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Section 1: 20-F (20-F)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 20-F
____________________________________
(cid:133)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
(cid:58) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
(cid:133)
(cid:133)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-14536
___________________________________
PartnerRe Ltd.
(Exact name of registrant as specified in its charter)
______________________________________
Bermuda
(Jurisdiction of incorporation or organization)
90 Pitts Bay Road, Pembroke, Bermuda
(Address of principal executive offices)
Marc Wetherhill
Chief Legal Officer
90 Pitts Bay Road, Pembroke, HM 08, Bermuda Telephone: +1 441-292-0888
, Email: marc.wetherhill@partnerre.com
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
_____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
5.875% Series F Non-Cumulative Preferred Shares,
$1.00 par value
6.50% Series G Cumulative Preferred Shares,
$1.00 par value
7.25% Series H Cumulative Preferred Shares,
$1.00 par value
5.875% Series I Non-Cumulative Preferred Shares,
$1.00 par value
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
_________________________________
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 100,000,000 common shares, par value
$0.00000001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:58)
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:58)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:58) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:58) No (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Accelerated filer (cid:133) Non-accelerated filer (cid:58)
U.S. GAAP (cid:58)
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes (cid:133) No (cid:58)
International Financial Reporting Standards as issued by the International Accounting Standards Board (cid:133) Other (cid:133)
TABLE OF CONTENTS
Page
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
PART II
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other than Equity Securities
Defaults, Dividend Arrearages and Delinquencies
Item 13.
Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 14.
Controls and Procedures
Item 15.
Audit Committee Financial Expert
Item 16A.
Code of Ethics
Item 16B.
Principal Accountant Fees and Services
Item 16C.
Exemptions from the Listing Standards for Audit Committees
Item 16D.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16E.
Change in Registrant’s Certifying Accountant
Item 16F.
Item 16G.
Corporate Governance
Item 16H. Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
4
4
4
25
36
36
74
78
78
80
82
86
91
91
91
93
95
95
95
96
96
96
96
97
97
97
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PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
A. Selected Financial Data
The selected consolidated financial data of PartnerRe Ltd. (the Company or PartnerRe) below should be read in conjunction with the Consolidated Financial
Statements and the accompanying Notes to the Consolidated Financial Statements in Item 18 and with other information contained in this report, including Operating and
Financial Review and Prospects in Item 5 of this report.
The selected consolidated financial data for 2016, 2015, 2014, 2013 and 2012 (in millions of U.S. dollars) is as follows:
Statement of Operations Data
2016
2015
2014
2013
2012
For the years ended December 31,
Net premiums earned
Net investment income
Net realized and unrealized investment gains (losses)
Other income
Total revenues
Net income
Net income attributable to PartnerRe Ltd. common shareholders
Balance Sheet Data
Total assets
Total shareholders’ equity attributable to PartnerRe Ltd.
Common shareholders’ equity
$
$
$
$
$
$
$
4,970
411
26
15
5,422
447
387
2016
21,939
6,688
5,984
$
$
$
$
$
$
$
5,269
450
(297)
9
5,431
107
47
$
$
$
$
5,609
480
372
16
6,477
1,068
998
At December 31,
2015
2014
21,406
6,901
6,047
$
$
$
22,270
7,049
6,195
$
$
$
$
$
$
$
5,198
484
(161)
17
5,538
673
597
2013
23,038
6,710
5,856
$
$
$
$
$
$
$
4,486
571
494
12
5,563
1,135
1,073
2012
22,980
6,933
6,040
As a result of the acquisition of the Company’s common shares by Exor N.V. (subsequently renamed EXOR Nederland N.V.) in March 2016, as described in
Information on the Company in Item 4 of this report, all of the Company’s publicly traded common shares issued and outstanding and all treasury shares held were
canceled and one common share of $1.00 par value was issued to Exor N.V. Subsequently, the Company subdivided the one common share into 100 million common
shares of $0.00000001 par value each for a total share capital of $1.00. Accordingly, per share data is no longer meaningful and is no longer presented.
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B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Introduction
Managing risk effectively is paramount to our success, and our organization is built around intelligent risk assumptions and careful risk management, as evidenced
by our development of the PartnerRe risk management framework, which provides an integrated approach to risk across the entire organization. We have identified what
we believe reflects key significant risks to the organization, and, in turn, the common and preferred shareholders.
First, in order to achieve an appropriate growth in tangible book value over the reinsurance cycle, we believe we must be able to generate an appropriate operating
return on average shareholders’ equity over the reinsurance cycle. Our ability to do that over a reinsurance cycle is dependent on our individual performance, but also on
industry factors that impact the level of competition and the price of risk. The level of competition is determined by supply of and demand for capacity. Demand is
determined by client buying behavior, which varies based on the client’s perception of the amount and volatility of risk, its financial capacity to bear it and the cost of risk
transfer. Supply is determined by the existing reinsurance companies’ level of financial strength and the introduction of capacity from new start-ups or capital markets.
Significant new capacity or significant reduction in demand will depress industry profitability until the supply/demand balance is redressed. Extended periods of
imbalance could depress industry profitability to a point where we would fail to meet our targets.
Second, we knowingly expose ourselves to significant volatility in our net income. We create shareholder value by assuming risk from the insurance and capital
markets. This exposes us to volatile earnings as untoward events happen to our clients and in the capital markets. Examples of potential large loss events include, without
limitation:
•
Natural catastrophes such as hurricane, windstorm, flood, tornado, earthquake, etc.;
• Man-made disasters such as terrorism;
•
•
•
Declines in the equity and fixed income markets;
Systemic increases in the frequency or severity of casualty losses; and
New mass tort actions or reemergence of old mass torts such as cases related to asbestosis.
We manage large loss events through evaluation processes, which are designed to enable proper pricing of these risks over time, but which do little to moderate
short-term earnings volatility. The only effective tools to dampen earnings volatility are through diversification by building a portfolio of uncorrelated risks and through
the purchase of retrocessional coverage to optimize a portfolio.
Third, we expose ourselves to significant risks that can impact our financial strength as measured by United States generally accepted accounting principles (U.S.
GAAP) or regulatory capital. In particular, ten risk sources have been identified for which management has established key risk limits approved by the Board of Directors
(Board). These ten risk sources and the related approved limits and actual limits deployed at December 31, 2016 and 2015 are presented in the Risk Management section
below.
The following risks should be read in conjunction with the Safe Harbor Statement in Item 5.G of this report. Operating and Financial Review and Prospects and the
Notes to the Consolidated Financial Statements in Item 18 of this report. These risks may affect our operating results and, individually or in the aggregate, could cause our
actual results to differ materially from past and projected future results. Some of these risks and uncertainties could affect particular business operations or segments,
while others could affect all of our businesses. Although risks are discussed separately, many are interrelated.
Except as may be required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events,
or otherwise. It is impossible to predict or identify all risk factors and, consequently, the following factors should not be construed as a complete discussion of risks and
uncertainties that may affect us.
As used in these Risk Factors, the terms “the Company”, “PartnerRe”, “we”, “our” or “us” may, depending upon the context, refer solely to the Company, to one or
more of the Company’s consolidated subsidiaries or to all of them taken as a whole. The terms EXOR and Exor Group relate the Company’s ultimate parent, Exor N.V.
and its affiliated companies.
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The catastrophe business that we underwrite will result in volatility of our earnings.
Risks Related to Our Company
Catastrophic losses result from events such as windstorms, hurricanes, tsunamis, earthquakes, floods, hailstorms, tornadoes, severe winter weather, fires, drought,
explosions and other natural and man-made disasters, the incidence and severity of which are inherently unpredictable. Because catastrophe reinsurance accumulates large
aggregate exposures to man-made and natural disasters, our loss experience in this line of business could be characterized as low frequency and high severity. This is
likely to result in substantial volatility in our financial results for any fiscal quarter or year, and may result in a decline of our book value of common equity and limit our
ability to make dividend payments and payments on our debt securities.
Notwithstanding our endeavors to manage our exposure to catastrophic and other large losses, the effect of a single catastrophic event or series of events affecting
one or more geographic zones, or changes in the relative frequency or severity of catastrophic or other large loss events, could reduce our earnings and limit the funds
available to make payments on future claims. The effect of an increase in frequency of mid-sized losses in any one reporting period affecting one or more geographic
zones, such as an unusual level of hurricane activity, could also reduce our earnings. Should we incur more than one very large catastrophic loss, our ability to write future
business may be adversely impacted if we are unable to replenish our capital.
By way of illustration, during the past five calendar years, the Company incurred the following pre-tax large catastrophic losses and large losses (defined as losses
exceeding $35 million), net of any related reinstatement premiums, reinsurance and profit commissions (in millions of U.S. dollars):
Calendar year Large catastrophic and large losses
2016
Wildfires in Fort McMurray, Alberta, Canada (the Canadian Wildfires), hurricane Matthew
that affected parts of the Caribbean and southeastern United States (Hurricane Matthew) and a
Ghana energy loss
Series of explosions in the Port of Tianjin, China (the Tianjin Explosion)
—
Extensive flooding in Alberta, Canada in June 2013, the hailstorm that affected large parts of
Germany in July 2013 and the floods that impacted large areas of Central Europe in June 2013 $
$
Superstorm Sandy and the U.S. drought (agriculture loss)
$
$
$
2015
2014
2013
2012
Pre-tax $ loss
156
59
—
142
318
We believe, and recent scientific studies have indicated, that the frequency of Atlantic basin hurricanes has increased and may change further in the future relative to
the historical experience over the past 100 years. As a result of changing climate conditions, such as global warming, there may be increases in the frequency and severity
of natural catastrophes and the losses that result from them. We monitor and adjust, as we believe appropriate, our risk management models to reflect our judgment of
how to interpret current developments and information, such as these studies. We believe that factors including increases in the value and geographic concentration of
insured property, particularly along coastal regions, the increasing risk of extreme weather events reflecting changes in climate and ocean temperatures, and the effects of
inflation may continue to increase the severity of claims from catastrophic events in the future.
We could face unanticipated losses from man-made catastrophic events and these or other unanticipated losses could impair our financial condition and reduce our
profitability.
We may have substantial exposure to unexpected, large losses resulting from future man-made catastrophic events, such as acts of terrorism, acts of war, nuclear
accidents and political instability, or from other perils. Although we may attempt to exclude losses from terrorism and certain other similar risks from some coverage we
write, we may continue to have exposure to such unforeseen or unpredictable events. This may be because, irrespective of the clarity and inclusiveness of policy language,
there can be no assurance that a court or arbitration panel will not limit enforceability of policy language or otherwise issue a ruling adverse to us.
It is also difficult to predict the timing of such events with statistical certainty, or estimate the amount of loss any given occurrence will generate. Under U.S. GAAP,
we are not permitted to establish reserves for potential losses associated with man-made or other catastrophic events until an event that may give rise to such losses
occurs. If such an event were to occur, our reported income would decrease in the affected period. In particular, unforeseen large losses could reduce our profitability or
impair our financial condition.
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Given the inherent uncertainty of models, the usefulness of such models as a tool to evaluate risk is subject to a high degree of uncertainty that could result in actual
losses that are materially different than our estimates, including probable maximum losses (PMLs), and our financial results may be adversely impacted, perhaps
significantly.
In addition to our own proprietary catastrophe models, we use third-party vendor analytic and modeling capabilities to provide us with objective risk assessment
relating to other risks in our reinsurance portfolio. We use these models to help us control risk accumulation and inform management and other stakeholders of capital
requirements and to improve the risk/return profile. However, given the inherent uncertainty of modeling techniques and the application of such techniques, these models
and databases may not accurately address a variety of matters which might be deemed to impact certain of our coverages.
For example, catastrophe models that simulate loss estimates based on a set of assumptions are important tools used by us to estimate our PMLs. These assumptions
address a number of factors that impact loss potential including, but not limited to, the characteristics of the natural catastrophe event; demand surge resulting from an
event; the types, function, location and characteristics of exposed risks; susceptibility of exposed risks to damage from an event with specific characteristics; and the
financial and contractual provisions of the reinsurance contracts that cover losses arising from an event. We run many model simulations in order to understand the impact
of these assumptions on its catastrophe loss potential. Furthermore, there are risks associated with catastrophic events, which are either poorly represented or not
represented at all by catastrophe models. Each modeling assumption or un-modeled risk introduces uncertainty into PML estimates that management must consider. These
uncertainties can include, but are not limited to, the following:
•
•
•
•
•
The models do not address all the possible hazard characteristics of a catastrophe peril (e.g., the precise path and wind speed of a hurricane);
The models may not accurately reflect the true frequency of events;
The models may not accurately reflect a risk’s vulnerability or susceptibility to damage for a given event characteristic;
The models may not accurately represent loss potential to reinsurance contract coverage limits, terms and conditions; and
The models may not accurately reflect the impact on the economy of the area affected or the financial, judicial, political, or regulatory impact on insurance claim
payments during or following a catastrophe event.
Our PMLs are selected after assessment of multiple third party vendor model output, internally constructed independent models, including the Company’s
CatFocus® suite of models, and other qualitative and quantitative assessments by management, including assessments of exposure not typically modeled in vendor or
internal models. Our methodology for estimating PMLs may differ from methods used by other companies and external parties given the various assumptions and
judgments required to estimate a PML.
As a result of these factors and contingencies, our reliance on assumptions and data used to evaluate our entire reinsurance portfolio and specifically to estimate a
PML, is subject to a high degree of uncertainty that could result in actual losses that are materially different from our PML estimates and our financial results may be
adversely impacted, perhaps significantly.
Our net income may be volatile because certain Life products expose us to reserve and fair value liability changes that are directly affected by market and other
factors and assumptions.
Our pricing and establishment of Life and Health reserves related to reserves for future policy benefits and valuation of life insurance and annuity products,
including reinsurance programs, are based upon various assumptions, including but not limited to market changes, mortality rates, morbidity rates and policyholder
behavior. The process of establishing reserves for future policy benefits relies on our ability to accurately estimate insured events that have not yet occurred but that are
expected to occur in future periods. Significant deviations in actual experience from assumptions used for pricing and for reserves for future policy benefits could have an
adverse effect on the profitability of our products and our business.
Under reinsurance programs covering variable annuity guarantees we assume the risk of guaranteed minimum death benefits (GMDB). Our net income is directly
impacted by changes in the reserves calculated in connection with the reinsurance of GMDB liabilities. Reported liabilities for GMDB reinsurance are determined using
internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to
fluctuations arising from, among other factors, changes in interest rates, changes in equity markets, changes in credit markets, changes in the allocation of the investments
underlying annuitant’s account values, and assumptions regarding future policyholder behavior. Adverse changes in market factors and policyholder behavior will have an
impact on both life underwriting income and net income. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term
economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term
economic risk and reward. For further information see Business Overview—Reserves section in Item 4 of this report.
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If actual losses exceed our estimated loss reserves, our net income and capital position will be reduced.
Our success depends upon our ability to accurately assess the risks associated with the businesses that we reinsure. We establish loss reserves to cover our estimated
liability for the payment of all losses and loss expenses incurred with respect to premiums earned on the contracts that we write. Loss reserves are estimates involving
actuarial and statistical projections at a given time to reflect our expectation of the costs of the ultimate settlement and administration of claims. Although we use actuarial
and computer models as well as historical reinsurance and insurance industry loss statistics, we also rely heavily on management’s experience and judgment to assist in
the establishment of appropriate claims and claim expense reserves. Because of the many assumptions and estimates involved in establishing reserves, the reserving
process is inherently uncertain. Our estimates and judgments are based on numerous factors, and may be revised as additional experience and other data become available
and are reviewed as new or improved methodologies are developed, as loss trends and claims inflation impact future payments, or as current laws or interpretations
thereof change.
Estimates of losses are based on, among other things, a review of potentially exposed contracts, information reported by and discussions with counterparties, and our
estimate of losses related to those contracts and are subject to change as more information is reported and becomes available. Losses for casualty and liability lines often
take a long time to be reported, and frequently can be impacted by lengthy, unpredictable litigation and by the inflation of loss costs over time. Changes in the level of
inflation also result in an increased level of uncertainty in our estimation of loss reserves, particularly for long-tail lines of business. As a consequence, actual losses and
loss expenses paid may deviate substantially from the reserve estimates reflected in our financial statements.
Although we did not operate prior to 1993, we assumed certain asbestos and environmental exposures through our acquisitions. Our non-life reserves include an
estimate of our ultimate liability for asbestos and environmental claims for which we cannot estimate the ultimate value using traditional reserving techniques, and for
which there are significant uncertainties in estimating the amount of our potential losses. These liabilities are especially hard to estimate for many reasons, including the
long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental
contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage. Certain of our subsidiaries have received and
continue to receive notices of potential reinsurance claims from ceding insurance companies, which have in turn received claims asserting asbestos and environmental
losses under primary insurance policies, in part reinsured by us. Such claims notices are often precautionary in nature and are generally unspecific, and the primary
insurers often do not attempt to quantify the amount, timing or nature of the exposure. Given the lack of specificity in some of these notices, and the legal and tort
environment that affects the development of claims reserves, the uncertainties inherent in valuing asbestos and environmental claims are not likely to be resolved in the
near future.
In addition, the reserves that we have established may be inadequate. If ultimate losses and loss expenses exceed the reserves currently established, we will be
required to increase loss reserves in the period in which we identify the deficiency to cover any such claims. As a result, even when losses are identified and reserves are
established for any line of business, ultimate losses and loss expenses may deviate, perhaps substantially, from estimates reflected in loss reserves in our financial
statements. Variations between our loss reserve estimates and actual emergence of losses could be material and could have a material adverse effect on our results of
operations and financial condition.
Since we rely on a few reinsurance brokers for a large percentage of our business, loss of business provided by these brokers could reduce our premium volume and
net income.
We produce our business both through brokers and through direct relationships with insurance company clients. For the year ended December 31, 2016,
approximately 73% of our gross premiums written were produced through brokers. In 2016, we had two brokers that accounted for 44% of our gross premiums written.
Because broker-produced business is concentrated with a small number of brokers, we are exposed to concentration risk. A significant reduction in the business produced
by these brokers could potentially reduce our premium volume and net income.
We are exposed to credit risk relating to our reinsurance brokers and cedants.
In accordance with industry practice, we may pay amounts owed under our policies to brokers, and they in turn pay these amounts to the ceding insurer. In some
jurisdictions, if the broker fails to make such an onward payment, we might remain liable to the ceding insurer for the deficiency. Conversely, the ceding insurer may pay
premiums to the broker, for onward payment to us in respect of reinsurance policies issued by us. In certain jurisdictions, these premiums are considered to have been paid
to us at the time that payment is made to the broker, and the ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the
premiums. We may not be able to collect all premiums receivable due from any particular broker at any given time. We also assume credit risk by writing business on a
funds-withheld basis. Under such arrangements, the cedant retains the premium they would otherwise pay to us to cover future loss payments.
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If we are significantly downgraded by rating agencies, our standing with brokers and customers could be negatively impacted and may adversely impact our results of
operations.
Third-party rating agencies assess and rate the claims-paying ability and financial strength of insurers and reinsurers, such as the Company’s principal operating
subsidiaries. These ratings are based upon criteria established by the rating agencies and have become an important factor in establishing our competitive position in the
market. Insured, insurers, ceding insurers and intermediaries use these ratings as one measure by which to assess the financial strength and quality of insurers and
reinsurers. These ratings are not an evaluation directed to investors of our preferred shares or debt securities, and are not a recommendation to buy, sell or hold our
preferred shares or debt securities.
Our financial strength ratings are subject to periodic review as rating agencies evaluate us to confirm that we continue to meet their criteria for ratings assigned to us
by them. Such ratings may be revised downward or revoked at the sole discretion of such ratings agencies in response to a variety of factors, including capital adequacy,
management strategy, operating earnings and risk profile. In addition, from time to time, one or more rating agencies may effect changes in their capital models and rating
methodologies that could have a detrimental impact on our ratings. It is also possible that rating agencies may in the future heighten the level of scrutiny they apply when
analyzing companies in our industry, may increase the frequency and scope of their reviews, may request additional information from the companies that they rate, and
may adjust upward the capital and other requirements employed in their models for maintenance of certain rating levels. We can offer no assurances that our ratings will
remain at their current levels.
If our ratings were significantly downgraded, our competitive position in the reinsurance industry may suffer, and it could result in a reduction in demand for our
products. In addition, certain business that we write contains terms that give the ceding company or derivative counterparty the right to terminate cover and/or require
collateral if our ratings are downgraded significantly.
See Liquidity and Capital Resources in Item 5 of this report for our current financial strength ratings. The status of any further changes to ratings or outlooks will
depend on various factors.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
Our future capital requirements depend on many factors, including regulatory requirements, our ability to write new business successfully, the frequency and
severity of catastrophic events, and our ability to establish premium rates and reserves at levels sufficient to cover losses. We may need to raise additional funds through
financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Financings could
result in the issuance of securities that have rights, preferences and privileges that are senior to those of our other securities. Disruption in the financial markets may limit
our ability to access capital required to operate our business and we may be forced to delay raising capital or bear a higher cost of capital, which could decrease our
profitability and significantly reduce our financial flexibility. In addition, if we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future,
we could incur higher borrowing costs and may have more limited means to access capital. If we cannot obtain adequate capital on favorable terms or at all, our business,
operating results and financial condition could be adversely affected. In such a severe event, the Company may be reliant on the parent company, Exor N.V., to provide a
further capital injection or contribution to the Company. However, all EXOR Group portfolio companies are managed independently and autonomously, hence no
guarantee can be given that EXOR will provide any additional capital.
The exposure of our investments to interest rate, credit, and equity risk may limit our net income and may affect the adequacy of our capital.
We invest the net premiums we receive unless, or until such time as, we pay out losses and/or until they are made available for distribution to common and preferred
shareholders, to pay interest on or redemption of debt and preferred shares, or otherwise used for general corporate purposes. Investment results comprise a substantial
portion of our income. For the year ended December 31, 2016, we had net investment income of $411 million, which represented approximately 8% of total revenues. In
addition, we recorded net realized and unrealized gains on investments of $26 million during 2016, which are recognized in net income. While the Board has implemented
what it believes to be prudent risk management and investment asset allocation practices, we are exposed to significant financial and capital market risks, including
changes in interest rates, credit spreads, equity and real estate prices, foreign exchange rates, market volatility, the performance of the economy in general and other
factors outside our control.
Interest rates are highly sensitive to many factors, including fiscal and monetary policies of major economies, inflation, economic and political conditions and other
factors outside our control. Changes in interest rates can negatively affect us in two ways. In a declining interest rate environment, we will be required to invest our funds
at lower rates, which would have a negative impact on investment income. We may be forced to liquidate investments prior to maturity at a loss in order to cover
liabilities. In a rising interest rate environment, the market value of our fixed income portfolio may decline.
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Our fixed maturity portfolio is primarily invested in high quality, investment grade securities. However, we invest a portion of the portfolio in securities that are
below investment grade. We also invest a portion of our portfolio in other investments such as fixed income type mutual funds, notes receivable, loans receivable, private
placement bond investments, derivative exposure assumed and other specialty asset classes. These securities generally pay a higher rate of interest and have a higher
degree of credit or default risk. These securities may also be less liquid in times of economic weakness or market disruptions.
We also invest a portion of our portfolio in preferred and common stocks or equity-like securities. The value of these assets fluctuates with equity markets. In times
of economic weakness, the market value and liquidity of these assets may decline, and may impact net income and capital. We use the term equity-like investments to
describe our investments that have market risk characteristics similar to equities and are not investment grade fixed maturity securities. This category includes high-yield
and convertible fixed maturity investments and private placement equity investments. Fluctuations in the fair value of our equity-like investments may reduce our income
in any period or year and cause a reduction in our capital. Our equity risk has declined during 2016 due to a reduction in investments in equities from $444 million at
December 31, 2015 to $39 million at December 31, 2016.
