SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 4, 2002
PARTNERRE LTD.
(Exact name of registrant as specified in its charter)
Bermuda 0-2253 Not Applicable
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
Chesney House,
96 Pitts Bay Road,
Pembroke, Bermuda HM 08
(Address of principal executive offices)
441 292-0888
(Registrant's telephone number, including area code)
Item 5. Other events
The following information includes financial statements of PartnerRe Ltd.
which combine information previously filed in the Form 10-K for the year ended
December 31, 2001 and the Form 8-K filed on November 4, 2002. This information
is being filed solely to comply with a technical requirement in connection with
a shelf registration statement on Form S-3 filed with the Securities and
Exchange Commission.
2
PartnerRe Ltd.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except share data)
December 31, December 31,
Assets 2000 2001
---------------------------------------------------------------------------------------- ----------- -----------
Investments and cash:
Fixed maturities, available for sale, at fair value (amortized cost: 2001,
$3,382,768; 2000, $3,047,090) ...................................................... $ 3,053,790 $ 3,420,759
Short-term investments, available for sale, at fair value (amortized cost: 2001,
$39,547; 2000, $24,972) ............................................................ 24,853 39,564
Equities, available for sale, at fair value (cost: 2001, $408,879; 2000, $327,965) ..... 354,801 400,825
Trading securities, at fair value (cost: 2001, $79,973; 2000, $nil) .................... - 77,452
Cash and cash equivalents, at fair value, which approximates amortized cost ............ 434,033 451,614
Other invested assets .................................................................. 14,594 20,500
----------- -----------
Total investments and cash ............................................................. 3,882,071 4,410,714
Accrued investment income .............................................................. 54,876 74,536
Reinsurance balances receivable ........................................................ 440,550 654,900
Reinsurance recoverable on paid and unpaid losses ...................................... 249,569 245,279
Funds held by reinsured companies ...................................................... 653,260 641,203
Deferred acquisition costs ............................................................. 245,981 274,152
Deposit assets ......................................................................... 105,136 241,845
Current and deferred taxes recoverable ................................................. 29,589 95,336
Goodwill ............................................................................... 455,554 429,519
Other .................................................................................. 60,793 97,942
----------- -----------
Total Assets ........................................................................... $ 6,177,379 $ 7,165,426
----------- -----------
Liabilities
Unpaid losses and loss expenses ........................................................ $ 2,386,032 $ 3,005,628
Policy benefits for life and annuity contracts ......................................... 673,096 693,250
Unearned premiums ...................................................................... 424,487 597,529
Funds held under reinsurance treaties .................................................. 26,924 31,371
Deposit liabilities .................................................................... 79,492 239,208
Long-term debt ......................................................................... 220,000 220,000
Payable for securities purchased ....................................................... 201,881 143,535
Accounts payable, accrued expenses and other ........................................... 79,461 86,796
----------- -----------
Total Liabilities ...................................................................... $ 4,091,373 $ 5,017,317
----------- -----------
Trust Preferred and Mandatorily Redeemable Preferred Securities ........................ - 400,000
----------- -----------
Shareholders' Equity
Common shares (issued and outstanding: 2001, 50,164,211; 2000, 50,113,311) ............ 50,113 50,164
Preferred shares (issued and outstanding: 2001, 10,000,000;000, 10,000,000) ........... 10,000 10,000
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December 31, December 31,
Assets 2000 2001
---------------------------------------------------------------------------------------- ----------- -----------
Additional paid-in capital ............................................................. 892,310 885,678
Deferred compensation .................................................................. (534) (397)
Accumulated other comprehensive income (loss):
Net unrealized gains on investments, net of tax ........................................ 107,511 24,023
Currency translation adjustment ........................................................ (45,710) (58,043)
Retained earnings ...................................................................... 1,072,316 836,684
----------- -----------
Total Shareholders' Equity ............................................................. 2,086,006 1,748,109
----------- -----------
Total Liabilities, Trust Preferred and Mandatorily Redeemable
Preferred Securities and Shareholders' Equity ...................................... $ 6,177,379 $ 7,165,426
----------- -----------
See accompanying Notes to Consolidated Financial Statements
4
PartnerRe Ltd.
Consolidated Statements of Operations and Comprehensive Income
(Expressed in thousands of U.S. dollars, except share data)
For the year For the For the
ended year ended year ended
December 31, December 31, December 31,
1999 2000 2001
----------- ----------- -----------
Revenues
Gross premiums written ............................................................. $ 1,432,966 $ 1,439,515 $ 1,878,256
----------- ----------- -----------
Net premiums written ............................................................... $ 1,326,410 $ 1,380,252 $ 1,825,096
----------- ----------- -----------
Decrease (increase) in unearned premiums ........................................... 11,599 (65,880) (191,588)
----------- ----------- -----------
Net premiums earned ................................................................ 1,338,009 1,314,372 1,633,508
Net investment income .............................................................. 307,638 273,588 239,608
Net realized investment (losses) gains ............................................. (15,880) (62,740) 20,192
Other income ....................................................................... 691 382 1,688
----------- ----------- -----------
Total Revenues ..................................................................... 1,630,458 1,525,602 1,894,996
----------- ----------- -----------
Expenses
Losses and loss expenses and life policy benefits .................................. 1,130,102 975,699 1,631,830
Acquisition costs .................................................................. 318,579 319,434 368,147
Other operating expenses ........................................................... 93,094 103,185 117,590
Interest expense ................................................................... 12,903 13,029 13,044
Amortization of goodwill ........................................................... 25,715 26,034 26,035
Net foreign exchange gains ......................................................... (906) (10,348) (7,054)
----------- ----------- -----------
Total Expenses ..................................................................... 1,579,487 1,427,033 2,149,592
----------- ----------- -----------
Income (loss) before distributions related to Trust
Preferred and Mandatorily Redeemable
Preferred Securities and taxes ..................................................... 50,971 98,569 (254,596)
Distributions related to Trust Preferred and
Mandatorily Redeemable Preferred Securities .................................... - - 3,002
Income tax benefit ................................................................. (43,784) (43,738) (69,304)
Net Income (Loss) Before Cumulative Effect of Adopting
New Accounting Standard, Net of Tax ............................................ 94,755 142,307 (188,294)
----------- ----------- -----------
Cumulative effect of adopting new accounting standard, net of tax .................. - - 27,812
