gains (losses)
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0.9 0.7 0.4 1.7 5.7 Other income
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879.6 1,630.4 1,525.6 1,895.0 2,669.9 Total revenues
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396.9 1,130.1 975.7 1,631.8 1,715.8 Losses and loss expenses including life policy benefits
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602.5 1,579.4 1,427.0 2,149.6 2,449.7 Total expenses
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Income (loss) before distributions related to Trust Preferred
277.1 51.0 98.6 (254.6) 220.2 and Mandatorily Redeemable Preferred Securities and taxes
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Distributions related to Trust Preferred and
- - - 3.0 27.3 Mandatorily Redeemable Preferred Securities
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10.8 (43.8) (43.7) (69.3) 2.7 Income tax expense (benefit)
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Net income (loss) before cumulative effect of adopting
266.3 94.8 142.3 (188.3) 190.3 new accounting standard, net of tax
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Cumulative effect of adopting new accounting standard, net of
- - - 27.8 - tax
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266.3 94.8 142.3 (160.5) 190.3 Net income (loss)
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4.34 1.40 2.41 (3.60) 3.28 Diluted net income (loss) per common share
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NON-LIFE RATIOS
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56.9% 77.1% 70.2% 100.4% 69.3% Loss ratio
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28.6% 32.7% 32.3% 29.8% 28.6% Expense ratio
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85.5% 109.8% 102.5% 130.2% 97.9% Combined ratio
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$ 0.86 $ 1.00 $ 1.04 $ 1.10 $ 1.15 Dividends Declared and Paid Per Common Share
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As at
December 31,
1998 1999 2000 2001 2002 BALANCE SHEET DATA
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$ 5,432.2 $ 5,494.8 $ 3,882.1 $ 4,410.7 $ 5,412.1 Total investments, cash and cash equivalents
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7,554.0 7,560.0 6,177.4 7,173.0 8,738.0 Total assets
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Unpaid losses and loss expenses and policy benefits for life
4,618.2 4,747.0 3,059.1 3,698.9 4,474.4 contracts
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220.0 220.0 220.0 220.0 220.0 Long-term debt
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Trust Preferred and Mandatorily Redeemable Preferred
- - - 400.0 400.0 Securities
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2,113.4 1,840.7 2,086.0 1,748.1 2,077.2 Total shareholders' equity
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33.53 31.82 35.54 29.05 34.02 Diluted book value per common and common equivalent share
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Weighted average number of common and common equivalent
56.8 53.2 50.7 50.1 51.9 shares outstanding
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52.8 49.3 50.1 50.2 52.4 Number of common shares outstanding
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In 1998, the Company acquired Winterthur Re and in 2000, the Company disposed of
PartnerRe Life U.S. (See Note 2 to the Consolidated Financial Statements.) In
2001 and 2002, the Company adopted SFAS 133 and SFAS 142, respectively. (See
Note 3 to the Consolidated Financial Statements.)
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PartnerRe
Annual Report 2002
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion and analysis of PartnerRe Ltd.'s (the
"Company") financial condition at December 31, 2002 and 2001, and results
of operations for the years ended December 31, 2002, 2001, and 2000. This
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
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 assumptions and
expectations concerning the potential effect on the Company of future
events and financial performance and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to significant business, economic, and competitive
risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements.
PartnerRe's forward-looking statements could be affected by numerous
foreseeable and unforeseeable events and developments such as:
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. Acts of terrorism
6. Changes in the cost, availability, and performance of retrocessional
reinsurance, including the ability to collect reinsurance recoverables
7. Concentration risk in dealing with a limited number of brokers
8. Developments in and risks associated with global financial markets
that could affect our investment portfolio
9. Changing rates of inflation and other economic conditions
10. Availability of borrowings and letters of credit under the Company's
credit facilities
11. Losses due to foreign currency exchange rate fluctuations
12. Restrictions in the issue of work permits that could result in the
loss of the services of any one of our executives
13. 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
14. 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. The words "believe," "anticipate,"
"estimate," "project," "plan," "expect," "intend," "hope," "will likely
result," or "will continue," or words of similar impact, generally involve
forward-looking statements. 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.
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United
States ("U.S. GAAP"). The preparation of financial statements in conformity
with U.S. GAAP requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Intercompany accounts and transactions have been eliminated and
all subsidiaries have been included in the consolidation. Certain
reclassifications have been made to prior year amounts to conform with the
current year's presentation. Because effective control of PartnerRe Life
U.S. was transferred on July 1, 2000, the second half of 2000 does not
include operating results from PartnerRe Life U.S. The following presents a
discussion of those accounting policies that Management believes are the
most critical to its operations and those policies that require significant
judgment on the part of Management.
LOSSES AND LOSS EXPENSES, INCLUDING LIFE POLICY BENEFITS
At December 31, 2002, the Company had gross Non-life reserves for unpaid
losses and loss expenses of $3.7 billion with outstanding loss reserves of
$1.9 billion, and incurred but not reported reserves, including additional
case reserves, of $1.8 billion. The Company had Non-life ceded reserves of
$0.2 billion recoverable under retrocessional agreements, resulting in net
Non-life reserves of $3.4 billion. See Note 5 to the Consolidated Financial
Statements.
Because a significant amount of time can lapse between the assumption of
risk, occurrence of a loss event, the reporting of the event to an
insurance or reinsurance company, and the ultimate payment of the claim on
the loss event, the Company's liability for unpaid losses and loss
adjustment expenses is based largely upon estimates. The liability for
unpaid losses and loss expenses for Non-life business includes amounts for
known losses reported by the Company's cedents and amounts for losses
assumed to be incurred but not yet reported.
The Company analyzes loss and loss expenses in three categories:
outstanding loss reserves on a case-by-case basis (case reserves),
additional case reserves (ACR), and incurred but not reported (IBNR)
reserves. Case reserves are reported by the Company's cedents and recorded
by the Company. ACR are established for particular circumstances where on
the basis of individual loss reports, the Company estimates that the
particular loss or account may incur additional liabilities until final
determination of the claims over and above those advised by the cedent.
IBNR reserves are the difference between the Company's estimate of the
total future loss and loss expense liabilities and the case reserves and
ACR. As such, the IBNR reserves represent a provision for claims that have
been incurred but not yet reported to the Company, as well as future loss
development on losses already reported in excess of the case reserves and
ACR. The Company also estimates the future unallocated loss expenses
associated with the loss reserves and these form part of the Company's loss
adjustment reserve.
The Company estimates future loss and loss expense liabilities by
subtracting claims payments from the Company's best estimate of actuarially
determined ultimate loss and loss expenses. The Company's best estimate of
ultimate liabilities is selected after consideration of a reasonable range
of outcomes that is produced by an actuarial analysis of the Company's
liabilities. The actuarial analysis of the Company's ultimate liabilities
depends on a set of actuarial assumptions. To select these assumptions, the
Company considers its own historical loss development for each line of
business. This is supplemented where appropriate by external industry
experience and benchmarks. In addition, the loss development assumptions
reflect Management's view of current and future trends in the business
environment and economic and social trends.
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Annual Report 2002
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Estimates of future liabilities are contingent on many future events. The
eventual outcome of these events may be different from the assumptions
underlying the reserve estimates. In the event the business environment and
social trends diverge from historical trends, the Company may have to
adjust its reserves to amounts falling significantly outside its current
estimate range. Management believes that the recorded reserves represent
the best estimate of future liabilities based on information available
today. The best estimate of ultimate liabilities will be updated in the
future as cedents report losses and additional information on any of the
assumptions underlying the actuarial analysis emerges. Such updates may
affect earnings in future periods.
Reserves for policy benefits for ordinary life and accident and health
policies have been established based upon information reported by ceding
companies supplemented by the Company's best actuarial estimates of
mortality, morbidity, persistency, and investment income, with appropriate
provision for adverse deviation. Future policy benefit reserves for annuity
and universal life products are carried at their accumulated values.
Reserves for policy claims and benefits include both mortality and
morbidity claims in the process of settlement and claims that are assumed
to have been incurred but not yet reported. Actual experience in a
particular period may vary from assumed experience and, consequently, may
affect the Company's earnings in future periods.
PREMIUMS
Management must also make judgments about the ultimate premiums written and
earned by the Company. Due to the lag in reporting premium data by the
Company's clients, it is necessary for the Company to make estimates to
supplement the data received based upon information reviewed during
submissions, historical client data, and projections. Reported premiums
written and earned are based upon reports received from ceding companies,
supplemented by the Company's own estimates of premiums written for which
ceding company reports have not been received. Premium estimates are
updated when new information is received. Differences between such
estimates and actual amounts are recorded in the period in which estimates
are changed or the actual amounts are determined. Approximately 40% of the
Company's reported net written premiums for the year are based upon such
estimates. Premiums are earned on a basis that is consistent with the risks
covered under the terms of the reinsurance contracts, which is generally
one to two years. Unearned premiums represent the portion of premiums
written that is applicable to the unexpired risks under contracts in force.
Annuity and universal life insurance premiums received are accounted for in
a manner consistent with accounting for interest-bearing financial
instruments and are not reported as revenues but rather as direct deposits
to the contract. Amounts assessed against annuity and universal life
policyholders are recognized as revenue in the period assessed.
DEFERRED ACQUISITION COSTS
Acquisition costs, consisting of brokerage, commissions, and excise taxes,
which vary directly with, and are primarily related to, the acquisition of
new and renewal reinsurance contracts, are capitalized and charged to
expense as the related premium revenue is recognized. Anticipated losses
and loss expenses, other costs, and investment income related to these
premiums are considered in determining the recoverability of deferred
acquisition costs. Acquisition costs related to individual life and annuity
business are deferred and amortized over the premium paying periods in
proportion to anticipated premium income, allowing for lapses,
terminations, and anticipated investment income. Acquisition costs related
to universal life and single premium annuity contracts are deferred and
amortized over the lives of the policies as a percentage of the estimated
gross profits expected to be realized on the policies.
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INVESTMENTS
Fixed maturities, short-term and equity investments which are classified as
"available for sale" are carried at fair value, based on quoted market
prices, with the difference between cost or amortized cost and fair value,
net of the effect of taxes, included as a separate component of
"accumulated other comprehensive income."
Fixed maturities, short-term and equity investments which contain
convertible features are classified as "trading securities" and carried at
fair value, based on quoted market prices, with the change in fair value
included in the net realized investment gains and losses in the
Consolidated Statements of Operations.
Investment income is recognized when earned and includes the accrual of
discount or amortization of premium on fixed maturities and short-term
investments. Realized gains and losses on the disposition of investments,
which are determined based upon specific identification of the cost of
investments sold, are reflected in the Consolidated Statements of
Operations.
The Company regularly evaluates the fair value of its investments to
determine whether a decline in fair value below the amortized cost basis
(original cost basis for equities) is other-than-temporary. If the decline
in fair value is judged to be other-than-temporary, the amortized cost of
the individual security is written-down to fair value as a new cost basis,
and the amount of the write-down is included as a realized investment loss
in the period in which the determination of other-than-temporary impairment
is made. While the cost basis cannot be adjusted upward when the value of
the security subsequently increases, the cost basis may be written-down
again if further other-than-temporary impairments are incurred.
INCOME TAXES
The Company obtains benefits from its status as a Bermuda-based company in
that the income earned by its Bermuda-based entities and branches is not
subject to taxation. Certain subsidiaries and branches of the Company
operate in jurisdictions where they are subject to taxation. Current and
deferred income taxes are charged or credited to operations, or in certain
cases, to "accumulated other comprehensive income," based upon enacted tax
laws and rates applicable in the relevant jurisdiction in the period in
which the tax becomes realizable or accruable. Deferred income taxes are
provided for all temporary differences between the bases of assets and
liabilities used in the financial statements and those used in the various
jurisdictional tax returns. The Company has a net deferred tax asset before
valuation allowance of $143.9 million arising primarily from net operating
loss carry-forwards that it can use to offset future taxable income. The
Company has established a valuation allowance of $52.9 million against its
deferred tax asset based upon Management's assessment that it is more
likely than not that certain of the deferred tax assets will not be
realized in the applicable jurisdiction. Realization of the deferred tax
asset is dependent upon generating sufficient taxable income within
specified future periods. In the event that the Company is unable to
realize a deferred tax asset, for example with the expiration of an
unutilized net operating loss carry-forward, net income would be adversely
affected to the extent a valuation allowance has not been established. In
establishing the appropriate value of this asset, Management must make
judgments about the Company's ability to recognize the benefit of the asset
over time including the Company's ability to utilize the net operating loss
carry-forwards.
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GOODWILL
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
142 requires that the Company make an annual assessment as to the value of
the Company's goodwill asset. Based upon the Company's assessment, there
was no impairment of its goodwill asset of $429.5 million as at December
31, 2002. In making an assessment of the value of its goodwill, the Company
used both market based and non-market based valuations. Assumptions
underlying these valuations include an analysis of the Company's stock
price relative to both its book value and its earnings in addition to
forecasts of future cash flows and future profits. Significant changes in
the data underlying these assumptions could result in an indication of an
impairment of the Company's goodwill asset. In addition, if the current
economic environment and/or the Company's financial performance were to
deteriorate significantly, this could lead to an impairment of goodwill,
the write-off of which would be recorded in the period such deterioration
was realized.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Company is the U.S. dollar. The national
currencies of the Company's subsidiaries are generally their functional
currencies, except for the Bermuda subsidiaries whose functional currency
is the U.S. dollar. In translating the financial statements of those
subsidiaries whose functional currency is other than the U.S. dollar,
assets and liabilities are converted into U.S. dollars using the rates of
exchange in effect at the balance sheet dates and revenues and expenses are
converted using the average exchange rates for the period. Related
translation adjustments and exchange gains and losses on forward exchange
contracts, which were used to hedge the Company's investment in its
subsidiaries prior to the Company's adoption of Statement of Financial
Accounting Standards No. 133, as amended, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) on January 1, 2001, are
reported as a separate component of "accumulated other comprehensive
income."
In recording foreign currency transactions, revenue and expense items are
converted into the functional currency at the weighted average rates of
exchange for the year. Assets and liabilities originating in currencies
other than the functional currency are translated into the functional
currency at the rates of exchange in effect at the balance sheet dates. The
resulting exchange gains or losses are included in the Consolidated
Statements of Operations. Prior to the Company's adoption of SFAS 133 on
January 1, 2001, exchange gains and losses related to the translation of
investments classified as available for sale were included in net
unrealized gains and losses on investments, a component of "accumulated
other comprehensive income." Following the adoption of SFAS 133, the
Company records those unrealized foreign exchange gains and losses that are
covered with designated hedges in the Consolidated Statements of Operations
(see note 3(k) to the Consolidated Financial Statements).
DERIVATIVES AND HEDGING ACTIVITIES
SFAS 133 requires the recognition of all derivative financial instruments,
including embedded derivative instruments, as either assets or liabilities
on the Consolidated Balance Sheets 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 of the
asset or liability hedged.
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company utilizes derivative financial instruments as part of an overall
currency risk management strategy. 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
"non-designated hedge" derivative. 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 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 are recognized in net realized investment gains and losses in the
Consolidated Statements of Operations. Derivatives employed by the Company
to hedge currency exposure related to other reinsurance assets and
liabilities are not designated as hedges under SFAS 133. The changes in
fair value of the non-designated hedge and the other reinsurance assets and
liabilities are also recognized in net realized investment gains and losses
in the Consolidated Statements of Operations.
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 the net realized investment
gains and losses in the Consolidated Statements of Operations.
The Company formally documents all relationships between designated 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
designated 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 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 Consolidated Balance
Sheets at its fair value with changes in its fair value recognized in
current period earnings. 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 "accumulated other comprehensive income."
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"), PartnerRe SA, and Partner
Reinsurance Company of the U.S. ("PartnerRe U.S."). Risks reinsured include
but are not limited to property, casualty, motor, agriculture,
aviation/space, catastrophe, credit/surety, engineering/energy, marine,
special risk, other lines and life/annuity and health.
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 exposure. 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 provides reinsurance, that pays only after the primary insurer has
experienced a specified level of loss, which tends to reduce the Company's
exposure to higher-frequency low-severity losses. 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, casualty, motor, agriculture, aviation/space,
catastrophe, credit/surety, engineering/energy, marine, special risk, other
lines and 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
catastrophic loss, its ability to write future business may be impacted.
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 1990s, the
industry's operating profitability and cash flow declined due to the
deterioration of pricing, terms, and conditions, as well as increasing loss
costs. These negatives were offset by high investment returns that led to
continued growth in capital -- a prime determinant of capacity and
competition.
In 2000, the cumulative impact of several years of declining profitability,
punctuated by the large European storms Lothar and Martin at the end of
1999, led to an improvement in pricing, which gained momentum into 2001.
The large loss events of 2001, including the terrorist attack of September
11 and the Enron bankruptcy, in conjunction with steep declines in interest
rates and equity values, added to the pressure for improvements in
insurance and reinsurance pricing and improved terms and conditions. The
Company observed in January 2002 the strongest renewal season in over five
years. Market conditions remained strong throughout 2002 and into the
January 2003 renewal season.
Notwithstanding recent progress, there is no certainty as to how long the
current market will last, or when increasing competition will lead to
declines in pricing adequacy and weakening terms and conditions. Management
believes that reinsurance pricing generally follows loss
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PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
cost trends, but that the lag between the loss trend cycle and the pricing
cycle depends on the availability of capital in the industry. As was
demonstrated in the late 1990s, the growing capital of the industry
forestalled a quick response to deteriorating loss trends and
profitability. The cumulative pressures on industry capital, due to
catastrophic losses, adverse reserve development, ongoing loss cost
inflation, and steep declines in equity values in 2000-2001 ultimately led
to an improvement in market conditions. While a number of companies exited
certain lines or the reinsurance market altogether, other companies have
been created in the aftermath of September 11. The total capital raised by
these new companies was not substantial when compared to the capital lost
by the industry over the last few years. However, this new capacity and the
expected growth in retained earnings of the industry resulting from recent
favorable market conditions should, at some point in the future, increase
the level of available capital to a more adequate level. Management is
unable to predict when improved capital levels or other developments in the
economic, regulatory, or judicial environment would drive increased
competition in the industry.
SALE OF PARTNERRE LIFE INSURANCE COMPANY OF THE U.S.
On August 4, 2000, the Company concluded the sale (the "Transaction") of
PartnerRe Life Insurance Company of the U.S., and its subsidiaries,
Republic-Vanguard Life Insurance Company, Investors Insurance Corporation,
and Investors Marketing Group, Inc. (collectively, "PartnerRe Life U.S."),
to SCOR Group. The total consideration for the Transaction was $155
million, including the repayment by SCOR Group of a $10 million surplus
note held by the Company. The Company, through a series of retrocession
agreements with SCOR Group, retained certain annuity treaties following the
sale.
RESULTS OF OPERATIONS
The Company concluded the sale of PartnerRe Life U.S. during the third
quarter of 2000 with an effective date of July 1, 2000, and, accordingly,
the results for 2000 included six months of operating earnings and realized
investment losses of PartnerRe Life U.S. while the results for 2002 and
2001 included no such operations. However, the investment income earned on
the proceeds of the sale has offset much of the operating earnings of the
business sold and, therefore, operating earnings, as defined below, for the
periods are comparable.
The Company measures its performance in several ways. Core to this process
is the concept of operating earnings, a measure that focuses on the
underlying fundamentals of our operations. Operating earnings as used by
the Company is defined as net after-tax income excluding net realized
after-tax gains and losses from the sale of investments and after deducting
dividend payments to our preferred shareholders and one-time adjustments
due to the adoption of new accounting standards. Operating earnings focuses
on the underlying fundamentals of our operations without the influence of
realized gains and losses from the sale of investments, which is driven by
the timing of the disposition of investments and not by our operating
performance. Likewise, dividend payments to our preferred shareholders are
excluded; thereby focusing this measure on results for our common
shareholders. Similarly, Management looks at operating earnings per fully
diluted common share. This measurement is calculated by dividing operating
earnings by the weighted average number of common shares and common share
equivalents outstanding. Finally, operating earnings is used in the
calculation of our Return on Equity. Operating Return on Equity is
calculated by dividing operating earnings by the net book value of our
common equity (total shareholders' equity less the aggregate liquidation
value of the preferred shares) at the beginning of the year.
9
PartnerRe
Annual Report 2002
40
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company, on January 1, 2001, adopted SFAS 133. In accordance with the
transition provisions of SFAS 133, the Company recorded a positive
cumulative effect adjustment of $27.8 million, after tax, or $0.54 per
diluted share, in the first quarter of 2001.
Results of operations for the years ended December 31, 2002, 2001, and 2000
were as follows ($ millions, except per share data):
2002 2001 2000
-----------------------------------------------------------------------------------
Net income (loss) $ 190.3 $ (160.5) $ 142.3
Less:
-----------------------------------------------------------------------------------
Net realized investment
(losses) gains net of tax (16.7) 14.1 (69.8)
-----------------------------------------------------------------------------------
Preferred dividends 20.0 20.0 20.0
-----------------------------------------------------------------------------------
Cumulative effect of adopting new
accounting standard, net of tax - 27.8 -
-----------------------------------------------------------------------------------
Operating earnings (loss) available
to common shareholders $ 187.0 $ (222.4) $ 192.1
-----------------------------------------------------------------------------------
Diluted net income (loss)
per common share $ 3.28 $ (3.60) $ 2.41
Less:
-----------------------------------------------------------------------------------
Net realized investment (losses)
gains per common share (0.32) 0.28 (1.38)
-----------------------------------------------------------------------------------
Cumulative effect of adopting
new accounting standard,
net of tax - 0.56 -
-----------------------------------------------------------------------------------
Diluted operating earnings
(loss) per common share $ 3.60 $ (4.44) $ 3.79
-----------------------------------------------------------------------------------
Return on beginning
common shareholders' equity
calculated with net income 11.4% (9.8%) 7.7%
-----------------------------------------------------------------------------------
Less: net realized gains
(losses) net of tax (1.1) 2.3 (4.4)
-----------------------------------------------------------------------------------
Operating return on equity 12.5% (12.1%) 12.1%
-----------------------------------------------------------------------------------
The results for 2001 were impacted by a net loss of $400.0 million or $7.52
per diluted share after tax from the terrorist attack of September 11,
2001. Net income for 2001 was favorably impacted by the cumulative effect
of adopting a new accounting standard, which resulted in an after-tax gain
of $27.8 million.
The next section provides a detailed analysis of the Company's operating
performance for the years ended December 31, 2002, 2001 and 2000.
RESULTS BY SEGMENT
Following a realignment of its 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 segments, Non-life and Life. The Non-life
segment is further divided into three sub-segments, U.S. Property and
Casualty, Global (Non-U.S.) Property and Casualty, and Worldwide Specialty.
