Exhibit 99.1
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RISK FACTORS
October 3, 2001
Before you invest in the securities of PartnerRe Ltd. (the "Company"), you
should carefully consider the risks involved. Accordingly, you should carefully
consider:
Financial Results May be Impacted by Volatility of the Business We Underwrite
Because of the inherent volatility of some of the lines of business the
Company underwrites the operating results and financial condition of the Company
can be adversely impacted by catastrophes and other large losses that may give
rise to claims under reinsurance coverages provided by the Company. Catastrophe
reinsurance comprises a material portion of the Company's business. Because
catastrophe reinsurance accumulates large aggregate exposures to man-made and
natural disasters, the Company's loss experience in this line of business could
be characterized by low frequency and high severity, particularly since it
usually writes treaties with high attachment points. This is likely to result in
substantial volatility in the Company's financial results for any fiscal quarter
or year and could have a material adverse effect on the Company's financial
condition or results of operations.
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. The Company writes other lines of business, which can
be affected by large losses, including property, agriculture, automobile,
casualty, marine, aviation and space, credit and surety, technical and
miscellaneous lines, life/annuity and health. The Company endeavors to manage
its exposure to catastrophe and other large losses by (i) attempting to limit
its aggregate exposure on catastrophe reinsurance in any particular geographic
zones defined by the Company and attempting to limit its exposure to per risk
reinsurance, (ii) agreeing to attachment points in its reinsurance contracts
which, in the Company's judgment, generally should be exceeded only by large,
infrequent catastrophic events, (iii) selective underwriting practices, (iv)
diversification of risks by geographic area and by lines and classes of
business, and (v) to a certain extent by purchasing retrocessional reinsurance.
Despite the Company's efforts to manage its exposure to catastrophe and other
large losses, the effect of a single catastrophic event or series of events
affecting one or more geographic zones or changes in the relative frequency or
severity of catastrophic or other large loss events could have a material
adverse effect on the Company's financial condition or results of operations.
Should the Company incur a substantial catastrophe loss, its ability to write
future business may be impacted.
Our Profitability is Affected by the Cyclical Nature of the Reinsurance Industry
Historically the reinsurance industry has experienced significant
fluctuations in operating results due to competition, catastrophic events,
levels of capacity, general
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economic conditions and other factors. Demand for reinsurance is influenced
significantly by underwriting results of primary insurers and prevailing general
economic conditions. The supply of reinsurance is related directly to prevailing
prices and levels of surplus capacity which, in turn, may fluctuate in response
to changes in rates of return on investments being realized in the reinsurance
industry.
We Operate in a Highly Competitive Environment
The reinsurance industry is highly competitive. The Company competes
with major domestic and foreign insurers and reinsurers, including independent
reinsurance companies, subsidiaries or affiliates of established worldwide
insurance companies and reinsurance departments of certain primary insurance
companies. Competition in the types of reinsurance business that the Company
underwrites is based on many factors, including the perceived financial strength
of the reinsurer, premium charges, other terms and conditions offered, services
provided, ratings assigned by independent rating agencies, speed of claims
payment and reputation and experience in the lines of reinsurance to be written.
Some competitors have greater financial, marketing, management resources and
higher credit ratings than the Company. Ultimately, competition could affect the
Company's ability to attract business on terms it believes are necessary to
achieve appropriate levels of profits.
Potential legislative or industry developments could further increase
competition in our industry. New competition from these potential developments
could cause the demand for reinsurance to fall, which would adversely affect our
ability to attract business at appropriate levels of profitability.
Actual Losses Could Exceed Our Estimated Loss Reserves
The Company, at December 31, 2000, had a recorded liability for unpaid
losses and loss adjustment expenses ("LAE"), including policy benefits for life
and annuity contracts, of $3.1 billion. Under U.S. GAAP, the Company is not
permitted to establish loss reserves with respect to its catastrophe reinsurance
until an event which may give rise to a claim occurs. Reserves are estimates
involving actuarial and statistical projections at a given time to reflect the
Company's expectations of the costs of the ultimate settlement and
administration of claims. Losses for "short-tailed" business, which includes all
types of property losses (property, automobile physical damage, aviation hull,
marine, etc.), tend to be reported reasonably promptly and settled within a
short period of time. However, losses for casualty and liability lines, which
business the Company intends to grow, often take longer to discover, and
frequently can be impacted by lengthy, unpredictable litigation. As a result,
even when losses are identified and reserves are established for any line of
business, ultimate losses and LAE paid may deviate, perhaps substantially, from
estimates reflected in the Company's loss reserves in its financial statements.