Net Income (Loss) .................................................................. 94,755 142,307 (160,482)
Preferred dividends ................................................................ 20,000 20,000 20,000
Net Income (Loss) Available to Common Shareholders ................................. $ 74,755 $ 122,307 $ (180,482)
----------- ----------- -----------
Comprehensive (Loss) Income, Net of Tax
Net income (loss) .................................................................. $ 94,755 $ 142,307 $ (160,482)
----------- ----------- -----------
Change in net unrealized gains or losses on investments ............................ (83,849) 183,636 (83,488)
Change in currency translation adjustment .......................................... (34,883) (22,446) (12,333)
----------- ----------- -----------
Comprehensive (Loss) Income ........................................................ $ (23,977) $ 303,497 $ (256,303)
----------- ----------- -----------
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For the year For the For the
ended year ended year ended
December 31, December 31, December 31,
1999 2000 2001
----------- ----------- -----------
Per Share Data:
Earnings per common share:
Basic net income (loss) ............................................................ $ 1.44 $ 2.48 $ (3.60)
Diluted net income (loss) .......................................................... $ 1.40 $ 2.41 $ (3.60)
Weighted average number of common and common equivalent shares outstanding ......... 53,231.1 50,677.5 50,136.8
----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements
6
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,
1999 2000 2001
-------------------------------------------------------- ----------- ----------- -----------
Common shares
Balance at beginning of year ........................... $ 52,801 $ 49,265 $ 50,113
Repurchase of common shares ............................ (4,704) (136) (52)
Issue of common shares ................................. 1,168 984 103
----------- ----------- -----------
Balance at end of year ................................. 49,265 50,113 50,164
----------- ----------- -----------
Preferred shares
Balance at beginning and end of year ................... 10,000 10,000 10,000
----------- ----------- -----------
Additional Paid-In Capital
Balance at beginning of year ........................... 1,053,138 879,603 892,310
Repurchase of common shares and warrants ............... (172,593) (4,177) (1,706)
Issue of common shares ................................. (942) 16,884 3,688
Issue of purchase contract for common shares ........... - - (8,614)
----------- ----------- -----------
Balance at end of year ................................. 879,603 892,310 885,678
----------- ----------- -----------
Deferred Compensation
Balance at beginning of year ........................... (433) - (534)
Issue of restricted common shares ...................... - (545) -
Amortization of deferred compensation .................. 433 11 137
----------- ----------- -----------
Balance at end of year ................................. - (534) (397)
----------- ----------- -----------
Accumulated Other Comprehensive (Loss) Income
Balance at beginning of year ........................... 19,343 (99,389) 61,801
Unrealized (losses) gains on investments, net of
reclassification adjustments ....................... (83,849) 183,636 (83,488)
Currency translation adjustment ........................ (34,883) (22,446) (12,333)
----------- ----------- -----------
Balance at end of year ................................. (99,389) 61,801 (34,020)
----------- ----------- -----------
Retained Earnings
Balance at beginning of year ........................... 978,585 1,001,232 1,072,316
Net income (loss) ...................................... 94,755 142,307 (160,482)
Dividends on common shares ............................. (52,108) (51,223) (55,150)
Dividends on preferred shares .......................... (20,000) (20,000) (20,000)
----------- ----------- -----------
Balance at end of year ................................. 1,001,232 1,072,316 836,684
----------- ----------- -----------
Total Shareholders' Equity ............................. $ 1,840,711 $ 2,086,006 $ 1,748,109
----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements
7
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,
Cash Flows From Operating Activities 1999 2000 2001
---------------------------------------------------------------------------- ----------- ----------- -----------
Net income (loss) .......................................................... $ 94,755 $ 142,307 $ (160,482)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Accrual of discount on investments, net of amortization of premium ......... 10,419 (18,294) (16,387)
Amortization of goodwill ................................................... 25,715 26,034 26,035
Effect of adopting new accounting standard ................................. - - (27,812)
Net realized investment losses (gains) ..................................... 15,880 62,740 (20,192)
Changes in:
Unearned premiums .......................................................... (16,355) 52,200 191,589
Reinsurance balances receivable ............................................ 65,319 (65,076) (213,634)
Unpaid losses and loss expenses including life policy benefits ............. 274,671 (197,677) 727,044
Net taxes recoverable ...................................................... (38,601) (35,528) (74,872)
Other changes in assets and liabilities .................................... (2,363) (4,989) (66,876)
Other items, net ........................................................... (871) (6,977) (652)
----------- ----------- -----------
Net cash provided by (used in) operating activities ........................ 428,569 (45,260) 363,761
----------- ----------- -----------
Cash Flows From Investing Activities
Sales of fixed maturities .................................................. 5,997,415 5,614,130 2,885,725
Redemptions of fixed maturities ............................................ 200,389 203,298 138,589
Purchases of fixed maturities .............................................. (6,763,370) (5,598,978) (3,545,763)
Net (purchases) sales of short term investments ............................ (24,337) 9,943 (22,694)
Net purchases of equities .................................................. (48,398) (167,105) (104,480)
Proceeds from disposition of subsidiary .................................... - 145,000 -
Cash sold with subsidiary .................................................. - (57,348) -
Other ...................................................................... 14,422 (44,944) (6,137)
----------- ----------- -----------
Net cash (used in) provided by investing activities ........................ (623,879) 103,996 (654,760)
----------- ----------- -----------
Cash Flows from Financing Activities
Cash dividends paid to shareholders ........................................ (72,108) (71,223) (75,150)
Repurchase of common shares and warrants ................................... (176,898) (4,313) (1,758)
Accounts payable related to repurchase of common shares and warrants ....... 399 - -
Issue of common shares ..................................................... 156 17,323 3,345
Issue of Trust Preferred Securities ........................................ - - 193,543
Issue of Mandatorily Redeemable Preferred Securities ....................... - - 193,313
----------- ----------- -----------
Net cash (used in) provided by financing activities ........................ (248,451) (58,213) 313,293
----------- ----------- -----------
Effect of exchange rate changes on cash .................................... 145 (4,673) (4,713)
(Decrease) increase in cash and cash equivalents ........................... (443,616) (4,150) 17,581
----------- ----------- -----------
Cash and cash equivalents - beginning of year .............................. 881,799 438,183 434,033
----------- ----------- -----------
Cash and cash equivalents - end of year .................................... $ 438,183 $ 434,033 $ 451,614
----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements
8
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
(formerly known as SAFR or SAFR PartnerRe) and Partner Reinsurance Company of
the U.S. ("PartnerRe U.S."). Risks reinsured include, but are not limited to,
property, catastrophe, agriculture, automobile, casualty, marine, aviation and
space, credit and surety, technical and miscellaneous 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. Acquisitions 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.