The Life segment includes Life, Health, and Annuity lines of 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 U.S. and Global (Non-U.S.) Property and Casualty sub-segments include
property and casualty business as well as motor business. These lines are
generally written in local markets. The U.S. Property and Casualty
sub-segment is comprised of property, casualty, and motor risks generally
originating in the United States, written by PartnerRe U.S. The Global
(Non-U.S.) Property and Casualty sub-segment is comprised of property,
casualty, and motor
10
PartnerRe
Annual Report 2002
41
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
business generally originating outside of the United States, written by
Partner Reinsurance Company and PartnerRe SA. The Worldwide Specialty
sub-segment is comprised of business that is generally considered to be
specialized due to the sophisticated technical underwriting required to
analyze risks, and is global in nature, inasmuch as appropriate risk
management for these lines requires 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 agriculture, aviation/space,
catastrophe, credit/surety, engineering/energy, marine, special risk, and
other lines.
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 and
losses, other income, other operating expenses, amortization of goodwill,
interest expense, distributions related to Trust Preferred and Mandatorily
Redeemable Preferred Securities, net foreign exchange gains and losses,
income tax expense or benefit, and preferred share dividends. Segment
revenues and profits or losses are shown net of intercompany transactions.
The corresponding information for the prior periods has been reclassified
to conform to the current period presentation.
Management measures segment results for the Non-life 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.
The technical ratio differs from the combined ratio as it does not include
the impact of other operating expenses. Management measures segment results
for the Life segment on the basis of "net technical result," which includes
revenues from net premiums earned and allocated investment income, and
expenses from loss and loss adjustment expenses and acquisition costs.
NON-LIFE SEGMENT
U.S. PROPERTY AND CASUALTY BUSINESS
Gross and net premiums written and net premiums earned for the years ended
December 31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
--------------------------------------------------------------------------
Gross premiums written $ 651.1 $ 413.1 $ 293.1
--------------------------------------------------------------------------
Net premiums written 649.0 411.0 291.6
--------------------------------------------------------------------------
Net premiums earned $ 600.0 $ 345.7 $ 268.7
--------------------------------------------------------------------------
Throughout 2002, the Company has observed a combination of rate increases
and improved terms and conditions in the property, casualty, and motor
lines. Notwithstanding the improvement in terms and conditions in the
industry, the Company has remained selective in pursuing business that
meets its profitability objectives.
Gross and net premiums written and net premiums earned for the year ended
December 31, 2002, increased by 58%, 58%, and 74%, respectively, compared
to the year ended December 31, 2001. This growth comes on top of growth in
2001 of 41% for gross written premiums, 41% for net written premiums, and
29% for net premiums earned over the comparable premium numbers in 2000.
The growth for both years results from a combination of increased
participations, pricing and exposures on business renewed during both years
as well as new business opportunities in all lines, but more predominately
in the casualty line. Premiums written are earned on a basis that is
consistent with risks and period of time covered under the terms of the
reinsurance contracts, which generally is one to two years.
11
PartnerRe
Annual Report 2002
42
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Losses and loss expenses and acquisition costs and the corresponding ratios
as a percentage of net premiums earned for the years ended December 31,
2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Losses and loss expenses $ 445.9 $ 443.5 $ 218.9
------------------------------------------------------------------
Acquisition costs 161.1 85.8 62.4
------------------------------------------------------------------
Loss and loss expense ratio 74.3% 128.3% 81.5%
------------------------------------------------------------------
Acquisition costs ratio 26.8 24.8 23.2
------------------------------------------------------------------
Technical ratio 101.1% 153.1% 104.7%
------------------------------------------------------------------
The improvement in the loss and loss expense ratio in 2002 over 2001 is in
large part due to the loss related to the September 11 terrorist attack.
This loss accounts for approximately $174.0 million of the 2001 losses and
loss expenses or 50.3 points on the loss and loss expense ratio for this
segment. In addition to the terrorist attack, 2001 was impacted by a higher
than normal frequency of storms in the United States, most notably Tropical
Storm Allison. The results for 2002 were also impacted by modestly higher
than expected losses being reported by cedents for prior years, most
noticeably in the facultative casualty line, which was terminated in 2000.
The increase in the absolute amount of losses when excluding the loss
relating to the September 11 terrorist attack reflects the growth in
exposure due to the Company's growing book of business. The modestly higher
loss ratio in 2000 versus the loss ratio for 2001 adjusted for the
September 11 attack is the result of the improvements seen in pricing in
2001.
The increase in the absolute acquisition costs for both 2002 compared to
2001 and 2001 compared to 2000 results primarily from the increase in the
related net premiums earned for each period. The increase in the
acquisition costs ratio for 2002 results from an increase in proportional
treaties, for which acquisition costs are typically higher than for
non-proportional treaties, in the property line and an increase in certain
non-proportional contracts in which the acquisition costs are shared
ratably with the cedent.
GLOBAL (NON-U.S.) PROPERTY AND CASUALTY
Gross and net premiums written and net premiums earned for the years ended
December 31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Gross premiums written $ 617.7 $ 491.6 $ 458.5
------------------------------------------------------------------
Net premiums written 599.8 479.7 439.8
------------------------------------------------------------------
Net premiums earned $ 560.2 $ 451.2 $ 426.8
------------------------------------------------------------------
During 2002, the Company has observed a combination of rate increases and
improved terms and conditions in the property and casualty markets in most
countries. Similar improvements were seen in the motor line although to a
more limited extent. Improvements varied broadly by country and type of
business and with the exception of the property line were generally not as
great as the improvements seen in the U.S. Property and Casualty segment.
Notwithstanding the improvement in terms and conditions in the industry,
the Company has remained selective in pursuing business that meets its
profitability objectives.
Gross and net premiums written and net premiums earned for the year ended
December 31, 2002, increased by 26%, 25%, and 24%, respectively, compared
to the same period in 2001. This growth comes on top of growth of 7% for
gross premiums written, 9% for net premiums
12
PartnerRe
Annual Report 2002
43
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
written, and 6% for net premiums earned in 2001 when compared to 2000.
Growth in 2002, and to a lesser extent in 2001, is the result of increased
participations, pricing, and exposures on business renewed during both
years, as well as new business opportunities. Growth during 2002 was
suppressed as a number of proportional treaties were renewed on a
non-proportional basis, which typically carry lower premiums but higher
expected profit margins. This shift in treaty type was most prominent in
the motor line. Premiums written are earned on a basis that is consistent
with the risks and period of time covered under the terms of the
reinsurance contracts, which generally is one to two years.
Losses and loss expenses and acquisition costs along with the corresponding
ratios as a percentage of net premiums earned for the years ended December
31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Losses and loss expenses $ 438.7 $ 388.2 $ 302.8
------------------------------------------------------------------
Acquisition costs 140.5 112.1 119.2
------------------------------------------------------------------
Loss and loss expense ratio 78.3% 86.0% 71.0%
------------------------------------------------------------------
Acquisition costs ratio 25.1 24.8 27.9
------------------------------------------------------------------
Technical ratio 103.4% 110.8% 98.9%
------------------------------------------------------------------
The results for both 2002 and 2001 include higher than expected
catastrophes and other large losses, while the 2000 year results reflect a
more normal level of large loss activity. The European floods that occurred
during the third quarter of 2002 resulted in losses of approximately $31.5
million, which added 5.6 points to the loss ratio for the year for this
segment. The third quarter of 2001 was impacted by the September 11
terrorist attack, which accounted for approximately $35.0 million of the
losses for the year and which added 7.8 points to the loss and loss expense
ratio of this segment. Notwithstanding the losses related to these two
events, the increases in the absolute losses for 2002 and 2001 reflect the
growth in exposure due to a growing book of business. The improvement in
the underlying loss and loss expense ratio for the year 2002 also reflects
the improved market conditions during 2002.
The increase in acquisition costs is likewise the result of the increase in
premium volume for the year. The modest increase in the acquisition cost
ratio in 2002 is caused by the relative increase in property business,
which carries higher acquisition costs.
WORLDWIDE SPECIALTY
Gross and net premiums written and net premiums earned for the years ended
December 31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Gross premiums written $ 1,254.6 $ 834.8 $ 501.4
------------------------------------------------------------------
Net premiums written 1,232.0 802.4 476.3
------------------------------------------------------------------
Net premiums earned $ 1,095.2 $ 704.8 $ 446.0
------------------------------------------------------------------
During 2002, the global reinsurance industry focused on rates, terms, and
conditions with a lower emphasis on market share in the specialty lines
area. In addition, several reinsurers withdraw from these markets, most
notably in the aviation/space line. The Company has attempted to take
advantage of the considerable rate increases and improved terms and
conditions it has seen in the lines of business that comprise this area.
The Worldwide Specialty area saw the most dramatic improvements within the
Non-life segment. Despite these improvements, the Company has remained
selective in pursuing business that meets its profitability objectives and
has allocated capital to those lines where pricing and terms were most
attractive.
13
PartnerRe
Annual Report 2002
44
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Gross and net premiums written and net premiums earned for the year ended
December 31, 2002, increased by 50%, 54%, and 55%, respectively, compared
to 2001. This growth comes on top of growth in gross premiums written of
67%, growth in net premiums written of 68%, and growth in net premiums
earned of 58% during 2001.
This growth for both 2002 and 2001 is the result of a combination of
increased participations, pricing, and exposures on business renewed during
both years and new business opportunities, most noticeably in the aviation,
catastrophe, marine, special risks, and engineering/energy lines. Although
all other lines experienced growth, it was less pronounced, particularly in
the credit/surety line, as the Company has reduced growth in light of the
current economic environment. Premiums written are earned on a basis that
is consistent with the risks and periods of time covered under the terms of
the reinsurance contracts, which generally is one to two years.
Losses and loss expenses and acquisition costs and the corresponding ratio
as a percentage of net premiums earned for the years ended December 31,
2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Losses and loss expenses $ 678.4 $ 675.4 $ 280.1
------------------------------------------------------------------
Acquisition costs 193.8 143.1 96.0
------------------------------------------------------------------
Loss and loss expense ratio 61.9% 95.8% 62.8%
------------------------------------------------------------------
Acquisition costs ratio 17.7 20.3 21.5
------------------------------------------------------------------
Technical ratio 79.6% 116.1% 84.3%
------------------------------------------------------------------
Overall the Worldwide Specialty sub-segment saw benefits from the improved
market conditions, most significantly in the aviation, energy, and
specialty property lines leading to an improvement in the loss and loss
expense ratio for the year. The credit/surety line incurred higher losses
than usual due to the higher number of bankruptcies and insolvencies
experienced during 2002. The results for 2002 include losses of
approximately $88.5 million related to the flooding in Europe during the
third quarter, predominantly in the catastrophe line. This event accounted
for approximately 8.1 points in the loss and loss expense ratio for the
year of this segment. Although the European floods were significant, the
remainder of 2002 was free of large catastrophes. Losses for 2001 were
significantly impacted by the September 11 terrorist attack, which resulted
in a loss primarily in the catastrophe, specialty property and aviation
lines of approximately $191.0 million, accounting for 26.9 points in the
loss and loss expense ratio of this segment. Losses for 2001 were also
impacted by the collapse of Enron, which resulted in losses, primarily in
the surety line, of $47.3 million, accounting for 6.7 points in the loss
and loss expense ratio of this segment.
The increases in the absolute dollar value of acquisition costs for both
2002 and 2001 result primarily from the increases in premium earned during
the periods. The decreases in the acquisition costs ratio are the result of
a higher percentage of business being written on a non-proportional basis,
which generally carries lower acquisition costs.
LIFE SEGMENT
Gross and net premiums written and net premiums earned for the years ended
December 31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Gross premiums written $ 182.3 $ 138.8 $ 186.5
------------------------------------------------------------------
Net premiums written 174.6 132.0 172.6
------------------------------------------------------------------
Net premiums earned $ 170.3 $ 131.8 $ 172.9
------------------------------------------------------------------
14
PartnerRe
Annual Report 2002
45
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The increase in gross and net premiums written and net premiums earned for
2002 is reflective of the new business generated by this segment during the
year. The Company has introduced new products and increased its
participation on treaties. The decrease in premiums from 2000 to 2001 is
the result of the sale of the Company's U.S. life operations during 2000.
Life policy benefits and acquisition costs incurred for the years ended
December 31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
------------------------------------------------------------------
Life policy benefits $ 152.8 $ 124.7 $ 173.9
------------------------------------------------------------------
Acquisition costs 60.7 27.1 41.8
------------------------------------------------------------------
The increase in life policy benefits for the 2002 year is due to the
increase in net premiums earned during the year. The decrease in life
policy benefits, as well as acquisition costs, from 2000 to 2001 is the
result of the sale of the Company's U.S. Life operations. The significant
increase in acquisition costs in 2002 is the result of a $25.0 million
write down of deferred acquisition costs relating to business that was
retained in the sale of the U.S. life reinsurance business in 2000. This
reduction in deferred acquisition costs is due to a shortfall in the assets
held for these treaties relative to their expected level. In addition, the
Company reduced the discount rate used for projecting its future benefit
obligations under this treaty.
PREMIUM DISTRIBUTION BY LINE OF BUSINESS
The distribution of net premiums written by line of business, for all
segments, for the years ended December 31, 2002, 2001, and 2000 was as
follows:
2002 2001 2000
------------------------------------------------------------------
Non-life
------------------------------------------------------------------
Property and Casualty
------------------------------------------------------------------
Property 20% 21% 23%
------------------------------------------------------------------
Casualty 15 13 13
------------------------------------------------------------------
Motor 12 15 17
------------------------------------------------------------------
Worldwide Specialty
------------------------------------------------------------------
Agriculture 6 7 7
------------------------------------------------------------------
Aviation/Space 9 8 4
------------------------------------------------------------------
Catastrophe 11 12 11
------------------------------------------------------------------
Credit/Surety 5 7 8
------------------------------------------------------------------
Engineering/Energy 7 3 -
------------------------------------------------------------------
Marine 3 2 2
------------------------------------------------------------------
Special Risk 5 4 2
------------------------------------------------------------------
Other - 1 1
------------------------------------------------------------------
Life 7 7 12
------------------------------------------------------------------
The comparison of the distribution of net premiums written by line of
business for the years ended December 31, 2002, 2001, and 2000 shows how
the lines of business grew relative to each other. The relative increase in
the casualty, aviation/space, marine, special risk, and engineering/energy
lines of business in 2002 compared to 2001 reflects faster growth, as a
result of the Company reallocating capital to those lines to take advantage
of better pricing, terms, and conditions. The relative decrease in the
motor, agriculture, and credit/surety lines of business in 2002 compared to
2001 reflects slower growth relative to other lines of business where
pricing, terms, and conditions were not as attractive as in the other
lines.
15
PartnerRe
Annual Report 2002
46
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The distribution of gross premiums written by type of treaty for the years
ended December 31, 2002, 2001, and 2000 was as follows:
2002 2001 2000
------------------------------------------------------------------
Non-life Segment
------------------------------------------------------------------
Proportional 52% 51% 58%
------------------------------------------------------------------
Non-Proportional 32 30 23
------------------------------------------------------------------
Facultative 10 11 7
------------------------------------------------------------------
Life Segment
------------------------------------------------------------------
Proportional 5 7 12
------------------------------------------------------------------
Non-Proportional 1 1 -
------------------------------------------------------------------
The Company typically writes business on either a proportional or
non-proportional basis. On a proportional treaty, the Company shares
proportionally in both the premiums and losses of the cedent. In
non-proportional business, the Company typically is exposed to loss events
in excess of a predetermined dollar amount or loss ratio. In both
proportional and non-proportional business, the Company is typically
reinsuring a large group of primary insurance contracts written by the
ceding company. In addition, the Company writes business on a facultative
basis. Facultative arrangements are generally specific to an individual
risk and can be written on either a proportional or non-proportional basis.
Generally, the Company has more influence over pricing, as well as terms
and conditions, in non-proportional and facultative arrangements.
PREMIUM DISTRIBUTION BY GEOGRAPHIC REGION
The geographic distribution of gross premiums written for the years ended
December 31, 2002, 2001, and 2000 was as follows:
2002 2001 2000
----------------------------------------------------------------------
Europe 39% 40% 37%
----------------------------------------------------------------------
North America 44 42 48
----------------------------------------------------------------------
Asia, Australia, and New Zealand 11 12 11
----------------------------------------------------------------------
Latin America and Caribbean 5 5 3
----------------------------------------------------------------------
Africa 1 1 1
----------------------------------------------------------------------
While the Company experienced growth in every region, the most significant
growth was seen in the North American and European markets, where gross
premiums written were up 50% and 39%, respectively.
PREMIUM BY PRODUCTION SOURCE
The Company produces its business both through brokers and through direct
relationships with insurance company clients. The distribution of gross
premiums written by production source for the years ended December 31,
2002, 2001, and 2000 was as follows:
2002 2001 2000
------------------------------------------------------------------
Broker 63% 60% 55%
------------------------------------------------------------------
Direct 37% 40% 45%
------------------------------------------------------------------
The increase in the use of brokers in 2002 and 2001 reflects the increase
in our U.S. Non-life business.
16
PartnerRe
Annual Report 2002
47
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING EXPENSES
Operating expenses for the years ended December 31, 2002, 2001, and 2000
were $161.7 million, $117.6 million, and $103.2 million, respectively, and
are comprised primarily of personnel and infrastructure costs. The
increases in operating expenses in 2002 and 2001 were the result of an
increase in headcount, from 612 employees at the end of 2000 to 785
employees at the end of 2002, as well as the amortization of the Company's
new reinsurance and financial systems, which were put into service in 2002
and 2001. Operating expenses represented 6.7% of net earned premiums (both
Life and Non-life) in 2002 compared to 7.2% in 2001 and 7.9% in 2000.
INVESTMENT RESULTS
Net investment income and net realized investment gains (losses) for the
years ended December 31, 2002, 2001, and 2000 were as follows ($ millions):
2002 2001 2000
---------------------------------------------------------------------------
Net investment income $ 245.2 $ 239.6 $ 273.6
---------------------------------------------------------------------------
Net realized investment (losses)
gains (6.8) 20.2 (62.7)
--------------------------------------------------------------------------
The increase in investment income in 2002 reflects a larger volume of
invested assets resulting from positive operating cash flow for the year of
$687.2 million as well as the capital raised in the fourth quarter of 2001,
the effects of which are partially offset by the declining interest rate
environment seen during the year. The decline in net investment income in
2001 is attributed to the sale of PartnerRe Life U.S. Excluding the
investment income from PartnerRe Life U.S., investment income in 2001 is 7%
higher than it was in 2000. This increase is primarily attributable to
strong cash flows from operations in 2001, mitigated by the effects of
lower interest rates earned on both new and reinvested funds.
Net realized investment gains and losses on sales of investments are a
function of the timing of disposition of available for sale fixed
maturities and equity securities, charges for the recognition of
other-than-temporary impairments in the Company's investment portfolio,
changes in the market value of trading securities, fair value adjustments
on total return and interest swaps, and the net ineffectiveness of the
Company's hedging activities.
FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES
INVESTMENTS
The Company's investment portfolio is categorized according to two distinct
accounting classifications -- "available for sale" and "trading"
securities. For a description of the different accounting treatments
afforded to these separate accounting classifications, refer to Note 3(f)
to the Consolidated Financial Statements.
Investments classified as available for sale comprise 98% of the Company's
total portfolio (excluding cash and cash equivalents) with 2% being
classified as trading securities. Included in the available for sale
category is the Company's portfolio of fixed maturity investments,
comprised primarily of investment grade securities issued by the U.S.
government or U.S. government sponsored agencies, state and foreign
governments and corporate debt securities. In addition, as part of its
investment strategy, the Company invests a small percentage of its
portfolio in less-than-investment grade bonds, which are also classified as
available for sale. Similarly, the Company has an allocation to convertible
securities in its investment portfolio; however, these particular
securities are classified as trading securities (for which changes in fair
value are recorded in net realized investment gains and losses in the
Consolidated Statements of Operations).
17
PartnerRe
Annual Report 2002
48
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The cost, market value, gross unrealized gains, and gross unrealized losses
on investments classified as available for sale at December 31, 2002 and
2001 were as follows ($ 000's):
Gross Unrealized Gross Unrealized
Cost/(1)/ Gains Losses Market Value
- -------------------------------------------------------------------------------------------------------------
2002
- -------------------------------------------------------------------------------------------------------------
Fixed maturities
- -------------------------------------------------------------------------------------------------------------
- - U.S. Government $ 403,708 $ 21,030 $ (261) $ 424,477
- -------------------------------------------------------------------------------------------------------------
- - states or political subdivisions
of states of the U.S. 98,249 5,921 (5) 104,165
- -------------------------------------------------------------------------------------------------------------
- - other foreign governments 928,840 19,092 - 947,932
- -------------------------------------------------------------------------------------------------------------
- - corporate 1,728,569 88,886 (6,688) 1,810,767
- -------------------------------------------------------------------------------------------------------------
- - mortgage / asset-backed securities 839,016 19,456 (219) 858,253
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities 3,998,382 154,385 (7,173) 4,145,594
- -------------------------------------------------------------------------------------------------------------
Short-term investments 3,787 15 (1) 3,801
- -------------------------------------------------------------------------------------------------------------
Equities 493,893 26,844 (47,574) 473,163
- -------------------------------------------------------------------------------------------------------------
$ 4,496,062 $ 181,244 $ (54,748) $ 4,622,558
- -------------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Cost/(1)/ Gains Losses Market Value
- -------------------------------------------------------------------------------------------------------------
2001
- -------------------------------------------------------------------------------------------------------------
Fixed maturities
- -------------------------------------------------------------------------------------------------------------
- - U.S. Government $ 477,782 $ 16,419 $ (1,847) $ 492,354
- -------------------------------------------------------------------------------------------------------------
- - states or political subdivisions
of states of the U.S. 83,149 537 (343) 83,343
- -------------------------------------------------------------------------------------------------------------
- - other foreign governments 720,342 8,362 (3,084) 725,620
- -------------------------------------------------------------------------------------------------------------
- - corporate 1,415,508 34,428 (27,303) 1,422,633
- -------------------------------------------------------------------------------------------------------------
- - mortgage / asset-backed securities 685,987 13,287 (2,465) 696,809
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities 3,382,768 73,033 (35,042) 3,420,759
- -------------------------------------------------------------------------------------------------------------
Short-term investments 39,547 22 (5) 39,564
- -------------------------------------------------------------------------------------------------------------
Equities 408,879 32,707 (40,761) 400,825
- -------------------------------------------------------------------------------------------------------------
$ 3,831,194 $ 105,762 (75,808) 3,861,148
- -------------------------------------------------------------------------------------------------------------
/(1)/ Cost is amortized cost for fixed maturities and short-term
investments and original cost for equity securities.
The market value of those investment securities classified as trading was
$75.3 million and $77.5 million at December 31, 2002 and 2001,
respectively.