If the Company's loss reserves in respect of business written should be
inadequate, the Company will be required to increase loss reserves with a
corresponding reduction in the Company's net income in the period in which the
deficiency is identified.
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Although the Company did not operate prior to 1993, it assumed certain
asbestos and environmental exposures through its acquisitions. The Company's
reserves for losses and LAE include an estimate of its ultimate liability for
asbestos and environmental claims for which ultimate value cannot be estimated
using traditional reserving techniques, and for which there are significant
uncertainties in estimating the amount of the Company's potential losses. The
Company and certain of its subsidiaries have received and continue to receive
notices of potential reinsurance claims from ceding insurance companies which
have in turn received claims asserting environmental losses under primary
insurance policies, in part reinsured by the Company. Such claims notices are
often precautionary in nature and generally are unspecific, and the primary
insurers often do not attempt to quantify the amount, timing or nature of the
exposure. Given the lack of specificity in some of these notices, and the legal
and tort environment that affect the development of claims reserves, the
uncertainties inherent in valuing asbestos and environmental claims are not
likely to be resolved in the near future. There can be no assurances that the
Company will not be affected by development of other latent exposures, and
further, there can be no assurances that the reserves established by the Company
will be adequate. If ultimate losses and LAE exceed the reserves currently
established, the Company will be required to increase loss reserves with a
corresponding reduction in the Company's net income in the period in which the
deficiency is identified to cover any such claims, which could have a material
adverse effect on the Company's financial condition and results of operations in
a particular period.
Our Financial Results May be Impacted by the Availability, Cost and Performance
of Retrocessional Reinsurance
As part of its overall risk and capacity management strategy, certain of
the Company's reinsurance subsidiaries have used retrocessional reinsurance
arrangements. The availability and cost of retrocessional protection are subject
to prevailing market conditions, which are beyond such entities' control. In
addition, each such subsidiary is subject to credit risk with respect to its
retrocessions because the ceding of risk to retrocessionaires does not relieve
the reinsurer of its liability to ceding companies. There can be no assurance
that such reinsurance subsidiaries will not experience difficulties in the
future in obtaining satisfactory retrocession cover or in recovering losses
under their retrocessional arrangements should one or more of their
retrocessionaires suffer financial deterioration or have a contractual dispute
with respect to coverage issues.
Reliance on a Few Reinsurance Brokers for a Large Percentage of Our Business
The Company produces its business both through brokers and through
direct relationships with insurance company clients. For the year ended December
31, 2000, approximately 55% of gross premiums were produced through brokers,
including one broker relationship accounting for approximately 16% of total
gross premiums. Because broker-produced business is concentrated with a small
number of brokers, due in part to consolidation in that industry over the last
several years, the Company is exposed to concentration risk. Loss of all or a
substantial portion of the business produced by these brokers could
significantly adversely affect the Company's premium volume and net income.
Additionally, because of this business concentration, the Company is
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exposed to credit risk to the extent that the Company has uncollected premiums
receivable from any particular broker.
There can be no assurance that the Company will be able to retain all of
the business produced by its brokers or will be able to collect all premiums
receivable due from any particular broker at any given time.
Investment Risks Could Affect Our Results and Financial Position
The Company invests the net premiums it receives until such time as it
pays out losses. Investment results comprise a substantial portion of the
Company's income. While management has implemented what it believes to be
prudent risk management and investment asset allocation practices, the Company
is exposed to interest rate risk, credit risk and market risk.
Changes in interest rates can affect the Company in two ways. In a
declining interest rate environment, the Company will be required to invest its
funds at lower rates, which would have a negative impact on investment income.
In a rising interest rate environment, the market value of the Company's fixed
income portfolio may decline, thereby reducing the Company's capital and
potentially affecting its ability to write business.
The Company's fixed income portfolio is primarily invested in high
quality, investment grade securities. However, a smaller portion of the
portfolio is invested in less than investment grade securities. These
securities, which pay a higher rate of interest, also have a higher degree of
credit risk or risk of default. These securities may also have lower liquidity
in times of economic weakness or market disruptions. While the Company has put
in place procedures to monitor the credit risk and liquidity of its invested
assets, it is possible that, in periods of economic weakness, the Company may
experience default losses in its portfolio. This may result in a reduction of
net income and capital.
A portion of the Company's portfolio is invested in common stocks or
equity-related securities. The value of these assets fluctuate with equity
markets. In times of economic weakness, the market value and liquidity of these
assets may decline, perhaps adversely impacting net income and capital.