Foreign currency fluctuations may reduce our net income and our capital levels.
Through our multinational reinsurance operations, we conduct business in a variety of foreign (non-U.S.) currencies, the principal exposures being the Euro, British
pound, Canadian dollar, Swiss Franc and Australian dollar. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates,
which may be material. Our reporting currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial
position. We employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully
hedged or the hedges are ineffective, our results or shareholders’ equity may be reduced by fluctuations in foreign currency exchange rates.
We may suffer losses due to defaults by others, including issuers of investment securities, reinsurance and derivative counterparties.
Issuers or borrowers whose securities we hold, reinsurers, clearing agents, clearing houses, derivative instrument counterparties and other financial intermediaries
may default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Even if we
are entitled to collateral when a counterparty defaults, such collateral may be illiquid or proceeds from such collateral when liquidated may not be sufficient to recover the
full amount of the obligation. All or any of these types of default could have a material adverse effect on our results of operations, financial condition and liquidity.
We may be adversely affected if Colisée Re, AXA or their affiliates fail to honor their obligations to Paris Re or its clients.
As part of the AXA Acquisition, PARIS RE Holdings Limited (Paris Re) entered into the 2006 Acquisition Agreements. See Liquidity and Capital Resources—
Non-life and Life and Health Reserves —Reserve Agreement and Funds Held-Directly Managed Account in Item 5 of this report.
Pursuant to the Quota Share Retrocession Agreement, the benefits and risks of Colisée Re’s reinsurance agreements were ceded to Paris Re France, which is now
Partner Reinsurance Europe SE (PartnerRe Europe), but Colisée Re (formerly known as AXA RE), a subsidiary of AXA SA (AXA), remains both the legal counterparty
for all such reinsurance contracts and the legal holder of the assets relating to such reserves.
Under the Run Off Services and Management Agreement, PartnerRe Europe has agreed that AXA Liabilities Managers (AXA LM) will manage claims arising from
all reinsurance and retrocession contracts subject to the Reserve Agreement. If AXA LM does not take into account PartnerRe Europe’s commercial concerns in the
context of PartnerRe Europe’s on-going business relations with the relevant ceding companies and retrocessionaires, our ability to renew reinsurance and retrocession
contracts with them may be adversely affected.
There can be no assurance that our business activities, financial condition, results or future prospects may not be adversely affected in spite of the existence of the
2006 Acquisition Agreements. In general, if AXA or its affiliates breach or do not satisfy their obligations under the 2006 Acquisition Agreements (potentially as a result
of insolvency or inability or unwillingness to make payments under the terms of the 2006 Acquisition Agreements), we could be materially adversely affected.
Our debt, credit and International Swap Dealers Association (ISDA) agreements may limit our financial and operational flexibility, which may affect our ability to
conduct our business.
We have incurred indebtedness, and may incur additional indebtedness in the future. Additionally, we have entered into credit facilities and ISDA agreements with
various institutions. Under these credit facilities, the institutions provide revolving lines of credit to us and our major operating subsidiaries and issue letters of credit to
our clients in the ordinary course of business.
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The agreements relating to our debt, credit facilities and ISDA agreements contain various covenants that may limit our ability, among other things, to borrow
money, make particular types of investments or other restricted payments, sell assets, merge or consolidate. Some of these agreements also require us to maintain
specified ratings and financial ratios, including a minimum net worth covenant. If we fail to comply with these covenants or meet required financial ratios, the lenders or
counterparties under these agreements could declare a default and demand immediate repayment of all amounts owed to them.
If we are in default under the terms of these agreements, then we would also be restricted in our ability to declare or pay any dividends, redeem, purchase or acquire
any shares or make a liquidation payment.
If any one of the financial institutions that we use in our operations, including those that participate in our credit facilities, fails or is otherwise unable to meet their
commitments, we could incur substantial losses and reduced liquidity.
We maintain cash balances significantly in excess of the U.S. Federal Deposit Insurance Corporation insurance limits at various depository institutions. We also
have funding commitments from a number of banks and financial institutions that participate in our credit facilities. See Liquidity and Capital Resources—Shareholders’
Equity and Capital Resources Management—Credit Agreements in Item 5 of this report. Access to funds under these existing credit facilities is dependent on the ability of
the banks that are parties to the facilities to meet their funding requirements. Those banks may not be able to meet their funding requirements if they experience shortages
of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time, and we might be forced to replace credit sources in a
difficult market. If we cannot obtain adequate financing or sources of credit on favorable terms, or at all, our business, operating results and financial condition could be
adversely impacted.
Operational risks, including human or systems failures, are inherent in our business.
Operational risks and losses can result from many sources including fraud, errors by employees, failure to document transactions properly or to obtain proper
internal authorization, failure to comply with regulatory requirements or information technology failures.
We believe our modeling, underwriting and information technology and application systems are critical to our business and reputation. Moreover, our technology
and applications have been an important part of our underwriting process and our ability to compete successfully. Such technology is and will continue to be a very
important part of our underwriting process. We have also licensed certain systems and data from third parties. We cannot be certain that we will have access to these, or
comparable service providers, or that our technology or applications will continue to operate as intended. In addition, we cannot be certain that we would be able to
replace these service providers or consultants without slowing our underwriting response time. A major defect or failure in our internal controls or information technology
and application systems could result in management distraction, harm to our reputation, a loss or delay of revenues or increased expense.
Cybersecurity events could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of
operations.
We are dependent upon the effective functioning and availability of our information technology and application systems platforms. These platforms include, but are
not limited to, our proprietary software programs such as catastrophe models as well as those licensed from third-party vendors including analytic and modeling systems.
We rely on the security of such platforms for the secure processing, storage and transmission of confidential information. Examples of significant cybersecurity events are
unauthorized access, computer viruses, deceptive communications (phishing), malware or other malicious code or cyber attack, catastrophic events, system failures and
disruptions and other events that could have security consequences (each, a Cybersecurity Event). A Cybersecurity Event could materially impact our ability to adequately
price products and services, establish reserves, provide efficient and secure services to our clients, brokers, vendors and regulators, value our investments and to timely
and accurately report our financial results. Although we have implemented controls and have taken protective measures to reduce the risk of Cybersecurity Events, we
cannot reasonably anticipate or prevent rapidly evolving types of cyber attacks and such measures may be insufficient to prevent a Cybersecurity Event. Cybersecurity
Events could expose us to a risk of loss or misuse of our information, litigation, reputational damage, violations of applicable privacy and other laws, fines, penalties or
losses that are either not insured against or not fully covered by insurance maintained. We may be required to expend significant additional resources to modify our
protective measures or to investigate and remediate vulnerabilities.
The loss of key management personnel could adversely affect us.
Our success has depended, and will continue to depend, partly upon our ability to attract and retain executive officers. If any of these executives ceased to continue
in his or her present role, we could be adversely affected.
We believe there are only a limited number of available qualified executives in the business lines in which we compete. Our ability to execute our business strategy
is dependent on our ability to attract and retain a staff of qualified executive officers, underwriters and other key personnel. The skills, experience and knowledge of the
reinsurance industry of our management team
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constitute important competitive strengths. If some or all of these managers leave their positions, and even if we were able to find persons with suitable skills to replace
them, our operations could be adversely affected.
We may be adversely impacted by inflation.
Deficit spending by governments in the Company’s major markets and monetary stimulus provided by central banks exposes the Company to a heightened risk of
inflation. We monitor the risk that the principal markets in which we operate could experience increased inflationary conditions, which would, among other things, cause
policyholder loss costs to increase, and impact the performance of our investment portfolio. Inflation related to medical costs, construction costs and tort issues in
particular impact the property and casualty industry, and broader market inflation has the potential risk of increasing overall loss costs. The impact of inflation on loss
costs could be more pronounced for those lines of business that are considered to be long-tail in nature, as they require a relatively long period of time to finalize and settle
claims. Changes in the level of inflation also result in an increased level of uncertainty in our estimation of loss reserves, particularly for long-tail lines of business. The
onset, duration and severity of an inflationary period cannot be estimated with precision.
Our profitability is affected by the cyclical nature of the reinsurance industry.
Risks Related to Our Industry
Historically, the reinsurance industry has experienced significant fluctuations in operating results due to competition, levels of available capacity, trends in cash
flows and losses, general economic conditions and other factors. Demand for reinsurance is influenced significantly by underwriting results of primary insurers, including
catastrophe losses, and prevailing general economic conditions. The supply of reinsurance is related directly to prevailing prices and levels of capacity that, in turn, may
fluctuate in response to changes in rates of return on investments being realized in the reinsurance industry. If any of these factors were to result in a decline in the demand
for reinsurance or an overall increase in reinsurance capacity, our profitability could be impacted. In recent years, we have experienced a generally softening market cycle,
with increased competition, surplus underwriting capacity, deteriorating rates and less favorable terms and conditions all having an impact on our ability to write business.
Currently, the Company is facing a challenging and limited growth environment, which is driven by price decreases in most markets and lines of business, reflecting
increased competition and excess capacity in the industry, cedants choosing to utilize fewer reinsurers by consolidating their reinsurance panels, relatively low loss
experience and a prolonged period of low interest rates, which has impacted our investment portfolio.
We anticipate that competition and pricing pressure may adversely affect our profitability and results of operations in future periods, and the impact may be
material.
We operate in a highly competitive environment.
The reinsurance industry is highly competitive and we compete with a number of worldwide reinsurance companies, including, Münchener Rückversicherungs-
Gesellschaft Aktiengesellschaft (Munich Re), Swiss Re Ltd. (Swiss Re), Hannover Rück SE (Hannover Re), SCOR SE, Transatlantic Reinsurance Company Inc.
(Transatlantic), General Reinsurance Corporation (GenRe), Reinsurance Group of America, Incorporated, Everest Re Group, Ltd. (Everest Re), RenaissanceRe Holdings
Ltd. (RenRe), and Validus Holdings, Ltd. (Validus).
The lack of strong barriers to entry into the reinsurance business means that we may also compete with new companies that may be formed to enter the insurance
and reinsurance markets. In addition, we may experience increased competition as a result of the consolidation in the reinsurance industry. These consolidated entities
may try to use their enhanced market power to negotiate price reductions for our products and services and/or obtain a larger market share through increased line sizes.
Competition in the types of reinsurance that we underwrite is based on many factors, including the perceived and relative financial strength, pricing and other terms
and conditions, services provided, ratings assigned by independent rating agencies, speed of claims payment, geographic scope of business, client and broker
relationships, reputation and experience in the lines of business to be written. If competitive pressures reduce our prices, we would expect to write less business. In
addition, competition for customers would become more intense and we could incur additional expenses relating to customer acquisition and retention, further reducing
our operating margins.
Further, insurance-linked securities, derivatives and other non-traditional risk transfer mechanisms and alternative vehicles are being developed and offered by other
parties, which could impact the demand for traditional insurance or reinsurance. A number of new, proposed or potential industry or legislative developments could
further increase competition in our industry. New competition from these developments could cause the demand for reinsurance to fall or the expense of customer
acquisition and retention to increase, either of which could have a material adverse effect on our growth and profitability. As a result of new and alternative capital inflows
into the industry and cedants retaining more business, there is an excess supply of reinsurance capital which is also driving pricing lower and putting pressure on terms
and conditions.
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All of the above factors may adversely affect our profitability and results of operations in future periods, the impact of which may be material, and may adversely
affect our ability to successfully execute our strategy as a global diversified reinsurance company.
Political, regulatory, governmental and industry initiatives could adversely affect our business.
Legal and Regulatory Risks
Our reinsurance operations are subject to extensive laws and regulations that are administered and enforced by a number of different governmental and non-
governmental self-regulatory authorities and associations in each of their respective jurisdictions and internationally. Our businesses in each jurisdiction are subject to
varying degrees of regulation and supervision. The laws and regulations of the jurisdictions in which our reinsurance subsidiaries are domiciled require, among other
things, maintenance of minimum levels of statutory capital, surplus, and liquidity; various solvency standards; and periodic examinations of subsidiaries’ financial
condition. In some jurisdictions, laws and regulations also restrict payments of dividends and reductions of capital. Applicable statutes, regulations, and policies may also
restrict the ability of these subsidiaries to write insurance and reinsurance policies, to make certain investments, and to distribute funds.
Some of these authorities regularly consider enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of
institutions under their supervision. These authorities may also seek to exercise their supervisory authority in new and more robust ways, and new regulators could
become authorized to oversee parts of our business.
It is not possible to predict all future impacts of these types of changes but they could affect the way we conduct our business and manage our capital, and may
require us to satisfy increased capital requirements, any of which, in turn, could affect our results of operations, financial condition and liquidity. Our material
subsidiaries’ regulatory environments are described in detail in Business Overview—Regulation in Item 4 of this report. Regulations relating to each of our material
subsidiaries may in effect restrict each of those subsidiaries’ ability to write new business, to make certain investments and to distribute funds or assets to us.
Recent government intervention and the possibility of future government intervention have created uncertainty in the insurance and reinsurance markets.
Government regulators are generally concerned with the protection of policyholders to the exclusion of other interested parties, including shareholders of reinsurers. We
believe it is likely there will continue to be increased regulation of, and other forms of government participation in, our industry in the future, which could adversely affect
our business by, among other things:
•
•
•
•
•
Providing reinsurance capacity in markets and to clients that we target or requiring our participation in industry pools and guaranty associations;
Further restricting our operational or capital flexibility;
Expanding the scope of coverage under existing policies;
Regulating the terms of reinsurance policies; or
Disproportionately benefiting the companies domiciled in one country over those domiciled in another.
The insurance industry is also affected by political, judicial and legal developments that may create new and expanded theories of liability, which may result in
unexpected claim frequency and severity and delays or cancellations of reinsurance products and services we provide, which could adversely affect our business.
U.S. regulatory changes may adversely impact our business.
It is not possible to predict whether U.S. legislation, rules or regulatory changes will be adopted or enacted in the future or what impact, if any, such legislation, rules
or changes could have on our business, financial condition or results of operations.
Compliance with these new laws and regulations may result in additional costs which may adversely impact our results of operations, financial condition and
liquidity.
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Legislative and regulatory activity in healthcare may affect our profitability as a provider of accident and health reinsurance benefit products.
We derive revenues from the provision of accident and health premiums in the U.S., by providing reinsurance to institutions that participate in the U.S. healthcare
delivery infrastructure. Changes in U.S. healthcare legislation, specifically the Patient Protection and Affordable Care Act of 2010 (the Healthcare Act), have made
significant changes to the regulation of health insurance and may negatively affect our healthcare liability business including, but not limited to, the healthcare delivery
system and the healthcare cost reimbursement structure in the U.S. In addition, the Company may be subject to regulations, guidance or determinations emanating from
the various regulatory authorities authorized under the Healthcare Act. It is difficult to predict the effect that the Healthcare Act, or any regulatory pronouncement made
thereunder, will have on its results of operations or financial condition. Additionally, future healthcare proposals could include tort reform provisions under which
plaintiffs would be restricted in their ability to bring suit against healthcare providers, which could negatively impact the demand for our healthcare liability products. Any
material changes in how healthcare providers insure their malpractice liability risks could have a material adverse effect on our results of operations.
Legal and enforcement activities relating to the insurance industry could affect our business and our industry.
The insurance industry has experienced substantial volatility as a result of litigation, investigations and regulatory activity by various insurance, governmental and
enforcement authorities concerning certain practices within the insurance industry.
These investigations have resulted in changes in the insurance and reinsurance markets and industry business practices. While at this time, none of these changes
have caused an adverse effect on our business, we are unable to predict the potential effects, if any, that future investigations may have upon our industry. As noted above,
because we frequently assume the credit risk of the counterparties with whom we do business throughout our insurance and reinsurance operations, our results of
operations could be adversely affected if the credit quality of these counterparties is severely impacted by investigations in the reinsurance or insurance industry or by
changes to industry practices.
Emerging claim and coverage issues could adversely affect our business.
Unanticipated developments in the law, as well as changes in social and environmental conditions could potentially result in unexpected claims for coverage under
our reinsurance and other contracts. These developments and changes may adversely affect our business by either extending coverage beyond our underwriting intent or
by increasing the number or size of claims. With respect to our casualty businesses, these legal, social and environmental changes may not become apparent until
sometime after their occurrence. Our exposure to these uncertainties could be exacerbated by an increase in insurance and reinsurance contract disputes, arbitration and
litigation.
The full effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. As a result, the full extent of our liability under our
coverages, and in particular, our casualty reinsurance contracts, may not be known for many years after a contract is issued.
The reinsurance industry is also affected by political, judicial and legal developments that may create new and expanded theories of liability, which may result in
unexpected claim frequency and severity and delays or cancellations of products and services we provide, which could adversely affect our business.
Our international business is subject to applicable laws and regulations relating to sanctions, foreign corrupt practices and money laundering, the violation of which
could adversely affect our operations.
Our activities are subject to applicable economic and trade sanctions, anti-bribery and money laundering laws and regulations in the jurisdictions where we operate
including the U.S. and the European Community (EU), among others. Compliance with these regulations may impose significant costs, limit or restrict our ability to do
business or engage in certain activities, or subject us to the possibility of civil or criminal actions or proceedings. Although we have policies and controls in place
designed to comply with applicable laws and regulations, it is possible that we, or an employee or agent acting on our behalf could fail to comply with applicable laws and
regulations as interpreted by the relevant authorities and, given the complex nature of the risks, it may not always be possible for us to attain compliance with such laws
and regulations. The implementation of the Joint Comprehensive Plan of Action, and the resulting divergence of regulatory requirements between U.S. and EU entities
and persons regarding business with Iran, has increased these risks. Failure to accurately interpret or comply with or obtain appropriate authorizations and/or exemptions
under such laws or regulations could expose us to civil penalties, criminal penalties and other sanctions, including fines or other punitive actions. In addition, such
violations could damage our business and/or our reputation. Such criminal or civil sanctions, penalties, other sanctions, and damage to our business and/or reputation
could have a material adverse effect on our financial condition and results of operations.
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Our international business is subject to applicable laws and regulations relating to data privacy, the changes or the violation of which could affect our operations.
Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection. In addition, the interpretation
and application of data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a
manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices,
which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to
change our business practices in a manner adverse to our business.
As a group operating worldwide, we strive to comply with all applicable data protection laws and regulations. It is however possible that we fail to comply with
applicable laws and regulations. The failure or perceived failure to comply may result in inquiries and other proceedings or actions against us by government entities or
others, or could cause us to lose clients which could potentially have an adverse effect on our business.
Changes in current accounting practices and future pronouncements may materially impact our reported financial results.
Developments in accounting practices may require considerable additional time and cost to comply, particularly if we are required to prepare information relating
to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future
pronouncements may be significant. The impact may affect the results of our operations, including among other things, the calculation of net income, and may affect our
financial position, including among other things, the calculation of unpaid losses and loss expenses, policy benefits for life and annuity contracts and total shareholders’
equity. In particular, recent guidance and ongoing projects put in place by standard setters globally have indicated a move away from the current insurance accounting
models toward more “fair value” based models which could introduce significant volatility in the earnings of reinsurance industry participants for certain significant
accounts not already at fair value, such as reserves and debt.
Risks Related to Our Preferred Shares
We are a holding company, and if our subsidiaries do not make dividend and other payments to us, we may not be able to pay dividends or make payments on our
preferred shares and other obligations.
We are a holding company with no operations or significant assets other than the capital stock of our subsidiaries and other intercompany balances. We have cash
outflows in the form of other expenses and dividends to both common and preferred shareholders. We rely primarily on cash dividends and payments from our
subsidiaries to meet our cash outflows. We expect future dividends and other permitted payments from our subsidiaries to be the principal source of funds to pay expenses
and dividends. The ability of our subsidiaries to pay dividends or to advance or repay funds to us is subject to general economic, financial, competitive, regulatory and
other factors beyond our control. In particular, the payment of dividends by our reinsurance subsidiaries is limited under Bermuda and Irish laws and certain statutes of
various U.S. states in which our U.S. subsidiaries are licensed to transact business and include minimum solvency and liquidity thresholds. As of December 31, 2016,
there were no significant restrictions on the payment of dividends by the Company’s subsidiaries that would limit the Company’s ability to pay preferred shareholders’
dividends and its corporate expenses. However, in 2016, EXOR S.p.A. and the Company agreed, as part of the terms of the preferred share exchange (see Note 11 to the
Consolidated Financial Statements in Item 18 of this report), that the payment of dividends on common shares be restricted to an amount not exceeding 67% of net
income per fiscal quarter until December 31, 2020. In addition, as a condition of the acquisition by Exor N.V., Partner Reinsurance Company of the U.S. and PartnerRe
America Insurance Company committed that it would not take any action to pay any dividend for the two-year period from March 18, 2016 to March 18, 2018 without the
prior approval of the New York State Department of Financial Services and the Delaware Commissioner of Insurance, respectively. At December 31, 2016, there were no
other restrictions on the Company’s ability to pay common and preferred shareholders’ dividends from its retained earnings, except for certain regulatory and statutory
restrictions on dividend payments applicable to our reinsurance subsidiaries (see Note 13 to the Consolidated Financial Statements in Item 18 of this report for a
description of these restrictions). Because we are a holding company, our right, and hence the right of our creditors and shareholders, to participate in any distribution of
assets by any of our subsidiaries, upon our liquidation or reorganization or otherwise, is subject to the prior claims of policyholders and creditors of these subsidiaries.
Our controlling shareholder owns a significant majority of our common shares, and its interest may differ from the interests of our preferred shareholders.
EXOR beneficially owns a significant majority of the outstanding common shares of the Company. As a result, EXOR has power to elect our directors and to
determine the outcome of any action requiring shareholder approval. EXOR’s interests may differ from the interests of the holders of our preferred shares and, given
EXOR’s majority controlling interest in the Company, circumstances may arise under which EXOR will exercise its control in a manner that is not favorable to the
interests of the holders of the preferred shares.
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Preferred shareholders may encounter difficulties in service of process and enforcement of judgments against us in the United States.
We are a Bermuda company and some of our directors and officers are residents of various jurisdictions outside the U.S. All, or a substantial portion, of the assets of
our officers and directors and of our assets are or may be located in jurisdictions outside the U.S. Although we have appointed an agent and irrevocably agreed that the
agent may be served with process in New York with respect to actions against us arising out of violations of the U.S. Federal securities laws in any Federal or state court
in the U.S., it could be difficult for investors to effect service of process within the U.S. on our directors and officers who reside outside the U.S. It could also be difficult
for investors to enforce against us or our directors and officers judgments of a U.S. court predicated upon civil liability provisions of U.S. Federal securities laws.
There is no treaty in force between the U.S. and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As
a result, whether a U.S. judgment would be enforceable in Bermuda against us or our directors and officers depends on whether the U.S. court that entered the judgment is
recognized by the Bermuda court as having jurisdiction over us or our directors and officers, as determined by reference to Bermuda conflict of law rules. A judgment
debt from a U.S. court that is final and for a sum certain based on U.S. Federal securities laws will not be enforceable in Bermuda unless the judgment debtor had
submitted to the jurisdiction of the U.S. court, and the issue of submission and jurisdiction is a matter of Bermuda law and not U.S. law.
In addition to and irrespective of jurisdictional issues, Bermuda courts will not enforce a U.S. Federal securities law that is either penal or contrary to public policy.