PartnerRe SA Acquisition and Preferred Share Offering
On July 10, 1997, the Company completed the acquisition of PartnerRe SA, a
French reinsurance company, from Swiss Reinsurance Company ("Swiss Re"). The
total purchase price was financed as follows: (i) 6,453,007 newly issued common
shares of the Company, which have been recorded at $152.9 million in the
consolidated statement of shareholders' equity, were transferred to Swiss Re
(4,353,007 of which Swiss Re received by exercise of its existing Class A
Warrants of the Company through delivery of shares of PartnerRe SA); and (ii)
$773.9 million of cash consideration which included (a) $192.2 million in net
proceeds from a public offering (the "Offering") of 8.0 million of 8% Series A
Cumulative Preferred Shares (the "Preferred Shares"), (b) $50.0 million in net
proceeds from the sale to Swiss Re of 2.0 million Preferred Shares, directly
and not as part of the Offering and
9
(c) the balance from sources internal to the Company. The Company accounted for
the PartnerRe SA acquisition as a purchase.
PartnerRe Life U.S. Disposition
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 is 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.
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. 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., and the Consolidated Balance Sheet
as at December 31, 2000, does not include PartnerRe Life U.S.
(a) Premiums
Premiums written 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. 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 property and
casualty 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
10
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.
(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
Funds held by reinsured companies represent premiums retained by ceding
companies for a period in accordance with contractual terms. The Company
generally earns investment income on these balances during the period funds are
held.
(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 SFAS No. 113
entitled "Accounting and Reporting for Reinsurance of Short Duration and Long
Duration Contracts." These contracts are accounted for using the deposit
accounting 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 theses 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 the
Statement 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 the
Statement 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 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.
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 Statement of Operations.
11
The Company utilizes 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
gains or losses on investments in the Statement of Operations. Collateral held
by brokers 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, and provisions for other than temporary impairments in the value of
investments retained, are reflected in the Statements of Operations.
(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 related to the acquisitions of PartnerRe SA and
Winterthur Re. The Company amortizes goodwill on a straight-line basis over a
period of 20 years. Accumulated amortization as of December 31, 2001 and 2000,
was $92.0 million and $66.0 million, respectively.
(i) Income Taxes
Certain subsidiaries of the Company operate in jurisdictions where they
are subject to taxation. Current and deferred income taxes are charged or
credited to operations, or "accumulated other comprehensive income" in certain
cases, based upon enacted tax laws and rates applicable in the relevant
jurisdiction in the period in which the tax becomes payable. 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.
(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 Consolidated 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 Statement 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 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
12
foreign exchange gains and losses that are covered with designated hedges in
the Statement of Operations (See Note 3(k).)
(k) Accounting for Derivatives and Hedging Activities
SFAS 133 requires the recognition of all derivative financial instruments,
including embedded derivative instruments, as either assets or liabilities in
the Balance Sheet and measurement of those instruments at fair value. The
accounting for gains and losses associated with changes in the fair value of a
derivative and the effect on the Consolidated Financial Statements will depend
on its hedge designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or liability
hedged. If the derivative is designated as a fair value hedge, the changes in
the fair value of the derivative and the hedged item will be recognized in
earnings. If the derivative is designated as a cash flow hedge, changes in the
fair value of the derivative will be recorded in other comprehensive income and
will be recognized in the Statement of Operations when the hedged item affects
earnings. A derivative that is not designated or does not qualify as an
effective hedge will be marked to fair value through earnings. The Company does
not currently designate any derivative financial instruments as cash flow
hedges.
The Company utilizes derivative financial instruments as part of an
overall currency risk management strategy. As part of its overall strategy to
manage the level of currency exposure, the Company uses currency derivatives to
hedge the fair value of certain available for sale fixed income securities
related to the Company's "liability funds" (funds corresponding to the
Company's net reinsurance liabilities). These derivatives have been designated
as "fair value hedges" under SFAS 133, and accordingly, the changes in fair
value of the derivative and the hedged item related to foreign exchange rates
will be recognized in earnings. Derivatives employed by the Company to hedge
currency exposure related to other reinsurance assets and liabilities are not
designated as hedges under SFAS 133. On the date the Company enters into a
derivative contract, management designates the derivative as a hedge of the
identified underlying exposure (a "designated hedge") or as a "no hedge
designation" derivative. If a derivative does not qualify or is not designated
in a hedging relationship, the derivative is recorded at fair value and changes
in its fair value are reported currently in earnings.
The Company's investment strategy allows for the use of derivative
securities, subject to strict limitations. Derivative instruments may be used
to hedge a variety of market risks, or to replicate investment positions or
market exposures that would be allowed under Company investment policy if
implemented in other ways. The Company does not designate these derivatives as
hedges for accounting purposes. Accordingly, these derivatives are recorded at
fair value and changes in the fair value of the derivatives are reported
currently in earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Company specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships,
both at the hedge inception and on an ongoing basis, in accordance with its
risk management policy.
The Company will discontinue hedge accounting prospectively if it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item. To the extent that the Company
in the future chooses to discontinue hedge accounting related to its fair-value
hedge of currency risk related to its available for sale fixed income
securities (liability funds) because, based on management's assessment, the
derivative(s) no longer qualifies as an effective fair-value hedge, the
derivative(s) will continue to be carried on the Balance Sheet at its fair
value with changes in its fair value recognized in current period 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".
13
(l) 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 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 for dilutive securities.
(m) New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as
amended by SFAS No. 138, on January 1, 2001. In accordance with the transition
provisions of SFAS 133, the Company recorded a positive cumulative-effect
adjustment of $27.8 million, after tax, or $0.54 per diluted share, in earnings
of the first quarter to recognize the net gains and losses associated with its
fair value currency hedging activities that were previously recorded in
"accumulated other comprehensive income." The transition provision did not
affect the book value of the Company.
Additionally, in response to the accounting implications of SFAS 133, the
Company reclassified approximately $89.2 million of available for sale
convertible debt and equity securities to a "trading" portfolio at January 1,
2001. Such reclassifications were 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. Prior to this reclassification, this net unrealized loss
was included as a component of "accumulated other comprehensive income" and,
accordingly, the reclassification did not affect the book value of the Company.
Under the provisions of SFAS 133, such a reclassification does not impact the
Company's ability to classify other debt securities as available-for-sale.