There is no assurance that fluctuations in interest rates and exposure
to losses in the fixed income and equity portfolios may not impact the results
of the Company in any period or year, or that they may not cause a significant
reduction in the capital of the Company.
Profitability and Financial Position May be Adversely Impacted by Foreign
Currency Fluctuations
The Company's functional currency is the U.S. dollar. The Company writes a
substantial portion of its business in currencies other than the U.S. dollar and
maintains a portion of its investment portfolio in investments denominated in
currencies other than
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the U.S. dollar. The Company endeavors to hedge most of its exposure to foreign
currency fluctuations. However, to the extent that these exposures are not fully
hedged, the Company's results and level of capital may be adversely affected by
fluctuations in foreign currency exchange rates.
Profitability May be Adversely Impacted by Inflation
The effects of inflation could cause the severity of claims from
catastrophes or other events to rise in the future. The Company's estimates for
losses and LAE include assumptions about future payments for settlement of
claims and claims handling expenses, such as medical treatments and litigation
costs. To the extent inflation causes these costs to increase above reserves
established for these claims, the Company will be required to increase loss
reserves with a corresponding reduction in the Company's net income in the
period in which the deficiency is identified.
Regulatory Constraints May Restrict our Ability to Operate
The Company's reinsurance operations are carried out through three main
subsidiaries, Partner Reinsurance Company Ltd. ("Partner Reinsurance") in
Bermuda (which also operates branches in Switzerland, Singapore, Labuan and Hong
Kong), Partner Reinsurance Company of the U.S. ("PartnerRe U.S.") in Greenwich,
Connecticut and PartnerRe SA in Paris. PartnerRe SA also operates a subsidiary
in Luxembourg, a branch in Canada and representative offices in Norway and South
Korea. Thus, it is subject to certain insurance laws of these jurisdictions.
There can be no assurances that the business of these subsidiaries of the
Company will not be adversely affected by applicable laws and regulations that
may affect various aspects of the reinsurance industry.
The Company's Bermuda-based reinsurance subsidiary, Partner Reinsurance, is
not admitted to do business in the United States. The insurance laws of each
state of the United States regulate the sale of insurance and reinsurance within
their jurisdiction by foreign insurers, such as Partner Reinsurance which are
not admitted to do business within such jurisdiction. Partner Reinsurance does
not intend to maintain an office or to solicit, advertise, settle claims or
conduct other insurance activities in any state of the United States where the
conduct of such activities would require that Partner Reinsurance be so
admitted. Accordingly, Partner Reinsurance does not believe that it is, or will
be, in violation of insurance laws of any state in the United States. There can
be no assurances, however, that inquiries or challenges relating to the
activities of Partner Reinsurance (or other subsidiaries of the Company) will
not be raised in the future or that Partner Reinsurance's location, regulatory
status or restriction on its activities resulting therefrom will not adversely
affect its ability to conduct its business. In general, the statutes and
regulations applicable to Partner Reinsurance are less restrictive than those
that would be applicable if it were subject to the insurance laws of any state
in the United States. No assurances can be given that if Partner Reinsurance
were to become subject to any such laws of the United States or any state
thereof at any time in the future, it would be in compliance with such laws.
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The insurance and reinsurance regulatory framework has been subject to
increased scrutiny in many jurisdictions, including Europe and the United States
and various states within the United States. It is not possible to predict the
future impact of changing law or regulation on the operations of the Company.
There can be no assurance that such changes would not have a material adverse
effect on the Company or its business.
Our Non-U.S. Operations Could Become Subject to U.S. Taxation
The Company believes that it, Partner Reinsurance, PartnerRe Services, and
PartnerRe SA have operated, and will continue to operate, their respective
businesses in a manner that will not cause them to be viewed as engaged in a
trade or business in the United States and, on this basis, the Company does not
expect that it, Partner Reinsurance, PartnerRe Services or PartnerRe SA will be
required to pay U.S. corporate income taxes (other than potential withholding
taxes on certain types of U.S.-source passive income). Because there is
considerable uncertainty as to the activities which constitute being engaged in
a trade or business within the United States, there can be no assurances that
the IRS will not contend successfully that the Company, Partner Reinsurance,
PartnerRe Services or PartnerRe SA is engaged in a trade or business in the
United States. If the Company, Partner Reinsurance, PartnerRe Services or
PartnerRe SA were subject to U.S. income tax, the Company's shareholders' equity
and earnings could be materially adversely affected.