An action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign
capacity will not be entered by a Bermuda court. Certain remedies available under the laws of U.S. jurisdictions, including certain remedies under U.S. Federal securities
laws, would not be available under Bermuda law or enforceable in Bermuda court, as they would be contrary to Bermuda public policy. Further, no claim can be brought
in Bermuda against us or our directors and officers in the first instance for violation of U.S. Federal securities laws because these laws have no extra jurisdictional effect
under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability on us or our directors and officers if the facts alleged
in a complaint constitute or give rise to a cause of action under Bermuda law.
Changes in our effective income tax rate could affect our results of operations.
Taxation Risks
Our effective income tax rate could be adversely affected in the future by net income being lower than anticipated in jurisdictions where we have a relatively lower
statutory tax rate and net income being higher than anticipated in jurisdictions where we have a relatively higher statutory tax rate, or by changes in corporate tax rates and
tax regulations in any of the jurisdictions in which we operate. We are subject to regular audit by tax authorities in the various jurisdictions in which we operate. Any
adverse outcome of such an audit could have an adverse effect on our net income, effective income tax rate and financial condition.
In addition, the determination of our provisions for income taxes requires significant judgment, and the ultimate tax determination related to some tax positions
taken is uncertain. Although we believe our provisions are reasonable, the ultimate tax outcome may differ from the amounts recorded in our consolidated financial
statements and may materially affect our net income and effective income tax rate in the period such determination is made.
If our non-U.S. operations become subject to U.S. income taxation, our net income will decrease.
We believe that we and our non-U.S. subsidiaries (other than business sourced by PartnerRe Europe through PartnerRe Miami Inc. (PartnerRe Miami) and PartnerRe
Connecticut Inc. (PartnerRe Connecticut)) have operated, and will continue to operate, our respective businesses in a manner that will not cause us to be viewed as
engaged in a trade or business in the U.S. and, on this basis, we do not expect that either we or our non-U.S. subsidiaries will be required to pay U.S. corporate income
taxes (other than potential withholding taxes on certain types of U.S. source passive income) or branch profits taxes. Because there is considerable uncertainty as to the
activities that constitute being engaged in a trade or business within the U.S., the IRS may contend that either we or our non-U.S. subsidiaries are engaged in a trade or
business in the U.S. In addition, legislation regarding the scope of non-U.S. entities and operations subject to U.S. income tax has been proposed in the past, and may be
proposed again in the future. If either we or our non-U.S. subsidiaries are subject to U.S. income tax, our shareholders’ equity and net income will be reduced by the
amount of such taxes, which might be material.
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The Organisation for Economic Co-operation and Development’s (OECD) initiative to limit harmful tax competition may result in higher taxation and increased
complexity, burden and cost of compliance.
The OECD has published reports and launched a global initiative among member and non-member countries on measures to limit harmful tax competition, known
as the Base Erosion and Profit Shifting (BEPS) project. On June 21, 2016, the EU’s ministers of Finance and Economic Affairs unanimously approved the Anti-Tax
Avoidance Directive to harmonize potential BEPS changes in the EU. These measures are largely directed at counteracting the effects of tax havens and preferential tax
regimes in countries around the world. We expect that countries may change their tax laws in response to this project, and several countries have already changed or
proposed changes to their tax laws. Changes to tax laws and additional reporting requirements could increase the complexity, burden and cost of doing business with our
Bermuda companies and/or subject our Bermuda companies to increased tax and compliance burdens.
U.S. tax reform proposals could decrease the demand for our services, increase taxes payable by our U.S. reinsurance subsidiary, or otherwise adversely affect us.
New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the
future. In June of 2016, House Republicans issued a policy paper (the Blueprint) setting forth certain proposals for significant tax reforms. President Trump also issued a
high-level outline of his tax reform plan during his campaign that is consistent with the Blueprint in many respects. The most significant part of the Blueprint relates to
border tax adjustments. If border tax adjustments were to be applied to the reinsurance industry, a U.S. company purchasing offshore reinsurance may not be allowed to
deduct the expense of the premium in computing its taxable income. As such, the purchase of offshore reinsurance may become less efficient for any U.S. company. If
such proposed legislation were to become law, it could have an adverse effect on our business, financial condition and results of operations.
Further, currently, our U.S. reinsurance subsidiary retrocedes or may retrocede a portion of its U.S. business to our non-U.S. reinsurance subsidiaries and is
generally entitled to deductions for premiums paid for such retrocessions. Proposed legislation has been introduced that if enacted would impose a limitation on such
deductions, which could result in increased U.S. tax on this business and decreased net income. It is not possible to predict whether this or similar legislation may be
enacted in the future. In addition, it is possible that other legislative proposals could be introduced in the future that could have an adverse impact on us or our
shareholders.
U.S. tax law changes could reduce demand for insurance products, which could adversely affect our business, financial condition and results of operations.
Under the U.S. Internal Revenue Code, income tax payable by policyholders on investment earnings is deferred during the accumulation period of some life
insurance and annuity products. To the extent that the U.S. Internal Revenue Code is revised to reduce benefits associated with the tax-deferred status of life insurance and
annuity products (for example, by reducing individual income tax rates) or to increase the tax-deferred status of competing products, all life insurance companies would
be adversely affected with respect to their ability to sell such products, and, depending on grandfathering provisions, by the surrenders or existing annuity contracts and
life insurance policies. In addition, life insurance products are often used to fund estate tax obligations. The estate tax provisions of the U.S. Internal Revenue Code have
been revised frequently in the past. If Congress adopts legislation in the future to reduce or eliminate the estate tax, our U.S. life insurance company customers could face
reduced demand for some of their life insurance products, which in turn could negatively affect our reinsurance business. We cannot predict whether any tax legislation
impacting corporate taxes or insurance products will be enacted, what the specific terms of any such legislation will be or whether any such legislation would have a
material adverse effect on our business, financial condition and results of operations.
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Risk Management
In the reinsurance industry, the core of the business model is the assumption and management of risk. A key challenge is to create total shareholder value through
the intelligent and optimal assumption and management of reinsurance and investment risks while limiting and mitigating those risks that can destroy tangible as well as
intangible value, those risks for which the organization is not sufficiently compensated, and those risks that could threaten the ability of the Company to achieve its
objectives. While many companies start with a return goal, the Company starts with a capital-based risk appetite and then looks for risks that meet its return targets within
that framework. Management believes that this construct allows the Company to balance the cedants’ need for certainty of claims payment with the common
shareholder’s and preferred shareholders’ need for an adequate total return.
All business decisions entail a risk/return trade-off, and these decisions are applicable to the Company’s risks. In the context of assumed business risks, this requires
an accurate evaluation of risks to be assumed, and a determination of the appropriate economic returns required as fair compensation for such risks. In the context of other
than voluntarily assumed business risks, the decision relates to comparing the probability and potential severity of a risk event against the costs of risk mitigation
strategies. In many cases, the potential impact of a risk event is so severe as to warrant significant, and potentially expensive, risk mitigation strategies. In other cases, the
probability and potential severity of a risk does not warrant extensive risk mitigation.
Successful risk management is the foundation of the Company’s value proposition, with diversification of risks at the core of its risk management strategy. The
Company’s ability to succeed in risk assumption and business management is dependent on its ability to accurately analyze and quantify risk, to understand volatility and
how risks aggregate or correlate, and to establish the appropriate capital requirements and limits for the risks assumed. All risks, whether they are reinsurance-related risks
or capital market risks, are managed by the Company within an integrated framework of policies and processes to ensure the intelligent and consistent evaluation and
valuation of risk, and to ultimately provide an appropriate return to shareholders.
The Company’s results are primarily determined by how well the Company understands, prices and manages assumed risk. Management also believes that every
organization faces numerous risks that could threaten the successful achievement of a company’s goals and objectives. These include all factors which can be viewed as
either strategic, financial or operational risks that are common to any industry, such as choice of strategy and markets, economic and business cycles, competition,
changes in regulation, data quality and security, fraud, business interruption and management continuity. See Risk Factors above.
The Company has a clearly defined governance structure for risk management. Executive Management and the Board are responsible for setting the overall vision
and goals of the Company, which include the Company’s risk appetite and return expectations. The Company’s risk framework, including key risk policies, is
recommended by Executive Management and approved by the Board. Each of the Company’s risk policies relates to a specific risk and describes the Company’s approach
to risk management, defines roles and responsibilities relating to the assumption, mitigation, and control processes for that risk, and an escalation process for exceptions.
Key policies are established by the Chief Executive Officer (CEO) and operating policies and risk controls at the next level down are established by Business Unit and
Support Unit management as appropriate. Risk management policies and processes are coordinated by Group Risk Management and compliance is verified by Internal
Audit on a periodic basis. The results of audits are monitored by the Audit Committee of the Board.
The Company utilizes a multi-level risk management structure, whereby critical exposure limits, return requirement guidelines, capital at risk and key policies are
established by the Executive Management and Board, but day-to-day execution of risk assumption activities and related risk mitigation strategies are delegated to the
Business Units and Support Units. Reporting on risk management activities is integrated within the Company’s annual planning process, quarterly operations reports,
periodic reports on exposures and large losses, and presentations to the Executive Management and Board. Individual Business Units and Support Units employ, and are
responsible for reporting on, operating risk management procedures and controls, while Internal Audit periodically evaluates the effectiveness of such procedures and
controls.
Strategic Risks
Strategic risks are discussed and agreed to between the CEO and the Board, and managed by the CEO, and include the direction and governance of the Company, as
well as its response to key external factors faced by the reinsurance industry, such as changes in cedants’ risk retention behavior, regulation, competitive structure, and
macroeconomic, legal and social trends. Management considers that strong governance procedures, including a robust system of processes and internal controls are
appropriate to manage risks related to its reputation and risks related to new initiatives, including acquisitions, new products or markets. The Company seeks to preserve
its reputation through high professional and ethical standards and manages the impact of identified risks through the adoption and implementation of a sound and
comprehensive assumed risk framework.
Assumed Risks
Central to the Company’s assumed risk framework is its risk appetite. The Company’s risk appetite is a statement of how much and how often the Company will
tolerate economic losses during an annual period. The Company’s risk appetite is expressed
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as the maximum economic loss that the Board is willing to incur based on various modeled probability return periods. The Company’s risk appetite is approved by the
Board on an annual basis. Definitions for the maximum economic loss and available economic capital are as follows:
Economic Loss. The Company defines an economic loss as a decrease in the Company’s economic value, which is defined as common shareholder’s equity
attributable to PartnerRe Ltd. plus the “time value of money” discount of the Non-life reserves that is not recognized in the consolidated financial statements in
accordance with U.S. GAAP, net of tax, plus the embedded value of the Life portfolio that is not recognized in the consolidated financial statements in accordance with
U.S. GAAP, net of tax, less goodwill and intangible assets, net of tax.
Available Economic Capital. The Company defines economic capital as the economic value, as defined above, plus preferred shareholders’ equity and the carrying
value of debt recognized in the consolidated financial statements in accordance with U.S. GAAP.
The Maximum Economic Loss. The maximum economic loss is a loss expressed as a percentage of economic capital under various modeled probability return
periods.
The Company manages exposure levels from multiple risk sources to provide reasonable assurance that modeled operating or economic losses are contained within
the risk appetite approved by the Board. The Company utilizes an internal model to evaluate capital at risk levels and compliance with the Company’s risk appetite. The
results of the Company’s assessment of capital at risk levels in relation to the risk appetite are reported to the Board on a periodic basis.
To mitigate the chance of operating losses and economic losses exceeding the risk appetite, the Company relies upon diversification of risk sources and risk limits to
manage exposures. Diversification enables losses from one risk source to be offset by profits from other risk sources so that the chance of overall losses exceeding the
Company’s risk appetite is reduced. However, if multiple losses from multiple risk sources occur within the same year, there is the potential that operating and economic
losses can exceed the risk appetite. In addition, there is the chance that the Company’s internal assessment of capital at risk for a single source of risk or for multiple
sources of risk proves insufficient resulting in actual losses exceeding the Company’s risk appetite. To reduce the chance of either of these unfavorable outcomes, the
Company uses risk limits to minimize the chance that losses from a single risk source or from multiple risk sources will cause operating losses and economic losses to
exceed the Company’s risk appetite, and embeds correlations within its internal model to capture the possibility of multiple losses from multiple risk sources.
The Company establishes key risk limits net of any reinsurance/retrocession for any risk source deemed by management to have the potential to cause operating
losses or economic losses greater than the Company’s risk appetite. The Company may also establish risk limits for any risk source deemed to have the possibility of
causing reputational damage. The Board approves the key risk limits. Executive, Business and Support Unit Management may set additional specific and aggregate risk
limits within the key risk limits approved by the Board. The actual level of risk is dependent on current market conditions and the need for balance in the Company’s
portfolio of risks. On a periodic basis, management reviews and reports to the Board the actual limits deployed against the approved limits.
Individual Business and Support Units manage assumed risks, subject to the appetite, principles and limits approved by the Board and policies established by
Executive and Business Unit Management. At an operational level, Business and Support Units manage assumed risk through risk mitigation strategies including strong
processes, technical risk assessment and collaboration among different groups of professionals who each contribute a particular area of expertise.
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Management established key risk limits that are approved by the Board for ten risk sources. The approved limits and the actual limits deployed at December 31,
2016 and 2015 were as follows (in billions of U.S. dollars, except interest rate risk data):
Natural Catastrophe Risk
Long-Tail Reinsurance Risk
Market Risk
Equity and equity-like sublimit
Interest Rate Risk (duration)—excess fixed income investment portfolio(1)
Default and Credit Spread Risk
Trade Credit Risk
Longevity Risk
Pandemic Risk
Agriculture Risk
Mortgage Reinsurance Risk
Any one country sub-limit
December 31, 2016
December 31, 2015
Limit
approved(2)
Actual
deployed(2)
Limit
approved(2)
Actual
deployed(2)
$
$
$
$
$
$
$
$
$
$
$
2.3
1.2
3.4
2.8
6.0 years
9.5
0.9
2.0
1.3
0.3
1.0
0.8
$
$
$
$
$
$
$
$
$
$
$
1.4
0.8
1.4
1.1
4.4 years
5.6
0.6
1.5
0.7
0.1
0.8
0.7
$
$
$
$
$
$
$
$
$
$
$
2.3
1.2
3.4
2.8
6.0 years
9.5
0.9
2.0
1.3
0.3
1.0
0.8
$
$
$
$
$
$
$
$
$
$
$
1.3
0.8
2.0
1.4
3.0 years
5.6
0.6
1.5
0.6
0.1
0.6
0.5
(1) The excess fixed income investment portfolio relates to fixed income securities included in the Company’s capital funds, which are in excess of those included in
the Company’s liability funds and which support the net reinsurance liabilities. See capital and liability funds defined and described further in Liquidity and
Capital Resources—Investments in Item 5 of this report.
(2) The limits approved and the actual limits deployed in the table above are shown net of retrocession.
Natural Catastrophe Risk
The Company defines this risk as the risk that the aggregate losses from natural perils materially exceed the net premiums that are received to cover such risks,
which may result in operating and economic losses to the Company. The Company considers both catastrophe losses due to a single large event and catastrophe losses that
would occur from multiple (but potentially smaller) events in any year.
Natural catastrophe risk is managed through the allocation of catastrophe exposure capacity in each exposure zone to different Business Units, regular catastrophe
modeling and a combination of quantitative and qualitative analysis. The Company considers a peril zone to be an area within a geographic region, continent or country in
which losses from insurance exposures are likely to be highly correlated to a single catastrophic event. Not all peril zones have the same limit and peril zones are broadly
defined so that it would be unlikely for any single event to substantially erode the aggregate exposure limits from more than one peril zone. Even extremely high
severity/low likelihood events will only partially exhaust the limits in any peril zone, as they are likely to only affect a part of the area covered by a wide peril zone.
The Company imposes a limit to natural catastrophe risk from any single loss through exposure limits, net of retrocession, in each peril zone and to each peril and
also utilizes probable maximum loss (PML) estimates to manage its exposures to specific peril zones. Limits from catastrophe exposed business include limits on both
reinsurance treaties and insurance-linked securities. Specifically, the Company uses the lesser of any contractually defined limits or the PML per contract as the measure
of capacity per treaty including proportional exposures for the key peak exposures. This capacity measure is aggregated by contract within a peril zone to establish the
total exposures. Actual exposure limits deployed and estimated PML in a specific peril zone will vary from period to period depending on management’s assessment of
current market conditions, the results of the Company’s exposure modeling, and other analysis. See Natural Catastrophe PML below for a discussion of the Company’s
estimated exposures for selected peak industry natural catastrophe perils.
Long-Tail Reinsurance Risk
The Company defines this risk as the risk that the estimates of ultimate losses for casualty and other long-tail lines will prove to be too low, leading to the need for
substantial reserve strengthening, which may result in operating and economic losses to the Company. One of the greatest risks in long-tail lines of business, and
particularly in U.S. casualty, is that loss trends are higher than the assumptions underlying the Company’s ultimate loss estimates, resulting in ultimate losses that exceed
recorded loss reserves. When loss trends prove to be higher than those underlying the reserving assumptions, the impact can be large because of an
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accumulation effect. For long-tail lines, the Company carries reserves to cover claims arising from several years of underwriting activity and these reserves are likely to be
similarly affected by unfavorable loss trends. The effect is likely to be more pronounced for recent underwriting years because, with the passage of time, actual loss
emergence and data provide greater confidence around the adequacy of ultimate liability estimates for older underwriting years. Management believes that the volume of
long-tail business most exposed to these reserving uncertainties is limited.
The Company manages and mitigates the reserving risk for long-tail lines in a variety of ways. Underwriters and pricing actuaries follow a disciplined underwriting
process that utilizes all available data and information, including industry trends, and the Company establishes prudent reserving policies for determining recorded
reserves. These policies are systematic and management endeavors to apply them consistently over time. The Company’s limit for long-tail reinsurance risk represents the
written premiums for casualty and other long-tail lines for the four most recent calendar quarters. See Liquidity and Capital Resources—Critical Accounting Policies and
Estimates—Non-life and Life and Health Reserves in Item 5 of this report.
Market Risk
The Company defines this risk as the risk of a substantial decline in the value of its risk assets. Risk assets comprise the Company’s equity and equity-like securities
which include all invested assets that are not investment grade standard fixed income securities and certain fixed income asset classes that are not liquid (but excludes
certain insurance-linked securities as that risk is aggregated with liability risks). The Company limits the market value of risk assets as well as sub-limits the market value
of equity and equity-like securities that it will hold in its investment portfolio. During 2016, the Company substantially reduced its exposures to equity and equity-like risk
assets. The Company moved some of these assets into other investments including real estate. Refer to Note 3 to the Consolidated Financial Statements in Item 18 of this
report for further details of equities and changes in composition of investments, including equities, over the prior year.
The Company sets strict limits on investments in any one name and any one industry, which creates a diversified portfolio and allows management to focus on the
systemic effects of equity risks. Systemic risk is managed by asset allocation, subject to strict caps on Risk Assets as a percentage of shareholders’ equity. The Company’s
fully integrated information system provides real-time investment data, allowing for continuous monitoring and decision support. Each portfolio is managed against a
predetermined benchmark to enable alignment with appropriate risk parameters and achievement of desired returns. See Quantitative and Qualitative Disclosures about
Market Risk—Equity Price Risk in Item 11 of this report.
Interest Rate Risk
The Company defines this risk as the risk of a substantial mismatch of asset and liability durations, which may result in economic losses to the Company.
Economically, the Company is hedged against changes in asset and liability values resulting from small parallel changes in the risk-free yield curve to the degree asset and
liability durations are matched. Nonparallel shifts in the yield curve or extremely large changes in yields can introduce interest rate risk and investment losses to the
degree asset maturity and coupon payments are not exactly matched to liability payments. Investment losses associated with interest rate risk of a magnitude that have the
potential to exceed the Company’s risk appetite are associated with extremely large increases in interest rates over an annual period. The Company limits and monitors the
interest rate exposure on its fixed income assets held in excess of those that are matched against liabilities. The Company both matches assets and liabilities to hedge
against changes in interest rates and limits the total amount of interest rate exposure. See Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk
in Item 11 of this report.
Default and Credit Spread Risk
The Company defines this risk as the risk of a substantial increase in defaults in the Company’s standard fixed income credit securities (which includes investment
grade corporate bonds and asset-backed securities) leading to realized investment losses or a significant widening of credit spreads resulting in realized or unrealized
investment losses, either of which may result in economic losses to the Company. Investment losses of the magnitude that have the potential to exceed the Company’s risk
appetite are associated with the systemic impacts of severe economic and financial stress. As a result, the Company limits the exposure to the standard fixed income credit
securities so that investment losses will be mitigated in an extreme economic or financial crisis. See Quantitative and Qualitative Disclosures about Market Risk—Credit
Spread Risk in Item 11 of this report.
Trade Credit Risk
The Company defines this risk as the risk that aggregated trade credit losses materially exceed the net premiums that are received to cover such risks, which may
result in operating and economic losses to the Company. Trade credit losses of the magnitude that have the potential to exceed the Company’s risk appetite are associated
with the systemic impacts of severe economic and financial stress. In these events, with respect to underwriting, losses may arise from defaults of single large named
insureds and from a high frequency of defaults of smaller insureds. In addition, trade credit risk is highly correlated with default and
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credit spread widening risk of the standard investment grade fixed income portfolio during times of economic stress or financial crises.
In order to determine a trade credit limit metric for the purposes of risk accumulation, the Company examines extreme scenarios and measures its exposure to loss
under those scenarios. Examples of these scenarios include historical losses from the largest trade credit defaults, prior periods of financial crisis and economic stress (e.g.
1990-1991 recession and 2008-2009 financial crisis) and potential impacts of financial crisis and economic stress scenarios. The Company does not rely upon modeled
losses to determine the limit metric, but benchmarks the scenario results against existing tests, scenarios and models. For risk accumulation purposes, the Company
examines the extreme scenario that would result in 100% of loss ratio adverse deviation on the trade credit portfolio written on a proportional basis (which far exceeds any
adverse deviation of the loss ratio experienced in past periods of economic stress or financial crises) increased by the net PMLs of the two largest named insureds in the
Company’s trade credit portfolio.
Longevity Risk
The Company considers longevity exposure to have a material accumulation potential and has established a limit to manage the risk of loss associated with this
exposure, which may result in operating and economic losses to the Company. The Company defines longevity risk as the potential for increased actual and future
expected annuity payments resulting from annuitants living longer than expected, or the expectation that annuitants will live longer in the future. Assuming longevity risk,
through reinsurance or capital markets transactions, is part of the Company’s strategy of building a diversified portfolio of risks. While longevity risk is highly
diversifying in relation to other risks in the Company’s portfolio (e.g. mortality products), longevity risk itself is a systemic risk with little opportunity to diversify within
the risk class. Longevity risk accumulates across cedants, geographies, and over time because mortality trends can impact diverse populations in the same manner.
Longevity risk can manifest slowly over time as experience proves annuitants are living longer than original expectations, or abruptly as in the case of a “miracle drug”
that increases the life expectancy of all annuitants simultaneously.
In order to determine a longevity limit metric for the purposes of risk accumulation, the Company examines extreme scenarios and measures its exposure to loss
under those scenarios. Examples of these scenarios include immediate elimination of major causes of death and an extreme improvement in mortality continuing
indefinitely. For risk accumulation purposes, the Company selects the most financially adverse scenario and adds an additional margin for potential deviation. To measure
utilization of the longevity limit (accumulation of longevity exposure) the Company accumulates the net present value of adverse losses resulting from the application of
the selected most extreme scenario, adds an additional margin to every in-force longevity treaty for potential delays in recognizing that an observed mortality deviation is
not short term in nature and, where appropriate, includes the notional value of longevity insurance-linked securities.