On July 20, 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," (SFAS 141) and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). The statements will change the accounting for
business combinations and goodwill in two significant ways. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Thus, amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of that statement, which for the Company, will be January 1, 2002. The
Company will be required to complete a transitional goodwill impairment test
six months from the date of adoption and impairment valuations annually or more
frequently if certain indicators are encountered. In connection with the
transitional adjustment, the Company will (i) identify its reporting units,
(ii) determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units and (iii) determine the fair value of each reporting
unit. If the carrying value of any reporting unit exceeds its fair value, then
detailed fair values for each of the assigned assets (excluding goodwill) and
liabilities will be determined to calculate the amount of goodwill impairment,
if any. Any transitional impairment loss resulting from the adoption will be
recognized as the effect of a change in accounting principle in the Company's
Statement of Operations.
The Company does not believe that the adoption of SFAS 141 will have a
significant impact on its financial statements. The Company estimates that the
adoption of SFAS 142 will result in the elimination of an annual amortization
expense related to goodwill in the amount of $22.4 million, after tax. The
Company is currently assessing but has not yet determined the impact of related
impairment, if any, on its financial position and results of operations.
14
4. Investments
(a) Fixed Maturities, Equities and Short-Term Investments
The cost, market value, gross unrealized gains and gross unrealized losses
on investments classified as available for sale at December 31, 2001 and 2000,
were as follows ($000's):
Gross Gross
Unrealized 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
2000
Fixed maturities
- U.S. Government $ 783,287 $ 45,137 $ (23,628) $ 804,796
- states or political subdivisions of states of the U.S. 12,462 - (1,180) 11,282
- other foreign governments 379,759 5,459 (5,977) 379,241
- corporate 1,063,467 28,956 (52,273) 1,040,150
- mortgage / asset-backed securities 808,115 15,319 (5,113) 818,321
----------- ----------- ----------- -----------
Total fixed maturities 3,047,090 94,871 (88,171) 3,053,790
Short-term investments 24,972 158 (277) 24,853
Equities 327,965 57,479 (30,643) 354,801
----------- ----------- ----------- -----------
$ 3,400,027 $ 152,508 $ (119,091) $ 3,433,444
----------- ----------- ----------- -----------
---------
(1) Cost is amortized cost for fixed maturities and short-term investments and
original cost for equity securities
(b) Maturity Distribution
The distribution of available for sale fixed maturities and short-term
investments at December 31, 2001, by contractual maturity is shown below
($000's):
Amortized Market
Cost Value
---------- ----------
One year or less ............................. $ 130,892 $ 132,698
More than one year through five years ........ 1,437,768 1,461,132
More than five years through ten years ....... 842,712 844,005
More than ten years .......................... 324,956 325,679
---------- ----------
Subtotal ..................................... 2,736,328 2,763,514
Mortgage / Asset-backed securities ........... 685,987 696,809
---------- ----------
Total ........................................ $3,422,315 $3,460,323
---------- ----------
15
(c) Change in Net Unrealized (Losses) Gains on Investments
The analysis of the change in net unrealized (losses) gains on
investments reflected in "accumulated other comprehensive income" for the years
ended December 31, 2001, 2000 and 1999, is as follows ($000's):
2001 2000 1999
--------- --------- ---------
Fixed maturities .................................................................... $ 31,291 $ 170,435 $(163,775)
Short-term investments .............................................................. 136 54 100
Other investments ................................................................... (41) (90) (47)
Equity securities ................................................................... (34,890) 16,952 8,408
--------- --------- ---------
(3,504) 187,351 (155,220)
(Increase) decrease in tax liability and other foreign exchange gains or losses ..... (79,984) (3,715) 71,371
--------- --------- ---------
Net change reflected in "accumulated other comprehensive income" .................... $ (83,488) $ 183,636 $ (83,849)
--------- --------- ---------
(d) Realized Gains and Losses on Available for Sale Securities
Proceeds from the sales of investments classified as available for sale
for the years ended December 31, 2001, 2000 and 1999, were $3,033.1 million,
$5,848 million and $6,346.6 million, respectively. Realized investment gains
and losses on securities classified available for sale for the years ended
December 31, 2001, 2000 and 1999, were as follows ($000's):
2001 2000 1999
--------- --------- ---------
Gross realized gains ................................................................ $ 92,717 $ 121,475 $ 81,195
Gross realized losses ............................................................... (52,933) (138,762) (78,080)
--------- --------- ---------
Total net realized gains (losses) ................................................... $ 39,784 $ (17,287) $ 3,115
--------- --------- ---------
For the year ended December 31, 2001, the Company recorded a net loss of
$1.1 million in "net realized investment gains (losses)" in the Statement of
Operations, representing the ineffectiveness of its designated fair value
hedging activities.
(e) Net Investment Income
The components of net investment income for the years ended December 31,
2001, 2000 and 1999, were as follows ($000's):
2001 2000 1999
--------- --------- ---------
Fixed maturities, short-term investments, cash and cash equivalents ................. $ 204,143 $ 243,722 $ 298,972
Equities ............................................................................ 14,816 9,294 7,292
Funds held and other ................................................................ 29,605 30,764 20,007
Investment expenses ................................................................. (8,956) (10,192) (18,633)
--------- --------- ---------
Net investment income ............................................................... $ 239,608 $ 273,588 $ 307,638
--------- --------- ---------
(f) Trading Securities
In response to accounting implications of SFAS 133, the Company
reclassified approximately $89.2 million of available for sale convertible debt
and equity securities to trading. This transfer resulted in gross realized
gains and losses of $6.3 million and $10.9 million, respectively, being
recognized in the Statement of Operations. There were no other transfers from
available for sale to trading during the year.
16
For the year ended December 31, 2001, the change in net unrealized holding
losses on trading securities resulted in a loss of $1.3 million being
recognized in the Statement 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.
(g) Pledged Securities
At December 31, 2001 and 2000, cash and securities with a market value of
approximately $1,453.4 million and $1,091.0 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. 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.
