Based in Bermuda, PartnerRe Ltd. (PRE) was formed in 1993, raising nearly $1 billion in an IPO to capitalize on the void in catastrophe reinsurance capacity following Hurricane Andrew and the concurrent difficulties faced by Lloyds of London. While beginning as a pure property reinsurer, the company has become a dynamic and diversified property-casualty (P&C) and life reinsurer over the years, covering catastrophe, automobile, agricultural, credit and surety, marine, space and aviation, miscellaneous casualty, and life/health risks. Since 1997, the company has been a leading international reinsurance company that writes multi-line reinsurance on a pro-rata as well as excess of loss basis and offers both treaty and facultative contracts.
In December 2007, PRE redefined its financial reporting segments. According to the latest redefinition the company classified its activities into three primary segments for FY06:
Non-life - $3.2 billion in net written premiums (NWP), or 86.5% of PRE's total NWP:
U.S. Property and Casualty 32.2% of Non-life NWP
Global (Non-U.S.) Property and Casualty 23.8% of Non-life NWP
Global (Non-U.S.) Specialty 31.0% of Non-life NWP
Catastrophe 12.9% of Non-life NWP
Life - 13.2% of PRE's total NWP:
Corporate and Other 0.3% of PRE's total NWP:
Insurance Linked Securities
PartnerRe operates in Asia, Europe, South America, and in the U.S. through its subsidiaries Partner Reinsurance Company Ltd, PartnerRe SA, and Partner Reinsurance Company of the U.S. In 2006, North America and Europe contributed 43% and 42% of gross written premiums, respectively. The balance came from Asia, Australia, and New Zealand (8%) Latin America, Caribbean Islands, and Africa (7%).
History of earnings stability
PRE's diversified book of business, both geographically (more than 120 countries) and across reinsurance products, has contributed to more stable earnings and better underwriting profitability, compared to many of its peers. Although in the third quarter of 2004 the company suffered hurricane losses adding 16 points to the combined ratio (the loss ratio was 71.3% versus 65.1% in the year-ago quarter), it still generated an underwriting profit, albeit a slim one the third quarter of 2004 combined ratio was 99.5%. Progressing further into the soft market, we think this diversification and apparent underwriting discipline will likely enable the company to continue generating a ROE in the teens, albeit below recent levels. The company generated a ROE of 17% in 2004 and surpassed our expectations to expand at 26% for 2006 exceeding the very strong 21% earned in 2003. Though operating ROE slightly moderated during the first half of FY07 (operating ROE at 18% for 1H07), due to soft pricing strong results for the third quarter again pushed operating ROE to 23% annualized for the nine months ended September 2007 .
Conservative reserving policy
Added earnings cushion going into the softening P&C cycle could come from favorable reserve development. PRE began writing casualty business as the cycle was turning up in 2001, and therefore we believe coverages written were more likely to be priced and reserved appropriately. Indeed, the company has experienced favorable reserve development in all of the last eight quarters a trend we think could continue. We do note, however, that the favorable reserve development comes from policies written in a hard market, and the company's lack of casualty underwriting experience could result in negative surprises in the future.
Life segment poised to benefit from market consolidation
The Life segment, which accounts for 16% of net written premiums for 3Q07, is positioned to benefit from the consolidation in the global life reinsurance market. The weak dollar has contributed to rapid growth in recent years we would expect the growth trend to moderate, when the dollar's decline reverses. Net life premiums earned increased 29% year-over-year during 3Q07, however, in our opinion, we expect growth in the teens for the coming quarters as the global life reinsurance market consolidates.
Benign loss environment to boost profits: Hurricane season has remained mild so far which should keep the level of incurred losses below average levels resulting in higher profits. However, we do expect continued softening in pricing environment and increasing competition to offset some of the profits.
Excellent returns to the shareholders: PRE has continued to return additional value to its shareholders through stock buybacks and dividend payments. From inception till the end of 3Q07, the company has returned a total of $1.6 billion in dividends and share repurchases, which exceeds the total common equity raised by it.