Pandemic Risk
The Company considers mortality exposure to have a material accumulation potential to common risk drivers, in particular to pandemic events, which may result in
operating and economic losses to the Company. The Company defines pandemic risk as the increase in mortality over an annual period associated with a rapidly spreading
virus (either within a highly populated geographic area or on a global basis) with a high mortality rate. Assuming mortality risk, through reinsurance or capital markets
transactions, is part of the Company’s strategy of building a diversified portfolio of risks. While mortality risk is highly diversifying in relation to other risks in the
Company’s portfolio (e.g. longevity products), mortality risk itself is a systemic risk when the risk driver is a pandemic with little opportunity to diversify within the risk
class. Mortality risk from pandemics can accumulate across cedants and geographies.
In order to determine a pandemic limit metric for the purposes of risk accumulation, the Company examines extreme scenarios and measures its exposure to loss
under those scenarios. Examples of these scenarios include increased mortality associated with past pandemic events (e.g. 1918 Spanish flu) and potential mortality
outcomes from transmission scenarios across differing age groups, and across developed and developing countries. For risk accumulation purposes, the Company selects
an extreme mortality scenario applied to the insured portfolio in developing and developed countries that would have twice the assumed fatality rate of the 1918 Spanish
flu recurring today, combined with an adverse mortality age pattern, and with the same transmissibility characteristics.
Agriculture Risk
The Company defines this risk as the risk that losses from multi-peril crop insurance materially exceed the net premiums that are received to cover such risks, which
may result in operating and economic losses to the Company. Multi-peril crop underwriting losses of the magnitude that have the potential to exceed the Company’s risk
appetite are associated with the systemic impacts of severe weather events, particularly drought or flooding, over a large geographic area. Localized events such as
convective
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thunderstorms or hail, while potentially devastating, are unlikely to have the large geographic footprint necessary to create material losses exceeding the net premiums
collected.
Multi-peril crop risk is managed through geographic diversification both within individual countries and across countries. This is accomplished through the
allocation and tracking of capacity across exposure zones (defined as individual countries) and is accompanied by regular extreme event modeling, and a combination of
quantitative and qualitative analysis.
The Company utilizes PML estimates particularly for the U.S., net of retrocession, to manage its exposures. The limit approved measure is aggregated by contract
within an exposure zone to establish the total exposures. Actual exposures deployed and estimated PMLs in a specific zone will vary from period to period depending on
management’s assessment of current market conditions, the results from exposure modeling, and other analysis.
Mortgage Reinsurance Risk
The Company defines this risk as the risk that losses from mortgage reinsurance materially exceed the net premiums that are received to cover such risks, which
may result in operating and economic losses to the Company. Mortgage insurance underwriting losses that have the potential to exceed the Company’s risk appetite are
associated with the systemic impacts of severe mortgage defaults, driven by large scale economic downturns and high unemployment. Localized or regional economic
downturns are unlikely to have a large enough geographic footprint necessary to create material losses exceeding the net premiums collected.
At December 31, 2016, the majority of the Company’s exposure to mortgage risk related to risks in the U.S. The Company’s U.S. mortgage portfolio consists of
prime mortgages, with most of the underlying risks related to policies written post-financial crisis and subject to enhanced post-financial crisis underwriting procedures
that differentiate between risks. Mortgage insurance is managed through geographic diversification both within countries and across countries. This is accomplished
through the allocation and tracking of capacity across exposure zones (defined as individual countries) and is accompanied by regular extreme event modeling, and a
combination of quantitative and qualitative analysis.
The Company utilizes total limits deployed, net of retrocession, to manage its exposures. The limits per individual contract are aggregated within an exposure zone
to establish the total exposures. Actual exposures deployed and estimated PMLs in a specific zone will vary from period to period depending on management’s assessment
of current market conditions, the results from exposure modeling, and other analysis.
Operational and Financial Risks
Operational and financial risks are managed by designated functions within the organization. These risks include, but are not limited to, failures or weaknesses in
financial reporting and controls, regulatory non-compliance, poor cash management, fraud, breach of information technology security, disaster recovery planning and
reliance on third-party vendors. The Company seeks to minimize these risks through robust processes and monitoring throughout the organization.
Other Underwriting Risk and Exposure Controls
The Company’s underwriting is conducted at the Business Unit level through specialized underwriting teams with the support of technical staff in disciplines such
as actuarial, claims, legal, risk management and finance.
The Company’s underwriters generally speak the local language and/or are native to their country or area of specialization. They develop close working
relationships with their ceding company counterparts and brokers through regular visits, gathering detailed information about the cedant’s business and local market
conditions and practices. As part of the underwriting process, the underwriters also focus on the reputation and quality of the proposed cedant, the likelihood of
establishing a long-term relationship with the cedant, the geographic area in which the cedant does business and the cedant’s market share, historical loss data for the
cedant and, where available, historical loss data for the industry as a whole in the relevant regions, in order to compare the cedant’s historical loss experience to industry
averages, and to gauge the perceived insurance and reinsurance expertise and financial strength of the cedant. The Company trains its underwriters extensively and strives
to maintain continuity of underwriters within specific geographic markets and areas of specialty.
Given the Company underwrites volatile lines of business, such as catastrophe reinsurance, the operating results and financial condition of the Company can be
adversely affected by catastrophes and other large losses that may give rise to claims under reinsurance coverages provided by the Company. The Company manages its
exposure to catastrophic and other large losses by (i) limiting its aggregate exposure on catastrophe reinsurance in any particular geographic zone, (ii) selective
underwriting practices, (iii) diversification of risks by geographic area and by lines and classes of business, and (iv) purchasing retrocessional reinsurance.
The Company generally underwrites risks with specified limits per treaty program. Like other reinsurance companies, the Company is exposed to multiple insured
losses arising out of a single occurrence, whether a natural event such as hurricane,
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windstorm, tornado, flood or earthquake, or man-made events. Any such catastrophic event could generate insured losses in one or many of the Company’s reinsurance
treaties and facultative contracts and in one or more lines of business. The Company considers such event scenarios as part of its evaluation and monitoring of its
aggregate exposures to catastrophic events.
Retrocessional Reinsurance
The Company uses retrocessional reinsurance agreements to reduce its exposure on certain reinsurance risks assumed and to mitigate the effect of any single major
event or the frequency of medium-sized events. These agreements provide for the recovery of a portion of losses and loss expenses from retrocessionaires. The majority of
the Company’s retrocessional reinsurance agreements cover property and specialty lines (e.g. agriculture, aviation, marine, mortgage and certain risks included in the
credit/surety line) exposures, predominantly those that are catastrophe exposed. The Company also utilizes retrocessions in the Life and Health segment to manage the
amount of per-event and per-life risks to which it is exposed. Retrocessionaires must be pre-approved based on their financial condition and business practices, with
stability, solvency and credit ratings being important criteria. Strict limits per retrocessionaire are also put into place and monitored to mitigate counterparty credit risk.
The Company remains liable to its cedants to the extent that the retrocessionaires do not meet their obligations under retrocessional agreements, and therefore
retrocessions are subject to credit risk in all cases and to aggregate loss limits in certain cases. The Company holds collateral, including escrow funds, trusts, securities and
letters of credit under certain retrocessional agreements. Provisions are made for amounts considered potentially uncollectible and reinsurance losses recoverable from
retrocessionaires are reported after allowances for uncollectible amounts.
In addition to the retrocessional agreements, PartnerRe Europe has a Reserve Agreement in place with Colisée Re (see Liquidity and Capital Resources— Reserves
in Item 5 of this report).
Claims
In addition to managing and settling reported claims and consulting with ceding companies on claims matters, the Company conducts periodic audits of specific
claims and the overall claims procedures at the offices of ceding companies. The Company attempts to evaluate the ceding company’s claim adjusting techniques and
reserve adequacy and whether it follows proper claims processing procedures. The Company also provides recommendations regarding procedures and processes to the
ceding company.
Natural Catastrophe PML
The following discussion of the Company’s natural catastrophe PML information contains forward-looking statements based upon assumptions and expectations
concerning the potential effect of future events that are subject to uncertainties. See Risk Factors in Item 3 of this report for a list of the Company’s risk factors. Any of
these risk factors could result in actual losses that are materially different from the Company’s PML estimates below.
Natural catastrophe risk is a source of significant aggregate exposure for the Company and is managed by setting risk appetite and limits, as discussed above.
Natural catastrophe perils can impact geographic regions of varying size and can have economic repercussions beyond the geographic region directly impacted.
The Company considers a peril zone to be an area within a geographic region, continent or country in which losses from insurance exposures are likely to be highly
correlated to a single catastrophic event. The Company defines peril zones to capture the vast majority of exposures likely to be incorporated by typical modeled events.
There is, however, no industry standard and the Company’s definitions of peril zones may differ from those of other parties.
The Company has exposures in other peril zones that can potentially generate losses greater than the PML estimates below. The Company’s PMLs represent an
estimate of loss for a single event for a given return period. The table below discloses the Company’s 1-in-250 and 1-in-500 year return period estimated loss for a single
occurrence of a natural catastrophe event in a one-year period. In other words, the 1-in-250 and 1-in-500 year return period PMLs mean that there is a 0.4% and 0.2%
chance, respectively, in any given year that an occurrence of a natural catastrophe in a specific peril zone will lead to losses exceeding the stated estimate.
The PML estimates below include all significant exposure from our Non-life and Life and Health business operations. This includes coverage for property, marine,
energy, engineering, workers’ compensation, mortality, and exposure to catastrophe from insurance-linked securities. The PML estimates do not include casualty
coverage that could be exposed as a result of a catastrophic event. In addition, they do not include estimates for contingent losses to insureds that are not directly impacted
by the event (e.g. loss of earnings due to disruption in supply lines).
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The Company’s single occurrence estimated net PML exposures (pre-tax and net of retrocession and reinstatement premiums) for certain selected peak industry
natural catastrophe perils as at October 1, 2016 were as follows (in millions of U.S. dollars):
Zone
U.S. Southeast
U.S. Northeast
U.S. Gulf Coast
Caribbean
Europe
Japan
California
British Columbia
Japan
Australia
New Zealand
Peril
Hurricane
Hurricane
Hurricane
Hurricane
Windstorm
Typhoon
Earthquake
Earthquake
Earthquake
Earthquake
Earthquake
Single Occurrence
Estimated Net PML Exposure
1-in-250 year PML
1-in-500 year PML
(Earthquake Perils Only)
$
$
$
$
$
$
$
$
$
$
$
496
560
502
165
387
190
462
161
315
187
147
$
$
$
$
$
$
$
$
$
$
$
—
—
—
—
—
—
595
317
349
258
211
ITEM 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
PartnerRe Ltd., an exempt company incorporated under the laws of Bermuda with limited liability, is the holding company for our international reinsurance group
).
and was incorporated in Bermuda in August 1993. The principal office is located at 90 Pitt’s Bay Road, Pembroke, Bermuda (telephone number: +1 441-292-0888
The Company predominantly provides reinsurance on a worldwide basis through its principal wholly-owned subsidiaries, including Partner Reinsurance Company Ltd.
(PartnerRe Bermuda), Partner Reinsurance Europe SE (PartnerRe Europe), Partner Reinsurance Company of the U.S. (PartnerRe U.S.) and, effective April 1, 2015,
Partner Reinsurance Asia Pte. Ltd. (PartnerRe Asia). The Company’s principal office in the U.S. is located at One Greenwich Plaza, Greenwich, Connecticut (telephone
number: +1 203 485 4200
).
In July 1997, the Company completed the acquisition of SAFR (subsequently renamed PartnerRe SA and reinsurance business transferred into PartnerRe Europe), a
well-established global professional reinsurer based in Paris. In December 1998, the Company completed the acquisition of the reinsurance operations of Winterthur Re,
further enhancing the Company’s expansion strategy. In December 2009, the Company completed the acquisition of PARIS RE Holdings Limited (Paris Re), a French-
listed, Swiss-based holding company and its operating subsidiaries. Effective December 31, 2012, the Company completed the acquisition of Presidio Reinsurance Group,
Inc. (Presidio, subsequently renamed and referred to herein as PartnerRe Health), a U.S. specialty accident and health reinsurance and insurance writer.
On October 20, 2016, the Company entered into a definitive agreement to acquire 100% of the outstanding ordinary shares of Aurigen Capital Limited (Aurigen), a
North American life reinsurance company. This acquisition enables the Company to expand its life reinsurance footprint in Canada and the U.S. The acquisition was
completed on April 3, 2017. See Note 22 to the Consolidated Financial Statements in Item 18 for further details.
On August 2, 2015, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Exor N.V., Pillar Ltd., a wholly-owned subsidiary of
Exor N.V., and solely with respect to certain specified sections thereof, EXOR S.p.A., a European investment company controlled by the Agnelli family, whereby Pillar
Ltd. would be merged with and into the Company, with the Company continuing as the surviving company and a wholly-owned subsidiary of Exor N.V. (the Merger). On
March 18, 2016, the Company announced completion of the acquisition by Exor N.V. following receipt of all regulatory approvals. Pursuant to the terms of the Merger
Agreement, each PartnerRe common share issued and outstanding immediately prior to the effective time of the Merger was cancelled and converted into $137.50 in cash
per share and a one-time special pre-closing cash dividend in the amount of $3.00 per common share (the Merger Special Dividend) was paid. Subsequently, one common
share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the Company.
Pursuant to the terms of the Merger Agreement, PartnerRe common shares are no longer traded on the NYSE. The Company’s preferred shares continue to be traded
on the NYSE following the closing of the transaction.
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Effective November 24, 2016, the one common share of $1.00 par value was subdivided into 100 million shares of $0.00000001 par value each, which are wholly
owned by EXOR Nederland N.V. (formerly Exor N.V.).
B. Business Overview
The Company provides reinsurance for its clients in approximately 150 countries around the world. The Company’s principal offices are located in Hamilton
(Bermuda), Dublin, Greenwich (Connecticut, U.S.), Paris, Singapore and Zurich.
Effective July 1, 2016, the Company’s business units have been consolidated into three worldwide business units comprised of Property & Casualty (P&C),
Specialty and Life and Health. The Company has determined that these three business units represent its segments as the Company monitors the performance of its
operations for these business units. The combined business included in the P&C and Specialty segments is collectively referred to in this report as Non-life business. The
P&C, Specialty and Life and Health segments each separately represent markets that are reasonably homogeneous in terms of client types, buying patterns, underlying
risk patterns and approach to risk management.
The Company provides reinsurance of risks to ceding companies (primary insurers, cedants or reinsureds). Risks reinsured include, but are not limited to,
agriculture, aviation/space, casualty, catastrophe, energy, engineering, financial risks, marine, motor, multiline and other lines, property, mortality, longevity, accident and
health and alternative risk products. The Company’s alternative risk products include weather and credit protection to financial, industrial and service companies on a
worldwide basis.
Reinsurance is offered on either a proportional or non-proportional basis through treaties or facultative reinsurance:
In a proportional (or quota share) treaty reinsurance agreement, the reinsurer assumes a proportional share of the original premiums and losses incurred by the
•
cedant. The reinsurer pays the ceding company a commission, which is generally based on the ceding company’s cost of acquiring the business being reinsured
(including commissions, premium taxes, assessments and miscellaneous administrative expenses) and may also include a profit.
•
In a non-proportional (or excess of loss) treaty reinsurance agreement the reinsurer indemnifies the reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified amount, which is called a retention or attachment point. Non-proportional business is written in layers and a
reinsurer or group of reinsurers accepts a band of coverage up to a specified amount. The total coverage purchased by the cedant is referred to as a program and is
typically placed with predetermined reinsurers in pre-negotiated layers. Any liability exceeding the upper limit of the program reverts to the ceding company.
In a facultative (proportional or non-proportional) reinsurance agreement the reinsurer assumes individual risks. The reinsurer separately rates and underwrites
•
each risk rather than assuming all or a portion of a class of risks as in the case of treaty reinsurance.
The Company’s businesses are geographically diversified with premiums being written on a worldwide basis.
Premium Distribution
The Company’s gross premiums written by segment for the years ended December 31, 2016, 2015 and 2014 are as follows (in millions of U.S. dollars). Segment
data included below for prior years has been recast to conform to the current year presentation.
Non-life business:
P&C segment
Specialty segment
Total Non-life business
Life and Health segment
2016
2015
2014
$
$
2,269
1,920
4,189
1,168
5,357
$
$
2,371
1,906
4,277
1,271
5,548
$
$
2,539
2,128
4,667
1,265
5,932
See Note 20 to the Consolidated Financial Statements in Item 18 of this report for additional disclosure of the geographic distribution of gross premiums written and
for information about the Company’s segments.
The Company’s results by segment are presented in Operating Results—Results by Segment in Item 5 of this report.
Non-life Business
Non-life business is comprised of the P&C and Specialty segments, which are as follows:
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•
•
The P&C segment provides holistic access to property and casualty risks, including property catastrophe and facultative risks, through five regional units: North
America; Europe; Asia; Latin America; and Middle East, Africa and Russia.
The Specialty segment is comprised of business written on a worldwide basis, through a centralized specialty unit offering specialty lines treaty and facultative
solutions, generally considered to be specialized due to the sophisticated technical underwriting required to analyze these risks.
Distribution
The Company’s Non-life business is generated both through brokers and through direct relationships with insurance companies. For the year ended December 31,
2016, the Company had two brokers that individually accounted for 10% or more of the Company’s total gross premiums written.
The percentage of Non-life gross premiums written through these two brokers for the year ended December 31, 2016 was as follows:
Broker
Marsh (including Guy Carpenter)
Aon Group (including the Benfield Group)
Percentage
27%
25%
The combined percentage of Non-life gross premiums written through these two brokers by segment for the year ended December 31, 2016 was as follows:
Non-life segment
P&C
Specialty
Percentage
57%
46%
The majority of the Company’s gross premiums written were written on a proportional basis (more than 75%) for each of the years ended December 31, 2016, 2015
and 2014.
The gross premiums written in each of the P&C and Specialty segments, and the year-over-year comparisons, are described in Operating Results—Results by
Segment in Item 5 of this report.
The geographic distribution of the Company’s total gross premiums written (total non-life and life and health business) is presented in Note 20 to the Consolidated
Financial Statements in Item 18 of this report.
Competition
The Company competes with other reinsurers, some of which have greater financial, marketing and management resources than the Company, and it also competes
with new market entrants, and, specifically in the catastrophe line of business, with alternative capital sources and insurance-linked securities. Competition in the types of
reinsurance that the Company underwrites is based on many factors, including the perceived and relative financial strength; pricing and other terms and conditions;
services provided; ratings assigned by independent rating agencies; speed of claims payment; and reputation and experience in the lines of business to be written.
Management believes that the Company’s major competitors are the larger European, U.S. and Bermuda-based international reinsurance companies, as well as
specialty reinsurers and regional companies in certain local markets. These competitors include Munich Re, Swiss Re, Hannover Re, SCOR SE, Transatlantic, GenRe,
Everest Re, RenRe, and Validus.
Management believes the Company ranks among the world’s largest professional reinsurers and is well positioned in terms of client services and highly technical
underwriting expertise. Management also believes that the Company’s global franchise and diversified platform, which allows the Company to provide broad risk
solutions across many lines of business and geographies, is increasingly attractive to cedants who are choosing to utilize fewer reinsurers by consolidating their
reinsurance panels and focus on those reinsurers who can cover more than one line of business. Furthermore, the Company’s capitalization and strong financial ratios
allow the Company to offer security to its clients.
Life and Health Business
The Company’s Life and Health segment includes the mortality, longevity and accident and health lines of business written primarily in the U.K., Ireland and France
and accident and health business written in the U.S. The Company will also write mortality business originating in Canada following the acquisition of Aurigen. The
acquisition was completed on April 3, 2017. See Note 22 to the Consolidated Financial Statements in Item 18 for further details.
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A description of the business written within the Life and Health segment is as follows:
• Mortality—The Company provides reinsurance coverage to primary life insurers and pension funds to protect against individual and group mortality and
disability risks. Mortality business is written primarily on a proportional basis through treaty agreements. Mortality business is subdivided into death and disability
covers (with various riders) primarily written in Continental Europe, term assurance and critical illness (TCI) primarily written in the U.K. and Ireland, and
guaranteed minimum death benefit (GMDB) primarily written in Continental Europe. The Company also writes certain treaties on a non-proportional basis,
primarily in France.
Longevity—The Company provides reinsurance coverage to employer sponsored pension schemes and primary life insurers who issue annuity contracts offering
•
long-term retirement benefits to consumers, who, in turn, seek protection against outliving their financial resources. Longevity business is written on a long-term,
proportional basis primarily in the U.K. The Company’s longevity portfolio is subdivided into standard and non-standard annuities. The non-standard annuities are
annuities sold to consumers with aggravated health conditions and are usually medically underwritten on an individual basis. The main risk the Company is exposed
to by writing longevity business is an increase in the future life span of the insured compared to the expected life span.
•
Accident and Health—The Company provides reinsurance coverage to primary life insurers with respect to individual and group health risks. PartnerRe Health
writes specialty accident and health business, predominantly in the U.S., including Health Maintenance Organizations (HMO) reinsurance, medical reinsurance and
provider and employer excess of loss programs.
Distribution
The Company’s Life and Health business is generated both through brokers and through direct relationships with insurance companies. For the year ended
December 31, 2016, only one broker, the Aon Group (including the Benfield Group), accounted for more than 10% of the Life and Health segment’s total gross premiums
written at 13%. No one cedant, and no other broker, accounted for more than 10% of the Life and Health segment’s total gross premiums written.
The gross premiums written in the Life and Health segment for the years ended December 31, 2016, 2015 and 2014, and the year-over-year comparisons, are
described in Operating Results—Results by Segment in Item 5 of this report.
The geographic distribution of the Company’s total gross premiums written (total Non-life and Life and Health business) for the years ended December 31, 2016,
2015 and 2014 is presented in Note 20 to the Consolidated Financial Statements in Item 18 of this report.
Competition
For the Company’s Life business, the competition differs by location but generally includes multi-national reinsurers and local reinsurers or state-owned insurers in
the U.K., Ireland and Continental Europe for its mortality and longevity lines of business. The competition specifically related to the Health business generally includes
other specialty accident and health reinsurance providers in the U.S. and departments of worldwide reinsurance companies. These competitors include Munich Re,
Reinsurance Group of America, Incorporated, Swiss Re, Hannover Re, SCOR SE and General Reinsurance Corporation.
Reserves
See Liquidity and Capital Resources—Non-life and Life and Health Reserves in Item 5 and Notes 2(b) and 8 to the Consolidated Financial Statements in Item 18 of
this report for further details for the Company’s loss reserves, including disclosures required by the SEC Industry Guide 4: Disclosures concerning unpaid claims and
claim adjustment expenses of property-casualty insurance underwriters.
Regulation
The business of reinsurance is regulated in all countries in which we operate, although the degree and type of regulation varies significantly from one jurisdiction to
another. Some jurisdictions impose complex regulatory requirements on reinsurance or insurance businesses while other jurisdictions impose fewer requirements. In
certain foreign countries, reinsurers are required to be licensed by governmental authorities. These licenses may be subject to modification, suspension or revocation
dependent on such factors as amount and types of reserves and minimum capital and solvency tests. The violation of regulatory requirements may result in fines, censures
and/or criminal sanctions in various jurisdictions. See Risk Factors in Item 3 of this report.