The Company employs a conservative investment philosophy. It maintains a
high-quality, well-balanced and liquid portfolio having the dual objectives
of optimizing current income and achieving capital appreciation. Invested
assets supporting our reinsurance liabilities (referred to as "liability
funds") are invested entirely in high-quality fixed income securities. The
preservation of liquidity and protection of capital are the primary
investment objectives for these assets. The portfolio managers are required
to follow strict investment guidelines as to minimum ratings, and issuer
and sector concentrations. Invested assets representing the capital of the
Company (referred to as "capital funds") are invested to maximize total
return, subject to strict risk assumption and portfolio diversification
guidelines, including issuer and sector concentration limitations. Capital
funds may be invested in investment-grade fixed income securities,
less-than-investment grade bonds, convertible securities, preferred stocks,
and common stocks. The Company believes that an allocation of a portion of
its investments to equities is both prudent and desirable inasmuch as it
helps to achieve broader asset diversification and maximization of the
portfolio's total return over time. Since the Company's allocation to
equities is predicated on a long-term strategic investment in this asset
class, the Company has the ability to and fully expects to withstand the
effects of cyclical market value swings of the broader equity markets on
its portfolio.
18
PartnerRe
Annual Report 2002
49
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table provides a breakdown of the credit quality of the
Company's fixed income securities at December 31, 2002:
% of Total Fixed
Rating Category Income Securities
---------------------------------------------------------
AAA 56%
---------------------------------------------------------
AA 13%
---------------------------------------------------------
A 16%
---------------------------------------------------------
BBB 9%
---------------------------------------------------------
Below Investment Grade 6%
---------------------------------------------------------
At December 31, 2002, approximately 94% of the Company's fixed income
portfolio carried investment-grade ratings. At December 31, 2002, the
Company had gross unrealized losses on its fixed maturities of $7.2 million
of which $2.9 million was attributable to investment-grade securities and
$4.3 million was attributable to securities rated less than investment
grade.
The gross unrealized losses recorded on the Company's portfolio of fixed
maturity securities at December 31, 2002 and 2001 related primarily to the
Company's portfolio of less-than-investment grade fixed income securities.
While interest rates were generally declining, interest rates associated
with this asset class increased which resulted in gross unrealized losses.
The Company believes that these decreases in values are temporary and
additional analysis of individual securities for potential
other-than-temporary impairments was carried out by the Company to validate
its belief. Additionally, the Company has the intent and ability to retain
such investments for a period of time sufficient to allow for any
anticipated recovery in market value or to hold the securities to their
maturity. The tables below (see section titled "Maturity Distribution")
show the distribution by contractual maturity date of available for sale
fixed maturity investments at December 31, 2002.
The gross unrealized losses recorded on the Company's portfolio of equity
securities at December 31, 2002 and 2001 resulted primarily from decreases
in quoted market values from the dates that certain investment securities
within that portfolio were acquired as opposed to the fundamental changes
in the issuer's financial performance and near-term financial prospects.
Therefore, these decreases in values are also viewed as temporary.
The Company's equity portfolios are currently managed by professional
external investment managers. If at any time an individual equity holding
is deemed to be impaired with little or no expectation for recovery, then
the manager will in most cases take immediate action to sell the security
and realize the loss. The process by which managers evaluate their holdings
for potential impairments varies by individual manager; however, they
typically perform ongoing evaluation of each security and consider such
things as poor operating results or weakened financial condition,
management changes and other available evidence as indicators of potential
impairment problems. This process is reviewed as part of the Company's
ongoing monitoring of the external managers and the portfolios they manage.
The Company does not adopt broad sector or market views regarding potential
impairments in its equity portfolios. In Management's opinion, such
evaluation assessment is most appropriately applied at the security level
and only in rare cases would there be a systemic impairment situation
affecting a group of equity holdings in one industry sector or issued in a
particular market.
19
PartnerRe
Annual Report 2002
50
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Approximately 96% of the invested assets currently held by the Company are
publicly traded and, accordingly, market valuations for such securities are
readily available. For those securities not publicly traded (4% of the
Company's invested assets or approximately $206 million), consisting
primarily of bank loan portfolios, non-publicly traded real estate funds,
private placement equity investments, and other specialty asset classes,
valuation techniques depend on the nature of the individual assets. The
valuation techniques used by the Company's investment managers are reviewed
by the Company and are generally commensurate with standard valuation
techniques for each asset class.
The following table presents an analysis of the continuous periods during
which we have held investment positions that were carried at an unrealized
loss (excluding short-term investments and investments classified as
trading securities) as of December 31, 2002 ($ millions):
Less than Between More than
1 Year 1 and 2 Years 2 Years Total
------------------------------------------------------------------------------------------------
Fixed maturity investments:
------------------------------------------------------------------------------------------------
Market value $ 127.8 $ 22.4 $ 11.0 $ 161.2
------------------------------------------------------------------------------------------------
Amortized cost 132.1 23.6 12.7 168.4
------------------------------------------------------------------------------------------------
Unrealized loss 4.3 1.2 1.7 7.2
------------------------------------------------------------------------------------------------
Equity investments:
------------------------------------------------------------------------------------------------
Market value $ 175.0 $ 191.4 $ 17.5 $ 383.9
------------------------------------------------------------------------------------------------
Amortized cost 197.3 214.0 20.1 431.4
------------------------------------------------------------------------------------------------
Unrealized loss 22.3 22.6 2.6 47.5
------------------------------------------------------------------------------------------------
Total:
------------------------------------------------------------------------------------------------
Market value $ 302.8 $ 213.8 $ 28.5 $ 545.1
------------------------------------------------------------------------------------------------
Amortized cost 329.4 237.6 32.8 599.8
------------------------------------------------------------------------------------------------
Unrealized loss 26.6 23.8 4.3 54.7
------------------------------------------------------------------------------------------------
% of total gross unrealized losses 48% 44% 8% 100%
------------------------------------------------------------------------------------------------
The Company's largest single security unrealized loss position as at
December 31, 2002, was an unrealized loss of $2.8 million.
During the year ended December 31, 2002, the Company recorded charges for
other-than-temporary impairments relating to its investment portfolio in
the aggregate amount of $33.8 million. The Company did not record any such
charges during each of the years ended December 31, 2001 and 2000.
Typically, the Company considers impairment related to any specific issuer
of a security to have occurred when events specific to a particular issuer
have occurred that are likely to prevent the Company from recovering its
initial investment in the security. Securities that are deemed to be
impaired are generally sold immediately, with the effect of the valuation
adjustment being reflected in realized investment losses in the
Consolidated Statements of Operations. In our determination of
other-than-temporary impairment, we consider several factors and
circumstances including the issuer's overall financial condition, the
issuer's credit and financial strength ratings, general market conditions
in the industry or geographic region in which the issuer operates, general
economic and financial market conditions, a prolonged period (typically
nine months or longer) in which the fair value of an issuer's securities
remains below our cost (typically 30% or more below cost or amortized cost
on a continuous basis) and factors that may raise doubt about the issuer's
ability to continue as a going concern. Other-than-temporary impairments
are recorded as realized investment losses on the Consolidated Statements
of Operations, which reduce net income and earnings per share. Temporary
losses are recorded as unrealized investment losses (which do not impact
net income and earnings per share but reduce other comprehensive income),
except for those related to trading securities (which are recorded
immediately in net income).
20
PartnerRe
Annual Report 2002
51
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MATURITY DISTRIBUTION
The distribution of available for sale fixed maturities and short-term
investments at December 31, 2002, by contractual maturity date is shown
below ($ 000's):
Amortized Market
Cost Value
------------------------------------------------------------------------
One year or less $ 395,001 $ 399,683
------------------------------------------------------------------------
More than one year through five years 1,290,905 1,338,015
------------------------------------------------------------------------
More than five years through ten years 1,158,753 1,214,477
------------------------------------------------------------------------
More than ten years 318,494 338,967
------------------------------------------------------------------------
Subtotal 3,163,153 3,291,142
------------------------------------------------------------------------
Mortgage / asset-backed securities 839,016 858,253
------------------------------------------------------------------------
Total $ 4,002,169 $ 4,149,395
------------------------------------------------------------------------
The maturity distribution for those available for sale fixed maturities
that were in an unrealized loss position as at December 31, 2002, was as
follows ($ 000's):
Gross
Amortized Market Unrealized
Cost Value Loss
--------------------------------------------------------------------------
One year or less $ 5,351 $ 4,138 $ (1,213)
--------------------------------------------------------------------------
More than one year through five
years 28,117 26,670 (1,447)
--------------------------------------------------------------------------
More than five years through ten
years 42,139 40,121 (2,018)
--------------------------------------------------------------------------
More than ten years 28,001 25,724 (2,277)
--------------------------------------------------------------------------
Subtotal 103,608 96,653 (6,955)
--------------------------------------------------------------------------
Mortgage / asset-backed securities 64,746 64,528 (218)
--------------------------------------------------------------------------
Total $ 168,354 $ 161,181 $ (7,173)
--------------------------------------------------------------------------
As discussed above, the Company generally has the intent and ability to
retain its fixed maturity investments for a period of time sufficient to
allow for any anticipated recovery in market value or to hold the
securities to their maturity.
REALIZED GAINS AND LOSSES
Proceeds from the sales of investments classified as available for sale for
the years ended December 31, 2002, 2001, and 2000 were $5,197.4 million,
$3,033.1 million, and $5,848.4 million, respectively. Realized investment
gains and losses on securities classified as available for sale for the
years ended December 31, 2002, 2001, and 2000 were as follows ($ 000's):
2002 2001 2000
--------------------------------------------------------------------------------------
Gross realized gains $ 113,089 $ 92,717 $ 121,475
--------------------------------------------------------------------------------------
Gross realized losses (139,551) (52,933) (138,762)
--------------------------------------------------------------------------------------
Total net realized investment (losses) gains $ (26,462) $ 39,784 $ (17,287)
--------------------------------------------------------------------------------------
As mentioned above, the Company's asset managers have the dual investment
objectives including optimization of current income and achieving capital
appreciation. To meet these objectives, it is often necessary and desirable
to sell securities when opportunities for superior expected returns are
identified. Accordingly, recognition of realized gains and losses is
considered by the Company to be a typical consequence of our ongoing
investment management activities. Included in gross realized losses in 2002
are charges for other-than-temporary impairments in the aggregate amount of
$33.8 million as mentioned previously. Although the Company did not record
any charges for other-than-temporary impairments during 2001, the Company
did
21
PartnerRe
Annual Report 2002
52
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
record realized losses (included in the aggregate gross realized losses
above) in connection with various "headline losses" occurring during the
year. This includes $4.2 million related to Global Crossing, $1.7 million
for Enron and $1.0 million for Worldcom. The Company liquidated its
investment positions in each of these names either prior to or upon
announcement of the respective bankruptcies of these companies.
For the years ended December 31, 2002 and 2001, the change in net
unrealized investment gains and losses on trading securities resulted in a
net gain of $5.3 million and a net loss of $1.2 million, respectively,
being recognized in net realized investment gains and losses in the
Consolidated Statements of Operations. There were no gains or losses
recognized in prior years since the Company did not classify any of its
investments as trading prior to January 1, 2001.
In addition, the Company recorded a net gain of $5.4 million in 2002 and a
net loss of $0.4 million in 2001, in the net realized investment gains and
losses in the Consolidated Statements of Operations, representing the
ineffectiveness of its designated fair value hedging activities.
SHAREHOLDERS' EQUITY AND CAPITAL MANAGEMENT
Shareholders' equity at December 31, 2002 was $2.1 billion, a 19% increase
compared to $1.7 billion at December 31, 2001. The major factors
influencing the level of shareholders' equity in 2002 were:
- net income of $190.3 million;
- dividend payments of $78.4 million;
- the $27.2 million positive effect of the currency translation adjustment
resulting from the strengthening of the Euro against the U.S. dollar;
- $95.6 million increase in the market value of investments, net of
deferred taxes, recorded in equity;
- issuance of shares in a common stock offering and under the Company's
Stock Plans for $99.1 million; and
- payments of $4.9 million under purchase contracts for common shares.
In 2001, following the event of September 11, the Company raised $400.0
million in new capital in the form of Trust Preferred and Mandatorily
Redeemable Preferred Securities. $200.0 million was raised in the form of
Trust Preferred Securities, which have a 30-year maturity with an option to
extend to 49 years. The Trust Preferred Securities were issued out of a
subsidiary of the Company's U.S. operations. Additionally, the Company
issued $200 million of Premium Equity Participating Security Units ("PEPS
Units"), where each PEPS Unit consists of a purchase contract to buy common
shares of the Company prior to December 31, 2004, and one of the Company's
Series B Preferred Shares. Series B Preferred Shares are redeemable on June
30, 2005 and are pledged as collateral to secure the holders' obligation
under the purchase contract.
The table below sets forth the capital structure of the Company at December
31, 2002 and 2001 ($ 000's):
2002 2001
-----------------------------------------------------------------------------------------
Capital Structure:
Long-term Debt $ 220,000 8% $ 220,000 9%
Trust Preferred Securities 200,000 7 200,000 8
Series B Cumulative Redeemable
Preferred Shares (PEPS) 200,000 7 200,000 8
8% Series A Cumulative
Preferred Shares 242,163 9 242,163 10
Common Shareholders' Equity 1,835,019 69 1,505,946 65
-----------------------------------------------------------------------------------------
Total Capital $ 2,697,182 100% $ 2,368,109 100%
-----------------------------------------------------------------------------------------
22
PartnerRe
Annual Report 2002
53
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASSETS
At December 31, 2002, total assets were $8.7 billion compared to $7.2
billion at December 31, 2001. The increase in total assets is the result of
the Company's growing reinsurance operations, the positive cash flows from
operations for the year as well the increase in the unrealized gain on the
Company's investment portfolio.
Total invested assets, including cash and cash equivalents, were $5.4
billion as at December 31, 2002, compared to $4.4 billion at December 31,
2001. The major factors influencing the increase in cash and invested
assets in 2002:
- issuance of shares in a common stock offering and under the Company's
Stock Plans for $99.1 million;
- cash inflows from operations of $687.2 million;
- increase in unsettled security trades of $46.6 million;
- the increase in the net unrealized gains on investments of $78.6 million;
- the positive influence of the effect of stronger Euro relative to the
U.S. dollar as it relates to conversion of PartnerRe SA's invested assets
and cash balances into U.S. dollars; offset by
- dividend payments totaling $78.4 million; and
- distributions on trust preferred and PEPS securities of $31.8 million.
At December 31, 2002 and 2001, fixed maturities, short-term investments and
cash and cash equivalents had an average expected duration of 3.3 years and
3.7 years, respectively. As of December 31, 2002, approximately 85% of the
fixed maturities were rated A- or better by Standard & Poor's (or estimated
equivalent) compared to 82% as of December 31, 2001.
At December 31, 2002, fixed maturities, short-term investments and cash and
cash equivalents had an average yield to maturity at market of 3.5%,
compared to 5.1% as at December 31, 2001. The decrease in average yield to
maturity in 2002 was primarily due to the decline in interest rates during
2002. The prime rate fell from 4.75% to 4.25% while 12 month LIBOR (USD)
declined from 2.42% to 1.45%.
LIABILITIES
The Company has recorded Non-life reserves for unpaid losses and loss
expenses of $3.7 billion and $3.0 billion at December 31, 2002 and 2001,
respectively. Policy benefits for life contracts were $816.0 million and
$693.3 million at December 31, 2002 and 2001, respectively. The increase in
the value of unpaid losses and loss expenses relates primarily to the
overall growth in business.
As discussed further in Note 5 to the Consolidated Financial Statements,
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 2002 increased to $687.2 million from $363.8
million in 2001. This increase in cash flow is primarily attributable to
the significant growth in business during the year. The Company has
received requests for and has subsequently paid out $107 million of its
estimated September 11 loss of $400 million.
23
PartnerRe
Annual Report 2002
54
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As a holding company, the Company relies primarily on cash dividends from
Partner Reinsurance Company and PartnerRe SA, including its subsidiary,
PartnerRe U.S. (collectively the "reinsurance subsidiaries") for its cash
flow. Although the payment of dividends by the reinsurance subsidiaries to
the Company is limited under Bermuda and French laws and certain insurance
statutes of various U.S. states in which PartnerRe U.S. is licensed to
transact business, there are presently no significant restrictions on the
payment of dividends by the reinsurance subsidiaries; except that PartnerRe
U.S. may not pay cash dividends without prior regulatory approval. (See
Note 12 to the Consolidated Financial Statements.)
The Company has cash outflows in the form of operating expenses and
dividends to both common and preferred shareholders. Holding company
operating expenses were $17.2 million in 2002. During 2002 the Company paid
$58.4 million in dividends to its common shareholders in the form of
quarterly dividends of $0.28 per share in the first quarter and $0.29 per
share for the three subsequent quarters of 2002. Additionally, the Company
paid the holders of its Series A Preferred Stock $20.0 million in dividends
during the year. The Company also paid $16.0 million during 2002 on the
PEPS Units.
PartnerRe U.S. has $220.0 million in outstanding third party debt as well
as $200 million of Trust Preferred Stock outstanding. Interest payments on
the debt amounted to approximately $13.0 million per year and dividends on
the Trust Preferred Stock amounted to $15.8 million. Payments under these
two obligations are currently made from cash on hand at the U.S. holding
company.
The reinsurance subsidiaries of the Company depend upon cash flow from the
collection of premiums as well as investment income. Cash outflows are in
the form of claims payments, operating expenses as well as dividend
payments to the holding company, and additionally, in the case of PartnerRe
U.S., interest payments on the long-term debt and dividends on the Trust
Preferred Stock. Historically the operating 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.
Some of the Company's treaties contain special funding and termination
clauses that are triggered in the event the Company is downgraded by one of
the major rating agencies to levels specified in the treaties, or the
Company's capital is significantly reduced. If such an event were to
happen, the Company would be required, in certain instances, to post
collateral in the form of letters of credit and/or trust accounts against
existing outstanding losses, if any, related to the treaty. In a limited
number of instances, the subject treaties could be cancelled retroactively
or commuted by the cedent.
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 (formerly the French franc), 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. As a result of the PartnerRe SA acquisition in 1997, the
Company's most significant foreign currency exposure is to the Euro. The
Euro increased in value by 18% in 2002 (from .89 to 1.05 U.S. dollar per
Euro) thereby increasing book value as the aggregate currency translation
loss was reduced from $58.0 million as at December 31, 2001 to $30.8
million at December 31, 2002.
EFFECTS OF INFLATION
The effects of inflation are considered implicitly in pricing and
estimating reserves for unpaid losses and loss adjustment expenses. The
actual effects of inflation on the results of operations of the Company
cannot be accurately known until claims are ultimately settled.
24
PartnerRe
Annual Report 2002
55
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," (SFAS 141) and SFAS No.
142, "Goodwill and Other Intangible Assets" (SFAS 142).
The adoption of SFAS 141 had no impact on the Company's Consolidated
Financial Statements. The adoption of SFAS 142 has resulted in the
elimination of a quarterly amortization expense related to goodwill. The
following table reflects pro forma net income (loss), and basic and diluted
net income (loss) per share as if SFAS 142 had been applied since January
1, 2000 ($ 000's, except per share data):
2002 2001 2000
-----------------------------------------------------------------------------------------
Net Income (loss)
-----------------------------------------------------------------------------------------
Net income (loss) as reported $ 190,302 $ (160,482) $ 142,307
-----------------------------------------------------------------------------------------
Goodwill amortization - 26,035 26,034
-----------------------------------------------------------------------------------------
Adjusted net income (loss) $ 190,302 $ (134,447) $ 168,341
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Basic net income (loss) per share
-----------------------------------------------------------------------------------------
Basic net income (loss) as reported $ 3.37 $ (3.60) $ 2.48
-----------------------------------------------------------------------------------------
Goodwill amortization - 0.52 0.53
-----------------------------------------------------------------------------------------
Adjusted basic net income (loss) $ 3.37 $ (3.08) $ 3.01
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Diluted net income (loss) per share
-----------------------------------------------------------------------------------------
Diluted net income (loss) per share $ 3.28 $ (3.60) $ 2.41
-----------------------------------------------------------------------------------------
Goodwill amortization - 0.52 0.52
-----------------------------------------------------------------------------------------
Adjusted net income (loss) $ 3.28 $ (3.08) $ 2.93
-----------------------------------------------------------------------------------------
Management has performed a transitional goodwill impairment test during the
second quarter of 2002 and at that time concluded that there was no
impairment to the value of the Company's goodwill asset. SFAS 142 requires
that impairment valuations be performed annually or more frequently if
certain indicators are encountered. In connection with the transitional
goodwill impairment test, the Company has (i) identified its reporting
units, (ii) determined 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) determined the fair
value of each reporting unit. If the carrying value of any reporting unit
had exceeded its fair value, then detailed fair values for each of the
assigned assets (excluding goodwill) and liabilities would have been
determined to calculate the amount of goodwill impairment, if any. The
Company updated its goodwill impairment test as at September 30, 2002 and
determined that no adjustment to goodwill was necessary. The Company has
established September 30 as the date for performing the Company's annual
impairment test.
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
as amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133" and by SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," 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 of 2001 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.
25
PartnerRe
Annual Report 2002
56
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 made 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 of 2001. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OVERVIEW
Management believes the Company is principally exposed to four types of
market risk: interest rate risk, foreign currency risk, credit risk and
equity price risk. How these risks relate to the Company, and the process
used to manage them, is discussed below.
The Company's investment philosophy distinguishes between assets that are
matched against the estimated reinsurance liabilities ("liability funds")
and those assets that represent shareholder capital ("capital funds").
Liability funds are invested in a way that match them to the corresponding
liabilities in both duration and currency composition. This procedure seeks
to immunize the capital of the Company against changes in interest rates
and currency exchange rates. As the focus of this disclosure is to identify
risk exposures that impact the market value of assets alone, it is
important for the reader to recognize that the risks discussed herein are
significantly mitigated to the extent that the Company's investment
strategy allows market forces to influence the economic valuation of both
assets and liabilities in the same way. At December 31, 2002, liability
funds represented 59% (or $3.1 billion) of the Company's total investment
assets.
At December 31, 2002, capital funds represented 41% (or $2.2 billion) of
the Company's total investment assets. These assets represent shareholder
capital and they are invested in a diversified portfolio that has the
objective of maximizing investment return, subject to prudent risk
constraints. Capital funds contain most of the asset classes typically
viewed as offering a higher risk, higher return profile: primarily longer
duration fixed income securities, common stock, convertible and high yield
bonds, and real estate in addition to high quality investment grade
securities. The Company's investment philosophy is to reduce foreign
currency risk on capital funds by investing primarily in U.S. dollar
investments. In considering the market risk of capital funds, it is
important to recognize the benefits of portfolio diversification. Although
these asset classes in isolation may introduce more risk into the
portfolio, market forces have a tendency to influence each class in
different ways and at different times. Consequently, the aggregate risk
introduced by a portfolio of these assets should be less than might be
estimated by summing the individual risks.
The Company's investment strategy allows the use of derivative securities,
subject to strict limitations. Derivative instruments may be used to hedge
market risk, or to replicate investment positions or market exposures that
would be allowed under Company investment policy if implemented in other
ways. The use of financial leverage, whether achieved through derivatives
or margin borrowing, is prohibited without the express approval of the
Board of Directors. The Company also imposes a high standard for the credit
quality of counterparties in all derivative transactions. See Note 3(k) to
the Consolidated Financial Statements for additional disclosure concerning
derivatives.
The following comments address those areas where the Company believes it
has exposure to material market risk in its operations.
26
PartnerRe
Annual Report 2002
57
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTEREST RATE RISK
The Company's fixed income portfolio is exposed to interest rate risk.