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, 2001, 2000 and 1999 ($000's):
2001 2000 1999
----------- ----------- -----------
Gross liability at beginning of year .................. $ 2,386,032 $ 2,616,556 $ 2,649,380
Reinsurance recoverable at beginning of year .......... 203,180 205,982 257,398
----------- ----------- -----------
Net liability at beginning of year .................... 2,182,852 2,410,574 2,391,982
----------- ----------- -----------
Net incurred losses related to:
Current year .......................................... 1,515,006 801,916 917,106
Prior year ............................................ (7,871) (112) (60,351)
----------- ----------- -----------
1,507,135 801,804 856,755
----------- ----------- -----------
Net paid losses related to:
Current year .......................................... 209,473 146,433 144,720
Prior year ............................................ 615,276 778,382 537,682
----------- ----------- -----------
824,749 924,815 682,402
----------- ----------- -----------
Effects of exchange rate changes ...................... (74,501) (104,711) (155,761)
----------- ----------- -----------
Net liability at end of year .......................... 2,790,737 2,182,852 2,410,574
Reinsurance recoverable at end of year ................ 214,891 203,180 205,982
----------- ----------- -----------
Gross liability at end of year ........................ $ 3,005,628 $ 2,386,032 $ 2,616,556
----------- ----------- -----------
The Company's reserve for unpaid losses and loss expenses as of December
31, 2001, 2000 and 1999, included $128.5 million, $146.4 million and $146.2
million, respectively, that represents an estimate of its net ultimate
liability for asbestos and environmental claims. The gross liability for such
claims as at December 31, 2001, 2000 and 1999, is $155.4 million, $171.3
million and $173.7 million, respectively, of which $130.9 million, $145.6
million and $150.6 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 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 assurances
that the reserves established by the Company will not be adversely affected by
development of other
17
latent exposures, and further, there can be no assurances 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 recoverable was $16.9 million and $13.0
million as at December 31, 2001 and 2000, 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. 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.
Premiums and losses and loss expenses for 2001, 2000 and 1999 are reported
net of reinsurance in the Company's Statement of Operations. Assumed, ceded and
net amounts for the years ended December 31, 2001, 2000 and 1999, were as
follows ($000s):
Losses
Premiums Premiums and Loss
Written Earned Expenses
---------- ---------- ----------
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
---------- ---------- ----------
1999
Assumed ............................................... $1,432,966 $1,447,404 $1,287,738
Ceded ................................................. 106,556 109,395 157,636
---------- ---------- ----------
Net ................................................... $1,326,410 $1,338,009 $1,130,102
---------- ---------- ----------
18
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. The company incurred interest expense of $13.0 million, $13.0
million and $12.9 million in 2001, 2000 and 1999, respectively, and paid
interest of $13.0 million in each of 2001, 2000 and 1999 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 of the Company operate in,
and are subject to taxation by, other jurisdictions.
Income tax expense for the years ended December 31, 2001, 2000 and 1999,
and income taxes payable as at December 31, 2001, 2000 and 1999, were as
follows ($000's):
2001 2000 1999
-------- -------- --------
Current income tax benefit ............................ $ (2,557) $ (5,984) $(22,557)
Deferred income tax benefit ........................... (66,747) (37,754) (21,227)
-------- -------- --------
Income tax benefit .................................... $(69,304) $(43,738) $(43,784)
-------- -------- --------
Current income tax recoverable, net ................... $ (9,924) $(10,525) $(14,958)
Deferred income tax (recoverable) payable, net ........ (83,961) (12,471) 6,810
-------- -------- --------
Income taxes recoverable net .......................... $(93,885) $(22,996) $ (8,148)
-------- -------- --------
Deferred income taxes 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, 2001 and 2000, were as follows ($000's):
2001 2000
--------- ---------
Discounting of loss reserves and adjustment to life policy reserves ...... $ 31,100 $ 16,257
Retirement and other compensation plans .................................. 1,887 1,973
Tax loss carryforwards ................................................... 105,566 47,959
Unearned premium ......................................................... 13,300 8,617
Other deferred tax assets ................................................ 7,723 6,975
--------- ---------
159,576 81,781
--------- ---------
Valuation allowance ...................................................... (14,319) (9,409)
--------- ---------
Deferred tax assets ...................................................... 145,257 72,372
--------- ---------
Unrealized appreciation and timing differences on investments ............ 13,182 19,887
Deferred acquisition costs ............................................... 20,813 16,097
Tax equalization reserves ................................................ 11,382 11,698
Other deferred tax liabilities ........................................... 15,919 12,219
--------- ---------
Deferred tax liabilities ................................................. 61,296 59,901
--------- ---------
Net deferred tax asset ................................................... $ 83,961 $ 12,471
--------- ---------
19
As at December 31, 2001, the Company had tax benefits associated with
deferred tax loss carryforwards with the following expiration dates: $27.3
million in 2006, $17.5 million in 2007, $33.8 million in 2008, $4.5 million in
2018, $3.9 million in 2019, $7.7 million in 2020 and $10.9 million in 2021. The
Company has recorded a valuation allowance 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
income 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, 2001, 2000 and 1999 ($000's):
Before tax Tax effect Net of tax
---------- ---------- ----------
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
--------- --------- ---------
1999
Foreign currency translation adjustment .................................. $ (34,883) $ - $ (34,883)
--------- --------- ---------
Unrealized (losses) gains on investments:
Unrealized (losses) gains on investments and other foreign exchange
gains and losses arising during the period ........................... (116,780) 34,632 (82,148)
Less reclassification adjustment for available for sale securities ....... (3,115) 1,414 (1,701)
--------- --------- ---------
(119,895) 36,046 (83,849)
--------- --------- ---------
Change in accumulated other comprehensive income ......................... $(154,778) $ 36,046 $(118,732)
--------- --------- ---------
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 has a management role), and their respective affiliates
as discussed below:
20
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, 2001, 2000, and 1999, were $0.1 million, $0.1 million
and $0.3 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 2001 and 2000. Included
in the 2001 consolidated results were assumed and ceded premiums of $15.3
million and $1.7 million, respectively, losses and loss expenses, including
policy benefits for life contracts, of $8.9 million, loss recoveries of $11.5
million and assumed and ceded acquisition costs of $5.7 million and $0.5
million, respectively. As at December 31, 2001, there were reinsurance balances
receivable and recoverable aggregating $26.8 million, unpaid losses and loss
expenses, including policy benefits for life contracts of $20.1 million, funds
held under reinsurance treaties of $0.3 million. Included in the 2000
consolidated results were assumed and ceded premiums of $15.1 million and $1.6
million, respectively, losses and loss expenses, including policy benefits for
life contracts of $10.6 million, loss recoveries of $7.7 million and assumed
and ceded acquisition costs of $5.4 million and $0.7 million, respectively. As
at December 31, 2000, there were reinsurance balances recoverable aggregating
$22.8 million, unpaid losses and loss expenses, including policy benefits for
life contracts, of $18.6 million, and funds held under reinsurance treaties of
$1.6 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 pays a fee
to each of Swiss Re, HAMB, and MSDWIM. Investment fees expensed for the years
ended December 31, 2001, 2000 and 1999, aggregated $2.4 million, $2.8 million
and $2.7 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.
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 a frozen
non-contributory defined benefit plan.
Contributions are based on the participants' 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
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.
21
The Company incurred pension expense for these pension arrangements of
$5.7 million, $5.4 million and $3.3 million for the years ended December 31,
2001, 2000, and 1999, 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 Compensation 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 a 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 key 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, to be 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.