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Bermuda has been deemed Solvency II equivalent under the European Union’s (EU) Solvency II initiative (Solvency II). Bermuda has been granted equivalence for
an unlimited period for all three relevant equivalence areas: Articles 172, 227 and 260, with the exception of rules on captives and special purpose insurers, which are
subject to a different regulatory regime in Bermuda. This determination has resulted in Bermuda-based reinsurers being exempt from the requirement to post collateral in
the EU and allows reinsurance contracts concluded with undertakings having their head office in Bermuda to be treated in the same manner as reinsurance contracts
concluded with undertakings authorized in accordance with the directive (Article 172); EU insurance groups can conduct their EU prudential reporting for a subsidiary in
Bermuda under local rules instead of Solvency II if deduction and aggregation is allowed as the method of consolidation of group accounts (Article 227); and Bermuda
insurance groups which are active in the EU are exempt from some aspects of group supervision in the EU as Member States will rely on the equivalent supervision
exercised by the Bermuda Monetary Authority (BMA ) (Article 260). Bermuda was deemed Solvency II equivalent effective January 1, 2016.
One of the key concepts of Solvency II is the principal of one “home” regulator over all the operating entities in a particular insurance or reinsurance group (referred
to as Group Supervision). The Insurance Act 1978 of Bermuda and related regulations, as amended (the Insurance Act) sets out provisions regarding Group Supervision,
including the power of the BMA to include or exclude specified entities from Group Supervision, the power of the BMA to withdraw as group supervisor, the functions of
the BMA as Group supervisor and the power of the BMA to make rules regarding Group Supervision. This Group Supervision regime is in addition to the regulation of
the Company’s various operating subsidiaries in their local jurisdictions. The BMA’s Group Supervision rules set out the rules in respect of the assessment of the financial
situation and solvency of an insurance group, the system of governance and risk management, and supervisory reporting and disclosures of an insurance group. The Group
solvency rules set out the rules in respect of the capital and solvency return and enhanced capital requirements for an insurance group. The BMA has chosen PartnerRe
Bermuda as the designated insurer for the purposes of Group Supervision, and the BMA currently acts as Group supervisor of the Company and its subsidiaries. As Group
supervisor, the BMA gathers relevant and essential information on and assesses the financial situation of the Company, and coordinates the dissemination of such
information to other relevant competent authorities for the purposes of assisting in their regulatory functions and the enforcement of regulatory action against the
Company or any of its subsidiaries.
PartnerRe Ltd. is not a registered insurer; however, pursuant to its functions as Group supervisor, the BMA includes the Company and may include any member of
the group within its Group Supervision.
Significant aspects of the Bermuda insurance regulatory framework and requirements imposed on Insurance and Reinsurance Groups include the solvency
assessment. The Company must annually perform an assessment of its own risk and solvency requirements, referred to as a Group’s Solvency Self Assessment (GSSA).
The GSSA allows the BMA to obtain an insurance group’s view of the capital resources required to achieve its business objectives and to assess a group’s governance,
risk management and controls surrounding this process. In addition, the Company must file with the BMA a Catastrophe Risk Return which assesses an insurer’s reliance
on vendor models in assessing catastrophe exposure.
Effective January 1, 2014, the BMA imposed the Enhanced Capital Requirement (ECR) on the Company pursuant to its function as the Company’s group
supervisor. The PartnerRe group’s ECR may be calculated by either (a) the standard model developed by the BMA, or (b) an internal capital model which the BMA has
approved for use for this purpose. The Company currently uses the BMA standard model in calculating its group ECR requirements. In addition, the Company is required
to prepare and submit annual audited group U.S. GAAP financial statements, annual group statutory financial statements, annual group statutory financial return, annual
group capital and solvency return and quarterly group unaudited financial returns.
Pursuant to the Insurance (Public Disclosure) Rules 2015, the BMA requires all commercial insurers and insurance groups (including PartnerRe Bermuda and
PartnerRe group) to prepare and publish a Financial Condition Report (FCR) containing both qualitative and quantitative information on (i) the business and performance;
(ii) governance structure; (iii) risk profile; (iv) solvency valuation; (v) capital management and (vi) subsequent events of commercial insurers (including PartnerRe
Bermuda) and insurance groups (including the PartnerRe group). The FCR is required to be filed with the BMA annually with the first filing deadline being 30 June, 2017
for the 2016 financial year end. The FCR is required to be published on the PartnerRe website within fourteen days of filing the same with the BMA. The FCR must be
signed off by the CEO and either the chief risk officer or chief financial officer (CFO) declaring the appropriateness of the information contained in the FCR.
Bermuda
The Insurance Act regulates the business of PartnerRe Bermuda. The Insurance Act imposes solvency and liquidity standards and auditing and reporting
requirements on Bermuda insurance companies and grants the BMA powers to supervise, investigate and intervene in the affairs of Bermuda registered insurance
companies. The Insurance Act makes no distinction between insurance and reinsurance business.
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PartnerRe Bermuda is licensed as a Class 4 and Class E insurer in Bermuda and is therefore authorized to carry on general and long-term insurance business,
respectively. Significant aspects of the Bermuda insurance regulatory framework and requirements imposed on Class 4 and Class E insurers such as PartnerRe Bermuda
include the following:
Minimum Capital Requirements. The BMA imposes certain minimum capital regulatory requirements on PartnerRe Bermuda, which are to hold statutory capital
and surplus equal to or exceeding the Target Capital Level, which is equivalent to 120% of the ECR. PartnerRe Bermuda’s ECR should be calculated by either (a) the
model developed by the BMA, or (b) an internal capital model which the BMA has approved for use for this purpose. PartnerRe Bermuda currently uses the BMA model
in calculating its solvency requirements. The Bermuda risk-based regulatory capital adequacy and solvency margin regime provides a risk-based capital model (termed the
Bermuda Solvency Capital Requirement (BSCR)) as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The BSCR
employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers to the capital that is dedicated to their business;
Effective from the 2016 financial year end onwards, the BMA has implemented an Economic Balance Sheet (EBS) framework which will now be used as the
basis to determine the ECR for all commercial insurers, including PartnerRe Bermuda. The EBS framework applies prudential filters and other EBS valuation adjustments
to an insurers GAAP balance sheet to produce an economic valuation of the assets and liabilities of the insurer. The EBS framework includes BSCR capital charge
amendments for cash and cash equivalents, credit risk, currency risk, concentration risk and geographic diversification.
Solvency Assessment. PartnerRe Bermuda must perform an assessment of its own risk and solvency requirements, referred to as a Commercial Insurer’s Solvency
Self Assessment (CISSA). The CISSA allows the BMA to obtain an insurer’s view of the capital resources required to achieve its business objectives and to assess a
company’s governance, risk management and controls surrounding this process. In addition, PartnerRe Bermuda must file with the BMA a Catastrophe Risk Return which
assesses an insurer’s reliance on vendor models in assessing catastrophe exposure;
Reporting Requirements. PartnerRe Bermuda must prepare audited annual statutory financial statements and file them with the BMA, together with audited annual
financial statements which are prepared in accordance with U.S. GAAP;
Dividends and Distributions. PartnerRe Bermuda is prohibited from declaring or paying any dividend of more than 25% of its total statutory capital and surplus, as
shown in its previous financial year statutory balance sheet, unless at least seven days before payment of the dividend it files with the BMA an affidavit that it will
continue to meet its minimum capital requirements as described above. In addition, PartnerRe Bermuda must obtain the BMA’s prior approval before reducing its total
statutory capital, as shown in its previous financial year statutory balance sheet, by 15% or more.
In addition to the above, PartnerRe Bermuda maintains an operating branch in Canada and a representative office in Mexico. The Canadian branch is subject to
regulation in Canada by the Office of the Superintendent of Financial Institutions (OFSI). For a further discussion of the regulations pertaining to the Canadian branch see
below.
Ireland
The Central Bank of Ireland (the Central Bank) regulates insurance and reinsurance companies authorized in Ireland, including PartnerRe Europe and PartnerRe
Ireland Insurance dac (PartnerRe Ireland). PartnerRe Holdings Europe Limited, a holding company for PartnerRe Europe and PartnerRe Ireland, is not subject to
regulation by the Central Bank. PartnerRe Europe is a reinsurance company incorporated under the laws of Ireland and is duly authorized as a reinsurance undertaking to
carry on non-life and life reinsurance business in accordance with the European Union (Insurance and Reinsurance) Regulations 2015. PartnerRe Ireland is an insurance
company incorporated under the laws of Ireland and is duly authorized as an insurance undertaking to carry on non-life insurance business in accordance with the
European Union (Insurance and Reinsurance) Regulations 2015.
Significant aspects of the Irish re/insurance regulatory framework and requirements imposed on PartnerRe Europe and PartnerRe Ireland include the following:
Solvency Requirements. The Solvency II European Directive related to the solvency standards applicable to insurers and reinsurers prescribes, at the level of
PartnerRe Europe and PartnerRe Ireland, the minimum amounts of financial resources that both companies are required to have in order to cover the risks to which they
are exposed and the principles that should guide their overall risk management and reporting.
This Directive became effective January 1, 2016. In addition to the Solvency II requirements, PartnerRe Europe and PartnerRe Ireland have similar governance
requirements to those of PartnerRe Bermuda such as Economic Balance Sheet, Own Risk and Solvency Assessment, Solvency and Financial Condition Report and a
Regular Supervisory Report.
Reporting Requirements. PartnerRe Europe and PartnerRe Ireland must file and submit annual audited financial statements in accordance with International
Financial Reporting Standards and related reports to the Irish Companies Registration Office (CRO) together with an annual return of certain core corporate information.
Changes to core corporate information during the year must
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also be notified to the CRO. These requirements are in addition to the regulatory returns required to be filed annually with the Central Bank and additionally, in the case of
PartnerRe Ireland, with the National Association of Insurance Commissioners (NAIC) in the U.S.; and
Dividends and Distributions. Pursuant to Irish company law, PartnerRe Europe and PartnerRe Ireland are restricted to declaring dividends only out of “profits
available for distribution”. Profits available for distribution are, broadly, a company’s accumulated realized profits less its accumulated realized losses. Such profits may
not include profits previously utilized.
In addition to the above, PartnerRe Europe has also established operating branches in the U.K., France, Switzerland, Dubai and Hong Kong and a representative
office in Brazil, which are subject to Irish reinsurance supervision regulations. In addition, the Hong Kong branch is subject to regulation by the Office of the
Commissioner of Insurance of Hong Kong. PartnerRe Ireland, pursuant to the Nonadmitted and Reinsurance Reform Act of 2010 (part of the Dodd-Frank Act), is a
nonadmitted alien insurer in the U.S. and is eligible to write business as an excess and surplus lines insurer in all U.S. states. PartnerRe Ireland has also established an
operating branch in the U.K. which is subject to Irish reinsurance supervision regulations.
United States
PartnerRe U.S. Corporation is a Delaware domiciled holding company for its wholly-owned (re)insurance subsidiaries, PartnerRe U.S., PartnerRe Insurance
Company of New York (PRNY) and PartnerRe America Insurance Company (PRAIC) (PartnerRe U.S., PRNY and PRAIC together being the PartnerRe U.S. Insurance
Companies). The PartnerRe U.S. Insurance Companies are subject to regulation under the insurance statutes and regulations of their domiciliary states (New York in the
case of PartnerRe U.S. and PRNY, and Delaware in the case of PRAIC, and all states where they are licensed, accredited or approved to underwrite insurance and
reinsurance).
Currently, the PartnerRe U.S. Insurance Companies are licensed, accredited or approved reinsurers and/or insurers in all fifty states and the District of Columbia,
and are subject to the requirements described below.
PartnerRe U.S. Corporation is also the owner of Presidio and its 100% owned subsidiaries Presidio Excess Insurance Services, Inc. (PXS), PartnerRe Management
Ltd. (PRM) and Presidio Reinsurance Corporation Inc. (PRC). PXS is a managing general underwriter licensed in a number of states. PRM is domiciled in the U.K. and
regulated by the Financial Services Authority. PRC is a Montana domiciled captive reinsurer and the Montana Department of Insurance is the domiciliary regulator of
PRC. These entities are not subject to any significant regulatory requirements or restrictions that would have a material impact on the Company.
Risk-Based Capital Requirements. The Risk-Based Capital (RBC) for Insurers Model Act (the Model RBC Act), as it applies to property and casualty insurers and
reinsurers, was initially adopted by the NAIC in December 1993. The Model RBC Act or similar legislation has been adopted by the majority of states in the U.S. The
main purpose of the Model RBC Act is to provide a tool for insurance regulators to evaluate the capital of insurers with respect to the risks assumed by them and to
determine whether there is a need for possible corrective action. U.S. insurers and reinsurers are required to report the results of their RBC calculations as part of the
statutory annual statements that such insurers and reinsurers file with state insurance regulatory authorities. The Model RBC Act provides for four different levels of
regulatory actions, each of which may be triggered if an insurer’s Total Adjusted Capital (as defined in the Model RBC Act) is less than a corresponding level of risk-
based capital. Decreases in an insurer’s Total Adjusted Capital as a percentage of its Annualized Control Level (as defined in the Model RBC Act) triggers increasing
regulatory actions. Such regulatory actions include but are not limited to issuance of orders for corrective action by the insurer, rehabilitation or liquidation of the insurer.
Insurance Regulatory Information System (IRIS) Ratios. A committee of state insurance regulators developed the NAIC’s IRIS primarily to assist state insurance
departments in executing their statutory mandates to oversee the financial condition of insurance or reinsurance companies operating in their respective states. IRIS
identifies thirteen industry ratios and specifies usual values for each ratio. Generally, a company will become subject to regulatory scrutiny if it falls outside the usual
ranges with respect to four or more of the ratios, and regulators may then act, if the company has insufficient capital, to constrain the company’s underwriting capacity.
No such action has been taken with respect to the PartnerRe U.S. Insurance Companies.
Reporting Requirements. Regulations vary from state to state, but generally require insurance holding companies and insurers and reinsurers that are subsidiaries of
insurance holding companies to register and file with their state domiciliary regulatory authorities certain reports, including information concerning their capital structure,
ownership, financial condition and general business operations. State regulatory authorities monitor compliance with, and periodically conduct examinations with respect
to, state mandated standards of solvency, licensing requirements, investment limitations, and restrictions on the size of risks which may be reinsured, deposits of securities
for the benefit of reinsureds, methods of accounting for assets, reserves for unearned premiums and losses, and other purposes. In general, such regulations are for the
protection of reinsureds and, ultimately, their policyholders, rather than security holders. In the U.S., the New York State Department of Financial Services (NYDFS) is
the domiciliary regulator of PartnerRe U.S. and PRNY, and the Delaware Department of Insurance is the domiciliary regulator of PRAIC.
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Dividends and Distributions. Under New York law, the NYDFS must approve any dividend declared or paid by PartnerRe U.S. or PRNY that, together with all
dividends declared or distributed by each of them during the preceding twelve months, exceeds the lesser of 10% of their respective statutory surplus as shown on the
latest statutory financial statements on file with the NYDFS, or 100% of their respective adjusted net investment income during that period. In addition, as a condition of
the acquisition by Exor N.V., PartnerRe U.S. committed that it would not take any action to pay any dividend for the two-year period from March 18, 2016 to March 18,
2018 without the prior approval of the NYDFS (see Risk Factors in Item 3 of this report). Under Delaware law the Delaware Commissioner of Insurance must approve
any dividend declared or paid by PRAIC that, together with all dividends or distributions made within the preceding 12 months exceeds the greater of (i) ten percent of
PRAIC’s surplus as regards policyholders as of the preceding December 31 or (ii) the net income, not including realized capital gains, for the 12-month period ending the
preceding December 31. In addition, as a condition of the acquisition by Exor N.V., PRAIC also committed that it would not take any action to pay any dividend for the
two-year period from March 18, 2016 to March 18, 2018 without the prior approval of the Delaware Commissioner of Insurance (see Risk Factors in Item 3 of this
report). Both Delaware and New York do not permit a dividend to be declared or distributed, except out of earned surplus.
In addition to the above, the Dodd-Frank Act currently impacts the PartnerRe U.S. Insurance Companies. The Dodd-Frank Act represents a comprehensive overhaul
of the financial services industry in the U.S. and established a FIO within the U.S. Treasury Department. Although the FIO does not have general supervisory or
regulatory authority over the business of insurance or reinsurance, it is charged with monitoring all aspects of the insurance industry, consulting with state insurance
regulators, assisting in administration of the TRIA and other duties. Furthermore, the director of the FIO is a non-voting member of the multi-agency FSOC, and the
FSOC may, among other things, subject an insurance company or an insurance holding company to heightened prudential standards in accordance with Title I of the
Dodd-Frank Act following an extended determination process (which can require that such insurance company be subject also to supervision by the Board of Governors
of the Federal Reserve System). The Dodd-Frank Act also made small changes to the regulation of credit for reinsurance and surplus lines insurance in the U.S. See Risk
Factors in Item 3 of this report.
Cybersecurity Requirements. In February 2017, the NYDFS issued final Cybersecurity Requirements for Financial Service Companies that will require regulated
entities, including PartnerRe U.S. Insurance Companies, to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and
soundness of New York’s financial services industry. The regulation became effective on March 1, 2017, subject to certain phase-in periods. Depending on the
regulation’s implementation and the NYDFS enforcement efforts with respect to it, the PartnerRe U.S. Insurance Companies and other financial services companies may
be required to incur significant expense in order to meet its requirements.
Canada
Canadian branches of PartnerRe Bermuda and PartnerRe U.S. hold licenses to write reinsurance business in Canada. Each Canadian branch is authorized to insure,
in Canada, risks falling within the classes of insurance and reinsurance as specified in their respective licenses and is limited to the business of reinsurance. The Canadian
branch of PartnerRe Bermuda is licensed to write life business in Ontario. The Canadian branch of PartnerRe U.S. is licensed to write property and casualty business in
Ontario. Each Canadian branch is subject to local regulation for its Canadian branch business, specified principally pursuant to Part XIII of the Insurance Companies Act
(the Canadian Insurance Act) applicable to foreign property and casualty companies and to foreign life companies as well as relevant provincial insurance acts. OSFI
supervises the application of the Canadian Insurance Act.
PartnerRe Bermuda and PartnerRe U.S. maintain sufficient assets, vested in trust at a Canadian financial institution approved by OSFI, to allow their branches to
meet minimum statutory solvency requirements as required by the Act and the regulations made under it. Certain statutory information is filed with federal and provincial
insurance regulators in respect of both property and casualty and life business written by branches. This information includes, among other things, a yearly business plan
and an annual Dynamic Capital Adequacy Test report from the Appointed Actuary of the branch that tests the adequacy of the assets that are vested under various adverse
scenarios.
Singapore
The Monetary Authority of Singapore (MAS) regulates insurance and reinsurance companies authorized in Singapore, including PartnerRe Asia.
PartnerRe Asia is the principal reinsurance carrier for the Company’s business underwritten in the Asia Pacific region, conducting general insurance business as a
reinsurer and life insurance business as a reinsurer. PartnerRe Asia has an established operating branch in Labuan which is subject to regulation by the Labuan Financial
Services Authority.
Significant aspects of the Singapore reinsurance regulatory framework and requirements include the following:
Solvency Requirements: As a licensed reinsurer, PartnerRe Asia is required to maintain minimum capital of SGD25 million. In addition, PartnerRe Asia is required
to establish and maintain separate insurance funds for each class of business that it carries on
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for both Singapore and offshore policies. The solvency requirement in respect of each insurance fund shall at all times be not less than the total risk requirement of the
fund (determined by reference to three components being insurance risks, asset portfolio risks and asset concentration risks). The MAS is entitled to require that a licensed
reinsurer holds assets of a certain type and prescribed value in Singapore.
Reporting Requirements: PartnerRe Asia must file and submit annual audited financial statements in accordance with Singapore Financial Reporting Standards and
related reports to the Accounting and Corporate Regulatory Authority (ACRA) together with an annual return of certain core corporate information. Changes to core
corporate information during the year must also be notified to ACRA. These requirements are in addition to the regulatory returns required to be filed annually with the
MAS.
Dividends and Distribution: Dividends are generally declared from unappropriated profits. The declaration of a dividend by PartnerRe Asia may be subject to
relevant conditions and requirements being met as specified under the Insurance Act (Singapore) and its associated regulations. Any proposed reduction of capital or
redemption of preference shares requires the prior approval of the MAS. In addition to the above, the laws and initiatives issued by the MAS regarding Corporate
Governance, Outsourcings and Technology Risk Management currently impact or may impact Partner Re Asia in the future.
Other Regulatory Considerations
Moreover, there are various regulatory bodies and initiatives that impact the Company in multiple international jurisdictions and the potential for significant impact
on the Company could be heightened as a result of recent industry and economic developments. In particular, Solvency II, adopted in the EU effective January 1, 2016,
aims to establish a revised set of risk-based capital requirements and risk management standards that will replace the current Solvency I requirements. Solvency II sets out
new, strengthened requirements applicable to the entire EU relating to capital adequacy and risk management for insurers. Other similar measures, such as the
International Association of Insurance Supervisors (IAIS) announced plans to include a risk-based global insurance capital standard within the common supervision
framework it is currently developing, also have the potential for significant impact on the Company. Furthermore, the IAIS has developed policy measures for institutions
it designates as Global Systemically Important Insurers, including enhanced supervision standards, measures to facilitate resolution, and capital requirements to increase
loss absorption capacity.
Taxation of the Company and its Subsidiaries
The following summary of the taxation of PartnerRe and its subsidiaries, PartnerRe Bermuda, PartnerRe Europe, PartnerRe Asia, and PartnerRe U.S. Corporation
and its subsidiaries (collectively PartnerRe U.S. Companies) is based upon current law. Legislative, judicial or administrative changes may be forthcoming that could
affect this summary, especially in the U.S. where significant tax reforms may be implemented by the new Administration in 2017. See Risk Factors—Taxation Risks in
Item 3 above for discussion of potential tax reforms.
Certain subsidiaries, branch offices and representative offices of the Company are subject to taxation related to operations in Brazil, Canada, Chile, China, France,
Hong Kong, Ireland, Labuan, Mexico, Singapore, Switzerland and the U.S. The discussion below covers the significant locations for which the Company or its
subsidiaries are subject to taxation.
Bermuda
PartnerRe Ltd. and PartnerRe Bermuda have each received from the Bermuda Minister of Finance an assurance under The Exempted Undertakings Tax Protection
Act, 1966 of Bermuda, that in the event that any legislation is enacted in Bermuda imposing tax computed on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to PartnerRe Ltd. or PartnerRe Bermuda
or to any of their operations or the shares, debentures or other obligations of PartnerRe Ltd. or PartnerRe Bermuda until March 2035. These assurances are subject to the
proviso that they are not construed to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda (PartnerRe Ltd. and PartnerRe
Bermuda are not currently so designated) or to prevent the application of any tax payable in accordance with the provisions of The Land Tax Act, 1967 of Bermuda or
otherwise payable in relation to the property leased to PartnerRe Bermuda.
Canada
The Canadian life branch of PartnerRe Bermuda and the Canadian non-life branch of PartnerRe U.S. are subject to Canadian taxation on their profits.
The profits of the Canadian life branch of PartnerRe Bermuda and the Canadian non-life branch of PartnerRe U.S. are taxed at the federal level as well as the
Ontario provincial level at a combined rate of 26.5% in 2016. See also the discussion of taxation in the United States below.