PartnerRe U.S. and PartnerRe Insurance Company of New York, which are both
wholly-owned subsidiaries of PartnerRe U.S. Corporation, conduct business in the
United States and are subject to U.S. corporate income taxes thereon.
The Company Operates as a Holding Company and is Dependent on Its Subsidiaries
for Dividends and Payments
The Company is a holding company with no operations or significant assets
other than the capital stock of its subsidiaries. The Company relies primarily
on cash dividends and payments from Partner Reinsurance and PartnerRe SA,
including its subsidiary, PartnerRe U.S., (collectively, the "Reinsurance
Subsidiaries") to pay its operating expenses, shareholder dividends and other
obligations that may arise from time to time. Future dividends and other
permitted payments from such subsidiaries are expected to be the Company's
principal source of funds to pay expenses and dividends. Although the payment of
dividends by the Reinsurance Subsidiaries to the Company is limited under
Bermuda and French law and certain insurance statutes of various U.S. states in
which PartnerRe U.S. is licensed to transact business, the Company believes that
there are presently no significant restrictions on the payment of dividends by
the Reinsurance Subsidiaries.
The payment of dividends by Partner Reinsurance to the Company is limited
under Bermuda law and regulations. Under The Insurance Act 1978, amendments
thereto, including the Insurance Amendment Act 1995, and related regulations
(collectively, the "Insurance Act"), Partner Reinsurance is prohibited from
paying
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dividends in any one calendar year of more than 25% of its statutory capital and
surplus as of the beginning of such year, unless it files an affidavit stating
that it will continue to meet the required solvency margin and minimum liquidity
ratio requirements and from declaring or paying any dividends without the
approval of the Minister of Finance of Bermuda if it failed to meet its required
margins in the previous fiscal year. The Insurance Act requires Partner
Reinsurance to maintain a minimum solvency margin and minimum liquidity ratio
and prohibits dividends which would result in a breach of these requirements. In
addition, Partner Reinsurance is prohibited under the Insurance Act from
reducing its statutory capital as of the beginning of any year by more than 15%
in any one year without the approval of the Minister of Finance.
PartnerRe SA's ability to pay dividends is subject to French laws and
regulations governing French companies generally. Although PartnerRe SA's
ability to pay dividends to the Company is not restricted under current French
laws and regulations specifically applicable to reinsurers, the amount of cash
dividends that may be paid in any twelve month period is generally limited to
the net after-tax profits (determined under French accounting and tax rules)
generated in that twelve month period. PartnerRe U.S. may generally pay cash
dividends only out of statutory surplus and the maximum amount of dividends that
may be paid in any twelve month period, without prior regulatory approval, is
the lesser of net investment income or 10% of statutory surplus. There can be no
assurances that the Reinsurance Subsidiaries will be able to, or will, pay
dividends to the Company sufficient to pay its operating expenses, shareholder
dividends or its other obligations.
Because the Company is a holding company, the right of the Company, and
hence the right of creditors and shareholders of the Company, to participate in
any distribution of assets of any subsidiary of the Company, upon its
liquidation or reorganization or otherwise is necessarily subject to the prior
claims of policyholders and creditors of such subsidiaries.
Since the Board of Directors is authorized to issue additional securities
without the consent of the shareholders, the Company could incur obligations in
the future to pay dividends. The use of funds to repurchase shares under any
share repurchase program of the Company could limit the ability of the Company
to pay dividends. These factors could result in the Company having less capital
available to sustain losses than would otherwise be the case. If substantial
losses were to occur, the ability of the Company to pay dividends could be
adversely affected.
Our Operations and Business Opportunities May be Affected by Certain
Transactions and Conflicts of Interest
In connection with the continuing operations of the Company, the Company
has entered into various agreements with Swiss Reinsurance Company ("Swiss Re")
and its affiliates, including agreements relating to the provision of certain
underwriting, licensed technologies and investment advisory services, for which
the Company pays fees. A director of the Company is a director and officer of
Swiss Re or its affiliates. In addition, Swiss Re and its affiliates currently
hold approximately 28% of the Common Shares of
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the Company. Conflicts of interest could arise with respect to future
transactions involving Swiss Re or its respective affiliates, on the one hand,
and the Company, on the other hand. Such transactions will be subject to the
approval of a majority vote of the disinterested members of the Company's Board
of Directors.