Fluctuations in interest rates have a direct impact on the market valuation
of these securities. As interest rates rise, market values of fixed income
portfolios fall, and vice versa. The Company manages interest rate risk on
liability funds by constructing bond portfolios in which the economic
impact of a general interest rate shift is comparable to the related
liabilities. This process involves matching the duration of the portfolio
to the estimated duration of the liabilities. For loss reserves and policy
benefits related to Non-life and traditional Life business, the estimated
duration of the Company's liabilities is based on projected claims payout
patterns. For policy benefits related to life annuity business, the Company
estimates duration based on its commitment to annuitants. The Company
believes that this matching process mitigates the overall interest rate
risk on an economic basis.
The maturity distribution of the Company's available for sale fixed income
and short-term investments at December 31, 2002 was as follows ($ 000's):
Amortized Cost Market Value
------------------------------------------------------------------------
One year or less $ 395,001 $ 399,683
More than one year through five years 1,290,905 1,338,015
More than five years through ten years 1,158,753 1,214,477
More than ten years 318,494 338,967
------------------------------------------------------------------------
Subtotal 3,163,153 3,291,142
Mortgage / asset-backed securities 839,016 858,253
------------------------------------------------------------------------
Total $ 4,002,169 $ 4,149,395
------------------------------------------------------------------------
A certain proportion of the fixed income portfolio is designated as capital
funds. The Company manages the exposure to interest rate volatility by
choosing a duration profile which it believes will optimize the risk-reward
relationship.
The Company holds approximately $858.3 million (or 15.9%) of its total
invested assets in mortgage-related securities. These assets are exposed to
prepayment risk, the adverse impact of which is more evident in a declining
interest rate environment. In such an environment, holders of individual
mortgages increase the frequency with which they prepay the outstanding
principal before the maturity date and refinance at lower interest cost.
This can cause a diminution of future investment income (relative to an
equivalent fixed income security without prepayment risk).
The Company estimates that a 100 basis point increase or decrease in
interest rates (across all currencies) would result in a $160 million
decline or increase, respectively, in the market value of its fixed income
portfolio (including mortgage-related securities). This does not take into
account taxes or the corresponding reduction or increase, respectively, in
the economic value of its reinsurance liabilities, which, as noted above,
would substantially offset the negative effect on invested assets.
As noted above, the Company strives to match the currency exposure in its
fixed income portfolios to its multi-currency liabilities. The Company
believes this matching process creates a diversification benefit.
Consequently, the exact market value effect of a change in interest rates
will depend on which countries experience interest rate changes and the
currency mix of the Company's fixed income portfolio at the time of rate
changes. See "Foreign Currency Risk."
Interest rate movements also affect the economic values of the Company's
outstanding fixed-rate debt obligations and preferred stock in the same way
as they affect the Company's fixed income investments, and this can result
in a liability whose economic value is different from the value reported in
the Consolidated Financial Statements. The Company believes
27
PartnerRe
Annual Report 2002
58
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
the economic fair values and carrying values of its outstanding fixed-rate
debt and preferred stock obligations as at December 31, 2002 were as
follows ($ 000's):
Carrying Value Fair Value
----------------------------------------------------------------------------
Long-term debt $ 220,000 $ 238,310
----------------------------------------------------------------------------
Trust Preferred, Mandatorily Redeemable
Preferred Securities and Purchase Contracts
----------------------------------------------------------------------------
Trust Preferred Securities 200,000 205,840
----------------------------------------------------------------------------
Mandatorily Redeemable Preferred Securities
and Purchase Contracts (PEPS Units) 200,000 210,800
----------------------------------------------------------------------------
Series A Cumulative Preferred Shares 250,000 255,000
----------------------------------------------------------------------------
Fair value of the outstanding fixed-rate debt has been calculated as the
present value of estimated future cash flows using a discount rate
reflective of market interest rates, which is lower than the original
interest rate on the debt of 5.81%. For the Company's Trust Preferred
Securities, PEPS Units and Series A Cumulative Preferred Shares, fair value
is based on quoted market prices, while carrying value is based on the
liquidation value of the securities.
FOREIGN CURRENCY RISK
Through its multinational reinsurance operations, the Company conducts
business in a variety of foreign (non-U.S.) currencies, the principal
exposures being the Euro, the British pound, the Swiss franc, the Canadian
dollar and the Japanese yen. Assets and liabilities denominated in foreign
currencies are exposed to changes in currency exchange rates. As the
Company's functional currency is the U.S. dollar, exchange rate
fluctuations may materially impact the Company's consolidated results of
operations and financial position. However, the Company employs two
strategies to manage its exposure to foreign currency exchange risk.
The first strategy involves hedging related to the Company's "liability
funds" where assets are matched against liabilities both by currency and
duration. However, the Company does not maintain invested assets in
currencies where its liability exposures are immaterial or in countries
where it is unable or impractical to maintain investments. In such cases,
the Company is not hedged and is exposed to currency risk. However, the
Company does not believe that the currency risks corresponding to these
unhedged positions are material. For the main (non-U.S. dollar) currencies
in which the Company transacts business, identified above, the Company
employs a hedging strategy utilizing derivative financial instruments, as
appropriate, to ensure its liability funds are matched by currency. See
Note 3(k) to the Consolidated Financial Statements for additional
information about the Company's currency hedging activities.
The second strategy employed is to maintain capital funds primarily in U.S.
dollar investments. To the extent that the Company has net asset positions
invested in non-U.S. dollar currencies, forward currency contracts may be
used to hedge these non-U.S. dollar currency exposures.
An additional factor mitigating the Company's foreign currency risk is the
ongoing nature of its reinsurance operations. Cash receipts in foreign
currencies from premiums can be used to pay claims and expenses incurred in
the same currency.
As of December 31, 2002, 70% of the Company's total investments were in
U.S. dollar denominated instruments and 30% were non-U.S. dollar
investments identified as "liability funds" (matched to corresponding
liabilities or hedged to the U.S dollar as discussed above).
CREDIT RISK
The Company has exposure to credit risk primarily as a holder of fixed
income securities. The Company controls this exposure by emphasizing
investment grade credit quality in the fixed income securities it
purchases. At December 31, 2002, approximately 56% of the
28
PartnerRe
Annual Report 2002
59
PartnerRe Ltd.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company's fixed income portfolio was rated "AAA" (or equivalent rating) and
85% was rated "A-" or better. At December 31, 2002, 6% of the Company's
fixed income portfolio was rated below investment grade. The Company
believes this high quality concentration significantly reduces its exposure
to credit risk on these fixed-income investments to an acceptable level. To
a lesser extent, the Company also has credit risk exposure as a party to
foreign currency forward contracts and other derivatives contracts. To
mitigate this risk, the Company ensures that counterparties to these
contracts are high credit quality international banks or counterparties.
The Company is exposed to credit risk in its underwriting operations, most
notably in the credit/surety lines and in the business written by the
Company's Alternative Risk Transfer team. PartnerRe provides its clients in
these lines of business with reinsurance protection against credit
deterioration, defaults or other types of financial performance of or by
the underlying credits which are the subject of the reinsurance provided
and, accordingly, the Company is exposed to the credit risk of those
credits. As with all of our business, these risks are subject to rigorous
underwriting and pricing standards. In addition, the Company strives to
mitigate the risks associated with these credit-sensitive lines of business
through the use of risk management techniques such as risk diversification,
careful monitoring of risk aggregations and accumulations and, at times,
through the use of retrocessional reinsurance protection. Loss experience
in these lines of business is cyclical and is affected by the state of the
general economic environment and, accordingly, the Company's profitability
in the credit/surety lines was negatively impacted in 2001 and 2002 -- see
"Results of Operations" for further discussion. As part of its ongoing risk
management process and loss scenario modeling, the Company estimates that
the maximum gross loss in the credit/surety lines that could be incurred by
the Company in the event of a widespread and prolonged recession is $150
million.
Lastly, the Company has exposure to credit risk as it relates to its trade
balances receivable, namely reinsurance balances (mainly premiums)
receivable and reinsurance recoverable on paid and unpaid losses.
Reinsurance balances receivable from our clients as at December 31, 2002
were $994.5 million. We believe credit risk exposure related to these
balances is mitigated by several factors, including but not limited to
credit checks performed as part of the underwriting process and monitoring
of aged receivable balances. In addition, as the vast majority of our
reinsurance agreements permit us the right to offset premiums receivable
from our clients against losses payable to them, we believe that the credit
risk in this area is substantially reduced.
The Company does not rely heavily on retrocessional reinsurance, but we
require our reinsurers to have very high financial strength ratings. The
Company evaluates the financial condition of its reinsurers and monitors
concentration of credit risk on an ongoing basis. Provisions are made, as
necessary, for amounts considered potentially uncollectible. The balance
for reinsurance recoverable on paid and unpaid losses at December 31, 2002
was $216.7 million. The amount of the allowance provided for uncollectible
reinsurance balances receivable and recoverable was $22.7 million.
EQUITY PRICE RISK
The Company invests a portion of its capital funds in marketable equity
securities ($473 million). These assets are exposed to equity price risk,
defined as the potential for loss in market value owing to a decline in
equity prices. The Company reviews this class of assets on a regular basis
to ensure that diversification strategies to manage this risk continue to
be in place. The Company believes that effects of diversification and the
relatively small size of the existing investment in equities mitigate its
exposure to equity price risk.
29
PartnerRe
Annual Report 2002
60
PartnerRe Ltd.
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars, except parenthetical share data)
December 31, DECEMBER 31,
2001 2002 ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
Investments and cash:
- ------------------------------------------------------------------------------------------------------------------------------
$ 3,420,759 $ 4,145,594 Fixed maturities, available for sale, at fair value (amortized cost: 2002, $3,998,382; 2001,
$3,382,768)
- ------------------------------------------------------------------------------------------------------------------------------
39,564 3,801 Short-term investments, available for sale, at fair value (amortized cost: 2002, $3,787; 2001,
$39,547)
- ------------------------------------------------------------------------------------------------------------------------------
400,825 473,163 Equities, available for sale, at fair value (cost: 2002, $493,893; 2001, $408,879)
- ------------------------------------------------------------------------------------------------------------------------------
77,452 75,284 Trading securities, at fair value (cost: 2002, $72,998; 2001, $79,973)
- ------------------------------------------------------------------------------------------------------------------------------
451,614 710,640 Cash and cash equivalents, at fair value, which approximates amortized cost
- ------------------------------------------------------------------------------------------------------------------------------
20,500 3,630 Other invested assets
- ------------------------------------------------------------------------------------------------------------------------------
4,410,714 5,412,112 Total investments and cash
- ------------------------------------------------------------------------------------------------------------------------------
74,536 66,980 Accrued investment income
- ------------------------------------------------------------------------------------------------------------------------------
654,900 994,502 Reinsurance balances receivable
- ------------------------------------------------------------------------------------------------------------------------------
245,279 216,681 Reinsurance recoverable on paid and unpaid losses
- ------------------------------------------------------------------------------------------------------------------------------
641,203 726,722 Funds held by reinsured companies
- ------------------------------------------------------------------------------------------------------------------------------
274,152 304,873 Deferred acquisition costs
- ------------------------------------------------------------------------------------------------------------------------------
241,845 359,606 Deposit assets
- ------------------------------------------------------------------------------------------------------------------------------
93,885 100,002 Current and deferred taxes recoverable
- ------------------------------------------------------------------------------------------------------------------------------
429,519 429,519 Goodwill
- ------------------------------------------------------------------------------------------------------------------------------
106,989 126,977 Other
- ------------------------------------------------------------------------------------------------------------------------------
$ 7,173,022 $ 8,737,974 Total Assets
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
$ 3,005,628 $ 3,658,416 Unpaid losses and loss expenses
- ------------------------------------------------------------------------------------------------------------------------------
693,250 815,978 Policy benefits for life and annuity contracts
- ------------------------------------------------------------------------------------------------------------------------------
597,529 869,925 Unearned premiums
- ------------------------------------------------------------------------------------------------------------------------------
31,371 32,359 Funds held under reinsurance treaties
- ------------------------------------------------------------------------------------------------------------------------------
239,208 356,091 Deposit liabilities
- ------------------------------------------------------------------------------------------------------------------------------
220,000 220,000 Long-term debt
- ------------------------------------------------------------------------------------------------------------------------------
143,535 190,110 Net payable for securities purchased
- ------------------------------------------------------------------------------------------------------------------------------
94,392 117,913 Accounts payable, accrued expenses and other
- ------------------------------------------------------------------------------------------------------------------------------
5,024,913 6,260,792 Total Liabilities
- ------------------------------------------------------------------------------------------------------------------------------
400,000 400,000 Trust Preferred and Mandatorily Redeemable Preferred Securities
- ------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
50,164 52,376 Common shares (par value $1.00, issued and outstanding: 2002, 52,375,938; 2001, 50,164,211)
- ------------------------------------------------------------------------------------------------------------------------------
10,000 10,000 Preferred shares (par value $1.00, issued and outstanding: 2002 and 2001, 10,000,000;
aggregate liquidation preference, $250,000,000)
- ------------------------------------------------------------------------------------------------------------------------------
885,678 977,714 Additional paid-in capital
- ------------------------------------------------------------------------------------------------------------------------------
(397) (261) Deferred compensation
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss):
- ------------------------------------------------------------------------------------------------------------------------------
24,023 119,605 Net unrealized gains on investments, net of tax
- ------------------------------------------------------------------------------------------------------------------------------
(58,043) (30,820) Currency translation adjustment
- ------------------------------------------------------------------------------------------------------------------------------
836,684 948,568 Retained earnings
- ------------------------------------------------------------------------------------------------------------------------------
1,748,109 2,077,182 Total Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Trust Preferred and Mandatorily Redeemable Preferred Securities
$ 7,173,022 $ 8,737,974 and Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
30
PartnerRe
Annual Report 2002
61
PartnerRe Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Expressed in thousands of U.S. dollars, except per share data)
For the Year For the Year FOR THE YEAR
Ended Ended ENDED
December 31, December 31, DECEMBER 31,
2000 2001 2002 REVENUES
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,439,515 $ 1,878,256 $ 2,705,672 Gross premiums written
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,380,252 $ 1,825,096 $ 2,655,374 Net premiums written
- -------------------------------------------------------------------------------------------------------------------------------
(65,880) (191,588) (229,638) Increase in unearned premiums
- -------------------------------------------------------------------------------------------------------------------------------
1,314,372 1,633,508 2,425,736 Net premiums earned
- -------------------------------------------------------------------------------------------------------------------------------
273,588 239,608 245,189 Net investment income
- -------------------------------------------------------------------------------------------------------------------------------
(62,740) 20,192 (6,758) Net realized investment (losses) gains
- -------------------------------------------------------------------------------------------------------------------------------
382 1,688 5,727 Other income
- -------------------------------------------------------------------------------------------------------------------------------
1,525,602 1,894,996 2,669,894 Total Revenues
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
- -------------------------------------------------------------------------------------------------------------------------------
975,699 1,631,830 1,715,762 Losses and loss expenses including life policy benefits
- -------------------------------------------------------------------------------------------------------------------------------
319,434 368,147 556,085 Acquisition costs
- -------------------------------------------------------------------------------------------------------------------------------
103,185 117,590 161,706 Other operating expenses
- -------------------------------------------------------------------------------------------------------------------------------
13,029 13,044 12,960 Interest expense
- -------------------------------------------------------------------------------------------------------------------------------
26,034 26,035 - Amortization of goodwill
- -------------------------------------------------------------------------------------------------------------------------------
(10,348) (7,054) 3,158 Net foreign exchange (gains) losses
- -------------------------------------------------------------------------------------------------------------------------------
1,427,033 2,149,592 2,449,671 Total Expenses
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before distributions related to Trust Preferred and
98,569 (254,596) 220,223 Mandatorily Redeemable Preferred Securities and taxes
- -------------------------------------------------------------------------------------------------------------------------------
Distributions related to Trust Preferred and Mandatorily Redeemable Preferred
- 3,002 27,260 Securities
- -------------------------------------------------------------------------------------------------------------------------------
(43,738) (69,304) 2,661 Income tax (benefit) expense
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Cumulative Effect of
142,307 (188,294) 190,302 Adopting New Accounting Standard, Net of Tax
- -------------------------------------------------------------------------------------------------------------------------------
- 27,812 - Cumulative effect of adopting new accounting standard, net of tax
- -------------------------------------------------------------------------------------------------------------------------------
142,307 (160,482) 190,302 Net Income (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
20,000 20,000 20,000 Preferred dividends
- -------------------------------------------------------------------------------------------------------------------------------
$ 122,307 $ (180,482) $ 170,302 Net Income (Loss) Available to Common Shareholders
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss), Net of Tax
- -------------------------------------------------------------------------------------------------------------------------------
$ 142,307 $ (160,482) $ 190,302 Net income (loss)
- -------------------------------------------------------------------------------------------------------------------------------
183,636 (83,488) 95,582 Change in net unrealized gains or losses on investments
- -------------------------------------------------------------------------------------------------------------------------------
(22,446) (12,333) 27,223 Change in currency translation adjustment
- -------------------------------------------------------------------------------------------------------------------------------
$ 303,497 $ (256,303) $ 313,107 Comprehensive Income (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
- -------------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
- -------------------------------------------------------------------------------------------------------------------------------
$ 2.48 $ (3.60) $ 3.37 Basic net income (loss)
- -------------------------------------------------------------------------------------------------------------------------------
$ 2.41 $ (3.60) $ 3.28 Diluted net income (loss)
- -------------------------------------------------------------------------------------------------------------------------------
49,274.8 50,136.8 50,551.0 Weighted average number of common shares outstanding
- -------------------------------------------------------------------------------------------------------------------------------
50,677.5 50,136.8 51,907.7 Weighted average number of common and common equivalent shares outstanding
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
31
PartnerRe
Annual Report 2002
62
PartnerRe Ltd.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in thousands of U.S. dollars)
For the year For the year FOR THE YEAR
ended ended ENDED
December 31, December 31, DECEMBER 31,
2000 2001 2002 COMMON SHARES
- ----------------------------------------------------------------------------------------------------------------
$ 49,265 $ 50,113 $ 50,164 Balance at beginning of year
- ----------------------------------------------------------------------------------------------------------------
(136) (52) (6,000) Repurchase of common shares
- ----------------------------------------------------------------------------------------------------------------
984 103 8,212 Issue of common shares
- ----------------------------------------------------------------------------------------------------------------
50,113 50,164 52,376 Balance at end of year
- ----------------------------------------------------------------------------------------------------------------
PREFERRED SHARES
- ----------------------------------------------------------------------------------------------------------------
10,000 10,000 10,000 Balance at beginning and end of year
- ----------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- ----------------------------------------------------------------------------------------------------------------
879,603 892,310 885,678 Balance at beginning of year
- ----------------------------------------------------------------------------------------------------------------
(4,177) (1,706) (283,620) Repurchase of common shares and warrants
- ----------------------------------------------------------------------------------------------------------------
16,884 3,688 380,520 Issue of common shares
- ----------------------------------------------------------------------------------------------------------------
- (8,614) (4,864) Issue and adjustment of purchase contract for common shares
- ----------------------------------------------------------------------------------------------------------------
892,310 885,678 977,714 Balance at end of year
- ----------------------------------------------------------------------------------------------------------------
DEFERRED COMPENSATION
- ----------------------------------------------------------------------------------------------------------------
- (534) (397) Balance at beginning of year
- ----------------------------------------------------------------------------------------------------------------
(545) - - Issue of restricted common shares
- ----------------------------------------------------------------------------------------------------------------
11 137 136 Amortization of deferred compensation
- ----------------------------------------------------------------------------------------------------------------
(534) (397) (261) Balance at end of year
- ----------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------
(99,389) 61,801 (34,020) Balance at beginning of year
- ----------------------------------------------------------------------------------------------------------------
183,636 (83,488) 95,582 Unrealized gains (losses) on investments, net of reclassification
adjustments
- ----------------------------------------------------------------------------------------------------------------
(22,446) (12,333) 27,223 Currency translation adjustment
- ----------------------------------------------------------------------------------------------------------------
61,801 (34,020) 88,785 Balance at end of year
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- ----------------------------------------------------------------------------------------------------------------
1,001,232 1,072,316 836,684 Balance at beginning of year
- ----------------------------------------------------------------------------------------------------------------
142,307 (160,482) 190,302 Net income (loss)
- ----------------------------------------------------------------------------------------------------------------
(51,223) (55,150) (58,418) Dividends on common shares
- ----------------------------------------------------------------------------------------------------------------
(20,000) (20,000) (20,000) Dividends on preferred shares
- ----------------------------------------------------------------------------------------------------------------
1,072,316 836,684 948,568 Balance at end of year
- ----------------------------------------------------------------------------------------------------------------
$ 2,086,006 $ 1,748,109 $ 2,077,182 Total Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
32
PartnerRe
Annual Report 2002
63
PartnerRe Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)
For the year For the year FOR THE YEAR
ended ended ENDED
December 31, December 31, DECEMBER 31,
2000 2001 2002 CASH FLOWS FROM OPERATING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
$ 142,307 $ (160,482) $ 190,302 Net income (loss)
- ----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
- ----------------------------------------------------------------------------------------------------------------
(18,294) (16,387) (2,843) Accrual of discount on investments, net of amortization of
premium
- ----------------------------------------------------------------------------------------------------------------
26,034 26,035 - Amortization of goodwill
- ----------------------------------------------------------------------------------------------------------------
- (27,812) - Effect of adopting new accounting standard
- ----------------------------------------------------------------------------------------------------------------
62,740 (20,192) 6,758 Net realized investment losses (gains)
- ----------------------------------------------------------------------------------------------------------------
Changes in:
- ----------------------------------------------------------------------------------------------------------------
52,200 191,589 229,638 Unearned premiums
- ----------------------------------------------------------------------------------------------------------------
(65,076) (213,634) (286,275) Reinsurance balances receivable
- ----------------------------------------------------------------------------------------------------------------
(197,677) 727,044 500,869 Unpaid losses and loss expenses including life policy benefits
- ----------------------------------------------------------------------------------------------------------------
(35,528) (74,872) 2,918 Net taxes recoverable
- ----------------------------------------------------------------------------------------------------------------
(4,989) (66,876) 43,337 Other changes in assets and liabilities
- ----------------------------------------------------------------------------------------------------------------
(6,977) (652) 2,539 Other items, net
- ----------------------------------------------------------------------------------------------------------------
(45,260) 363,761 687,243 Net cash (used in) provided by operating activities
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
5,614,130 2,885,725 4,152,522 Sales of fixed maturities
- ----------------------------------------------------------------------------------------------------------------
203,298 138,589 297,286 Redemptions of fixed maturities
- ----------------------------------------------------------------------------------------------------------------
(5,598,978) (3,545,763) (4,776,121) Purchases of fixed maturities
- ----------------------------------------------------------------------------------------------------------------
9,943 (22,694) 37,380 Net sales (purchases) of short-term investments
- ----------------------------------------------------------------------------------------------------------------
(167,105) (104,480) (172,905) Net purchases of equities
- ----------------------------------------------------------------------------------------------------------------
145,000 - - Proceeds from disposition of subsidiary
- ----------------------------------------------------------------------------------------------------------------
(57,348) - - Cash sold with subsidiary
- ----------------------------------------------------------------------------------------------------------------
(44,944) (6,137) 11,469 Other
- ----------------------------------------------------------------------------------------------------------------
103,996 (654,760) (450,369) Net cash provided by (used in) investing activities
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
- ----------------------------------------------------------------------------------------------------------------
(71,223) (75,150) (78,418) Cash dividends paid to shareholders
- ----------------------------------------------------------------------------------------------------------------
(4,313) (1,758) (289,620) Repurchase of common shares and warrants
- ----------------------------------------------------------------------------------------------------------------
17,323 3,345 388,732 Issue of common shares
- ----------------------------------------------------------------------------------------------------------------
- - (4,864) Adjustment on purchase contract for common shares
- ----------------------------------------------------------------------------------------------------------------
- 193,543 - Issue of Trust Preferred Securities
- ----------------------------------------------------------------------------------------------------------------
- 193,313 - Issue of Mandatorily Redeemable Preferred Securities
- ----------------------------------------------------------------------------------------------------------------
(58,213) 313,293 15,830 Net cash (used in) provided by financing activities
- ----------------------------------------------------------------------------------------------------------------
(4,673) (4,713) 6,322 Effect of exchange rate changes on cash
- ----------------------------------------------------------------------------------------------------------------
(4,150) 17,581 259,026 (Decrease) increase in cash and cash equivalents
- ----------------------------------------------------------------------------------------------------------------
438,183 434,033 451,614 Cash and cash equivalents-beginning of year
- ----------------------------------------------------------------------------------------------------------------
$ 434,033 $ 451,614 $ 710,640 Cash and cash equivalents-end of year
- ----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
33
PartnerRe
Annual Report 2002
64
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
PartnerRe Ltd. (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"), PartnerRe
SA and Partner Reinsurance Company of the U.S. ("PartnerRe U.S."). Risks
reinsured include, but are not limited to, property, casualty, motor,
agriculture, aviation/space, catastrophe, credit/surety,
engineering/energy, marine, special risk, other lines, and life/annuity and
health.