33
France
The French branch of PartnerRe Europe is conducting business in and is subject to taxation in France. Since January 1, 2016, the tax on corporate profits in France
has been 34.43%. The French Bill for 2017, enacted on December 30, 2016, includes a decrease of the statutory corporate income tax rate from 34.43% to 28%. This new
rate will be first applicable to small companies; it will have a partial effect on PartnerRe’s taxation in 2018 and a full effect in 2019. See also the discussion of taxation in
Ireland below.
Ireland
The Company’s Irish subsidiaries, PartnerRe Holdings Europe Limited, PartnerRe Europe, PartnerRe Ireland, and PartnerRe Ireland Finance DAC conduct business
in and are subject to taxation in Ireland. Profits of an Irish trade or business are subject to Irish corporation tax at the rate of 12.5%, whereas profits arising from other than
a trade or business are taxable at the rate of 25%. The Swiss, U.S. and French branches and subsidiaries of PartnerRe Europe are subject to taxation in Ireland at the Irish
corporation tax rate of 12.5%. However, under Irish domestic tax law, the amount of tax paid in Switzerland, U.S. and France can be credited or deducted against the Irish
corporation tax. As a result, the Company does not expect to incur significant taxation in Ireland with respect to the Swiss, U.S., and French branches.
Singapore
The Company’s Singapore subsidiary, PartnerRe Asia, is subject to corporate taxation in Singapore at the rate of 17% on profits arising from onshore business and
10% on profits arising from offshore business. However, tax exemptions may apply to qualifying profits derived from certain lines of business.
Switzerland
The Swiss branch of PartnerRe Europe is subject to Swiss taxation, mainly on profits and capital. To the extent that net profits are generated, profits are taxed at a
rate of 21.15%. The branch pays capital taxes at a rate of approximately 0.17% on its imputed branch capital calculated according to a procured taxation ruling. See also
the discussion of taxation in Ireland above.
United States
PartnerRe U.S. Companies transact business in and are subject to taxation in the U.S. The Canadian non-life branch of PartnerRe U.S. conducts business in Canada
and is subject to taxation in Canada as discussed above. Under U.S. tax law, the amount of tax paid in Canada by the Canadian non-life branch of PartnerRe U.S. can be
credited or deducted against U.S. corporation tax.
In addition, PartnerRe Europe writes certain U.S. facultative and Latin American business, through its reinsurance intermediaries, PartnerRe Miami in Miami,
Florida and PartnerRe Connecticut in Greenwich, Connecticut. As a result, PartnerRe Europe is deemed to be engaged in a U.S. trade or business and thus is subject to
taxation in the U.S. Finally, PartnerRe Capital Investments Corp. (PCIC) is also a U.S. corporation subject to taxation in the U.S. The current statutory rate of tax on
corporate profits in the U.S. is 35%. See the discussion of U.S. branch taxation below and the discussion of taxation in Ireland above.
On this basis, the Company does not expect that it and its subsidiaries, other than the PartnerRe U.S. Companies, PartnerRe Europe for its U.S. intermediaries
(PartnerRe Miami and PartnerRe Connecticut) and PCIC, will be required to pay U.S. corporate income taxes (other than withholding taxes as described below).
However, because there is considerable uncertainty as to the activities that constitute a trade or business in the U.S., there can be no assurance that the IRS will not
contend successfully that the Company or its non-U.S. subsidiaries are engaged in a trade or business in the U.S. The maximum federal tax rate is currently 35% for a
corporation’s income that is effectively connected with a trade or business in the U.S. In addition, U.S. branches of foreign corporations may be subject to the branch
profits tax, which imposes a tax on U.S. branch after-tax earnings that are deemed repatriated out of the U.S., for a potential maximum effective federal tax rate of
approximately 54% on the net income connected with a U.S. trade or business.
Foreign corporations not engaged in a trade or business in the U.S. are subject to U.S. income tax, effected through withholding by the payer, on certain fixed or
determinable annual or periodic gains, profits and income derived from sources within the U.S. as enumerated in Section 881(a) of the Internal Revenue Code, such as
dividends and interest on certain investments.
The U.S. also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the U.S. The rate of
tax applicable to reinsurance premiums paid to PartnerRe Bermuda is 1% of gross premiums.
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Legal Proceedings
The Company’s reinsurance subsidiaries, and the insurance and reinsurance industry in general, are subject to litigation and arbitration in the normal course of their
business operations. In addition to claims litigation, the Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business
that do not arise from or directly relate to claims on reinsurance treaties. This category of business litigation typically involves, among other things, allegations of
underwriting errors or omissions, employment claims or regulatory activity. While the outcome of business litigation cannot be predicted with certainty, the Company will
dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
At December 31, 2016, the Company was not a party to any litigation or arbitration that it believes could have a material effect on the financial condition, results of
operations or liquidity of the Company.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose
in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealing with the
Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the
period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the U.S. by non-U.S. entities and even when such
activities were conducted in compliance with applicable law.
On January 16, 2016, the United States and the EU eased sanctions against Iran pursuant to the Joint Comprehensive Plan of Action, and many of the reportable
activities, transactions and dealings under Section 13(r) are no longer subject to U.S. sanctions and no longer prohibited by applicable local law.
Certain of our non-U.S. reinsurance operations provide reinsurance treaty coverage to non-U.S. insurers of marine & energy risks as well as mutual associations of
ship owners that provide their members with protection and liability coverage. As a result of the recent lifting of European sanctions on Iran, some of these insurers have
informed us that they have begun shipping, or will begin to ship, cargo to and from Iran, including transporting crude oil, petrochemicals and refined petroleum products.
Because these non-U.S. subsidiaries insure or reinsure multiple voyages and fleets containing multiple ships, we are unable to attribute gross revenues and net profits
from such policies to activities with Iran. As the activities of our insureds are permitted under applicable laws and regulations, the Company intends for its non-U.S.
subsidiaries to continue providing such coverage to its insureds and reinsureds.
A non-U.S. subsidiary provides a property catastrophe excess of loss reinsurance to an Iranian pool of insurers of which one member is Bimeh Iran. Bimeh Iran is an
entity that has been identified as owned or controlled by the Government of Iran and appears on the List of Persons Identified as Blocked Solely Pursuant to Executive
Order 13599. The agreement was executed in 2017 and coverage began on September 23, 2016 for one year. Expected gross revenue is €100,000 and expected net profits
attributable to this contract are €10,000. The subsidiary intends to continue providing such coverage in accordance with applicable law.
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C. Organizational Structure
Following the acquisition of the Company’s common shares on March 18, 2016, the Company became a wholly-owned subsidiary of Exor N.V. and, as such, a
subsidiary of the ultimate parent company, EXOR S.p.A., one of Europe’s leading investment companies, controlled by the Agnelli family.
On October 27, 2016, Exor N.V. changed its name to EXOR Nederland N.V.
On December 11, 2016, a cross-border merger of EXOR S.p.A. with and into EXOR HOLDING N.V. became effective. Following this merger, EXOR HOLDING
N.V. was renamed EXOR N.V. As a result of this merger, EXOR N.V., headquartered in Amsterdam, the Netherlands, is the ultimate parent of the Company and the
holding company of the EXOR Group. EXOR N.V. is listed on the Milan Stock Exchange.
In addition to the Company, significant subsidiaries of EXOR N.V. include Fiat Chrysler Automobiles, CNH Industrial, Ferrari, The Economist Group, Juventus
Football Club, Welltec and Banca Leonardo.
The Company’s principal operating subsidiaries at December 31, 2016 are as follows:
Partner Reinsurance Company Ltd.
Partner Reinsurance Asia Pacific Pte. Ltd.
Partner Reinsurance Europe SE
Partner Reinsurance Company of the U.S.
Jurisdiction
Bermuda
Singapore
Ireland
New York, United States
Percentage
Interest Held
100%
100%
100%
100%
See Exhibit 8.1 to this annual report on Form 20-F for a listing of all of the Company’s subsidiaries.
D. Property, Plants and Equipment
The Company does not own any significant property, plants and equipment but does lease office space in Hamilton (Bermuda) where the Company’s principal
executive offices are located. Additionally, the Company leases office space in various other locations, principally in Dublin, Connecticut in the U.S., Paris and Zurich.
ITEM 4.A
UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussions should be read in conjunction with our consolidated financial statements for the years ended December 31, 2016, 2015 and 2014 in Item
18 of this report.
The financial results below are presented in U.S. dollar as the reporting currency. The financial information presented below is based on, or has been derived from,
the U.S. GAAP.
This discussion includes forward-looking statements, which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which
could cause actual events or conditions to differ materially from those expressed or implied by the forward-looking statements. See Safe Harbor in Item 5 and Risk
Factors in Item 3 of this report for a discussion of risks and uncertainties.
Executive Overview
The Company is a leading global reinsurer, with a broadly diversified and balanced portfolio of traditional reinsurance and insurance risks and capital markets risks.
The Company has three segments comprised of two non-life segments: P&C and Specialty, and the Life & Health segment (see Results by Segment section below).
The Company’s long-term objective is to manage a portfolio of diversified risks that will create shareholder value. Given the Company’s profitability in any
particular quarterly or annual period can be significantly affected by the level of large catastrophic losses or the impact of changes in interest rates on the change in fair
value of investments (see Key Factors Affecting Year-over-Year Comparability below), management assesses this long-term objective over the reinsurance cycle since the
Company’s performance during any particular quarterly or annual period is not necessarily indicative of its performance over the longer-term
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reinsurance cycle. For a discussion of the metrics that management uses to measure its success in achieving its long-term objective, see Key Financial Measures section
below.
Industry Environment, Strategic Initiatives and Capital Management
The Company’s Non-life operations are facing a challenging and limited growth environment, which is driven by continued price decreases and significant pressure
on terms and conditions in most markets and lines of business. These drivers reflect increased competition and excess capacity in the industry, and relatively low loss
experience.
In 2016, management announced the formation of a new organizational structure that would provide increased value to its clients around the world and better align
the Company’s product and global expertise with the needs of its client base. Effective July 1, 2016, PartnerRe’s business units have been consolidated into three
worldwide business units comprised of P&C, Specialty and Life and Health, which, as noted above, represent the Company’s segments.
See Risk Factors—Legal and Regulatory Risks and Risk Factors—Taxation Risks in Item 3 of this report for a description of governmental, economic or political
factors that may affect our business.
The following discussion provides an overview of business operations, trends and the outlook for 2017 with respect to each of the Company’s Non-life, Life and
Health and Investment operations.
Non-life reinsurance operations, trends and 2017 outlook
The Company generates its Non-life reinsurance revenue from premiums. Premium rates and terms and conditions vary depending on market conditions. Pricing
cycles are driven by supply of capital in the industry and demand for reinsurance and insurance and other risk transfer products. The reinsurance business is also
influenced by several other factors, including variations in interest rates and financial markets, changes in legal, regulatory and judicial environments, loss trends, inflation
and general economic conditions. The Company writes a large majority of its business on a treaty basis and the majority of the non-life treaty business renewed on
January 1, 2017. The remainder of this business renews at other times during the year. In addition to treaty business, the Company writes direct and facultative business
which renews throughout the year.
The Company differentiates itself through its risk management strategy, its financial strength, its underwriting selection process and its global presence. In assuming
its clients’ risks, the Company removes the volatility associated with those risks from the client, and then manages those risks and the risk-related volatility. Through its
broad product and geographic diversification, the Company is able to achieve a better portfolio diversification of risk compared to its clients, and its execution capabilities
and global presence enables the Company to respond quickly to market needs.
A key challenge facing the Company is successfully managing risk through all phases of the reinsurance cycle. The Company believes that its long-term strategy of
closely monitoring the progression of each business, being selective in the business that it writes, and maintaining the diversification and balance of its portfolio, will
optimize returns over the reinsurance cycle. Individual businesses and markets have their own unique characteristics and are at different stages of the reinsurance pricing
cycle at any given point in time. Management believes the Company has an appropriate portfolio diversification by product, geography, type of business, length of tail and
distribution channel. Further, management believes that this diversification, in addition to the financial strength of the Company and its strong global franchise, will help
to mitigate cyclical declines in underwriting profitability.
The Non-life reinsurance market has historically been highly cyclical in nature as evidenced by hard and soft markets. Since late 2003, with the exception of lines
and markets impacted by specific catastrophic or large loss events, the Company has been experiencing a soft market with general decreases in pricing and profitability.
Erosion of prices and terms, resulting from excess capital and benign loss activity, and limited new opportunities continue to provide a challenge to writing non-life
business that meets our profitability requirements. This trend is expected to continue in the near future.
The outlook for 2017 for each of the P&C and Specialty segments are summarized as follows:
2017 P&C Segment Outlook
During the January 1, 2017 renewals, the Company observed challenging market conditions primarily driven by continued competition exhibited through both lower
pricing and broader contractual terms. As a result of these factors, and given the limited new business or growth opportunities, the overall expected premium volume from
the Company’s January 1, 2017 renewals, at constant foreign exchange rates, decreased compared to the prior year renewal. Although premium volume has decreased
compared to the prior year renewal, overall profitability is expected to remain unchanged as the non-renewed business carried lower margins.
2017 Specialty Segment Outlook
During the January 1, 2017 renewals, the Company generally observed continued competitive conditions across all markets, with ample reinsurance capacity and
pressure on terms. As a result of these factors, and given the limited new business or growth
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opportunities, the expected premium volume from the Company’s January 1, 2017 renewal, at constant foreign exchange rates, decreased compared to the prior year
renewal. Although premium volume has decreased compared to the prior year renewal, the recent renewal was in line with management’s expectations.
Life and Health reinsurance operations, trends and 2017 outlook
The Company’s Life and Health segment derives revenues primarily from renewal premiums from existing reinsurance treaties and new premiums from existing or
new reinsurance treaties. Within the Life and Health segment, the Company writes mortality (including disability), longevity and U.S. accident and health products.
Management believes the Life and Health business provides the Company with diversification benefits and balance to its portfolio as they are generally not correlated to
the Company’s Non-life business.
The long-term profitability of the life business (including the mortality and longevity lines of business) mainly depends on the volume and amount of death claims
incurred and the ability to adequately price the risk the Company assumes. The majority of the premium arises from long-term in-force contracts. The life reinsurance
policies are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. The volume of
the business may be reduced each year by terminations of the underlying treaties related to lapses, voluntary surrenders, death of insureds and recaptures by ceding
companies. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and can fluctuate significantly
from period to period.
The active January 1 renewals for Life business only impact the short-term mortality in-force premium, which is a relatively limited portion of the Life portfolio. For
those treaties that actively renewed, pricing conditions and terms were under moderate pressure compared to the January 1, 2016 renewals. Management expects moderate
continued growth in the Company’s Life portfolio in 2017 assuming constant foreign exchange rates.
The acquisition of Aurigen will enable the Company to expand its life reinsurance footprint in Canada and the U.S. with limited overlap in market coverage.
The long-term profitability of the accident and health business mainly depends on the volume and amount of medical claims and expenses. While the volume of
medical claims can be predicted to a certain extent, the amount of claims and expenses depends on various factors, primarily healthcare inflation rates, driven by a shift
towards the older population, reliance on expensive medical equipment and technology, and changes in demand for healthcare services over time.
At the January 1, 2017 renewals, the expected premium volume arising from the PartnerRe Health business, at constant foreign exchange rates, held steady
compared to the prior year. Strong client retention and organic growth in the underlying portfolios were largely offset by continued market pressure on reinsurance
pricing. Similar expectations remain for the remainder of 2017. We may see the impact of any material change contemplated by the new U.S. administration to the
Healthcare Act reform on the reinsurance market during the January 1, 2018 renewals at the earliest.
Investment operations, trends and 2017 outlook
The Company generates revenue from its high quality investment portfolio, as well as the investments underlying the funds held–directly managed account, through
net investment income, including coupon interest on fixed maturities and realized and unrealized gains and losses on investments.
For the Company’s investment risks, which include public, private market and real estate investments, diversification of risk is critical to achieving the risk and
return objectives of the Company. The Company’s investment policy distinguishes between liquid, high quality assets that support the Company’s liabilities, and the more
diversified, higher risk asset classes that are allowed within the Company’s capital funds (see Liquidity and Capital Resources— Shareholders’ Equity and Capital
Resources Management—Liquidity below for a discussion of liability and capital funds).
While there will be years where such investments may earn less than the risk-free rate of return, or potentially even negative results, the Company believes the
rewards for assuming these risks in a disciplined and measured way will produce a positive excess return to the Company over time. Additionally, since a portion of our
investment risks are not fully correlated with the Company’s reinsurance risks, this increases the overall diversification of the Company’s total risk portfolio.
The Company follows prudent investment guidelines through a strategy that seeks to maximize returns while managing investment risk in line with the Company’s
overall objectives of earnings stability and long-term book value growth. The Company allocates its invested assets into two categories: liability funds and capital funds.
A key challenge for the Company is achieving the right balance between current investment income and total returns (that include price appreciation or depreciation) in
changing market conditions. The Company regularly reviews the allocation of investments to asset classes within its investment portfolio and its funds held–directly
managed account and allocates investments to those asset classes the Company anticipates will outperform in the future, subject to limits and guidelines. Similarly, the
Company reduces its exposure to asset classes where returns are deemed
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unattractive. The Company may also lengthen or shorten the duration of its fixed maturity portfolio in anticipation of changes in interest rates, or increase or decrease the
amount of credit risk it assumes, depending on credit spreads and anticipated economic conditions.
The Company’s investment operations continue to respond to uncertain market conditions. In 2016, while interest rates rose modestly from the prior year, there was
volatility during the year. Generally, in 2016, equity markets were positive and corporate credit spreads remained tight. Assuming constant foreign exchange rates,
management expects a decrease in net investment income in 2017, mainly due to changes in asset allocation.
A. Operating Results
As a result of the Company’s shares no longer being listed on the NYSE and the Company having only one common shareholder, operating earnings per share and
book value per share data are no longer considered meaningful and have been excluded for both the current reporting period and for the comparative periods.
Key Financial Measures
The Company is in the business of assessing and assuming risk for an appropriate return. The Company creates value through its ability to understand, evaluate,
diversify and distribute risk. Its strategy is founded on a capital-based risk appetite and the selected risks that management believes will allow the Company to meet its
goals for appropriate profitability and risk management within that appetite. Management believes that this construct allows the Company to balance the cedant’s need for
confidence of claims payment with its shareholder’s need for an appropriate return on their capital.
Throughout this annual report, the Company’s operating results and discussions on liquidity and capital resources have been presented in the way that management
believes will be the most meaningful and useful to its common shareholder, preferred shareholders, debt holders, rating agencies and others who use financial information
in evaluating the performance of the Company. These measures are presented in the following sections below.
Key Factors Affecting Year-over-Year Comparability
The key factors affecting the year-over-year comparison of the Company’s results for the years ended December 31, 2016, 2015 and 2014 include certain other
expenses, volatility in capital markets, large catastrophic and large loss events, and foreign exchange movements. These factors may continue to affect our results of
operations and financial condition in the future.
Other Expenses
The results for the years ended December 31, 2016 and 2015 were significantly impacted by certain expenses that are reasonably expected to not recur, included
within Other expenses, as follows (in millions of U.S. dollars):
Year ended December 31,
2016
2015
$
$
Total
128
411
•
•
•
•
During the year ended December 31, 2016, the Company recorded $128 million of transaction and severance related costs as follows:
$45 million of severance expenses associated with the restructuring of the Company’s business units, certain changes to the Company’s investment operations
and executive changes;
$38 million in stock-based compensation expense related to the Company’s share-based awards which fully vested and were settled in cash upon the change in
control of the Company on March 18, 2016; and
$45 million were other transaction related costs, which included $38 million for professional fees.
During the year ended December 31, 2015, the Company recorded $411 million of transaction and severance related costs as follows:
$315 million paid to Axis Capital Holdings Limited (AXIS) as a termination fee and reimbursement of expenses (AXIS Amalgamation Agreement Termination
Fee) in connection with the termination of the Agreement and Plan of Amalgamation (Amalgamation Agreement) that the Company previously entered into with
AXIS. The Amalgamation
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Agreement was terminated in connection with the execution of the Merger Agreement with Exor N.V. and EXOR S.p.A (Merger Agreement);
$71 million other costs primarily related to professional fees and severance costs associated with the Amalgamation Agreement and Merger Agreement referred
to above; and
$25 million negotiated earn-out consideration cost paid in 2015 to the former shareholders of Presidio. The Company previously accrued $4 million in
connection with the Earn-out Agreement through December 31, 2014 for a total earn-out consideration of $29 million.
•
•
Volatility in Capital Markets
Operating results for the years ended December 31, 2016, 2015 and 2014 were significantly impacted by the volatility in the capital markets with the Company
reporting net realized and unrealized gains (losses) on investments in net income as follows (in millions of U.S. dollars):
Year ended December 31,
2016
2015
2014
$
$
$
Total
26
(297)
372
In 2016, U.S. risk-free interest rates increased at the end of the year and credit spreads narrowed compared to December 31, 2015 resulting in a net realized and
unrealized gain on investments recorded in net income.
In 2015, U.S. risk-free interest rates increased, credit spreads widened and worldwide equity markets deteriorated compared to December 31, 2014. The result of
these movements was a net realized and unrealized loss on investments recorded in net income.
In 2014, U.S. and European risk-free interest rates decreased and U.S. equity markets improved compared to December 31, 2013. The result of these movements
was a net realized and unrealized gain on investments recorded in net income.
Large Catastrophic and Large Loss Events
As the Company’s reinsurance operations are exposed to low-frequency and high-severity risk events, some of which are seasonal, results for certain periods may
include unusually low loss experience, while results for other periods may include modest or significant catastrophic losses. The Company considers losses greater than
$35 million to be large catastrophic or large loss events.
The impact of the Canadian Wildfires, Hurricane Matthew and the Ghana energy loss in 2016 and the Tianjin Explosion in 2015 on the Company’s operating results
for the years ended December 31, 2016 and 2015 were as follows (in millions of U.S. dollars):
2016
Large catastrophic and large losses
Impact on the loss ratio
Impact on the technical ratio
Impact on the non-life combined ratio
P&C segment
Specialty
segment
Total Non-life(1)
$
110
$
46
$
156
5.8%
5.3%
2.2%
2.6%
4.2%
4.0%
4.0%
(1)
Large catastrophic and large losses, net of retrocession and reinstatement premiums, are comprised of $69 million related to the Canadian Wildfires, $45 million
related to Hurricane Matthew, and $42 million related to the Ghana energy loss.
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2015
Large catastrophic and large losses
Impact on the loss ratio
Impact on the technical ratio
Impact on the non-life combined ratio
P&C segment
Specialty
segment
Total Non-life(1)
$
37
$
22
$
59
1.7%
1.7%
1.2%
1.2%
1.5%
1.5%
1.5%
(1)
Large losses of $59 million related to the Tianjin Explosion, net of retrocession.
The loss ratio, technical ratio, and the non-life combined ratio are presented and defined in Note 20 in the Notes to Consolidated Financial Statements in Item 18 of
this report. These ratios are calculated based on the losses noted in the table above divided by net premiums earned, as presented in Results by Segment section below.
Foreign Exchange Movements
The Company’s reporting currency is the U.S. dollar. The Company’s significant subsidiaries and branches have one of the following functional currencies: U.S.
dollar, Euro or Canadian dollar. As a significant portion of the Company’s operations is transacted in foreign currencies, fluctuations in foreign exchange rates may affect
year-over-year comparisons. To the extent that fluctuations in foreign exchange rates affect comparisons, their impact has been quantified, when possible, and discussed
throughout this annual report. See Note 2(m) to the Consolidated Financial Statements in Item 18 of this report for a discussion of translation of foreign currencies.