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, 2001, 2000 and 1999, of approximately $137,000, $11,000 and $433,000,
respectively. Related deferred compensation expense at December 31, 2001 and
2000, was $397,000 and $534,000, 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 $35,000 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.
22
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. The
ESPP is administered by the Committee. The ESPP has two offering periods a year
with the first period commencing June 1, 2000. All employees are eligible to
participate in the ESPP and can contribute between 1% and 10% of base salary
towards the purchase of PartnerRe Ltd. shares up to a limit of $25,000 per
annum. Employees who enroll in the ESPP may purchase PartnerRe Ltd. shares at a
15% discount of the fair market value. Once purchased, there is a restriction
upon transfer or sale of the shares for a period of two years following
purchase. Participants in the ESPP are eligible to receive dividends on their
PartnerRe Ltd. shares as of the purchase date. A total of 500,000 common shares
may be issued under the ESPP.
A summary of the status of the Company's outstanding stock options as of
December 31, 2001, 2000 and 1999, and changes during the years ending on those
dates, is presented below:
2001 2000 1999
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- --------- ----------
Outstanding at beginning of year ...... 2,074,642 $ 37.62 2,182,008 $ 31.59 1,579,358 $ 28.24
Granted ............................... 544,742 49.87 755,969 37.11 640,210 40.48
Exercised ............................. (93,306) 35.75 (806,987) 20.69 (7,100) 27.12
Forfeited ............................. (79,998) 41.59 (56,348) 38.37 (30,460) 44.52
--------- ---------- --------- ---------- --------- ----------
Outstanding at end of year ............ 2,446,080 40.29 2,074,642 37.62 2,182,008 31.59
--------- ---------- --------- ---------- --------- ----------
Options exercisable at year end ....... 1,054,060 $ 37.50 980,352 $ 36.24 1,418,078 $ 26.23
--------- ---------- --------- ---------- --------- ----------
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 2001, 2000 and 1999, respectively: risk
free interest rates of 5.1%, 6.4% and 5.7%, expected lives of seven years,
expected volatility of 25% and a dividend yield of 2%. The weighted average
fair value of options granted during 2001, 2000 and 1999, was $14.80, $10.61
and $12.47, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------------------- ------------------------------
Weighted Average Weighted
Number Remaining Weighted Average Number Average Number
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
-------------------------------- ----------- ---------------- ---------------- ----------- --------------
$ 19.38 - $ 31.00 497,253 5.5 years $ 26.50 321,453 $ 24.14
$ 31.84 - $ 37.16 698,735 7.6 36.58 230,065 35.83
$ 37.17 - $ 46.84 511,380 6.9 44.30 289,900 44.31
$ 46.85 - $ 51.38 504,720 8.5 49.12 140,840 49.20
$ 51.39 - $ 55.57 233,992 9.2 52.88 71,802 52.16
--------- --- ------- --------- -------
$ 19.38 - $ 54.26 2,446,080 7.4 $ 40.29 1,054,060 $ 37.50
--------- --- ------- --------- -------
Exercise prices for all options issued during 2001, 2000 and 1999, equaled
the average market price of the stock on the grant date.
23
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, the Company's net income available to common
shareholders and earnings per common share would have been reduced to the pro
forma amounts indicated below ($000's except per share data):
2001 2000 1999
----------- ----------- -----------
Net (loss) income available to common shareholders:
As reported ......................................... $ (180,482) $ 122,307 $ 74,755
Pro forma ........................................... $ (187,216) $ 117,157 $ 71,224
(Loss) earnings per common share:
Basic
As reported ......................................... $ (3.60) $ 2.48 $ 1.44
Pro forma ........................................... $ (3.73) $ 2.38 $ 1.37
Diluted
As reported ......................................... $ (3.60) $ 2.41 $ 1.39
Pro forma ........................................... $ (3.73) $ 2.31 $ 1.34
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
law and certain insurance statutes of various U.S. states in which PartnerRe
U.S. is licensed. The restrictions are generally based on net income and/or
certain levels of policyholders' earned surplus as determined in accordance
with the relevant statutory accounting practices. At December 31, 2001, 2000
and 1999, there were no material statutory restrictions, except as noted below,
on the reinsurance subsidiaries' abilities to pay dividends. PartnerRe U.S., a
company licensed in the U.S., may not pay cash dividends without prior
regulatory approval.
The 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, 2001, the reinsurance subsidiaries'
solvency, liquidity, surplus 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
24
Company. Proceeds of the issue of junior subordinated debt securities will be
used in the operations of PartnerRe U.S.
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 a rate 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
$206,185,600 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 net proceeds from the sale of PEPS Unit will be
used for general corporate purposes.
25
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 preferred shares. (See Note 14.)
14. Shareholders' Equity
Authorized Shares
At December 31, 2001 and 2000, the total authorized shares of the Company
were 120 million shares, par value $1.00 per share. In 2001, 100 million shares
were designated as common shares, 10 million shares have been designated as 8%
Series A Cumulative Preferred Shares, 4 millions shares have been designated as
5.61% Series B Cumulative Preferred Shares (see Note 13) and 6 million shares
remain undesignated. In 2000, 100 million shares were designated as common
shares, 10 million shares were designated as 8% Series A Cumulative Preferred
Shares and 10 million shares remain undesignated.
Class A and Class B Warrants
In 1993, in connection with the issuance of common shares, the Company
issued Class A Warrants to purchase, in the aggregate, approximately 10.1
million common shares. No Class A Warrants remained unexercised as of December
31, 2000. In 1993, the Company also 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 July 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. 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, after July 10, 2002 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.
Earnings Per Share
The reconciliation of basic and diluted earnings per share is as follows
($000's except per share amounts):
2001 2000 1999
------------------------------ --------------------------- -----------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ --------- ------ ------ ---------
Net income (loss)............. $(160,482) $142,307 $94,755
Preferred stock dividends..... (20,000) (20,000) (20,000)
Basic Earnings Per Share
--------- -------- ------ -------- -------- ----- ------- -------- -----
Net income (loss) available
to common shareholders.... $(180,482) 50,136.8 $(3.60) $122,307 49,274.8 $2.48 $74,755 51,941.0 $1.44
--------- -------- ------ -------- -------- ----- ------- -------- -----
26
2001 2000 1999
------------------------------ --------------------------- -----------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ --------- ------ ------ ---------
Effect of Dilutive
Securities:(1)
Class A and B Warrants........ 873.8 63.7
Stock Options................. 528.9 1.226.4
Diluted Earnings Per Share
Net income available to
common shareholders....... $122,307 50,677.5 $2.41 $74,755 53,231.1 $1.40
-------- -------- ----- ------- -------- -----
---------
(1) Diluted net loss per share has not been shown for 2001 because the effect
of dilutive securities would have been antidilutive. The weighted average
number of common and common equivalent shares outstanding for the period
amounted to 51,566.5 thousand shares after the dilutive effect of Class A
and B warrants, and stock options of 899.6 thousand and 530.1 thousand,
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, 2001 ($000's):
Period Amount
----------------------------------------------------------- ----------
2002....................................................... $ 12,532
2003....................................................... 11,294
2004....................................................... 8,903
2005....................................................... 8,817
2006 through 2012.......................................... $ 42,981
Rent expense for the years ended December 31, 2001, 2000 and 1999, was
$11.2 million, $9.2 million and $8.4 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. At December 31, 2001, the present value of
these commitments was $13.1 million.