The Company was incorporated in August 1993 under the laws of Bermuda. The
Company commenced operations in November 1993 upon completion of the sale
of common shares and warrants pursuant to subscription agreements and an
initial public offering. On July 10, 1997, the Company completed the
acquisition of PartnerRe SA, and on December 23, 1998, the Company
completed the acquisition of Winterthur Re.
2. ACQUISITION AND DISPOSITION
WINTERTHUR RE ACQUISITION
On December 23, 1998, the Company completed the acquisition (the
"Acquisition") of the active reinsurance operations ("Winterthur Re") of
the Winterthur Insurance Group ("Winterthur"). The purchase included
Winterthur Reinsurance Corporation of America in New York and Winterthur Re
Life Insurance Company in Dallas (collectively the "U.S. Operations") and
the reinsurance operations of Winterthur in Switzerland (the "Swiss
Operations").
On October 3, 1998, Partner Reinsurance Company entered into an Asset
Purchase Agreement with Winterthur Swiss Insurance Company and certain
affiliates (collectively "Winterthur Swiss"), to purchase the Swiss
Operations. On the same date, Partner Reinsurance Company entered into a
Reinsurance Agreement with Winterthur Swiss to transfer certain Life and
Non-life reinsurance portfolios of Winterthur Swiss, including current
business and reserves of approximately $1.5 billion, to Partner Reinsurance
Company.
On October 23, 1998, PartnerRe U.S. Corporation, a wholly owned subsidiary
of the Company, entered into a Share Purchase Agreement with two U.S.
subsidiaries of Winterthur to acquire the U.S. Operations.
Although the Company entered into both agreements in October 1998, the
Acquisition was not completed until all regulatory approvals were obtained
on December 23, 1998. The Swiss Operations and U.S. Operations have
functioned as part of Partner Reinsurance Company (through a branch in
Switzerland) and PartnerRe U.S., respectively, since January 1, 1999.
The aggregate purchase price for the Swiss Operations and U.S. Operations
was approximately $771 million. The Company financed the purchase with $551
million from sources internal to the Company and $220 million of external
bank debt. The Company accounted for the Acquisition as a purchase.
SALE OF PARTNERRE LIFE INSURANCE COMPANY OF THE U.S.
On August 4, 2000, the Company concluded the sale (the "Transaction") of
its indirect wholly owned subsidiary PartnerRe Life Insurance Company of
the U.S., and its subsidiaries Republic-Vanguard Life Insurance Company,
Investors Insurance Corporation and Investors Marketing Group, Inc.
(collectively "PartnerRe Life U.S."), to SCOR Group. The Company purchased
PartnerRe Life U.S. in December 1998 as part of the Winterthur Re
acquisition. The total consideration for the Transaction was $155 million,
including the repayment by SCOR Group of a $10 million surplus note held by
the Company. The Company, through a series of retrocession agreements with
SCOR Group, retained certain annuity treaties following the sale.
34
PartnerRe
Annual Report 2002
65
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United
States ("U.S. GAAP"). The preparation of financial statements in conformity
with U.S. GAAP requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Intercompany accounts and transactions have been eliminated and
all subsidiaries have been included in the consolidation. Certain
reclassifications have been made to prior year amounts to conform with the
current year's presentation. Because effective control of PartnerRe Life
U.S. was transferred on July 1, 2000, the second half of 2000 does not
include operating results from PartnerRe Life U.S.
(A) PREMIUMS
Premiums written and earned are based upon reports received from ceding
companies, supplemented by the Company's own estimates of premiums written
and earned for which ceding company reports have not been received.
Differences between such estimates and actual amounts are recorded in the
period in which the actual amounts are determined. Premiums are earned on a
basis that is consistent with the risks covered under the terms of the
reinsurance contracts, which are generally one to two years. Unearned
premiums represent the portion of premiums written which is applicable to
the unexpired risks under contracts in force. Annuity and universal life
insurance premiums received are accounted for in a manner consistent with
accounting for interest-bearing financial instruments and are not reported
as revenues, but rather as direct deposits to the contract. Amounts
assessed against annuity and universal life policyholders are recognized as
revenue in the period assessed.
(B) LOSSES AND LOSS EXPENSES, INCLUDING LIFE POLICY BENEFITS
The liability for unpaid losses and loss expenses for Non-life business
includes amounts determined from loss reports on individual cases and
amounts for losses incurred but not reported. Such reserves are estimated
by Management based upon reports received from ceding companies,
supplemented by the Company's own actuarial estimates of reserves for which
ceding company reports have not been received, and based on the Company's
own historical experience. To the extent that the Company's own historical
experience is inadequate for estimating reserves, such estimates may be
actuarially determined based upon industry experience and Management's
judgment. The estimates are continually reviewed and the ultimate liability
may be in excess of, or less than, the amounts provided, for which any
adjustments will be reflected in the periods in which they become known.
The liabilities for policy benefits for ordinary life and accident and
health policies have been established based upon information reported by
ceding companies supplemented by the Company's best actuarial estimates of
mortality, morbidity, persistency and investment income, with appropriate
provision for adverse deviation. Future policy benefit reserves for annuity
and universal life products are carried at their accumulated values.
Reserves for policy claims and benefits include both mortality and
morbidity claims in the process of settlement and claims that have been
incurred but not yet reported. Interest rate assumptions used to estimate
liabilities for policy benefits for life and annuity contracts ranged from
2.0% to 6.5%. Actual experience in a particular period may vary from
assumed experience and, consequently, may affect the Company's operating
results in future periods.
35
PartnerRe
Annual Report 2002
66
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
(C) DEFERRED ACQUISITION COSTS
Acquisition costs, primarily brokerage fees, commissions and excise taxes,
which vary directly with, and are primarily related to, the acquisition of
new and renewal reinsurance contracts, are capitalized and charged to
expense as the related premium revenue is recognized. Anticipated losses
and loss expenses, other costs and investment income related to these
premiums are considered in determining the recoverability of deferred
acquisition costs. Acquisition costs related to individual life and annuity
business are deferred and amortized over the premium paying periods in
proportion to anticipated premium income, allowing for lapses, terminations
and anticipated investment income. Acquisition costs related to universal
life and single premium annuity contracts are deferred and amortized over
the lives of the policies as a percentage of the estimated gross profits
expected to be realized on the policies.
(D) FUNDS HELD BY REINSURED COMPANIES
The Company, in order to be competitive in certain markets, writes business
on a funds withheld basis. In such an arrangement the reinsured retains the
premiums that would have otherwise been paid to the Company and the Company
earns interest on these funds. With the exception of those arrangements
discussed below, the Company generally earns investment income on the funds
held balances based upon a predetermined rate, either fixed at the onset of
the contract or based upon a recognized index (e.g., LIBOR). Interest rates
at December 31, 2002 ranged from 2.0% to 4.5%.
In certain circumstances, the Company may receive an investment return
based upon the result of a pool of assets held by the reinsured, generally
used to collateralize the funds held balance, or the overall investment
return earned by the cedent. This is most common in the Company's life
insurance business. In these arrangements, gross investment returns are
typically reflected in income with a corresponding increase or decrease
(net of a spread) being recorded as life policy benefits and held as a
policy liability by the Company. In these arrangements, the Company is
exposed, to a limited extent, to the underlying credit risk of the pool of
assets in as much as the underlying policies may have guaranteed minimum
returns.
(E) DEPOSIT ASSETS AND LIABILITIES
In the normal course of its operations, the Company enters into certain
contracts that do not meet the risk transfer provisions of Statement of
Financial Accounting Standards No. 113 "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" (SFAS 113).
These contracts are accounted for using the deposit accounting method as
per Statement of Position 98-7, "Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Risk" (SOP 98-7). SOP 98-7 provides guidance
on the method of accounting for insurance and reinsurance contracts that do
not transfer insurance risk, defined in the SOP as the deposit method. For
those contracts, the Company originally records deposit liabilities for an
amount equivalent to the assets received. Actuarial studies are used to
estimate the final liabilities under these contracts and the appropriate
accretion rates to increase the original liabilities over the term of the
contracts. The accretion charge of the period is recorded in other income
in the Consolidated Statements of Operations.
Under certain contracts that do not meet the risk transfer provisions,
cedents retain the assets on a funds held basis. In those cases, the
Company records those assets as deposit assets and records the related
income in other income in the Consolidated Statements of Operations.
(F) INVESTMENTS
Fixed maturities, short-term and equity investments which are classified as
"available for sale" are carried at fair value, based on quoted market
prices, with the difference between cost or
36
PartnerRe
Annual Report 2002
67
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
amortized cost and fair value, net of the effect of taxes, included as a
separate component of "accumulated other comprehensive income." Short-term
investments comprise securities with a maturity greater than three months
but less than one year from the date of purchase. Investment purchases and
sales are recorded on the trade date. Other invested assets, which consist
primarily of non-publicly traded real estate funds, private placement
equity investments, and other specialty asset classes, are recorded based
on valuation techniques depending on the nature of the individual assets.
The valuation techniques used by the Company's investment managers are
reviewed by the Company and are generally commensurate with standard
valuation techniques for each asset class.
Fixed maturities, short-term and equity investments which contain
convertible features are classified as "trading securities" and carried at
fair value, based on quoted market prices, with the change in fair value
included in the net realized investment gains and losses in the
Consolidated Statements of Operations.
The Company may utilize financial futures contracts for the purpose of
managing certain investment portfolio exposures and duration. Futures
contracts are not recognized as assets or liabilities in the accompanying
Consolidated Financial Statements as they settle daily. Changes in the
market value of futures contracts produce daily cash flows, which are
included in net realized investment gains and losses in the Consolidated
Statements of Operations. Collateral held by brokers, which is equal to a
percentage of the total value of open futures contracts, is included in
fixed maturities.
Investment income is recognized when earned and includes the accrual of
discount or amortization of premium on fixed maturities and short-term
investments. Realized gains and losses on the disposition of investments,
which are determined based upon specific identification of the cost of
investments sold, are reflected in the Consolidated Statements of
Operations.
The Company regularly evaluates the fair value of its investments to
determine whether a decline in fair value below the amortized cost basis
(original cost basis for equities) is other-than-temporary. If the decline
in fair value is judged to be other-than-temporary, the amortized cost of
the individual security is written-down to fair value as a new cost basis,
and the amount of the write-down is included as a realized investment loss
in the period in which the determination of other-than-temporary impairment
is made. While the cost basis cannot be adjusted upward when the value of
the security subsequently increases, the cost basis may be written-down
again if further other-than-temporary impairments are incurred.
(G) CASH AND CASH EQUIVALENTS
Cash equivalents are carried at fair value and include debt securities
that, at purchase, have a maturity of three months or less.
(H) GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets received recorded on the acquisitions of PartnerRe SA and
Winterthur Re. SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS
142) requires that, upon adoption, goodwill assets cease to be amortized,
and the Company perform an initial valuation of its goodwill assets to test
them for impairment. The Company is required to update this analysis on an
annual basis. If, as a result of the assessment, the Company determines the
value of its goodwill asset is impaired, goodwill is to be written-down in
the period in which the determination is made. The Company adopted SFAS 142
on January 1, 2002 and neither the Company's initial valuation nor its
subsequent valuation has indicated any impairment of the Company's goodwill
asset.
37
PartnerRe
Annual Report 2002
68
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
(I) INCOME TAXES
Certain subsidiaries and branches of the Company operate in jurisdictions
where they are subject to taxation. Current and deferred income taxes are
charged or credited to operations, or, in certain cases, to "accumulated
other comprehensive income" based upon enacted tax laws and rates
applicable in the relevant jurisdiction in the period in which the tax
becomes realizable or accruable. Deferred income taxes are provided for all
temporary differences between the bases of assets and liabilities used in
the Consolidated Financial Statements and those used in the various
jurisdictional tax returns. When Management's assessment indicates it is
more likely than not that deferred income tax assets will be not realized,
a valuation allowance is recorded against the deferred tax assets.
(J) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Company is the U.S. dollar. The national
currencies of the Company's subsidiaries are generally their functional
currencies, except for the Bermuda subsidiaries whose functional currency
is the U.S. dollar. In translating the financial statements of those
subsidiaries whose functional currency is other than the U.S. dollar,
assets and liabilities are converted into U.S. dollars using the rates of
exchange in effect at the balance sheet dates, and revenues and expenses
are converted using the average exchange rates for the period. Related
translation adjustments and exchange gains and losses on forward exchange
contracts, which may be used to hedge these investments, are reported as a
separate component of "accumulated other comprehensive income."
In recording foreign currency transactions, revenue and expense items are
converted into the functional currency at the weighted average rates of
exchange for the year. Assets and liabilities originating in currencies
other than the functional currency are translated into the functional
currency at the rates of exchange in effect at the balance sheet dates. The
resulting exchange gains or losses are included in the Consolidated
Statements of Operations. Prior to the Company's adoption of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
as amended on January 1, 2001, exchange gains and losses related to the
translation of investments classified as available for sale were included
in net unrealized gains and losses on investments, a component of
"accumulated other comprehensive income." Following the adoption of SFAS
133, the Company records unrealized foreign exchange gains and losses that
are covered with designated hedges in the Consolidated Statements of
Operations (See Note 3(k)).
(K) 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 Consolidated Balance Sheets 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 of the
asset or liability hedged.
The Company utilizes derivative financial instruments as part of an overall
currency risk management strategy. 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
"non-designated hedge" derivative. 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 are recognized in net realized investment gains and losses in the
Consolidated Statements of Operations. Derivatives employed by the
38
PartnerRe
Annual Report 2002
69
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
Company to hedge currency exposure related to other reinsurance assets and
liabilities are not designated as hedges under SFAS 133. The changes in
fair value of the non-designated hedge and the other reinsurance assets and
liabilities are also recognized in net realized investment gains and losses
in the Consolidated Statements of Operations.
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 the net realized investment
gains and losses in the Consolidated Statements of Operations.
The Company formally documents all relationships between designated 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
designated 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 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 no longer qualifies as an effective fair-value hedge, the
derivative will continue to be carried on the Consolidated Balance Sheets
at its fair value with changes in its fair value recognized in current
period earnings 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 "accumulated other comprehensive income."
(L) TOTAL RETURN AND INTEREST SWAPS
As a part of the capital market initiative within the Company's Alternative
Risk Transfer operations, which underwrite finite reinsurance and capital
markets transactions, the Company has entered, since the beginning of the
second quarter of 2002, into a limited number of total return and interest
rate swaps directly related to securities for which the Company has had an
active role in the structuring process. Interest income and interest
expenses related to these swaps are reported in net investment income and
any fair value adjustments on the swaps, including unrealized gains or
losses, are reported in net realized investments gains and losses in the
Consolidated Statements of Operations, in accordance with SFAS 133, as
amended. The Company records these swaps at fair value, which is determined
by obtaining valuations from independent parties. The Company reviews these
valuations for reasonableness based on changes in interest rates, credit
spreads and credit ratings of the counterparties.
(M) NET INCOME PER COMMON SHARE
Diluted net income per common share is based upon the weighted average
number of common shares outstanding using the treasury stock method for all
potentially dilutive securities, including common share warrants, Series B
Cumulative Redeemable Preferred Shares (PEPS) units and options. When the
effect of dilutive securities would be anti-dilutive, these securities are
excluded from the calculation of diluted earnings per share. Basic earnings
per share is determined as net income available to common shareholders
divided by the weighted average number of common shares outstanding for the
period, giving no effect to dilutive securities.
39
PartnerRe
Annual Report 2002
70
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
(N) STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 (APB Opinion
No. 25) "Accounting for Stock Issued to Employees" to account for employee
stock options. Accordingly, no compensation cost has been recognized for
grants of stock options under the Company's stock option plans. See Note 11
"Stock and Stock Option Plans" for additional disclosures relating to the
Company's accounting for stock based compensation.
(O) 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. 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of The Effective Date of FASB Statement No.
133" and by SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," 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 of 2001. 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 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 is
prohibited. SFAS 142 requires that goodwill and intangible assets that have
indefinite useful lives not be amortized but, instead, be tested annually
for impairment. 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 performed a transitional
goodwill impairment test at June 30, 2002 and an annual impairment
valuation at September 30, 2002, and has concluded that there is no
impairment to the value of the Company's goodwill asset. The Company has
established September 30 as the date for performing the Company's annual
impairment test. In connection with the transitional goodwill impairment
test, the Company has (i) identified its reporting units, (ii) determined
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) determined the fair value of each reporting
unit. If the carrying value of any reporting unit had exceeded its fair
value, then detailed fair values for each of the assigned assets (excluding
goodwill) and liabilities would have been determined to calculate the
amount of goodwill impairment, if any.
40
PartnerRe
Annual Report 2002
71
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
The adoption of SFAS 141 had no impact on the Company's Consolidated
Financial Statements. The adoption of SFAS 142 has resulted in the
elimination of an annual amortization expense related to goodwill in the
amount of $26.0 million. The following table reflects pro forma net income
(loss), and basic and diluted net income (loss) per share as if SFAS 142
had been applied since January 1, 2000 ($ 000's except per share data).
2002 2001 2000
------------------------------------------------------------------------
Net Income (loss)
------------------------------------------------------------------------
Net income (loss) as reported $ 190,302 $ (160,482) $ 142,307
------------------------------------------------------------------------
Goodwill amortization - 26,035 26,034
------------------------------------------------------------------------
Adjusted net income (loss) $ 190,302 $ (134,447) $ 168,341
------------------------------------------------------------------------
Basic net income (loss) per share
------------------------------------------------------------------------
Basic net income (loss)
as reported $ 3.37 $ (3.60) $ 2.48
------------------------------------------------------------------------
Goodwill amortization - 0.52 0.53
------------------------------------------------------------------------
Adjusted basic net income (loss) $ 3.37 $ (3.08) $ 3.01
------------------------------------------------------------------------
Diluted net income (loss) per share
------------------------------------------------------------------------
Diluted net income (loss) per
share $ 3.28 $ (3.60) $ 2.41
------------------------------------------------------------------------
Goodwill amortization - 0.52 0.52
------------------------------------------------------------------------
Adjusted net income (loss) $ 3.28 $ (3.08) $ 2.93
------------------------------------------------------------------------
In February 2003, the Derivatives Implementation Group of the FASB issued
SFAS 133 Implementation Issue No. B36 "Embedded Derivatives: Bifurcation of
a Debt Instrument That Incorporates Both Interest Rate Risk and Credit Risk
Exposures That Are Unrelated or Only Partially Related to the
Creditworthiness of the Issuer of That Instrument." This new guidance
addresses the potential for embedded derivatives within funds held balances
relating to certain reinsurance contracts (refer to Note 3(d)). The
guidance will be effective for fiscal quarters beginning after June 15,
2003. The Company is in the process of determining the effect that the
adoption of this new guidance will have on its operations; however, the
Company does not believe that the adoption will have a significant impact
on its financial statements.
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" (SFAS 148). SFAS 148 amends existing guidance to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
additional disclosure requirements of SFAS 148 are effective for fiscal
years ending after December 15, 2002. Management has elected to continue to
follow the intrinsic value method of accounting as prescribed by APB No.
25, to account for employee stock options. Accordingly, no compensation
cost has been recognized for grants of stock options under the Option Plan
or the Directors' Stock Plan.
41
PartnerRe
Annual Report 2002
72
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Significant Accounting Policies (Continuation)
The following table illustrates the effect on net income available to
common shareholders and earnings per common share if the Company had
applied the fair value recognition provisions with the method of SFAS 123
($ 000's except per share data):
2002 2001 2000
- --------------------------------------------------------------------------------
Net income (loss) available to common
shareholders:
- --------------------------------------------------------------------------------
As reported $ 170,302 $ (180,482) $ 122,307
- --------------------------------------------------------------------------------
Pro forma $ 160,567 $ (187,216) $ 117,157
- --------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic
- --------------------------------------------------------------------------------
As reported $ 3.37 $ (3.60) $ 2.48
- --------------------------------------------------------------------------------
Pro forma $ 3.18 $ (3.73) $ 2.38
- --------------------------------------------------------------------------------
Diluted
- --------------------------------------------------------------------------------
As reported $ 3.28 $ (3.60) $ 2.41
- --------------------------------------------------------------------------------
Pro forma $ 3.09 $ (3.73) $ 2.31
- --------------------------------------------------------------------------------
In November 2002, the FASB issued Interpretation No. 45 (FIN 45)
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates
on the existing disclosure requirements for most guarantees. It also
clarifies that at the time a company issues a guarantee, the Company must
recognize an initial liability for the fair value of the obligation it
assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The initial recognition and
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The adoption of FIN 45 did not have a material impact on the
Company's results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity
to support its activities. A variable interest entity may be essentially
passive or it may engage in research and development or other activities on
behalf of another company. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company is in the process of determining the effect that
the adoption of FIN 46 will have on its operations; however, the Company
does not believe that the adoption will have a significant impact on its
financial statements.