The foreign exchange fluctuations for the principal currencies in which the Company transacts business were as follows:
•
•
the U.S. dollar average exchange rate for the year was stronger against most currencies, except the Japanese yen, in 2016 compared to 2015 and was stronger
against most currencies in 2015 compared to 2014; and
the U.S. dollar ending exchange rate strengthened against most currencies, except the Japanese yen and the Canadian dollar, at December 31, 2016 compared to
December 31, 2015.
The strengthening of the U.S. dollar in 2016 and 2015 had a significant impact on certain individual line items of the Company’s Consolidated Statement of
Operations, including gross and net premiums written and earned and net foreign exchange gains. However, the overall net impact is not significant due to the matching of
assets and liabilities by currency, resulting in foreign exchange movements offsetting, and due to the hedging of material foreign exchange exposures. See also section B.
Liquidity and Capital Resources—Currency below for a discussion of the impact of foreign exchange movements on the Consolidated Balance Sheets.
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Table of Contents
Review of Net Income
The components of net income and net income attributable to PartnerRe Ltd. common shareholders for the years ended December 31, 2016, 2015 and 2014 are
presented in the Company’s Consolidated Statement of Operations, and the breakdown by segment in Note 20 to the Consolidated Financial Statements in Item 18 of this
report.
Management analyzes the Company’s net income in three parts: underwriting result, investment result and other components of net income or loss not allocated to
the Company’s Non-life (P&C and Specialty) and Life and Health segments.
The components of net income, as disclosed in Note 20 to the Consolidated Financial Statements in Item 18 of this report, for the years ended December 31, 2016,
2015 and 2014 were as follows (in millions of U.S. dollars):
Underwriting result:
Non-life
Life and Health
Investment result:
Net investment income
Net realized and unrealized investment gains (losses)
Interest in (losses) earnings of equity method investments
Other components of net income not allocated to segments:
Other income not allocated to segments
Other expenses not allocated to segments
Interest expense
Loss on redemption of senior notes
Amortization of intangible assets
Net foreign exchange gains (losses)
Income tax expense
Net income
2016
2015
2014
$
$
$
$
$
$
$
$
$
$
$
$
$
249
3
411
26
(23)
3
(177)
(49)
(22)
(26)
78
(26)
447
$
$
$
$
$
$
$
$
$
$
$
$
$
584
35
450
(297)
6
$
$
$
$
$
$
3
$
(509)
(49)
$
— $
$
(27)
$
(9)
$
(80)
107
$
610
13
480
372
15
5
(130)
(49)
—
(27)
18
(239)
1,068
The increase in net income in 2016 compared to 2015 was primarily due to the change from net realized and unrealized investment losses in 2015 to gains in 2016,
and other expenses in 2015, which included the AXIS Amalgamation Agreement Termination Fee of $315 million. These were partially offset by the reduction in
underwriting income and net investment income.
The decrease in net income in 2015 compared to 2014 was primarily due to the change from net realized and unrealized investment gains in 2014 compared to losses
in 2015, the AXIS Amalgamation Agreement Termination Fee paid in 2015 and the reduction in net investment income. These decreases were partially offset by a
decrease in income tax expense.
Each of the components of net income, and changes for the years presented above, is described below.
Underwriting Result
Underwriting result consists of net premiums earned and other income less losses and loss expenses, acquisition costs and other expenses. Underwriting result is a
measurement that the Company uses to manage and evaluate its Non-life segments (P&C and Specialty) and Life and Health segment as it is a primary measure of
underlying profitability for the Company’s core reinsurance operations, separate from the investment results. The Company believes that in order to enhance the
understanding of its profitability, it is useful for our shareholders and other users of this report to evaluate the components of net income or loss separately and in the
aggregate. Underwriting result should not be considered a substitute for net income or loss and does not reflect the overall profitability of the business, which is also
impacted by investment results and other items.
2016 compared to 2015
The decrease in the Non-life underwriting result for 2016 compared to 2015 primarily reflected a higher level of reported large and mid-sized loss activity and a
lower level of net favorable prior year loss development (see Note 8(a) to the Consolidated Financial Statements in Item 18 of this report). The most significant losses in
2016, net of any reinsurance and reinstatement premiums, were the Canadian Wildfires ($69 million), Hurricane Matthew ($45 million) and a Ghana energy loss ($42
million). The net favorable prior year loss development decreased compared to 2015 in both Non-life segments.
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The decrease in the underwriting result for the Life and Health segment, which excludes allocated investment income, was primarily due to a lower level of net
favorable prior year loss development from both the mortality and health lines of business.
See Results by Segment below for further details.
2015 compared to 2014
The decrease in the Non-life underwriting result in 2015 compared to 2014 primarily reflected increasingly competitive pricing and conditions, resulting in higher
downward prior year premium adjustments, modestly higher loss picks and higher acquisition costs, and large catastrophic losses related to the Tianjin Explosion. The net
favorable prior year loss development increased compared to 2014, primarily as a result of increases in the Specialty segment.
The increase in the underwriting result for the Life and Health segment, which excludes allocated investment income, was primarily due to a higher level of net
favorable prior year loss development from both the mortality and health lines of business.
See Results by Segment below.
Investment Result
Investment result consists of net investment income, net realized and unrealized investment gains or losses and interest in earnings or losses of equity method
investments.
Net investment income includes interest, dividends and amortization, net of investment expenses, generated by the Company’s investment activities, as well as
interest income generated on funds held assets.
Net realized and unrealized investment gains or losses include sales of the Company’s fixed income, equity and other invested assets and investments underlying
the funds held–directly managed account and changes in net unrealized gains or losses.
Interest in earnings or losses of equity method investments represents the Company’s aggregate share of earnings or losses related to several private placement
investments and limited partnership interests.
Net Investment Income
Net investment income by asset source for the years ended December 31, 2016, 2015 and 2014 was as follows (in millions of U.S. dollars):
Fixed maturities, short-term investments and cash and cash equivalents
Equities
Funds held and other
Funds held–directly managed
Investment expenses
Net investment income
2016
2015
2014
$
$
398
4
34
10
(35)
411
$
$
426
31
27
12
(46)
450
$
$
445
40
33
14
(52)
480
Because of the interest-sensitive nature of some of the Company’s life products, net investment income is considered in management’s assessment of the
profitability of the Life and Health segment (see discussion on Life and Health segment above). The following discussion includes net investment income from all
investment activities, including the net investment income allocated to the Life and Health segment.
2016 compared to 2015
Net investment income decreased in 2016 compared to 2015 due to lower income from fixed income securities, the strengthening of the U.S. dollar against most
major currencies (which resulted in a 2% decrease in net investment income) and a decrease from equities, primarily due to a change in investment portfolio composition.
These decreases were partially offset by lower investment expenses.
2015 compared to 2014
Net investment income decreased in 2015 compared to 2014 due to lower income from fixed income securities, the strengthening of the U.S. dollar against most
major currencies (which resulted in a 4% decrease in net investment income) and a decrease from equities, primarily due to lower dividend income.
43
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2017 Outlook
Assuming constant foreign exchange rates, management expects net investment income to decrease in 2017 compared to 2016 primarily due to portfolio
repositioning.
Net Realized and Unrealized Investment Gains (Losses)
The Company’s portfolio managers have a total return investment objective, achieved through a combination of optimizing current investment income and pursuing
capital appreciation. To meet this objective, it is often desirable to buy and sell securities to take advantage of changing market conditions and to reposition the
investment portfolios. Accordingly, recognition of realized gains and losses is considered by the Company to be a normal consequence of its ongoing investment
management activities. In addition, the Company records changes in fair value for substantially all of its investments as unrealized investment gains or losses in its
Consolidated Statements of Operations. Realized and unrealized investment gains and losses are generally a function of multiple factors, with the most significant being
prevailing interest rates, credit spreads and equity market conditions.
The components of net realized and unrealized investment gains (losses) for the years ended December 31, 2016, 2015 and 2014 were as follows (in millions of U.S.
dollars):
2016
2015
2014
Net realized investment gains on fixed maturities and short-term investments
Net realized investment gains (losses) on other invested assets
Net realized investment gains on funds held–directly managed
Net realized investment gains on equities
Net realized investment gains
Change in net unrealized investment (losses) gains on fixed maturities and short-term investments
Change in net unrealized investment (losses) gains on equities
Change in unrealized investment gains (losses) on other invested assets
Change in net unrealized investment (losses) gains on funds held–directly managed
Net other realized and unrealized investment gains (losses)
Change in net unrealized investment (losses) gains
$
$
97
5
1
—
103
(90)
(15)
25
—
3
(77)
Net realized and unrealized investment gains (losses)
$
26
$
66
(33)
1
138
172
(277)
(188)
1
(6)
1
(469)
(297)
$
$
121
(21)
2
99
201
229
3
(58)
1
(4)
171
372
2016 compared to 2015
The net realized and unrealized investment gains of $26 million in 2016 were primarily due to narrowing of credit spreads, partially offset by increases in U.S. risk-
free interest rates. Net realized and unrealized investment losses of $297 million in 2015 are described below.
2015 compared to 2014
The net realized and unrealized investment losses of $297 million in 2015 were primarily due to increases in U.S. risk-free interest rates, the widening of credit
spreads, decreases in worldwide equity markets and realized losses on treasury note futures. Net realized and unrealized investment gains were $372 million in 2014 and
were primarily due to decreases in U.S. and European risk-free interest rates and improvements in worldwide equity markets, which were partially offset by losses on
treasury note futures and widening credit spreads.
Other Components of Net Income Not Allocated to Segments
Other Income
Other income primarily relates to income on insurance-linked securities and principal finance transactions within the Corporate and Other segment.
Other Expenses
The Company’s total other expenses for the years ended December 31, 2016, 2015 and 2014 were as follows (in millions of U.S. dollars, except ratios):
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Other expenses, as reported
AXIS Amalgamation Agreement Termination Fee and Presidio earn-out expense
Other transaction and severance related costs
Other expenses, as adjusted for various transaction and Presidio related costs
Other expenses, as adjusted, as a % of total net premiums earned
2016 compared to 2015
2016
2015
2014
$
$
$
$
472
—
(128)
344
6.9%
$
$
791
(340)
(71)
380
7.2%
450
—
—
450
8.0%
Other expenses decreased by $319 million, or 40%, in 2016 compared to 2015 primarily due to the AXIS Amalgamation Agreement Termination Fee of $315
million and the Presidio earn-out expense of $25 million related to payments to former shareholders in 2015. In addition, other transaction and severance related costs
were $57 million higher in 2016 than in 2015 primarily as a result of the closing of the acquisition by Exor N.V. in March 2016 and costs related to the reorganization of
the Company’s operations (see Note 21 to the Consolidated Financial Statements in Item 18 of this report for further details).
2015 compared to 2014
Other expenses were higher in 2015 compared to 2014 by $341 million, or 76%, primarily due to the AXIS Amalgamation Agreement Termination Fee of $315
million, the Presidio earn-out expense of $25 million and the other transaction and severance related costs of $71 million in 2015 referred to above. These increases were
partially offset by the impact of foreign exchange and lower personnel, facilities and information technology costs in 2015 compared to 2014.
Interest Expense
Interest expense in 2016 was comparable to 2015 and 2014.
Loss on Redemption of Senior Notes
The loss on redemption of senior notes related to the redemption of the $250 million senior notes during the year from the make whole payment to the note holders
representing the present value of the remaining scheduled payments on the notes following their early redemption. See Note 10 to the Consolidated Financial Statements
in Item 18 for further details of the Company’s redemption of senior notes.
Amortization of Intangible Assets
Amortization of intangible assets relates to intangible assets acquired upon acquisition of Paris Re in 2009 and Presidio in 2012.
Net Foreign Exchange Gains (Losses)
The Company hedges a significant portion of its currency risk exposure as discussed in Quantitative and Qualitative Disclosures about Market Risk in Item 11 of
this report.
The net foreign exchange gains in 2016 resulted primarily from the impact of the strengthening of the U.S. dollar on certain unhedged non-U.S. denominated
liabilities, partially offset by the cost of hedging activities.
The net foreign exchange losses in 2015 resulted primarily from the impact of the strengthening of the U.S. dollar on certain unhedged non-U.S. denominated
investment portfolios, partially offset by gains related to the timing of hedging activities and the difference in forward points embedded in the Company’s hedges.
Income Taxes
The effective income tax rate, which the Company calculates as income tax expense or benefit divided by net income or loss before taxes, may fluctuate
significantly from period to period depending on the geographic distribution of pre-tax net income or loss in any given period between different jurisdictions with
comparatively higher tax rates and those with comparatively lower tax rates. The geographic distribution of pre-tax net income or loss can vary significantly between
periods due to, but not limited to, the following factors: the business mix of net premiums written and earned, the geographic location, quantum and nature of net losses
and loss expenses and life policy benefits incurred, the quantum and geographic location of other expenses, net investment income, net realized and changes in unrealized
investment gains and losses and the quantum of specific adjustments to determine the income tax basis in each of the Company’s operating jurisdictions. In addition, a
significant portion of the Company’s gross and net premiums are written and earned in Bermuda, a non-taxable jurisdiction, including the majority of the Company’s
catastrophe business, which can result in significant volatility in the Company’s pre-tax net income or loss from period to period.
45
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The Company’s income tax expense and effective income tax rate for the years ended December 31, 2016, 2015 and 2014 were as follows (in millions of U.S.
dollars):
Income tax expense
Effective income tax rate
2016 compared to 2015
2016
2015
2014
$
$
26
5.5%
$
80
42.6%
239
18.3%
Income tax expense and the effective income tax rate during 2016, 2015 and 2014 were primarily driven by the geographic distribution of the Company’s pre-tax net
income between its various taxable and non-taxable jurisdictions.
In 2016, the income tax expense and the effective income tax rate included a significant portion of the Company’s pre-tax net income recorded in non-taxable
jurisdictions and jurisdictions with comparatively lower tax rates driven by net favorable prior year loss development and net realized and unrealized gains, which were
partially offset by catastrophe losses. A less significant portion of the Company’s pre-tax net income was recorded in jurisdictions with comparatively higher tax rates and
was driven by net favorable prior year loss development, which was partially offset by net realized and unrealized investment losses. In addition, the income tax expense
recorded in jurisdictions with comparatively higher tax rates included a tax benefit during 2016 following the favorable outcome of certain tax litigation and favorable
adjustments related to certain tax-exempt bonds.
In 2015, the income tax expense and the effective income tax rate reflects the Company’s jurisdictions with comparatively higher tax rates recording a pre-tax net
income, driven by net favorable prior year loss development, which was partially offset by net realized and unrealized investment losses. The Company’s non-taxable
jurisdictions recorded a pre-tax net loss with no associated tax benefit, driven primarily by the AXIS Amalgamation Agreement Termination Fee and net realized and
unrealized investment losses, which were partially offset by net favorable prior year loss development and the absence of large catastrophic losses. The Company’s
jurisdictions with comparatively lower tax rates recorded a modest pre-tax net income and a tax benefit related primarily to the release of a valuation allowance previously
recorded against tax loss carryforwards.
2015 compared to 2014
In 2014, the income tax expense and the effective income tax rate included a relatively even distribution of the Company’s pre-tax net income between its various
jurisdictions. The Company’s pre-tax net income recorded in non-taxable jurisdictions and jurisdictions with comparatively lower tax rates was driven by net favorable
prior year loss development and the absence of large catastrophic losses. The Company’s pre-tax net income recorded in jurisdictions with comparatively higher tax rates
was driven by net realized and unrealized investment gains, net favorable prior year loss development and the absence of large catastrophic losses.
Results by Segment
Effective July 1, 2016, the Company’s business units have been consolidated into three worldwide business units comprised of P&C, Specialty and Life and Health.
The new organizational structure provides increased value to the Company’s clients around the world and better aligns PartnerRe’s global expertise with the needs of its
clients’ base.
Following the realignment of its business units, the Company monitors the performance of its operations in three segments: P&C, Specialty and Life and Health.
Segments represent markets that are reasonably homogeneous in terms of client types, buying patterns, underlying risk patterns and approach to risk management. As a
result of the realignment of its business units, segment data included below for prior periods has been recast to conform to the current year presentation. See the
description of the Company’s segments as well as a discussion of how the Company measures its segment results in Note 20 to the Consolidated Financial Statements
included in Item 18 of this report.
The following table reconciles the technical results presented in the P&C segment and Specialty segment sections below to the total Non-life underwriting results
presented in the Review of Net Income above. See also Note 20 to the Consolidated Financial Statements in Item 18 for further details.
Technical result
Other income
Other expenses
Underwriting result
P&C
segment
2016
Specialty
segment
$
282
$
194
$
$
Total
Non-life
P&C
segment
2015
Specialty
segment
Total
Non-life
P&C
segment
2014
Specialty
segment
$
541
$
262
$
$
803
—
(219)
584
476
2
(229)
249
46
$
666
$
193
$
$
Total
Non-life
859
3
(252)
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P&C Segment
The P&C segment provides holistic access to property and casualty risks, including property catastrophe and facultative risks through five regions: North America;
Europe; Asia; Latin America; and Middle East, Africa and Russia.
The components of the technical result, which is calculated as net premiums earned less losses and loss expenses and acquisition costs, and the corresponding ratios,
which are calculated as a percentage of net premiums earned, for the P&C segment for the years ended December 31, 2016, 2015 and 2014 were as follows (in millions of
U.S. dollars, except ratios):
Gross premiums written
Net premiums written
Net premiums earned
Losses and loss expenses
Acquisition costs
Technical result
Loss ratio
Acquisition ratio
Technical ratio
Premiums
$
$
$
$
2016
2015
2014
$
$
$
$
2,269
2,061
2,086
(1,248)
(556)
282
59.8%
26.7
86.5%
$
$
$
$
2,371
2,236
2,240
(1,129)
(570)
541
50.4%
25.4
75.8%
2,539
2,467
2,401
(1,136)
(599)
666
47.3%
24.9
72.2%
The P&C segment represented 42%, 43% and 43% of total net premiums written in 2016, 2015 and 2014, respectively. Business reported in this segment is, to a
significant extent, originally denominated in foreign currencies and is reported in U.S. dollars. The U.S. dollar can fluctuate significantly against other currencies and this
should be considered when making year to year comparisons.
2016 compared to 2015
The decrease in gross premiums written resulted primarily from foreign exchange movements and cancellations and non-renewals due to continued pressure on
pricing and increased retentions by clients, which were partially offset by new business written. Net premiums written and earned decreased due to the same factors
driving the decrease in gross premiums written, in addition to higher premiums ceded in the catastrophe portfolio.
2015 compared to 2014
The decrease in gross premiums written was driven primarily by cancellations due to pricing and increased retentions by clients and downward prior year premium
adjustments, which were partially offset by new business written. Net premiums written and earned decreased due to the same factors driving the decreases in gross
premiums written, in addition to higher premiums ceded in the catastrophe portfolio.
Losses and loss expenses
See Liquidity and Capital Resources—Non-life and Life and Health Reserves—Non-life reserves in Item 5 and Note 8(a) to the Consolidated Financial Statements
in Item 18 of this report for an analysis of losses and loss expenses.
Technical result and ratio
2016 compared to 2015
The decrease in the technical result (and the corresponding increase in the technical ratio) in 2016 compared to 2015 was primarily attributable to a higher level of
mid-sized loss activity, large catastrophic losses related to the Canadian Wildfires and Hurricane Matthew during 2016 compared to the Tianjin Explosion in 2015 and a
lower level of favorable prior year loss development.
2015 compared to 2014
The decrease in the technical result (and the corresponding increase in the technical ratio) in 2015 compared to 2014 was primarily attributable to a higher level of
mid-sized loss activity and large catastrophic losses related to the Tianjin Explosion in 2015.
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Specialty Segment
The Specialty segment is composed of short-tail business in the form of agriculture and energy business and medium-tail business in the form of aviation/space,
financial risks, engineering, marine and multiline business.
The components of the technical result and the corresponding ratios for this segment for the years ended December 31, 2016, 2015 and 2014 were as follows (in
millions of U.S. dollars, except ratios):
Gross premiums written
Net premiums written
Net premiums earned
Losses and loss expenses
Acquisition costs
Technical result
Loss ratio
Acquisition ratio
Technical ratio
Premiums
$
$
$
$
2016
2015
2014
$
$
$
$
1,920
1,776
1,767
(1,073)
(500)
194
60.8%
28.3
89.1%
$
$
$
$
1,906
1,786
1,820
(1,064)
(494)
262
58.5%
27.1
85.6%
2,128
2,033
1,986
(1,327)
(466)
193
66.8%
23.5
90.3%
The Specialty segment represented 36%, 34% and 36% of total net premiums written in 2016, 2015 and 2014, respectively. Business reported in this segment is, to a
significant extent, originally denominated in foreign currencies and is reported in U.S. dollars.
2016 compared to 2015
The increase in gross premiums written was driven primarily by the impact of foreign exchange, new business written and a lower level of downward prior year
premium adjustments in 2016 compared to 2015. These increases were partially offset by cancellations, reduced participations and changes in underlying cedant premium.
Net premiums written and earned decreased largely due to higher premiums ceded in 2016, mainly due to the increased cession on financial risk business.
2015 compared to 2014
The decrease in gross premiums written was primarily driven by downward prior year premium adjustments, cancellations and reduced participations. These
decreases were partially offset by new business written. Net premiums written and earned decreased due to the same factors driving the decrease in gross premiums
written, as well as higher premiums ceded under the 2015 retrocessional programs.
Losses and loss expenses
See Liquidity and Capital Resources—Non-life and Life and Health Reserves—Non-life reserves in Item 5 and Note 8(a) to the Consolidated Financial Statements in Item
18 of this report for an analysis of losses and loss expenses.
Technical result and ratio
2016 compared to 2015
The decrease in the technical result (and the corresponding increase in the technical ratio) in 2016 compared to 2015 was primarily attributable to a lower level of
favorable prior year loss development, large catastrophic losses related to Hurricane Matthew and the Ghana energy loss in 2016 and a marginal increase in the acquisition
cost ratio, mainly related to profit commission adjustments in agriculture reflecting favorable experience, partially offset by a lower level of mid-sized loss activity during
2016 compared to 2015.
2015 compared to 2014
The increase in the technical result (and the corresponding decrease in the technical ratio) in 2015 compared to 2014 was primarily attributable to an increase in net
favorable prior year loss development, partially offset by higher downward premium adjustments, an increase in the acquisition cost ratio driven by increasingly
competitive market conditions and the restructuring of a significant financial risks treaty and large catastrophic losses related to the Tianjin Explosion in 2015.
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Life and Health Segment
The Company’s Life and Health segment includes the mortality, longevity and health business written primarily in the U.K., Ireland and France and accident and
health business written in the U.S.
The components of the allocated underwriting result for the Life and Health segment for the years ended December 31, 2016, 2015 and 2014 were as follows (in
millions of U.S. dollars):
Gross premiums written
Net premiums written
Net premiums earned
Losses and loss expenses
Acquisition costs
Technical result
Other income(1)
Other expenses
Underwriting result
Net investment income
Allocated underwriting result
2016
2015
2014
$
$
$
$
$
$
1,168
1,117
1,117
(927)
(131)
59
10
(66)
3
58
61
$
$
$
$
$
$
1,271
1,208
1,209
(964)
(153)
92
6
(63)
35
59
94
$
$
$
$
$
$
1,265
1,220
1,222
(1,000)
(149)
73
8
(68)
13
60
73
(1) Other income represents fee income on deposit accounted contracts and longevity swaps.
Premiums
The Life and Health segment represented 23%, 23% and 21% of total net premiums written in 2016, 2015 and 2014, respectively. Business reported in this segment
is, to a significant extent, originally denominated in foreign currencies and is reported in U.S. dollars.