Swiss Re has entered into a standstill agreement, dated as of July 10,
1997 (the "Standstill Agreement") with the Company pursuant to which Swiss Re
has agreed to limit its and its affiliates ownership in the Company to 30% of
the voting power of the outstanding shares, unless the Company otherwise
consents. Swiss Re also has a right of first refusal under the Standstill
Agreement with respect to certain issuances or sales by the Company of its
voting shares, in an amount equal to its percentage ownership of the Company's
voting shares prior to such issuance or sale, subject to certain exceptions. The
Standstill Agreement terminates on July 10, 2004. The Company has also entered
into an agreement granting Swiss Re registration rights with respect to certain
common shares of the Company issued to Swiss Re in connection with the Company's
acquisition of PartnerRe SA.
The Company has also entered into an Underwriting Services and Cooperation
Agreement, effective as of January 1, 1997 (the "Underwriting Services
Agreement"), pursuant to which Swiss Re has granted the Company a license to
utilize Swiss Re's underwriting technology, including Swiss Re's computer-based
rating software, and access to Swiss Re's historical database containing
reinsurance-related information. The Underwriting Services Agreement has
automatic one-year renewals unless either party elects not to renew, and may
also be cancelled by Swiss Re upon a change of control (as defined therein) of
the Company. Management believes that the termination of the Underwriting
Services Agreement would not have a material adverse effect on the Company, but
there can be no assurance that this would be the case. Conflicts of interest
could also arise with respect to business opportunities that could be
advantageous to Swiss Re or its affiliates, on the one hand, and the Company, on
the other hand. Swiss Re is engaged in reinsurance and insurance activities
worldwide. Partner Reinsurance may compete with Swiss Re or its affiliates on
reinsurance programs for the same prospective clients.
In the normal course of their underwriting activities, certain subsidiaries
of the Company have entered into reinsurance contracts (assumed and ceded) with
Swiss Re and certain Swiss Re subsidiaries. Management believes that the
termination of these contracts would not have a material effect on the Company
or its operations.
We Have Imposed Various Limitations on Voting and Ownership
Under the Company's Bye-Laws, subject to waiver by the Board of Directors,
no transfer of shares (including Common Shares and Preferred Shares) is
permitted if such transfer would result in a shareholder (other than Swiss Re or
its affiliates) controlling more than 9.9% of the voting power of the
outstanding shares (including Common Shares and Preferred Shares) of the
Company, and the Company may refuse to register any such transfer on the
Company's share transfer records. Any person (other than Swiss Re) controlling
more than the specified number of shares (the "Transferee") will be permitted
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to dispose of any shares purchased which violate the restriction and as to the
transfer of which registration is refused. The original owner of such shares
(before they were transferred to the Transferee) will be deemed to own such
shares for dividend, voting and reporting purposes until a transfer of such
shares has been registered on the stock transfer records of the Company. In
addition, in the event that the Company becomes aware of such ownership, the
Company's Bye-Laws provide that the voting rights with respect to shares
directly or indirectly beneficially or constructively owned by any person so
owning more than 9.9% (except Swiss Re or its affiliates) of the voting power of
the outstanding shares, including Common Shares and Preferred Shares, of the
Company will be limited to voting power of 9.9%. The voting rights with respect
to all shares held by such person in excess of the 9.9% limitation will be
allocated to the other holders of shares, pro rata based on the number of shares
held by all such other holders of shares, subject only to the further limitation
that no shareholder allocated any such voting rights may exceed the 9.9%
limitation as a result of such allocation.
Swiss Re and its affiliates are excepted from the limitations on voting and
ownership contained in the Company's Bye-Laws. Swiss Re's ownership and voting
rights are currently limited pursuant to the Standstill Agreement to 30% of the
voting power of the outstanding shares and share equivalents, unless the Company
otherwise consents. However, if the Standstill Agreement is terminated or if the
Company consents to a purchase by Swiss Re, Swiss Re would not be restricted
from obtaining a majority of the voting power of the outstanding shares.
Investors May Encounter Difficulties in Service of Process and Enforcement of
Judgments Against the Company in the United States
The Company is a Bermuda company and many of its officers and directors are
residents of various jurisdictions outside the United States. All or a
substantial portion of the assets of such officers and directors and of the
Company are or may be located in jurisdictions outside the United States.
Although the Company has appointed an agent and irrevocably agreed that it may
be served with process in New York, New York with respect to actions based on
offers and sales of securities, it could be difficult for investors to effect
service of process within the United States on directors and officers of the
Company who reside outside the United States or to recover against the Company
or such directors and officers on judgments of U.S. courts predicated upon civil
liabilities under the U.S. federal securities laws.
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