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.
27
Other Agreements
The Company has entered into service agreements and lease contracts that
provide for information technology support and computer equipment,
respectively. Future payments under these contracts will amount to $3.0
million.
16. Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair value
information 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. Financial instruments may or may not be recognized on the
balance sheet. 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 Sheet.
Fair value for fixed maturities, short-term investments, equities and
trading securities are based on quoted market prices. Carrying value of other
invested assets approximate 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 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.
The carrying values and fair values of the financial instruments recorded
in the Consolidated Balance Sheet as at December 31, 2001 and 2000, were as
follows (000's):
2001 2000
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
Assets
Fixed maturities ................................................. $3,420,759 $3,420,759 $3,053,790 $3,053,790
Short-term investments ........................................... 39,564 39,564 24,853 24,853
Equities ......................................................... 400,825 400,825 354,801 354,801
Trading securities ............................................... 77,452 77,452 - -
Other invested assets ............................................ 20,500 20,500 14,594 14,594
Liabilities
Net policy benefits for life and annuity contracts ............... $ 693,250 $ 693,250 656,492 656,492
Long-term debt ................................................... 220,000 220,140 220,000 215,140
Trust Preferred, Mandatorily Redeemable Preferred
Securities and Purchase Contracts
Trust Preferred Securities ....................................... $ 200,000 $ 200,000 - -
Mandatorily Redeemable Preferred Securities and Purchase
Contracts (PEPS Units) ........................................ 200,000 225,200 - -
28
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 Balance Sheet at fair value,
with changes in their fair value recognized in the Statement 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 counter parties 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, 2001 and
2000 were as follows ($000's):
2001 Net 2000 Net
Unrealized Unrealized
Contract Market Gains Contract Market Gains
Amount Value (Losses) Amount Value (Losses)
----------- ----------- ----------- ----------- ----------- -----------
Receivable ........... $ 1,745,614 $ 1,745,526 $ (88) $ 2,040,169 $ 2,043,152 $ 2,983
Payable .............. (1,745,614) (1,745,335) 279 (2,040,169) (2,040,454) (285)
----------- ----------- ----------- ----------- ----------- -----------
Net .................. $ -- $ 191 $ 191 $ -- $ 2,698 $ 2,698
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, 2001.
17. Credit Agreements
The Company has entered into agreements with financial institutions to
provide unsecured committed credit facilities in the aggregate amount of $325
million. These facilities provide for the issuance of lines of credit and
letters of credit. Under the terms of certain reinsurance agreements,
irrevocable letters of credit were issued on an unsecured basis in the amount
of $283.5 million and $159.7 million at December 31, 2001 and 2000,
respectively, in respect of reported loss reserves.
18. Segment Information
Following a realignment of its Global operations effective January 1,
2002, the Company changed its reporting segments to reflect the way its
business will be managed going forward. The Company monitors the performance of
its underwriting operations in two major segments, Non-Life and Life. The
Non-Life segment is further divided into three sub-segments, US Property and
Casualty, Non-US Property and Casualty and Worldwide Specialty. The Life
segment includes Life, Health and Annuity 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 US and Non-US Property and Casualty sub-segments include property and
casualty business as well as motor business. These lines are generally written
in local markets. The US Property and Casualty sub-segment is comprised of
property, casualty and motor risks originating in the United States, generally
written by PartnerRe U.S. The Non-US Property and Casualty sub-segment is
comprised of property, casualty and motor business originating outside of the
United States, generally written by Partner Reinsurance Company and PartnerRe
SA. The Worldwide Specialty sub-segment is comprised of that business which is
generally considered to be specialized due to the
29
sophisticated technical underwriting required to analyze risks, and 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
catastrophe, aviation and space, marine, agriculture, credit/surety, special
risk, engineering/energy and miscellaneous 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/losses, other income, amortization
of goodwill, interest expense, distributions related to Trust Preferred and
Mandatorily Redeemable Preferred Securities, net foreign exchange gains or
losses, income tax expense or benefit and preferred share dividends. Segment
revenues and profits or losses are shown net of intercompany transactions.
Management measures segment results for the US Property and Casualty,
Non-US Property and Casualty and Worldwide Specialty segments on the basis of
the "technical ratio," which is obtained by dividing the sum of the loss and
loss adjustment expenses and acquisition costs by net premiums earned.
Management measures segment results for the life segment on the basis of
"technical result" which is defined as net premiums earned less loss and loss
adjustment expenses and acquisition costs. The following table provides a
summary of the segment revenues and results for the years ended December 31,
2001, 2000 and 1999 ($ millions). The information for all periods presented has
been restated to conform to the new segmentation.