42
PartnerRe
Annual Report 2002
73
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
(a) FIXED MATURITIES, EQUITIES AND SHORT-TERM INVESTMENTS ON AVAILABLE FOR
SALE SECURITIES
The cost, market value, gross unrealized gains and gross unrealized losses
on investments classified as available for sale at December 31, 2002 and
2001, were as follows ($ 000's):
Gross Unrealized Gross Unrealized
Cost/(1)/ Gains Losses Market Value
- ----------------------------------------------------------------------------------------------------------------------------
2002
- ----------------------------------------------------------------------------------------------------------------------------
Fixed maturities
- ----------------------------------------------------------------------------------------------------------------------------
- - U.S. Government $ 403,708 $ 21,030 $ (261) $ 424,477
- ----------------------------------------------------------------------------------------------------------------------------
- - states or political subdivisions of states of the U.S. 98,249 5,921 (5) 104,165
- ----------------------------------------------------------------------------------------------------------------------------
- - other foreign governments 928,840 19,092 - 947,932
- ----------------------------------------------------------------------------------------------------------------------------
- - corporate 1,728,569 88,886 (6,688) 1,810,767
- ----------------------------------------------------------------------------------------------------------------------------
- - mortgage / asset-backed securities 839,016 19,456 (219) 858,253
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 3,998,382 154,385 (7,173) 4,145,594
- ----------------------------------------------------------------------------------------------------------------------------
Short-term investments 3,787 15 (1) 3,801
- ----------------------------------------------------------------------------------------------------------------------------
Equities 493,893 26,844 (47,574) 473,163
- ----------------------------------------------------------------------------------------------------------------------------
$ 4,496,062 $ 181,244 $ (54,748) $ 4,622,558
- ----------------------------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Cost/(1)/ Gains Losses Market Value
- ----------------------------------------------------------------------------------------------------------------------------
2001
- ----------------------------------------------------------------------------------------------------------------------------
Fixed maturities
- ----------------------------------------------------------------------------------------------------------------------------
- - U.S. Government $ 477,782 $ 16,419 $ (1,847) $ 492,354
- ----------------------------------------------------------------------------------------------------------------------------
- - states or political subdivisions of states of the U.S. 83,149 537 (343) 83,343
- ----------------------------------------------------------------------------------------------------------------------------
- - other foreign governments 720,342 8,362 (3,084) 725,620
- ----------------------------------------------------------------------------------------------------------------------------
- - corporate 1,415,508 34,428 (27,303) 1,422,633
- ----------------------------------------------------------------------------------------------------------------------------
- - mortgage / asset-backed securities 685,987 13,287 (2,465) 696,809
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 3,382,768 73,033 (35,042) 3,420,759
- ----------------------------------------------------------------------------------------------------------------------------
Short-term investments 39,547 22 (5) 39,564
- ----------------------------------------------------------------------------------------------------------------------------
Equities 408,879 32,707 (40,761) 400,825
- ----------------------------------------------------------------------------------------------------------------------------
$ 3,831,194 $ 105,762 $ (75,808) $ 3,861,148
- ----------------------------------------------------------------------------------------------------------------------------
/(1)/ Cost is amortized cost for fixed maturities and short-term
investments and original cost for equity securities.
(b) MATURITY DISTRIBUTION ON AVAILABLE FOR SALE SECURITIES
The distribution of available for sale fixed maturities and short-term
investments at December 31, 2002, by contractual maturity is shown below
($000's):
Amortized Cost Market Value
-------------------------------------------------------------------------
One year or less $ 395,001 $ 399,683
-------------------------------------------------------------------------
More than one year through five years 1,290,905 1,338,015
-------------------------------------------------------------------------
More than five years through ten years 1,158,753 1,214,477
-------------------------------------------------------------------------
More than ten years 318,494 338,967
-------------------------------------------------------------------------
Subtotal 3,163,153 3,291,142
-------------------------------------------------------------------------
Mortgage / asset-backed securities 839,016 858,253
-------------------------------------------------------------------------
Total $ 4,002,169 $ 4,149,395
-------------------------------------------------------------------------
43
PartnerRe
Annual Report 2002
74
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Investments (Continuation)
(c) CHANGE IN NET UNREALIZED GAINS (LOSSES) ON INVESTMENTS
The analysis of the change in net unrealized gains (losses) on investments
reflected in "accumulated other comprehensive income" for the years ended
December 31, 2002, 2001 and 2000, is as follows ($ 000's):
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Fixed maturities $ 109,221 $ 31,291 $ 170,435
- ------------------------------------------------------------------------------------------------------------------
Short-term investments (2) 136 54
- ------------------------------------------------------------------------------------------------------------------
Other investments 113 (41) (90)
- ------------------------------------------------------------------------------------------------------------------
Equity securities (12,677) (34,890) 16,952
- ------------------------------------------------------------------------------------------------------------------
96,655 (3,504) 187,351
- ------------------------------------------------------------------------------------------------------------------
Increase in tax liability and other foreign exchange gains or losses (1,073) (79,984) (3,715)
- ------------------------------------------------------------------------------------------------------------------
Net change reflected in "accumulated other comprehensive income" $ 95,582 $ (83,488) $ 183,636
- ------------------------------------------------------------------------------------------------------------------
(d) REALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE SECURITIES
Proceeds from the sales of investments classified as available for sale for
the years ended December 31, 2002, 2001 and 2000, were $5,197.4 million,
$3,033.1 million and $5,848.4 million, respectively. Realized investment
gains and losses on securities classified as available for sale for the
years ended December 31, 2002, 2001 and 2000, were as follows ($ 000's):
2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Gross realized gains $ 113,089 $ 92,717 $ 121,475
- --------------------------------------------------------------------------------------------------------
Gross realized losses excluding other-than-temporary impairments (105,728) (52,933) (138,762)
- --------------------------------------------------------------------------------------------------------
Other-than-temporary impairments (33,823) - -
- --------------------------------------------------------------------------------------------------------
Total net realized investment (losses) gains $ (26,462) $ 39,784 $ (17,287)
- --------------------------------------------------------------------------------------------------------
The following table is a reconciliation of the net realized investments
gains and losses on securities classified as available for sale to the net
realized investments gains and losses in the Consolidated Statements of
Operations ($ 000's):
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net realized investment (losses) gains on available for sale securities $ (26,462) $ 39,784 $ (17,287)
- -------------------------------------------------------------------------------------------------------------------
Net realized investment losses on trading securities (9,817) (18,231) (45,453)
- -------------------------------------------------------------------------------------------------------------------
Net unrealized investment gains (losses) on trading securities 5,262 (1,167) -
- -------------------------------------------------------------------------------------------------------------------
Net realized gains on real estate 15,490 - -
- -------------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses) on designated hedging activities 5,394 (441) -
- -------------------------------------------------------------------------------------------------------------------
Net realized investment gains on undesignated hedging activities 6,503 1,565 -
- -------------------------------------------------------------------------------------------------------------------
Other realized investment losses (3,128) (1,318) -
- -------------------------------------------------------------------------------------------------------------------
Total net realized investment (losses) gains $ (6,758) $ 20,192 $ (62,740)
- -------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2002 and 2001, the Company recorded a net
gain of $5.4 million and a net loss of $0.4 million, respectively, in the
net realized investment gains and losses in the Consolidated Statements of
Operations, representing the ineffectiveness of its designated fair value
hedging activities.
44
PartnerRe
Annual Report 2002
75
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Investments (Continuation)
During the year ended December 31, 2002, the Company recorded charges for
other-than-temporary impairments relating to its investment portfolio in
the aggregate amount of $33.8 million. The Company did not record any such
charges during the years ended December 31, 2001 and 2000.
(e) NET INVESTMENT INCOME
The components of net investment income for the years ended December 31,
2002, 2001 and 2000, were as follows ($ 000's):
2002 2001 2000
----------------------------------------------------------------------------------
Fixed maturities, short-term investments,
cash and cash equivalents $ 209,747 $ 204,143 $ 243,722
----------------------------------------------------------------------------------
Equities 13,614 14,816 9,294
----------------------------------------------------------------------------------
Funds held and other 35,527 29,605 30,764
----------------------------------------------------------------------------------
Total return and interest swaps 1,306 - -
----------------------------------------------------------------------------------
Investment expenses (15,005) (8,956) (10,192)
----------------------------------------------------------------------------------
Net investment income $ 245,189 $ 239,608 $ 273,588
----------------------------------------------------------------------------------
(f) TRADING SECURITIES
On January 1, 2001 the Company reclassified approximately $89.2 million of
available for sale convertible debt and equity securities to trading. This
reclassification resulted in gross realized gains and losses of $6.3
million and $10.9 million, respectively, being recognized in the
Consolidated Statements of Operations in 2001.
For the years ended December 31, 2002 and 2001, the change in net
unrealized investment gains and losses on trading securities being
recognized in the Consolidated Statements of Operations resulted in a gain
of $5.3 million and a loss of $1.2 million, respectively. There were no
gains or losses recognized in prior years since the Company did not
classify any of its investments as trading prior to January 1, 2001.
(g) PLEDGED SECURITIES
At December 31, 2002 and 2001, cash and securities with a market value of
approximately $1,342.9 million and $1,271.9 million, respectively, were
deposited, pledged or held in an escrow account to support long-term debt
or in favor of ceding companies or government authorities to comply with
reinsurance contract provisions and insurance laws.
(h) CONCENTRATION OF CREDIT RISK
Excluding debt securities issued by the U.S. and other AAA-rated sovereign
governments, the Company is not exposed to any significant credit
concentration risk on its investments.
(i) UNSETTLED TRADES
Unsettled trades have been netted on the Consolidated Balance Sheets. The
gross payable and receivable balances for unsettled trades at December 31,
2002 and 2001 were as follows ($ 000's):
2002 2001
------------------------------------------------------------------
Receivable for securities sold $ 111,927 $ 30,238
------------------------------------------------------------------
Payable for securities purchased (302,037) (173,773)
------------------------------------------------------------------
Net payable for securities purchased $ (190,110) $ (143,535)
------------------------------------------------------------------
45
PartnerRe
Annual Report 2002
76
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Unpaid Losses and Loss Expenses
The table below is a reconciliation of the beginning and ending liability
for unpaid losses and loss expenses, excluding policy benefits for life
contracts, for the years ended December 31, 2002, 2001 and 2000 ($ 000's):
2002 2001 2000
--------------------------------------------------------------------------------------
Gross liability at beginning of year $ 3,005,628 $ 2,386,032 $ 2,616,556
--------------------------------------------------------------------------------------
Reinsurance recoverable at beginning of year 214,891 203,180 205,982
--------------------------------------------------------------------------------------
Net liability at beginning of year 2,790,737 2,182,852 2,410,574
--------------------------------------------------------------------------------------
Net incurred losses related to:
--------------------------------------------------------------------------------------
Current year 1,506,860 1,515,006 801,916
--------------------------------------------------------------------------------------
Prior years 56,118 (7,871) (112)
--------------------------------------------------------------------------------------
1,562,978 1,507,135 801,804
--------------------------------------------------------------------------------------
Net paid losses related to:
--------------------------------------------------------------------------------------
Current year 201,669 209,473 146,433
--------------------------------------------------------------------------------------
Prior years 923,165 615,276 778,382
--------------------------------------------------------------------------------------
1,124,834 824,749 924,815
--------------------------------------------------------------------------------------
Effects of exchange rate changes 211,758 (74,501) (104,711)
--------------------------------------------------------------------------------------
Net liability at end of year 3,440,639 2,790,737 2,182,852
--------------------------------------------------------------------------------------
Reinsurance recoverable at end of year 217,777 214,891 203,180
--------------------------------------------------------------------------------------
Gross liability at end of year $ 3,658,416 $ 3,005,628 $ 2,386,032
--------------------------------------------------------------------------------------
During 2002 the Company incurred losses of $56.1 million relating to
adjustments to estimates of prior year's losses. These losses relate
primarily to the Company's U.S. casualty facultative business, which has
been discontinued, where losses reported by cedents have been higher than
was initially expected.
The table below is a reconciliation of losses and loss expenses including
life policy benefits for the years ended December 31, 2002, 2001, and 2000
($ 000's):
2002 2001 2000
-----------------------------------------------------------------------
Net incurred losses related to:
-----------------------------------------------------------------------
Non-life $ 1,562,978 $ 1,507,135 $ 801,804
-----------------------------------------------------------------------
Life 152,784 124,695 173,895
-----------------------------------------------------------------------
Losses and loss expenses
including life policy benefits $ 1,715,762 $ 1,631,830 $ 975,699
-----------------------------------------------------------------------
ASBESTOS AND ENVIRONMENTAL CLAIMS
The Company's reserve for unpaid losses and loss expenses as at December
31, 2002, 2001 and 2000, included $106.8 million, $110.0 million and $128.0
million, respectively, that represent an estimate of its net ultimate
liability for asbestos and environmental claims. The gross liability for
such claims as at December 31, 2002, 2001 and 2000, was $124.3 million,
$136.9 million and $152.8 million, respectively, of which $114.6 million,
$113.3 million and $128.0 million, respectively, relate to U.S. casualty
exposures arising from business written by PartnerRe SA. (See Note 6).
Ultimate values for such claims cannot be estimated using traditional
reserving techniques and there are significant uncertainties in estimating
the amount of the Company's
46
PartnerRe
Annual Report 2002
77
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Unpaid Losses and Loss Expenses (Continuation)
potential losses for these claims. In view of the changes in the legal and
tort environment that affect the development of such claims, the
uncertainties inherent in valuing asbestos and environmental claims are not
likely to be resolved in the near future. There can be no assurance that
the reserves established by the Company will not be adversely affected by
development of other latent exposures, and further, there can be no
assurance that the reserves established by the Company will be adequate.
The Company does, however, actively evaluate 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 which would
materially affect its loss and loss expense estimates.
6. CEDED REINSURANCE
The Company uses retrocessional agreements to reduce its exposure to risk
of loss on reinsurance assumed. These agreements provide for recovery of a
portion of losses and loss adjustment expenses from retrocessionaires. The
Company remains liable to the extent the retrocessionaires do not meet
their obligations under these agreements, and therefore the Company
evaluates the financial condition of its reinsurers and monitors
concentration of credit risk. Provisions are made for amounts considered
potentially uncollectible. The allowance for uncollectible reinsurance
recoverables was $22.7 million and $16.9 million as at December 31, 2002
and 2001, respectively.
In September 2001, the Company commuted a guaranty from the AGF Group
relating to loss development on U.S. casualty exposures arising from
business written prior to January 1, 1992, by certain companies that were
at the time part of the AGF Group and are currently part of PartnerRe SA.
The guaranty was commuted with an effective date of December 31, 2000, and
a settlement date of September 4, 2001. The commutation did not have a
significant impact on the results of operations for the year ended December
31, 2001. If losses and loss expenses relating to those reserves develop
beyond their level as at the date of commutation, the Company will be
required to increase loss reserves with a corresponding reduction in income
in the period in which the deficiency is identified.
Net premiums written, net premiums earned and losses and loss expenses
including life policy benefits for 2002, 2001, and 2000 are reported net of
reinsurance in the Company's Consolidated Statements of Operations.
Assumed, ceded and net amounts for the years ended December 31, 2002, 2001
and 2000, were as follows ($ 000s):
Premiums Premiums Losses and
2002 Written Earned Loss Expenses
-----------------------------------------------------------------------
Assumed $ 2,705,672 $ 2,481,693 $ 1,741,443
-----------------------------------------------------------------------
Ceded 50,298 55,957 25,681
-----------------------------------------------------------------------
Net $ 2,655,374 $ 2,425,736 $ 1,715,762
-----------------------------------------------------------------------
2001
-----------------------------------------------------------------------
Assumed $ 1,878,256 $ 1,686,163 $ 1,712,604
-----------------------------------------------------------------------
Ceded 53,160 52,655 80,774
-----------------------------------------------------------------------
Net $ 1,825,096 $ 1,633,508 $ 1,631,830
-----------------------------------------------------------------------
2000
-----------------------------------------------------------------------
Assumed $ 1,439,515 $ 1,378,140 $ 1,078,667
-----------------------------------------------------------------------
Ceded 59,263 63,768 102,968
-----------------------------------------------------------------------
Net $ 1,380,252 $ 1,314,372 $ 975,699
-----------------------------------------------------------------------
47
PartnerRe
Annual Report 2002
78
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
In connection with the Acquisition, the Company's subsidiary, PartnerRe
U.S., obtained a $220.0 million, 5.81% fixed rate bank loan. The loan,
which is fully collateralized, is repayable in 2008, with interest payments
due semiannually. PartnerRe U.S. incurred interest expense of $13.0 million
in 2002, 2001, and 2000, respectively, and paid interest of $13.0 million
in each year of 2002, 2001, and 2000 in relation to the loan.
8. TAXATION
Under current Bermuda law, neither the Company nor any of its
Bermuda-domiciled subsidiaries is required to pay taxes in Bermuda on
either income or capital gains. The Company has received from the Minister
of Finance of Bermuda an assurance under The Exempted Undertakings Tax
Protection Act, 1966 of Bermuda that in the event of any such taxes being
imposed, the Company will be exempted until 2016. Certain subsidiaries and
branches of the Company operate in, and are subject to taxation by, other
jurisdictions.
Income tax expense (benefit) for the years ended December 31, 2002, 2001
and 2000, and income tax assets as at December 31, 2002, 2001 and 2000,
were as follows ($ 000's):
2002 2001 2000
-----------------------------------------------------------------------
Current income tax expense (benefit) $ 2,752 $ (2,557) $ (5,984)
-----------------------------------------------------------------------
Deferred income tax benefit (91) (66,747) (37,754)
-----------------------------------------------------------------------
Income tax expense (benefit) $ 2,661 $ (69,304) $ (43,738)
-----------------------------------------------------------------------
Net current tax asset $ 8,954 $ 9,924 $ 10,525
-----------------------------------------------------------------------
Net deferred tax asset 91,048 83,961 12,471
-----------------------------------------------------------------------
Total tax asset $ 100,002 $ 93,885 $ 22,996
-----------------------------------------------------------------------
Deferred tax assets reflect the tax impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and
income tax purposes. Significant components of the net deferred tax asset
as of December 31, 2002 and 2001, were as follows ($ 000's):
2002 2001
-----------------------------------------------------------------------
Discounting of loss reserves and adjustment to
life policy reserves $ 27,891 $ 31,100
-----------------------------------------------------------------------
Retirement and other compensation plans 2,014 1,887
-----------------------------------------------------------------------
Tax loss carry-forwards 152,090 122,679
-----------------------------------------------------------------------
Unearned premium 16,604 13,300
-----------------------------------------------------------------------
Other deferred tax assets 6,588 7,723
-----------------------------------------------------------------------
205,187 176,689
-----------------------------------------------------------------------
Valuation allowance (52,852) (31,432)
-----------------------------------------------------------------------
Deferred tax assets 152,335 145,257
-----------------------------------------------------------------------
Unrealized appreciation and timing differences
on investments 17,170 13,182
-----------------------------------------------------------------------
Deferred acquisition costs 21,116 20,813
-----------------------------------------------------------------------
Tax equalization reserves 10,190 11,382
-----------------------------------------------------------------------
Other deferred tax liabilities 12,811 15,919
-----------------------------------------------------------------------
Deferred tax liabilities 61,287 61,296
-----------------------------------------------------------------------
Net deferred tax asset $ 91,048 $ 83,961
-----------------------------------------------------------------------
48
PartnerRe
Annual Report
79
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Taxation (Continuation)
As at December 31, 2002, the Company had $152.1 million in net tax
operating loss carryforwards that will expire, if not used, between the
years 2005 and 2022. The Company has recorded a valuation allowance of
$52.9 million related to certain deferred tax assets. The valuation
allowance reflects Management's assessment, based on available information,
that it is more likely than not that certain deferred tax assets will not
be realized in the applicable jurisdiction. Realization of the deferred tax
asset is dependent on generating sufficient taxable income in future
periods. Although realization is not assured, Management believes it is
more likely than not that the remaining deferred tax asset will be
realized.
The following table summarizes the changes in "accumulated other
comprehensive income" and the related tax benefit for the years ended
December 31, 2002, 2001 and 2000 ($ 000's):
Before Tax Tax Effect Net of Tax
-----------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ 27,223 $ - $ 27,223
-----------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on investments:
-----------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on investments arising during the period 70,193 (11,004) 59,189
-----------------------------------------------------------------------------------------------------------
Less reclassification adjustment for available for sale securities 26,462 9,931 36,393
-----------------------------------------------------------------------------------------------------------
96,655 (1,073) 95,582
-----------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive income $ 123,878 $ (1,073) $ 122,805
-----------------------------------------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ (12,333) $ - $ (12,333)
-----------------------------------------------------------------------------------------------------------
Unrealized (losses) gains on investments:
-----------------------------------------------------------------------------------------------------------
Unrealized (losses) gains on investments arising during the period (64,828) 15,072 (49,756)
-----------------------------------------------------------------------------------------------------------
Less reclassification adjustment for available for sale securities (39,784) 6,052 (33,732)
(104,612) 21,124 (83,488)
-----------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive income $ (116,945) $ 21,124 $ (95,821)
-----------------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ (22,446) $ - $ (22,446)
-----------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on investments:
-----------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on investments and other foreign exchange
gains and losses arising during the period 197,279 (37,993) 159,286
-----------------------------------------------------------------------------------------------------------
Less reclassification adjustment for available for sale securities 17,287 7,063 24,350
-----------------------------------------------------------------------------------------------------------
214,566 (30,930) 183,636
-----------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive income $ 192,120 $ (30,930) $ 161,190
-----------------------------------------------------------------------------------------------------------
49
PartnerRe
Annual Report 2002
80
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. AGREEMENTS WITH RELATED PARTIES
The Company was party to agreements with Swiss Reinsurance Company ("Swiss
Re," a shareholder), Head Company LLC ("Head Company," a company in which a
former board member has a management role), Morgan Stanley (a company in
which a former board member had a management role), and their respective
affiliates. Head Company LLC was no longer an affiliate of the Company
after May 2000 while Morgan Stanley was no longer an affiliate of the
Company after May 2001.
AGREEMENTS WITH SWISS REINSURANCE COMPANY
The Company utilized, in the conduct of its business, certain underwriting
services and licensed technology provided by Swiss Re pursuant to a service
agreement. Fees incurred pursuant to the agreement include fixed fees for
access to technology and database resources. Fees incurred for each of the
years ended December 31, 2002, 2001, and 2000, were $0.2 million, $0.1
million and $0.1 million, respectively.
In the normal course of their underwriting activities, the Company and
certain subsidiaries entered into reinsurance contracts (assumed and ceded)
with Swiss Re and certain Swiss Re subsidiaries during 2002 and 2001.
Included in the 2002 consolidated results were net ceded premiums written
of $1.0 million, net losses and loss expenses, including life policy
benefits of $2.5 million and net acquisition costs of $1.1 million. As at
December 31, 2002, there were reinsurance balances receivable and
recoverable aggregating $21.4 million, unpaid losses and loss expenses,
including life policy benefits of $9.1 million and net ceded funds held
under reinsurance treaties of $3.0 million. Included in the 2001
consolidated results were net premiums written of $13.6 million, net loss
recoveries, including life policy benefits of $2.6 million and net
acquisition costs of $5.2 million. As at December 31, 2001, there were
reinsurance balances receivable and recoverable aggregating $26.8 million,
unpaid losses and loss expenses, including life policy benefits of $20.1
million and net assumed funds held under reinsurance treaties of $0.3
million. Included in the 2000 consolidated results were net premiums
written of $13.5 million, net losses and loss expenses, including life
policy benefits of $2.9 million and net acquisition costs of $4.7 million.
INVESTMENT ADVISORY AGREEMENTS
The Company utilized the services of Swiss Re, Head Asset Management
(Bermuda) L.P. ("HAMB"), an affiliate of Head Company, and Morgan Stanley
Dean Witter Investment Management and affiliates ("MSDWIM"), a division of
Morgan Stanley, to manage portions of its investment portfolio pursuant to
investment advisory agreements. Pursuant to these agreements, which are
subject to the Company's investment guidelines and other restrictions, the
Company paid a fee to each of Swiss Re, HAMB, and MSDWIM. Investment fees
expensed for the years ended December 31, 2002, 2001 and 2000, aggregated
$1.5 million, $2.4 million and $2.8 million, respectively, under these
agreements.
ISSUANCE OF SECURITIES
The Company utilized the services of Morgan Stanley as lead underwriter in
the issuance of new securities during 2001, as described more fully in Note
13. The Company paid underwriting fees, in the aggregate, of $12.3 million
to all underwriters involved in the transactions.
50
PartnerRe
Annual Report 2002
81
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT BENEFIT ARRANGEMENTS
For employee retirement benefits, the Company actively maintains defined
contribution plans, which are contributory or non-contributory depending
upon competitive local market practices. In addition, the Company maintains
frozen non-contributory defined benefit plans.
Contributions are based on the participant's base salary and the
accumulated benefit for the majority of the plans vests immediately or over
a two-year period. Prior to the adoption of the defined contribution plans,
the Company had a defined benefit plan covering substantially all of its
employees. Effective June 30, 1999, benefit accruals under this plan were
frozen, except for certain disabled participants. All employees previously
enrolled in defined benefit retirement plans have been transferred to
defined contribution plans. As required by law, certain retirement plans
also provide for death and disability benefits and lump sum indemnities to
employees upon retirement.
The Company incurred pension expense for these pension arrangements of $7.9
million, $5.7 million and $5.4 million for the years ended December 31,
2002, 2001, and 2000, respectively.
11. STOCK AND STOCK OPTION PLANS
STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Option Plan") under which
the Company may grant, subject to certain restrictions, incentive ("ISOs")
and non-qualified ("NQSOs") stock options to directors and employees of the
Company. The Option Plan is administered by the Human Resource Committee of
the Board of Directors (the "Committee"). Under the Option Plan, ISOs may
only be granted to employees of the Company, while NQSOs may be granted to
employees, directors and consultants to the Company and to any other person
selected by the Committee.
Pursuant to the terms of the Option Plan, the dates on which each option
can be exercised, the expiration date of each option and the purchase price
of shares subject to each option shall be fixed by the Committee at the
time such options are granted. The exercise price of the options will be
subject to a minimum price, in the case of ISOs, equal to the fair market
value, as defined in the plan, of the common shares on the date of grant
and a minimum price in the case of NQSOs, equal to the par value of the
common shares. No options shall be exercisable after ten years from the
date of grant. A total of two million Common Shares may be issued under the
Option Plan.
EMPLOYEE INCENTIVE PLAN
The Company has adopted an Employee Incentive Plan (the "EIP") under which
the Company may grant, subject to certain restrictions, stock options,
restricted stock ("RS"), phantom stock units ("PSU"), performance units
("PU"), and performance shares ("PS") to employees of the Company. The EIP
is administered by the Committee.
Pursuant to the terms of the EIP, awards may be granted to eligible
employees at any time, in any amount, as determined by the Committee. The
RS and PSU awards will be subject to terms, conditions, restrictions and
restricted periods fixed by the Committee that may be linked to prescribed
performance goals. The PU and PS awards will be subject to performance
goals that shall be fixed by the Committee. A total of 3,500,000 Common
Shares may be issued under the EIP.
51
PartnerRe
Annual Report 2002
82
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stock and Stock Option Plans (Continuation)
The Company issued 10,000 restricted shares in 2000 with a weighted-average
grant date fair value of $54.50 per share. These shares will vest no
earlier than four years from the grant date. The Company incurred
compensation expense for restricted share grants in the years ended
December 31, 2002, 2001 and 2000, of approximately $136,000, $137,000, and
$11,000, respectively. Related deferred compensation expense at December
31, 2002 and 2001, was $261,000 and $397,000, respectively.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company has adopted a non-employee Directors' Stock Plan (the
"Directors' Stock Plan"). Under the terms of the Directors' Stock Plan,
non-employee Directors receive $40,000 in annual fees, paid at each annual
shareholders' meeting, in Common Shares ("Directors' Shares") or cash,
depending on their election. The Directors' Stock Plan also provides for
automatic annual awards of stock options to purchase 8,000 Common Shares at
an exercise price per share equal to the market value per share at the time
of grant, to be made to non-employee Directors at each successive annual
shareholders' meeting. No options shall be exercisable after ten years from
the date of grant. A total of 800,000 Common Shares may be issued under the
Directors' Stock Plan.
EMPLOYEE SHARE PURCHASE PLAN
The Employee Share Purchase Plan (the "ESPP") was approved by the
shareholders of the Company at the May 19, 2000, Annual General Meeting and
amended on February 25, 2002. The ESPP is administered by the Committee and
meets the requirement of Section 423 of the Internal Revenue Code of 1986,
as amended (the "Code"). The ESPP has one offering period per year with two
purchase periods of six months. All employees are eligible to participate
in the ESPP and can contribute between 1% and 10% of their base salary
towards the purchase of PartnerRe Ltd. shares up to the limit set by the
Code. Employees who enroll in the ESPP may purchase PartnerRe Ltd. shares
at a 15% discount of the fair market value. Participants in the ESPP are
eligible to receive dividends on their PartnerRe Ltd. shares as of the
purchase date. The number of Common Shares available for issue under the
ESPP was reduced from 500,000 to 300,000 on the establishment of the Swiss
Share Purchase Plan.
SWISS SHARE PURCHASE PLAN
In February 2002, the Board of Directors approved the establishment of the
Swiss Share Purchase Plan (the "SSPP"). At that time, 200,000 Common Shares
were relinquished from the ESPP and designated as available to issue under
the SSPP. The SSPP is administered by the Committee. The SSPP has two
offering periods a year with two purchase periods of six months. All Swiss
employees are eligible to participate in the SSPP and can contribute
between 1% and 8% of their base salary towards the purchase of PartnerRe
Ltd. shares up to a maximum of 5,000 Swiss francs per annum. Employees who
enroll in the SSPP may purchase PartnerRe Ltd. shares at a 40% discount of
the fair market value. Once purchased, there is a restriction upon transfer
or sale of these shares for a period of two years following purchase.
Participants in the SSPP are eligible to receive dividends on their
PartnerRe Ltd. shares as of the purchase date. A total of 200,000 common
shares may be issued under the SSPP.
52
PartnerRe
Annual Report 2002
83
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stock and Stock Option Plans (Continuation)
A summary of the status of the Company's outstanding stock options as of
December 31, 2002, 2001 and 2000, and changes during the years ending on
those dates, is presented below:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 2,446,080 $ 40.29 2,074,642 $ 37.62 2,182,008 $ 31.59
- ------------------------------------------------------------------------------------------------------------
Granted 742,752 53.26 544,742 49.87 755,969 37.11
- ------------------------------------------------------------------------------------------------------------
Exercised (180,236) 32.25 (93,306) 35.75 (806,987) 20.69
- ------------------------------------------------------------------------------------------------------------
Forfeited (20,338) 45.77 (79,998) 41.59 (56,348) 38.37
- ------------------------------------------------------------------------------------------------------------
Outstanding at end
of year 2,988,258 43.96 2,446,080 40.29 2,074,642 37.62
- ------------------------------------------------------------------------------------------------------------
Options exercisable
at year end 1,127,693 $ 40.06 1,054,060 $ 37.50 980,352 $ 36.24
- ------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002, 2001 and 2000, respectively: risk free
interest rates of 5.0%, 5.1%, and 6.4%, expected lives of seven years,
expected volatility of 25%, and a dividend yield of 2%. The weighted
average fair value of options granted during 2002, 2001 and 2000, was
$15.95, $14.80, and $10.61, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------------
$ 19.38 - $ 30.56 270,427 3.8 years $ 25.27 229,227 $ 24.33
- -------------------------------------------------------------------------------------------
$ 30.71 - $ 41.33 856,910 6.7 35.88 319,184 35.91
- -------------------------------------------------------------------------------------------
$ 41.54 - $ 48.74 638,400 6.7 46.44 295,960 45.88
- -------------------------------------------------------------------------------------------
$ 48.74 - $ 51.95 500,557 8.0 50.50 258,407 50.77
- -------------------------------------------------------------------------------------------
$ 52.15 - $ 55.57 721,964 8.5 53.82 24,915 53.71
- -------------------------------------------------------------------------------------------
$ 19.38 - $ 55.57 2,988,258 7.1 $ 43.96 1,127,693 $ 40.06
- -------------------------------------------------------------------------------------------
Exercise prices for all options issued during 2002, 2001 and 2000, equaled
the average market price of the stock on the grant date.
The Company applies APB Opinion No. 25 in accounting for stock options.
Accordingly, no compensation cost has been recognized for grants of stock
options under the Option Plan or the Directors' Stock Plan. Had
compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123), the Company's net income available to common
shareholders and earnings per Common Share would have been reduced to the
pro forma amounts indicated as follows ($ 000's except per share data):
53
PartnerRe
Annual Report 2002
84
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Stock and Stock Option Plans (Continuation)
2002 2001 2000
---------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders:
---------------------------------------------------------------------------------------------
As reported $ 170,302 $ (180,482) $ 122,307
---------------------------------------------------------------------------------------------
Pro forma $ 160,567 $ (187,216) $ 117,157
---------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic
---------------------------------------------------------------------------------------------
As reported $ 3.37 $ (3.60) $ 2.48
---------------------------------------------------------------------------------------------
Pro forma $ 3.18 $ (3.73) $ 2.38
---------------------------------------------------------------------------------------------
Diluted
---------------------------------------------------------------------------------------------
As reported $ 3.28 $ (3.60) $ 2.41
---------------------------------------------------------------------------------------------
Pro forma $ 3.09 $ (3.73) $ 2.31
---------------------------------------------------------------------------------------------
12. DIVIDEND RESTRICTIONS AND STATUTORY REQUIREMENTS
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 laws and certain insurance statutes of New York State,
in which the reinsurance subsidiaries of PartnerRe U.S. are domiciled. 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. At December 31, 2002, 2001, and 2000, there
were no material statutory restrictions on the reinsurance subsidiaries'
abilities to pay dividends except that PartnerRe U.S., a company licensed
in the U.S., may not pay cash dividends without prior regulatory approval.
The reinsurance subsidiaries are required to file annual statements with
insurance regulatory authorities prepared on an accounting basis prescribed
or permitted by such authorities ("statutory basis"), maintain minimum
levels of solvency and liquidity, and comply with risk based capital
requirements and licensing rules. As of December 31, 2002, the reinsurance
subsidiaries' solvency, liquidity, and risk-based capital amounts were well
in excess of the minimum levels required. The typical adjustments to
insurance statutory amounts to convert to U.S. GAAP include elimination of
certain statutory reserves, deferral of certain acquisition costs,
recognition of deferred income taxes, valuation of bonds at market and
presenting ceded reinsurance balances gross of assumed balances.
13. TRUST PREFERRED AND MANDATORILY REDEEMABLE PREFERRED SECURITIES
TRUST PREFERRED SECURITIES
On November 21, 2001, PartnerRe Capital Trust I (the "Trust"), a Delaware
statutory business trust, issued $200 million of 7.90% Preferred Securities
("Trust Preferred Securities"). The Trust is wholly owned by PartnerRe
Finance I Inc. ("PartnerRe Finance"), a Delaware corporation formed solely
for the purpose of issuing junior subordinated debt securities to the
Trust. PartnerRe Finance is an indirect, wholly-owned subsidiary of the
Company.
The Trust used the proceeds from the sale of the Trust Preferred Securities
to buy an equal principal amount of 7.90% junior subordinated debt
securities of PartnerRe Finance and will distribute any cash payments it
receives thereon to the holders of its preferred and common securities. The
Trust will redeem the Trust Preferred Securities on December 31, 2031,
which date may be extended to a date no later than December 31, 2050, and
may redeem them earlier, subject to the early redemption provisions of the
subordinated Debentures (discussed below). Distributions on the Trust
Preferred Securities are payable quarterly at an annual rate
54
PartnerRe
Annual Report 2002
85
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Trust Preferred and Mandatorily Redeemable Preferred Securities
(Continuation)
of 7.90%. The Trust may defer these payments for up to 20 consecutive
quarters ("the extension period"), but not beyond the maturity of Trust
Preferred Securities. Any accumulated but unpaid distributions will
continue to accrue interest at a rate of 7.90%, compounded quarterly,
during the extension period.
The sole asset of the Trust consists of 7.90% Junior Subordinated Debt
securities (the "Subordinated Debentures") with a principal amount of
$206.2 million issued by PartnerRe Finance. The Subordinated Debentures
mature on December 31, 2031, which date may be extended to a date no later
than December 31, 2050, and may be redeemed earlier, but no earlier than
November 21, 2006. Interest on the Subordinated Debentures is payable
quarterly at a rate of 7.90%. PartnerRe Finance may defer interest payments
for up to 20 consecutive quarters, but not beyond the maturity of the
Subordinated Debentures. Any accumulated but unpaid distributions will
continue to accrue interest at a rate of 7.90%, compounded quarterly,
during the extension period.
The Subordinated Debentures are unsecured obligations of PartnerRe Finance.
The Company has fully and unconditionally guaranteed all obligations of
PartnerRe Finance under the Subordinated Debentures. The Company's
obligations under this guarantee are unsecured and will rank junior in
priority or payment to the Company's current long-term debt (see Note 7).
In the event of default under the Subordinated Debentures, the Trust
Preferred Securities will rank prior to the common securities of the Trust
in priority of payments. The Company has guaranteed payments due on the
Trust Preferred Securities only to the extent that the Trust has funds on
hand available for such payment.
MANDATORILY REDEEMABLE PREFERRED SECURITIES
On November 21, 2001, the Company issued four million Premium Equity
Participating Security Units ("PEPS Units"). Each PEPS Unit consists of (i)
one of the Company's 5.61% Series B Cumulative Redeemable Preferred Shares,
$1 par value, liquidation preference $50 per share ("Series B Preferred
Shares") and (ii) a purchase contract ("Purchase Contract") issued by the
Company pursuant to which the holder will be obligated to purchase from the
Company, no later than December 31, 2004, a number of common shares to be
determined at that time for a price of $50. Each Series B Preferred Share
is pledged to the Company's benefit to secure the holder's obligations
under the Purchase Contract. Holders of Series B Preferred Shares will be
permitted to withdraw the pledged Series B Preferred Share from the pledge
arrangement only upon early settlement, settlement for cash or termination
of the related Purchase Contract. Dividends on Series B Preferred Shares
are cumulative, accrue at a rate of 5.61% of the liquidation preference
amount per year and are payable quarterly in arrears. In conjunction with
the payment of dividends on the Series B Preferred Shares, Purchase
Contract holders will receive quarterly contract adjustment payments at a
rate of 2.39% of the stated amount of $50 per Purchase Contract per year.
Purchase Contract adjustment payments may be deferred on similar terms to
the Series B Preferred Share dividends described above. Purchase Contract
holders will be required to purchase between 0.8696 and 1.0638 of the
Company's common shares, depending on the share price of the Common Shares
at that time.
The Company must redeem the Series B Preferred Shares on June 30, 2005, at
a redemption price of $50 per Series B Preferred Share, plus all accrued
and unpaid dividends, if any, on that date. The Company may not redeem the
Series B Preferred Shares prior to that date. The Series B Preferred Shares
rank on parity with the Company's Series A Cumulative Preferred Shares.
(See Note 14.)
55
PartnerRe
Annual Report 2002
86
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
At December 31, 2002 and 2001, the total authorized shares of the Company
were 150 million shares and 120 million shares, respectively, par value
$1.00 per share. In 2002, 100 million shares were designated as Common
Shares, 10 million shares were designated as 8% Series A Cumulative
Preferred Shares, 4 million shares were designated as Series B Cumulative
Preferred Shares (See Note 13) and 36 million shares remained undesignated.
In 2001, 100 million shares were designated as Common Shares, 10 million
shares were designated as 8% Series A Cumulative Preferred Shares, 4
million shares were designated as Series B Cumulative Preferred Shares (See
Note 13) and 6 million shares remained undesignated.
COMMON SHARES
In November 2002, the Company issued 8 million Common Shares, at an initial
price to the public of $46.40 per share net of underwriting fees, for net
proceeds of $371.2 million. The net proceeds from the offering were used in
part to repurchase 6 million Common Shares from Swiss Reinsurance Company
and certain of its affiliates at a price per share equal to the Company's
net proceeds after commissions. The repurchased shares were cancelled and
are no longer outstanding.
CLASS B WARRANTS
In 1993, in connection with the issuance of Common Shares, the Company
issued Class B Warrants to purchase, in the aggregate, up to approximately
6.8 million Common Shares provided certain performance criteria were met.
The exercise price is also subject to adjustment upon the occurrence of
certain events relating principally to changes in the number of Common
Shares, options or Warrants outstanding. Twenty percent of the Class B
Warrants were available for vesting on each of the first five anniversary
dates of the issue of the Warrants. The vesting conditions for the Class B
Warrants available for vesting in November 1998, 1996, 1995 and 1994, which
aggregated to 5.5 million Warrants, were not met and those Warrants have
been forfeited. The vesting conditions for the 1.3 million Class B Warrants
available for vesting in November 1997 were met and those Warrants are
available for exercise through November 2004 at an exercise price of $17
per share.
SERIES A CUMULATIVE PREFERRED SHARES
In 1997, the Company issued 10 million of the Company's 8% Series A
Cumulative Preferred Shares, par value $1.00 per share, for net proceeds of
$242.2 million, 2 million shares of which were issued to Swiss Re.
Cumulative dividends of $0.50 per share are payable quarterly. Effective
July 10, 2002, the Company may, under certain circumstances, described in
the Company's Bye-Laws and the Certificate of Designation, redeem the
stock, in whole or in part, for $25.00 per share plus accrued dividends. In
the event of liquidation of the Company, the holders of outstanding
Preferred Shares would have preference over the common shareholders and
would receive a distribution of $25.00 per share plus accrued dividends.
56
PartnerRe
Annual Report 2002
87
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Shareholders' Equity (Continuation)
EARNINGS PER SHARE
The reconciliation of basic and diluted earnings per share is as follows
($ 000's except per share amounts):
2002 2001 2000
Income Shares Per Share Income Shares Per Share Income Shares Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 190,302 $ (160,482) $ 142,307
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock dividends (20,000) (20,000) (20,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available
to common shareholders $ 170,302 50,551.0 $ 3.37 $ (180,482) 50,136.8 $ (3.60) $ 122,307 49,274.8 $ 2.48
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Dilutive
Securities:/(1)/
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Warrants 896.7 873.8
- ------------------------------------------------------------------------------------------------------------------------------------
Stock Options 460.0 528.9
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders $ 170,302 51,907.7 $ 3.28 $ 122,307 50,677.5 $ 2.41
- ------------------------------------------------------------------------------------------------------------------------------------
/(1)/ Diluted net loss per share has not been shown for 2001 because the
effect of dilutive securities would have been antidilutive. For the 2001
period, the weighted average number of common and common equivalent shares
outstanding amounted to 51,566.5 shares after the dilutive effect of Class
B warrants and stock options of 899.6 and 530.1, respectively.
15. COMMITMENTS
LEASE ARRANGEMENTS
The Company leases office space under operating leases expiring in various
years through 2012. The leases are renewable at the option of the lessee
under certain circumstances. The following is a schedule of future minimum
rental payments, exclusive of escalation clauses, on non-cancelable leases
as of December 31, 2002 ($ 000's):
Period Amount
------------------------------------------
2003 $ 13,046
------------------------------------------
2004 13,272
------------------------------------------
2005 13,035
------------------------------------------
2006 12,250
------------------------------------------
2007 7,777
------------------------------------------
2008 through 2012 $ 28,521
------------------------------------------
Rent expense for the years ended December 31, 2002, 2001 and 2000, was
$13.5 million, $11.2 million and $9.2 million, respectively.
PREMIUM EQUITY PARTICIPATING SECURITY UNITS
Under the terms of the Company's 8% Premium Equity Participating Security
Units (PEPS Units) the Company is obligated, under the Purchase Contract
component, to make a contract adjustment payment of $1.195 per unit per
year or 2.39% of the stated amount of $50. Future payments under these
contracts will amount to $9.6 million through December 31, 2004.
57
PartnerRe
Annual Report 2002
88
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Commitments (Continuation)
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its executive
officers. These agreements provide for annual compensation in the form of
salary, benefits, bonus, options to purchase shares in the Company and the
reimbursement of certain expenses, as well as certain severance provisions.
U.S. LIFE REPRESENTATIONS AND WARRANTIES
As part of the agreement to sell the U.S. life operations in 2000, the
Company entered into certain representations and warranties, extending
through 2008, related to the enterprise being sold. At the time of the sale
the Company established a reserve of $15.0 million for potential future
claims against such representations and warranties.
OTHER AGREEMENTS
The Company has entered into service agreements and lease contracts that
provide for information technology support and computer equipment. Future
payments under these contracts will amount to $2.8 million through 2006.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain financial instruments where quoted market prices are not
available, Management's best estimate of fair value may be based on quoted
market prices of similar instruments or on other valuation techniques. SFAS
No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS 107)
excludes insurance contracts, other than financial guarantees and
investment contracts and certain other financial instruments.
The following methods and assumptions were used by the Company in
estimating fair market value of each class of financial instruments
recorded on the Consolidated Balance Sheets.
Fair value for fixed maturities, short-term investments, equities and
trading securities are based on quoted market prices. Carrying value of
other invested assets approximates fair value. Policy benefits for life and
annuity contracts have a fair value equal to the cash value available to
the policyholder should the policyholder surrender the policy. Fair value
of long-term debt has been calculated as the present value of estimated
future cash flows using a discount rate reflective of current market
interest rates. For Trust Preferred Securities and PEPS Units, fair value
is based on quoted market prices, while carrying value is based on the
liquidation value of the securities.