2001 2000 1999
-------- -------- --------
NON-LIFE SEGMENT
US Property and Casualty
Net premiums written ............... $ 411.0 $ 291.6 $ 202.7
Net premiums earned ................ 345.7 268.7 191.9
Loss and loss expense ratio ........ 128.3% 81.5% 84.6%
Acquisition expense ratio .......... 24.8 23.2 27.4
-------- -------- --------
Technical ratio (1) ................ 153.1% 104.7% 112.0%
Non-US Property and Casualty
Net premiums written ............... $ 545.2 $ 439.8 $ 438.7
Net premiums earned ................ 514.1 426.8 438.5
Loss and loss expense ratio ........ 85.7% 71.0% 79.1%
Acquisition expense ratio .......... 24.9 27.9 27.9
-------- -------- --------
Technical ratio (1) ................ 110.6% 98.9% 107.0%
Worldwide Specialty
Net premiums written ............... $ 736.9 $ 476.3 $ 462.0
Net premiums earned ................ 641.9 446.0 480.2
Loss and loss expense ratio ........ 97.1% 62.8% 72.3%
Acquisition expense ratio .......... 19.8 21.5 23.2
-------- -------- --------
Technical ratio (1) ................ 116.9% 84.3% 95.5%
30
2001 2000 1999
-------- -------- --------
TOTAL NON-LIFE SEGMENT
Gross premiums written ............. $1,739.4 $1,253.0 $1,174.3
Net premiums written ............... 1,693.1 1,207.7 1,103.4
Net premiums earned ................ 1,501.7 1,141.5 1,110.6
Loss and loss expense ratio ........ 100.4% 70.2% 77.1%
Acquisition expense ratio .......... 22.7 24.3 25.7
Other overhead expense ratio ....... 7.2 8.0 6.9
-------- -------- --------
Expense ratio ...................... 29.9 32.3 32.6
-------- -------- --------
Combined ratio ..................... 130.3% 102.5% 109.7
-------- -------- --------
TOTAL LIFE SEGMENT
Gross premiums written ............. $ 138.8 $ 186.5 $ 258.7
Net premiums written ............... 132.0 172.6 223.0
Net premiums earned ................ 131.8 172.9 227.4
Technical result (2) ............... (20.0) (42.9) (78.5)
Investment income .................. 26.5 68.0 107.8
-------- -------- --------
Net technical result ............... $ 6.5 $ 25.1 $ 29.3
-------- -------- --------
---------
(1) Technical ratio is obtained by dividing the sum of loss and loss
adjustment expenses and acquisition costs by net premiums earned.
(2) Technical result is defined as net premiums earned, less loss and loss
adjustment expenses and acquisition costs.
2001 2000 1999
-------- -------- --------
Reconciliation to Income (Loss) before distributions related to Trust
Preferred and Mandatorily Redeemable Preferred Securities and taxes:
Technical result .............................................................. $ (366.6) $ 19.2 $ (110.6)
Other operating expenses ...................................................... (117.6) (103.2) (93.1)
Net investment income ......................................................... 239.6 273.6 307.6
Net realized investment gains (losses) ........................................ 20.2 (62.7) (15.9)
Other income .................................................................. 1.7 0.4 0.7
Interest expense .............................................................. (13.0) (13.0) (12.9)
Amortization of goodwill ...................................................... (26.0) (26.0) (25.7)
Net foreign exchange gains .................................................... 7.1 10.3 0.9
-------- -------- --------
Income (loss) before distributions related to Trust Preferred and
Mandatorily Redeemable Preferred Securities and taxes ..................... $ (254.6) $ 98.6 $ 51.0
The following table provides the geographic distribution of gross premiums
written for the years ended December 31, 2001, 2000 and 1999 ($ millions):
2001 2000 1999
-------- -------- --------
Europe ........................................................................ $ 753.3 $ 534.4 $ 629.9
North America ................................................................. 789.9 685.1 631.9
Asia, Australia and New-Zealand ............................................... 218.8 158.9 135.5
Latin America and the Caribbean ............................................... 102.1 47.6 27.0
Africa ........................................................................ 14.2 13.5 8.7
-------- -------- --------
Total gross premiums written .................................................. $1,878.3 $1,439.5 $1,433.0
31
The Company produces its business both through brokers and through direct
relationships with insurance company clients. None of the Company's clients
accounted for more than 3% of total gross premiums written. In 2001 the Company
had two brokers that accounted for 10% or more of its gross premiums written,
one accounting for 17% of gross premiums written and the other accounting for
11%. One broker accounted for approximately 16% and 10% of total gross premiums
written in 2000 and 1999, respectively. All segments include business written
through this broker.
32
19. Unaudited Quarterly Financial Information
2001 2000
---------------------------------------- ---------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
($ millions except per share amounts)
Net premiums written .......................... $ 422.1 $ 394.2 $ 410.9 $ 597.8 $ 290.0 $ 304.7 $ 345.4 $ 440.1
Net premiums earned ........................... 442.3 415.5 386.3 389.4 331.4 313.3 351.3 318.3
Net investment income ......................... 58.6 60.3 60.8 60.0 55.0 62.1 78.9 77.5
Net realized investment gains (losses) ........ 6.0 (0.4) 5.5 9.1 (10.8) (6.5) (7.7) (37.7)
Other income .................................. 1.6 - 0.1 - 0.2 0.2 0.1 (0.1)
Losses and loss expenses including life
policy benefits ........................... 362.9 710.7 285.9 272.4 242.1 222.1 264.1 247.3
Acquisition costs and other expenses .......... 131.2 126.2 114.5 113.9 122.1 97.1 110.9 92.5
Amortization of goodwill, interest expense
and net foreign exchange losses ........... 11.2 1.6 6.6 12.6 2.9 6.4 9.9 9.5
Distribution related to Trust Preferred and
Mandatorily Redeemable Preferred Securities 3.0 - - - - - - -
Income tax benefit ............................ (28.7) (24.6) (7.5) (8.5) (7.9) (7.4) (13.8) (14.6)
Cumulative effect of adopting new accounting
standard, net of tax ...................... - - - (27.8) - - - -
Net income (loss) ............................. 28.9 (338.5) 53.2 95.9 16.6 50.9 51.5 23.3
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 23.9 (343.5) 48.2 90.9 11.6 45.9 46.5 18.3
Earnings per common and common equivalent
share:
Diluted operating income (loss) per common
share ..................................... $ 0.33 $ (6.65) $ 0.92 $ 1.08 $ 0.54 $ 1.06 $ 1.07 $ 1.14
------- ------- ------- ------- ------- ------- ------- -------
Diluted net income (loss) per common share .... $ 0.46 $ (6.67) $ 0.93 $ 1.76 $ 0.23 $ 0.90 $ 0.92 $ 0.36
------- ------- ------- ------- ------- ------- ------- -------
Dividends declared per common share ........... $ 0.28 $ 0.28 $ 0.28 $ 0.26 $ 0.26 $ 0.26 $ 0.26 $ 0.26
Common stock price range
High ...................................... $ 54.00 $ 55.33 $ 57.00 $ 58.13 $ 61.00 $ 47.44 $ 38.69 $ 36.81
Low ....................................... 46.00 34.10 47.75 45.85 49.06 34.94 35.25 28.75
33
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 3(m) 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.
DELOITTE & TOUCHE
Hamilton, Bermuda
February 11, 2002, except for Note 18, as to which the date is November 4, 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARTNERRE LTD.
By: /s/ Albert Benchimol
----------------------------------
Name: Albert Benchimol
Title: Executive Vice President
and Chief Financial Officer
Date: January 17, 2003