58
PartnerRe
Annual Report 2002
89
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Fair Value of Financial Instruments (Continuation)
The carrying values and fair values of the financial instruments recorded
in the Consolidated Balance Sheets as at December 31, 2002 and 2001, were
as follows ($ 000's):
2002 2001
Carrying Value Fair Value Carrying Value Fair Value
-----------------------------------------------------------------------------------------------------------------
ASSETS
-----------------------------------------------------------------------------------------------------------------
Fixed maturities $ 4,145,594 $ 4,145,594 $ 3,420,759 $ 3,420,759
-----------------------------------------------------------------------------------------------------------------
Short-term investments 3,801 3,801 39,564 39,564
-----------------------------------------------------------------------------------------------------------------
Equities 473,163 473,163 400,825 400,825
-----------------------------------------------------------------------------------------------------------------
Trading securities 75,284 75,284 77,452 77,452
-----------------------------------------------------------------------------------------------------------------
Other invested assets 3,630 3,630 20,500 20,500
-----------------------------------------------------------------------------------------------------------------
LIABILITIES
-----------------------------------------------------------------------------------------------------------------
Net policy benefits for life and annuity contracts $ 815,978 $ 815,978 $ 693,250 $ 693,250
-----------------------------------------------------------------------------------------------------------------
Long-term debt 220,000 238,310 220,000 220,140
-----------------------------------------------------------------------------------------------------------------
TRUST PREFERRED, MANDATORILY REDEEMABLE PREFERRED
SECURITIES AND PURCHASE CONTRACTS
-----------------------------------------------------------------------------------------------------------------
Trust Preferred Securities $ 200,000 $ 205,840 $ 200,000 $ 200,000
-----------------------------------------------------------------------------------------------------------------
Mandatorily Redeemable Preferred Securities
and Purchase Contracts (PEPS Units) 200,000 210,800 200,000 225,200
-----------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company utilizes foreign exchange contracts as part of its overall
currency risk management and investment strategies. In accordance with SFAS
133, these derivative instruments are shown on the Consolidated Balance
Sheets at fair value, with changes in their fair value recognized in the
Consolidated Statements of Operations.
The Company is exposed to credit risk in the event of non-performance by
the other parties to the contracts. However, because the counterparties to
these agreements are high quality international banks, the Company does not
anticipate non-performance. The difference between the contract amounts and
the related market value is the Company's maximum credit exposure.
Forward foreign exchange contracts outstanding at December 31, 2002 and
2001 were as follows ($ 000's):
2002 2001
Net Net
Unrealized Unrealized
Contract Market Gains Contract Market Gains
Amount Value (Losses) Amount Value (Losses)
------------------------------------------------------------------------------------------
Receivable $ 1,889,021 $ 1,892,039 $ 3,018 $ 1,745,614 $ 1,745,526 $ (88)
------------------------------------------------------------------------------------------
Payable (1,889,021) (1,892,269) (3,248) (1,745,614) (1,745,335) 279
------------------------------------------------------------------------------------------
Net $ - $ (230) $ (230) $ - $ 191 $ 191
------------------------------------------------------------------------------------------
FUTURES CONTRACTS
Exchange traded bond and note futures are used by the Company as
substitutes for ownership of the physical bonds and notes for the purposes
of managing portfolio duration. Bond and note futures net positions were
$nil at December 31, 2002 and 2001.
17. CREDIT AGREEMENTS
In the normal course of its operations, the Company enters into agreements
with financial institutions to provide unsecured credit facilities. As at
December 31, 2002, the total amount of such credit facilities available to
the Company was $748.1 million. These facilities are used
59
PartnerRe
Annual Report 2002
90
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Credit Agreements (Continuation)
primarily for the issuance of letters of credit. Under the terms of certain
reinsurance agreements, irrevocable letters of credit were issued on an
unsecured basis in the amount of $360.9 million and $283.5 million at
December 31, 2002 and 2001, respectively, in respect of reported loss and
unearned premium reserves.
Included in the total credit facilities available to the Company is a $600
million syndicated, unsecured 364-day credit facility. When this credit
facility was put in place in June 2002, the Company terminated similar
pre-existing facilities aggregating $225 million.
Some of the credit facilities contain customary default and cross default
provisions and require that the Company maintains certain covenants,
including the following:
i. a financial strength rating from A.M. Best Company of at least
"A-" (for our material reinsurance subsidiaries which are rated
by A.M Best Company);
ii. maximum ratio of total debt to total capitalization of 35%. For
the purposes of this covenant, "debt" does not include Trust
Preferred and Mandatorily Redeemable Preferred Shares; and
iii. a minimum consolidated tangible net worth of $1.25 billion plus
50 percent of cumulative net income since January 1, 2002 (total
of $1.35 billion at December 31, 2002). For the purposes of this
covenant, "consolidated tangible net worth" includes Trust
Preferred and Mandatorily Redeemable Preferred Shares and
excludes goodwill.
The Company's breach of any of these covenants would result in an event of
default, upon which the Company would likely be required to repay any
outstanding borrowings and replace letters of credit issued under these
facilities. At December 31, 2002, the Company's total debt to total
capitalization ratio was 8.2% and its consolidated tangible net worth (as
defined under the terms of these facilities) was $2.05 billion.
18. SEGMENT INFORMATION
Following a realignment of its 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 segments, Non-life and Life. The Non-life
segment is further divided into three sub-segments, U.S. Property and
Casualty, Global (Non-U.S.) Property and Casualty and Worldwide Specialty.
The Life segment includes Life, Health and Annuity lines of 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 U.S. and Global (Non-U.S.) Property and Casualty sub-segments include
property and casualty business as well as motor business. These lines are
generally written in local markets. The U.S. Property and Casualty
sub-segment is comprised of property, casualty and motor risks generally
originating in the United States, written by PartnerRe U.S. The Global
(Non-U.S.) Property and Casualty sub-segment is comprised of property,
casualty and motor business generally originating outside of the United
States, written by Partner Reinsurance Company and PartnerRe SA. The
Worldwide Specialty sub-segment is comprised of business that is generally
considered to be specialized due to the sophisticated technical
underwriting required to analyze risks, and is global in nature, in as much
as appropriate risk management for these lines requires 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
agriculture, aviation/space, catastrophe, credit/surety,
engineering/energy, marine, special risk, and other lines.
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
60
PartnerRe
Annual Report 2002
91
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Segment Information (Continuation)
reinsurance operations. The following items are not considered in
evaluating the results of each segment: net realized investment gains and
losses, other income, other operating expenses, amortization of goodwill,
interest expense, distributions related to Trust Preferred and Mandatorily
Redeemable Preferred Securities, net foreign exchange gains and 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 Non-life 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 years ended
December 31, 2002, 2001, and 2000 ($ millions except ratios). The
information for all periods presented has been reclassified to conform to
the new segmentation.
2002 2001 2000
----------------------------------------------------------------------------------
Non-Life Segment
U.S. Property and Casualty
----------------------------------------------------------------------------------
Net premiums written $ 649.0 $ 411.0 $ 291.6
----------------------------------------------------------------------------------
Net premiums earned 600.0 345.7 268.7
----------------------------------------------------------------------------------
Loss and expense ratio 74.3% 128.3% 81.5%
----------------------------------------------------------------------------------
Acquisition costs ratio 26.8 24.8 23.2
----------------------------------------------------------------------------------
Technical ratio /(1)/ 101.1% 153.1% 104.7%
----------------------------------------------------------------------------------
Global (Non-U.S.) Property and Casualty
----------------------------------------------------------------------------------
Net premiums written $ 599.8 $ 479.7 $ 439.8
----------------------------------------------------------------------------------
Net premiums earned 560.2 451.2 426.8
----------------------------------------------------------------------------------
Loss and expense ratio 78.3% 86.0% 71.0%
----------------------------------------------------------------------------------
Acquisition costs ratio 25.1 24.8 27.9
----------------------------------------------------------------------------------
Technical ratio /(1)/ 103.4% 110.8% 98.9%
----------------------------------------------------------------------------------
Worldwide Specialty
----------------------------------------------------------------------------------
Net premiums written $ 1,232.0 $ 802.4 $ 476.3
----------------------------------------------------------------------------------
Net premiums earned 1,095.2 704.8 446.0
----------------------------------------------------------------------------------
Loss and expense ratio 61.9% 95.8% 62.8%
----------------------------------------------------------------------------------
Acquisition costs ratio 17.7 20.3 21.5
----------------------------------------------------------------------------------
Technical ratio /(1)/ 79.6% 116.1% 84.3%
----------------------------------------------------------------------------------
TOTAL NON-LIFE SEGMENT
----------------------------------------------------------------------------------
Gross premiums written $ 2,523.4 $ 1,739.5 $ 1,253.0
----------------------------------------------------------------------------------
Net premiums written 2,480.8 1,693.1 1,207.7
----------------------------------------------------------------------------------
Net premiums earned 2,255.4 1,501.7 1,141.5
----------------------------------------------------------------------------------
Loss and expense ratio 69.3% 100.4% 70.2%
----------------------------------------------------------------------------------
Acquisition costs ratio 22.0 22.7 24.3
----------------------------------------------------------------------------------
Other overhead expense ratio 6.6 7.1 8.0
----------------------------------------------------------------------------------
Expense ratio 28.6 29.8 32.3
----------------------------------------------------------------------------------
Combined ratio 97.9% 130.2% 102.5%
----------------------------------------------------------------------------------
61
PartnerRe
Annual Report 2002
92
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Segment Information (Continuation)
2002 2001 2000
---------------------------------------------------------
TOTAL LIFE SEGMENT
---------------------------------------------------------
Gross premiums written $ 182.3 $ 138.8 $ 186.5
---------------------------------------------------------
Net premiums written 174.6 132.0 172.6
---------------------------------------------------------
Net premiums earned 170.3 131.8 172.9
---------------------------------------------------------
Technical result /(2)/ (43.2) (20.0) (42.9)
---------------------------------------------------------
Investment income 34.5 26.5 68.0
---------------------------------------------------------
Net technical result $ (8.7) $ 6.5 $ 25.1
---------------------------------------------------------
/(2)/ Technical result is defined as net premiums earned, less loss and
loss adjustment expenses and acquisition costs.
RECONCILIATION TO INCOME (LOSS) BEFORE DISTRIBUTIONS
RELATED TO TRUST PREFERRED AND MANDATORILY REDEEMABLE
PREFERRED SECURITIES AND TAXES: 2002 2001 2000
------------------------------------------------------------------------------------------
Technical result $ 153.9 $ (366.6) $ 19.2
------------------------------------------------------------------------------------------
Other operating expenses (161.7) (117.6) (103.2)
------------------------------------------------------------------------------------------
Net investment income 245.2 239.6 273.6
------------------------------------------------------------------------------------------
Net realized investment (losses) gains (6.8) 20.2 (62.7)
------------------------------------------------------------------------------------------
Other income 5.7 1.7 0.4
------------------------------------------------------------------------------------------
Interest expense (13.0) (13.0) (13.0)
------------------------------------------------------------------------------------------
Amortization of goodwill - (26.0) (26.0)
------------------------------------------------------------------------------------------
Net foreign exchange (losses) gains (3.1) 7.1 10.3
------------------------------------------------------------------------------------------
Income (loss) before distributions related to Trust
Preferred and Mandatorily Redeemable Preferred
Securities and taxes $ 220.2 $ (254.6) $ 98.6
------------------------------------------------------------------------------------------
The following table provides the distribution of net premiums written by
line of business (as a percentage of total net premiums written) for the
years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-------------------------------------------------------
Non-life
-------------------------------------------------------
Property and Casualty
-------------------------------------------------------
Property 20% 21% 23%
-------------------------------------------------------
Casualty 15 13 13
-------------------------------------------------------
Motor 12 15 17
-------------------------------------------------------
Worldwide Specialty
-------------------------------------------------------
Agriculture 6 7 7
-------------------------------------------------------
Aviation/Space 9 8 4
-------------------------------------------------------
Catastrophe 11 12 11
-------------------------------------------------------
Credit/Surety 5 7 8
-------------------------------------------------------
Engineering/Energy 7 3 -
-------------------------------------------------------
Marine 3 2 2
-------------------------------------------------------
Special Risk 5 4 2
-------------------------------------------------------
Other - 1 1
-------------------------------------------------------
Life 7 7 12
-------------------------------------------------------
62
PartnerRe
Annual Report 2002
93
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Segment Information (Continuation)
The following table provides the geographic distribution of gross premiums
written for the years ended December 31, 2002, 2001 and 2000 ($ millions):
2002 2001 2000
---------------------------------------------------------------------------
Europe $ 1,049.4 $ 753.3 $ 534.4
---------------------------------------------------------------------------
North America 1,183.0 789.9 685.1
---------------------------------------------------------------------------
Asia, Australia, and New Zealand 299.5 218.8 158.9
---------------------------------------------------------------------------
Latin America and Caribbean 152.2 102.1 47.6
---------------------------------------------------------------------------
Africa 21.6 14.2 13.5
---------------------------------------------------------------------------
Total gross premiums written $ 2,705.7 $ 1,878.3 $ 1,439.5
---------------------------------------------------------------------------
The Company produces its business both through brokers and through direct
relationships with insurance company clients. None of the Company's clients
accounted for more than 2% of total gross premiums written. In 2002, the
Company had two brokers that accounted for 10% or more of its gross
premiums written. One of them accounted for 14% of gross premiums written
which represented 20% of the gross premiums written of the U.S. Property
and Casualty segment, 13% of the gross premiums written of the Global
(Non-U.S.) Property and Casualty segment, 13% of the gross premiums written
of the Worldwide Specialty segment and 4% of the Life segment,
respectively. The other broker accounted for 13% of gross premiums written
representing 35% of the gross premiums written of U.S. Property and
Casualty segment, 2% of the gross premiums written of the Global (Non-U.S.)
Property and Casualty segment, 9% of the gross premiums written of the
Worldwide Specialty segment and 2% of the Life segment, respectively. In
2001, the Company had two brokers that accounted for 10% or more of its
gross premiums written. One of them accounted for 17% of gross premiums
written which represented 36% of the gross premiums written of the U.S.
Property and Casualty segment, 7% of the gross premiums written of the
Global (Non-U.S.) Property and Casualty segment, 16% of the gross premiums
written of the Worldwide Specialty segment and less than 1% of the Life
segment, respectively. The other broker accounted for 11% which represented
13% of the gross premiums written of the U.S. Property and Casualty
segment, 9% of the gross premiums written of the Global (Non-U.S.) Property
and Casualty segment, 12% of the gross premiums written of Worldwide
Specialty segment and 8% of the Life segment, respectively. In 2000, the
Company had one broker that accounted for 10% or more of its gross premiums
written. This broker accounted for 16% of the gross premiums written which
represented 31% of the gross premiums written of the U.S. Property and
Casualty segment, 9% of the gross premiums written of the Global (Non-U.S.)
Property and Casualty segment, 19% of the gross premiums written of
Worldwide Specialty segment and less than 1% of the Life segment,
respectively.
63
PartnerRe
Annual Report 2002
94
PartnerRe Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
2002 2001
FOURTH THIRD SECOND FIRST Fourth Third Second First
($ millions except per share amounts) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ 697.5 $ 570.1 $ 563.3 $ 824.5 $ 422.1 $ 394.2 $ 410.9 $ 597.8
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums earned 748.7 631.9 565.7 479.5 442.3 415.5 386.3 389.4
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 66.8 60.2 59.5 58.7 58.6 60.3 60.8 60.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses) 6.6 0.8 (6.3) (7.9) 6.0 (0.4) 5.5 9.1
- -----------------------------------------------------------------------------------------------------------------------------------
Other income 2.2 1.5 1.3 0.7 1.6 - 0.1 -
- -----------------------------------------------------------------------------------------------------------------------------------
Losses and loss expenses including life policy
benefits 490.7 531.4 381.8 311.9 362.9 710.7 285.9 272.4
- -----------------------------------------------------------------------------------------------------------------------------------
Acquisition costs and other expenses 238.5 177.9 160.3 140.9 131.2 126.2 114.5 113.9
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of goodwill, interest expense and
net foreign exchange gains or losses 1.2 2.5 5.7 6.8 11.2 1.6 6.6 12.6
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution related to Trust Preferred and
Mandatorily Redeemable Preferred Securities 6.8 6.8 6.8 6.8 3.0 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax (benefit) expense (1.3) 3.7 (1.0) 1.3 (28.7) (24.6) (7.5) (8.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of
adopting new accounting standard, net of tax 88.4 (27.9) 66.6 63.3 28.9 (338.5) 53.2 68.1
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of adopting new accounting
standard, net of tax - - - - - - - 27.8
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 88.4 (27.9) 66.6 63.3 28.9 (338.5) 53.2 95.9
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred dividends 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders 83.4 (32.9) 61.6 58.3 23.9 (343.5) 48.2 90.9
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Earnings per common and common equivalent share:
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Diluted net income (loss) before cumulative effect
of adopting new accounting standard per common
share $ 1.58 $ (0.65) $ 1.19 $ 1.13 $ 0.46 $ (6.85) $ 0.93 $ 1.22
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Diluted net income (loss) per common share $ 1.58 $ (0.65) $ 1.19 $ 1.13 $ 0.46 $ (6.85) $ 0.93 $ 1.76
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Dividends declared per common share $ 0.29 $ 0.29 $ 0.29 $ 0.28 $ 0.28 $ 0.28 $ 0.28 $ 0.26
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Common stock price range
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High $ 54.38 $ 49.72 $ 56.90 $ 57.83 $ 54.00 $ 55.33 $ 57.00 $ 58.13
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Low $ 42.95 $ 40.36 $ 48.01 $ 48.39 $ 46.00 $ 34.10 $ 47.75 $ 45.85
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64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of PartnerRe Ltd.:
We have audited the accompanying consolidated balance sheets of PartnerRe
Ltd. and subsidiaries ("the Company") as of December 31, 2002 and 2001, and
the related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of PartnerRe Ltd. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 3(o) to the financial statements, the Company changed
its method of accounting for derivative instruments and hedging activities
on January 1, 2001 upon its adoption of newly issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended. As discussed in Note 3(h) to the financial
statements, the Company also changed its method of accounting for goodwill
on January 1, 2002 upon its adoption of newly issued Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche
----------------------
Deloitte & Touche
Hamilton, Bermuda
February 10, 2003
65
FINANCIAL REPORTING RESPONSIBILITY
The Management of PartnerRe Ltd. is responsible for the integrity of the
financial information included in this annual report and for assuring that
such information presents fairly the consolidated results of PartnerRe Ltd.
The financial statements have been prepared in conformity with accounting
principles that are generally accepted in the United States. The financial
statements include amounts that are based on management's best estimates
and judgments. The financial information presented elsewhere in this annual
report is consistent with the financial statements.
The accounting systems and internal accounting controls of the Company are
designed to provide reasonable assurance that transactions are executed in
accordance with management's authorization, that the financial records are
reliable for preparing financial statements and maintaining accountability
for assets and that assets are safeguarded against losses from unauthorized
use or disposition. Qualified staff throughout the Company maintain and
monitor these internal accounting controls on an ongoing basis.
The Company strives to foster an ethical environment such that its affairs
are conducted in accordance with the highest standards of business and
personal conduct.
Deloitte & Touche, our independent auditors, have audited the financial
statements of the Company, and their audit report is included on page 95.
In this regard, in conducting their audits, the independent auditors have
full access to all of the Company's records and to each member of
Management and the Audit Committee. Such audits are conducted in accordance
with auditing standards generally accepted in the United States and include
a review of internal controls, test of transactions and other auditing
procedures as they believe are necessary to express an opinion about the
Company's financial statements.
The Audit Committee of the Board of Directors, which is composed solely of
non-management directors, oversees Management's fulfillment of its
financial reporting responsibilities. Audit Committee activities are
discussed on page 97 in the Audit Committee Chairman's Letter.
Patrick Thiele Albert Benchimol
President and Chief Executive Officer Chief Financial Officer
66
AUDIT COMMITTEE CHAIRMAN'S LETTER
The Audit Committee of the Board of Directors is composed entirely of
non-management directors. The Committee held eight meetings during 2002.
The Audit Committee oversees Management's fulfillment of its financial
reporting responsibilities and also oversees the system of internal
controls established by management. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareholder
approval, the selection of Deloitte & Touche as the Company's independent
auditors. The Audit Committee discussed with representatives from Deloitte
& Touche the overall scope and specific plans for their audit, as well as
other matters required by the Securities and Exchange Commission. The Audit
Committee has reviewed Deloitte & Touche's ability to act independently and
has concluded that there are no auditor independence issues. The Committee
has also discussed the Company's financial statements and adequacy of the
Company's internal control structure.
The Committee met with Management and representatives of Deloitte & Touche
to discuss financial reporting and auditing matters. Representatives from
Deloitte & Touche are given the opportunity to meet with the Audit
Committee to discuss, without management present, the results of their
audits, their evaluations of the Company's internal controls and the
overall quality of the Company's financial reporting. Deloitte & Touche has
access at all times to the Audit Committee.
Robert M. Baylis
Chairman, Audit Committee
Jan H. Holsboer
Member, Audit Committee
Remy Sautter
Member, Audit Committee
67
Shareholder Information
Board of Directors
Chairman
John A. Rollwagen
Principal
Quatris Fund
USA
and Former Chairman and CEO
Cray Research Inc.
Patrick Thiele
President & Chief Executive Officer
PartnerRe Ltd.
Bermuda
Robert Baylis
Vice Chairman (Retired)
CS First Boston
USA
Jan H. Holsboer
Executive Board Member (Retired)
ING Group
The Netherlands
Sir Robert B. Horton
Chairman
Chubb plc
Deputy Chairman
Premier Farnell plc
United Kingdom
Walter B. Kielholz
Chairman
Credit Suisse Group
Vice Chairman
Swiss Reinsurance Company
Switzerland
Jean-Paul Montupet
Executive Vice President
And Advisory Director
Emerson Electric Co.
USA
Lucio Stanca
Minister of Innovation
And Technology
Italian Government
Italy
Remy Sautter
Chairman & Chief Executive Officer
RTL Radio
France
Dr. Jurgen Zech
Chairman (Retired)
Gerling-Konzern
Versicherungs Beteiligung - AG
Germany
Corporate Secretary
Christine Patton
General Counsel
PartnerRe Ltd.
Shareholders' Meeting
The 2002 Annual General Meeting
will be held on May 22, 2003,
in Pembroke, Bermuda.
Independent Accountants
Deloitte & Touche
Church & Parliament Streets
Hamilton, Bermuda
Outside Counsel
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Appleby, Spurling & Kempe
41 Cedar Avenue
Hamilton, Bermuda
Market Information
The following PartnerRe shares (with their related symbols) are traded on
the New York Stock Exchange:
Common shares "PRE"
8% Series A Cumulative
Preferred Shares "PRE-PrA"
8% PEPS Units "PRE-PrP"
PartnerRe Capital Trust I-
7.9% Cumulative
Preferred Shares "PRE-PrT"
As of March 14, 2003, the approximate number of common shareholders was 15,000.
Stock Transfer & Dividend Agent
Equiserve Trust Company, N.A.
150 Royall Street
Canton, Massachusetts 02021
Additional Information
PartnerRe's Annual Report on Form 10-K and PartnerRe's 1934 Act filings, as
filed with the Securities and Exchange Commission, are available at the
corporate headquarters in Bermuda or on the company website at www.partnerre.com
68