2016 compared to 2015
The decreases in gross and net premiums written and net premiums earned were driven by reductions in the longevity line due to the increased participation on a
significant longevity swap in 2015, downward prior year premium adjustments and cancellations in the mortality business, in addition to marginal decreases in the health
business due to continued competitive pressures. The impact of changes in foreign exchange rates also contributed to these decreases.
2015 compared to 2014
While gross premiums written increased marginally as a result of growth in business being partially offset by foreign exchange impacts, net premiums written and
earned decreased primarily due the impact of foreign exchange exceeding the growth in net premiums written and earned on a constant foreign exchange basis. Gross and
net premiums written and net premiums earned increased on a constant foreign exchange basis driven by accident and health and longevity business, due to an increased
participation on a significant longevity swap. The increase in accident and health premiums on a constant foreign exchange basis was impacted by growth in business
arising from the Healthcare Act.
Losses and loss expenses
See Liquidity and Capital Resources—Non-life and Life and Health Reserves—Life and Health Reserves in Item 5 and Note 8(d) to the Consolidated Financial
Statements in Item 18 of this report for an analysis of losses and loss expenses.
Allocated underwriting result
2016 compared to 2015
The allocated underwriting result decreased primarily due to a lower technical result in the health line of business due to an increase in loss ratio in a small number
of accounts mainly related to recent underwriting years.
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2015 compared to 2014
The allocated underwriting result increased primarily due to a higher level of net favorable prior year loss development, increased profitability from the health
business and a decrease in other expenses. These increases in the allocated underwriting result were partially offset by losses and lower profitability on certain short-term
mortality treaties and on a significant longevity treaty.
B. Liquidity and Capital Resources
The following discussion of liquidity and capital resources principally focuses on the Company’s Consolidated Balance Sheets and Consolidated Statements of Cash
Flows. See Risk Factors in Item 3 for additional information concerning risks related to our business, strategy and operations.
50
Capital Adequacy
A key challenge for management is to maintain an appropriate level of capital. Management’s first priority is to hold sufficient capital to meet all of the Company’s
obligations to cedants, meet regulatory requirements and support its position as one of the stronger reinsurers in the industry. Management closely monitors its capital
needs and capital level throughout the reinsurance cycle and in times of volatility and turmoil in global capital markets actively takes steps to increase or decrease the
Company’s capital in order to achieve an appropriate balance of financial strength and shareholder returns. Capital management is achieved by either deploying capital to
fund attractive business opportunities, or in times of excess capital and times when business opportunities are not so attractive, returning capital to its common shareholder
by way of dividends.
Shareholders’ Equity and Capital Resources Management
As part of its long-term strategy, the Company will seek to grow capital resources to support its operations throughout the reinsurance cycle, maintain strong ratings
from the major rating agencies and maintain the unquestioned ability to pay claims as they arise. The Company may also seek to restructure its capital through the
repayment or purchase of debt obligations, or increase or restructure its capital through the issuance of debt, when opportunities arise.
The total debt liabilities and preferred and common shareholders’ equity of the Company at December 31, 2016 and 2015 was as follows (in millions of U.S.
dollars):
Senior notes
Capital efficient notes
Preferred shareholders’ equity, aggregate liquidation value
Common shareholders’ equity attributable to PartnerRe Ltd.
Total
December 31, 2016
December 31, 2015
$
$
1,274
63
704
5,984
8,025
16% $
1
9
74
100% $
750
63
854
6,047
7,714
10%
1
11
78
100%
The increase in senior notes during 2016 was primarily related to proceeds of €750 million ($774 million) from the issuance of the 2016 senior notes which was
partially offset by the redemption of the 2008 senior notes of $250 million. See Note 10 to the Consolidated Financial Statements in Item 18 of this report for details of the
Company’s issuances and redemptions of debt.
Shareholders’ equity attributable to PartnerRe Ltd., comprised of preferred and common shareholders’ equity in the table above, was $6.7 billion at December 31,
2016, a 3% decrease compared to $6.9 billion at December 31, 2015. The major factors contributing to this decrease were as follows:
•
•
•
•
•
common and preferred dividend payments of $496 million in 2016, including the payment of the Merger Special Dividend of $150 million related to the closing
of the Exor acquisition in March 2016 and the loss on redemption of preferred shares of $5 million in November 2016;
redemption of the Series D and E preferred shares of $145 million in November 2016 (see Note 11 to the Consolidated Financial Statements in Item 18 of this
report); and
settlement of certain share-based awards in 2016 by the Company of $75 million that vested upon acquisition by Exor N.V.; partially offset by
comprehensive income of $456 million, which was primarily related to net income in 2016; and
issuance of common shares under the Company’s terminated employee equity plans of $48 million in 2016 prior to the acquisition by Exor N.V.
See Operating Results above for a discussion of the Company’s net income for the year ended December 31, 2016.
51
Liquidity and Cash Flows
The Company aims to be a reliable and financially secure partner to its cedants. This means that the Company must maintain sufficient liquidity at all times so that it
can support its cedants by settling claims quickly. The Company generates cash flows primarily from its underwriting and investment operations. Management believes
that a profitable, well-run reinsurance organization will generate sufficient cash from premium receipts to pay claims, acquisition costs and other expenses in most years.
To the extent that underwriting cash flows are not sufficient to cover operating cash outflows in any year, the Company may utilize cash flows generated from investments
and may ultimately liquidate assets from its investment portfolio. Management ensures that its liquidity requirements are supported by maintaining a high quality, well
balanced and liquid investment portfolio, and by matching the duration and currency of its investments and the investments underlying the funds held—directly managed
account with that of its net reinsurance liabilities. In 2017, the Company expects to continue to generate positive operating cash flows, absent catastrophic events.
Liquidity is a measure of the Company’s ability to access sufficient cash flows to meet the short-term and long-term cash requirements of its business operations.
Management believes that its significant cash flows from operations and high quality liquid investment portfolio will provide sufficient liquidity for the foreseeable future
to meet its present requirements. At December 31, 2016 and 2015, cash and cash equivalents were $1.8 billion and $1.6 billion, respectively. The increase in cash and
cash equivalents of $0.2 billion was primarily due to the issuance of the 2016 senior notes, partially offset by the redemptions of the Series D and E preferred shares and
2008 senior notes.
The Company’s Consolidated Statements of Cash Flows is included in the Consolidated Financial Statements in Item 18 of this report. Explanations of the cash
flows presented in the Consolidated Statements of Cash Flows are as follows:
Net cash provided by operating activities of $445 million in 2016 increased from $319 million in 2015. Cash flows from operating activities include net investment
income of $531 million in 2016 compared to $554 million in 2015 and underwriting cash flows of $75 million in 2016 compared to $265 million in 2015. These cash
inflows are offset by other net cash outflows, including foreign exchange, and, for 2015, the cash payment of $315 million AXIS Amalgamation Agreement Termination
Fee in 2015.
Net cash used in investing activities was $34 million in 2016 compared to net cash provided by investing activities of $295 million in 2015. The net cash used in
investing activities in 2016 was primarily driven by purchases of securities, including the purchase of an equity method investment in Almacantar S.A. for $539 million in
the second quarter of 2016 (see Note 19 to the Consolidated Financial Statements in Item 18 of this report), exceeding other sales and redemptions of securities. The net
cash used in investing activities in 2015 reflects the timing of investing activities and asset reallocations.
Net cash used in financing activities was $153 million in 2016 compared to $309 million in 2015. Net cash used in financing activities in 2016 was primarily related
to the dividend payments on common and preferred shares, including the payment of the Merger Special Dividend, the redemptions of $150 million of Series D and E
preferred shares and $250 million 2008 senior notes, and the settlement of certain share-based awards upon acquisition by Exor N.V. These cash outflows were partially
offset by the issuance of the 2016 €750 million senior notes. Net cash used in financing activities in 2015 was primarily related to dividend payments on common and
preferred shares, the Company’s share repurchases and distributions related to Lorenz Re Ltd.
The Company’s ability to pay common shareholder’s and preferred shareholders’ dividends, interest payments on debt, and its corporate expenses is dependent
mainly on cash dividends from PartnerRe Bermuda, PartnerRe Europe, PartnerRe U.S. and PartnerRe Asia (collectively, the reinsurance subsidiaries), which are the
Company’s most significant subsidiaries. The payment of such dividends by the reinsurance subsidiaries to the Company is limited under Bermuda, Irish and Singapore
laws and certain statutes of various U.S. states in which PartnerRe U.S. is licensed to transact business. 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. The reinsurance subsidiaries’ dividend restrictions at
December 31, 2016 are described in Note 13 to the Consolidated Financial Statements in Item 18 of this report. In addition, the Merger Agreement limits the payment of
dividends on common shares to an amount not exceeding 67% of net income per fiscal quarter until December 31, 2020.
The reinsurance subsidiaries of the Company depend upon cash inflows from the collection of premiums as well as investment income and proceeds from the sales
and maturities of investments to meet their obligations. Cash outflows are in the form of claims payments, purchase of investments, other expenses, income tax payments,
intercompany payments as well as dividend payments to the holding company (PartnerRe Ltd.), and additionally, in the case of PartnerRe U.S. Corporation, interest
payments on the Debt related to senior notes and the Capital Efficient Notes (CENts). At December 31, 2016, PartnerRe U.S. Corporation and its subsidiaries have $563
million in senior notes and CENts outstanding and will pay approximately $30 million in aggregate interest payments in 2017 related to this debt. At December 31, 2016,
PartnerRe Ireland Finance DAC has $774 million in senior notes outstanding and will pay approximately $10 million of interest payments in 2017 related to this debt.
Historically, the operating subsidiaries of the Company have generated sufficient cash flows to meet all of their obligations. Because of the inherent volatility of the
business written by the Company, the seasonality in the timing of payments by cedants, the irregular timing of loss payments, the impact of a change in interest rates and
credit spreads on the investment income as well as
52
seasonality in coupon payment dates for fixed income securities, cash flows from operating activities may vary significantly between periods. The Company believes that
annual positive cash flows from operating activities will be sufficient to cover claims payments, absent catastrophic loss activity. In the event that paid losses accelerate
beyond the ability to fund such payments from operating cash flows, the Company would use its cash and cash equivalents balances available, liquidate a portion of its
high quality and liquid investment portfolio or access certain uncommitted credit facilities. As discussed in the Investments section below, the Company’s investments
and cash and cash equivalents (excluding the funds held–directly managed account) totaled $16.3 billion at December 31, 2016, of which $13.4 billion was fixed income
securities.
Financial strength ratings and senior unsecured debt ratings represent the opinions of rating agencies on the Company’s capacity to meet its obligations. In the event
of a significant downgrade in ratings, the Company’s ability to write business and to access the capital markets could be impacted. Some of the Company’s reinsurance
treaties contain special funding and termination clauses that would be triggered in the event the Company or one of its subsidiaries is downgraded by one of the major
rating agencies to levels specified in the treaties, or the Company’s capital is significantly reduced. If such an event were to occur, the Company would be required, in
certain instances, to post collateral in the form of letters of credit and/or trust accounts against existing outstanding losses, if any, related to the treaty. In a limited number
of instances, the subject treaties could be canceled retroactively or commuted by the cedant.
The Company’s current financial strength ratings and outlooks are as follows:
Standard & Poor’s
Moody’s
A.M. Best
Fitch
Credit Agreements
A+ Stable
A1 Stable
A Stable
A+ Stable
In the normal course of its operations, the Company enters into agreements with financial institutions to obtain unsecured and secured letter of credit facilities. At
December 31, 2016, the total amount of such credit facilities available to the Company was approximately $664 million, with each of the significant facilities described
below. Under the terms of certain reinsurance agreements, irrevocable letters of credit were issued on an unsecured and secured basis in the amount of $135 million and
$379 million, respectively, at December 31, 2016, in respect of reported loss and unearned premium reserves.
The Company maintains a $300 million combined credit facility, with the first $100 million being unsecured and any utilization above the initial $100 million being
secured. This credit facility matures each year on November 14 and, unless canceled by either counterparty, this credit facility automatically extends for a further year.
In addition, the Company maintains committed secured letter of credit facilities. These facilities are used for the issuance of letters of credit, which must be fully
secured with cash, government bonds and/or investment grade bonds. The agreements include default covenants, which could require the Company to fully secure the
outstanding letters of credit to the extent that the facility is not already fully secured and disallow the issuance of any new letters of credit. Included in the Company’s
secured credit facilities at December 31, 2016 was a $200 million secured credit facility, which matures on December 31, 2019, and an $80 million secured credit facility,
which matures on December 31, 2017. At December 31, 2016, no conditions of default existed under these facilities.
Investments
Investment philosophy
The Company employs a prudent investment philosophy. It maintains a high quality, well-balanced and liquid portfolio having a total return investment objective,
achieved through a combination of optimizing current investment income and pursuing capital appreciation. The Company’s total invested assets of $16,887 million and
$16,526 million at December 31, 2016 and 2015, respectively, are comprised of total investments, cash and cash equivalents, the investment portfolio underlying the
funds held–directly managed account (which excludes other asset and liabilities underlying the funds held–directly managed account) and accrued interest. From a risk
management perspective, the Company allocates its invested assets into two categories: liability funds and capital funds.
Liability funds (including funds held–directly managed) represent invested assets supporting the net reinsurance liabilities, and are invested primarily in investment-
grade fixed maturity securities and cash and cash equivalents. The preservation of liquidity and protection of capital are the primary investment objectives for these assets.
The portfolio managers are required to adhere to investment guidelines as to minimum ratings and issuer and sector concentration limitations. Liability funds are invested
in a way that generally matches them to the corresponding liabilities (referred to as asset-liability matching) in terms of both duration and major currency composition to
provide the Company with a natural hedge against changes in interest and foreign exchange rates. In addition, the Company utilizes certain derivatives to further protect
against changes in interest and
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foreign exchange rates.
Capital funds represent shareholder capital of the Company and are invested in a diversified portfolio with the objective of maximizing investment return, subject to
prudent risk constraints. Capital funds contain most of the asset classes typically viewed as offering a higher risk and higher return profile, subject to risk assumption and
portfolio diversification guidelines which include issuer and sector concentration limitations. Capital funds may be invested in investment grade and below investment
grade fixed maturity securities, publicly listed and private equities, bond and loan investments, real estate investments, structured credit (for example Principal Finance),
and certain other specialty asset classes.
Overview
The Company’s total invested assets less net payable for securities purchased at December 31, 2016 and 2015 were split between liability and capital funds as
follows (in millions of U.S. dollars):
Liability funds
Capital funds
Total invested assets less net payable for securities purchased
2016
8,778
7,512
16,290
$
$
% of Total
Invested Assets
54% $
46
100% $
2015
9,043
7,298
16,341
% of Total
Invested Assets
55%
45
100%
The net decrease of $51 million in total invested assets less net payable for securities purchased at December 31, 2016 compared to December 31, 2015 was due an
increase in net payable for securities purchased ($597 million at December 31, 2016 compared to $185 million at December 31, 2015) and a decrease in the investments
held within funds held–directly managed (see below) partially offset by an increase in total investments and cash and cash equivalents. The increase in cash and cash
equivalents is discussed in the Liquidity and Cash Flows above.
The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. The Company may utilize various derivative
instruments, such as treasury note and equity futures contracts, credit default swaps, foreign currency option contracts, foreign exchange forward contracts, total return
and interest rate swaps, insurance-linked securities and to-be-announced mortgage-backed securities (TBAs) for the purpose of managing and hedging currency risk,
market exposure and portfolio duration, hedging certain investments, mitigating the risk associated with underwriting operations, or enhancing investment performance
that would be allowed under the Company’s investment policy if implemented in other ways. The use of financial leverage, whether achieved through derivatives or
margin borrowing, requires approval from the Board.
At December 31, 2016, the Company had no financial leverage achieved through derivatives and no margin borrowing has been approved by the Board.
The components and carrying values of the Company’s total investments, and the percentages of total investments, at December 31, 2016 and 2015 were as follows
(in millions of U.S. dollars):
Fixed maturities
Short-term investments
Equities
Other invested assets
Total investments (1)
2016
2015
$
$
13,432
22
39
1,076
14,569
92% $
—
—
8
100% $
13,448
47
444
399
14,338
94%
—
3
3
100%
(1) In addition to the total investments shown in the above table, the Company held cash and cash equivalents of $1.8 billion and $1.6 billion at December 31, 2016
and 2015, respectively.
The majority of the Company’s investments are carried at fair value with changes in fair value included in net realized and unrealized investment gains or losses in
the Consolidated Statements of Operations. The fair value of the Company’s fixed maturities and short-term investments at December 31, 2016 compared to 2015
primarily reflects higher U.S. risk-free interest rates and the strengthening of the U.S. dollar against most major currencies, partially offset by narrowing credit spreads. In
addition, the Company reduced its overall allocation to equities in 2016. The increase in other invested assets reflects new investments in certain real-estate and third-
party funds described in Notes 3 and 19 to the Consolidated Financial Statements in Item 18 of this report.
The Company’s investment portfolio generated a total accounting return (calculated based on the carrying value of all investments in local currency) of 2.4% in
2016 compared to 0.8% in 2015. The total accounting return in 2016 reflected overall mark to market gains, notwithstanding increases in U.S. and European risk-free
interest rates. The total accounting return in 2015
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was primarily due to net investment income, partially offset by increases in U.S. risk-free interest rates, the widening of credit spreads and decreases in worldwide equity
markets.
The cost, fair value and credit ratings of the Company’s fixed maturities, short-term investments and equities carried at fair value at December 31, 2016 were as
follows (in millions of U.S. dollars):
December 31, 2016
Fixed maturities
U.S. government
U.S. government sponsored enterprises
U.S. states, territories and municipalities
Non-U.S. sovereign government, supranational and
government related
Corporate
Asset-backed securities
Residential mortgage-backed securities
Fixed maturities
Short-term investments
Total fixed maturities and short-term investments
Equities
Total
% of Total fixed maturities and short-term investments
Cost (1)
Fair
Value
AAA
AA
A
BBB
Credit Rating (2)
$
3,519
52
670
1,089
5,675
125
2,256
13,386
22
13,408
28
$
$
$
3,489
52
685
1,136
5,705
124
2,241
13,432
22
13,454
39
$
13,436
$
13,493
— $
—
81
513
96
—
100
790
1
791
$
3,489
52
480
479
298
—
2,141
6,939
19
6,958
$
$
— $
—
—
— $
—
—
136
1,952
—
—
2,088
—
2,088
—
3,208
—
—
3,208
—
3,208
$
$
Below
investment
grade/
Unrated
—
—
124
8
151
124
—
407
2
409
6%
52%
15%
24%
3%
(1) Cost is amortized cost for fixed maturities and short-term investments and cost for equity securities.
(2) All references to credit rating reflect Standard & Poor’s (or estimated equivalent). Investment grade reflects a rating of BBB- or above.
At December 31, 2016, the Company did not have material investments in securities issued by peripheral European Union (EU) sovereign governments (Portugal,
Italy, Ireland, Greece and Spain).
At December 31, 2016, approximately 92% of the Company’s fixed maturity and short-term investments, which includes fixed income type mutual funds, were
publicly traded and approximately 97% were rated investment grade (BBB- or higher) by Standard & Poor’s (or estimated equivalent). The average credit quality, the
year-end yield to maturity and the expected average duration of the Company’s fixed maturities and short-term investments (which includes fixed income type mutual
funds) at December 31, 2016 and 2015 were as follows:
Average credit quality
Year-end yield to maturity
Expected average duration
2016
A
2.7 %
4.9 years
2015
A
2.9 %
3.6 years
The average credit quality of fixed maturities and short-term investments at December 31, 2016 remained unchanged compared to December 31, 2015.
The average yield to maturity on fixed maturities and short-term investments decreased primarily due to decreases in U.S. and European risk-free interest rates for
most of the year.
The expected average duration of fixed maturities and short-term investments increased during the fourth quarter of 2016 compared to December 31, 2015. After the
2016 U.S. Presidential election and the subsequent increase in U.S. treasury rates, the Company elected to extend the expected duration of its fixed maturities to 4.9 years,
bringing it closer to the expected duration of its reinsurance liabilities. Duration can be adjusted through the utilization of interest rate futures and other instruments.
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Maturity Distribution
The distribution of fixed maturities and short-term investments at December 31, 2016 by contractual maturity date was as follows (in millions of U.S. dollars):
December 31, 2016
One year or less
More than one year through five years
More than five years through ten years
More than ten years
Subtotal
Mortgage/asset-backed securities
Total
Cost
Fair
Value
264
5,361
3,721
1,681
11,027
2,381
13,408
$
$
264
5,381
3,703
1,741
11,089
2,365
13,454
$
$
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or
prepayment penalties.
Corporate bonds included in Fixed maturities
Corporate bonds are comprised of obligations of U.S. and foreign corporations. The fair values of corporate bonds issued by U.S. and foreign corporations by
economic sector at December 31, 2016 were as follows (in millions of U.S. dollars):
December 31, 2016
Sector
Finance
Consumer noncyclical
Consumer cyclical
Industrials
Energy
Communications
Utilities
Insurance
Real estate investment trusts
Technology
Basic materials
Catastrophe bonds
Government guaranteed corporate debt
All Other
Total
% of Total
U.S.
Foreign
Fair
Value
Percentage to
Total Fair
Value of
Corporate
Bonds
$
$
915
971
570
510
381
292
261
256
239
233
156
—
—
30
$
4,814
$
214
127
41
76
93
48
46
15
11
—
77
106
19
18
891
$
$
1,129
1,098
611
586
474
340
307
271
250
233
233
106
19
48
5,705
84%
16%
20%
19
11
10
8
6
5
5
4
4
4
2
—
2
100%
At December 31, 2016, other than the U.S., no country accounted for more than 10% of the Company’s corporate bonds. At December 31, 2016, the ten largest
issuers accounted for 18% of the corporate bonds held by the Company (6% of total investments and cash) and no single issuer accounted for more than 3% of total
corporate bonds (1% of total investments and cash).
Within the finance sector, 100% of corporate bonds were rated investment grade and 43% were rated A- or better at December 31, 2016.
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Asset-backed and Residential Mortgage-backed Securities included in Fixed maturities
Asset-backed securities and residential mortgage-backed securities by U.S. and non-U.S. originations and the related the fair value and credit ratings at
December 31, 2016 were as follows (in millions of U.S. dollars):
December 31, 2016
Asset-backed securities
U.S.
Non-U.S.
Asset-backed securities
Residential mortgage-backed securities
U.S.
Non-U.S.
Residential mortgage-backed securities
Total
% of Total
Credit Rating (1)
GNMA (2)
GSEs (3)
AAA
Below
investment
grade /
Unrated
Fair
Value
$
$
$
$
$
— $
—
— $
483
$
— $
$
$
483
483
20%
— $
—
— $
1,658
—
1,658
1,658
$
$
$
—
—
—
—
100
100
100
$
$
$
$
$
71%
4%
79
45
124
$
$
— $
—
— $
$
124
5%
79
45
124
2,141
100
2,241
2,365
100%
(1) All references to credit rating reflect Standard & Poor’s (or estimated equivalent).
(2) GNMA represents the Government National Mortgage Association. The GNMA, or Ginnie Mae as it is commonly known, is a wholly-owned U.S. government
corporation within the Department of Housing and Urban Development which guarantees mortgage loans of qualifying first-time home buyers and low-income
borrowers.
(3) GSEs, or government sponsored enterprises, includes securities that carry the implicit backing of the U.S. government and securities issued by U.S. government
agencies.
Residential mortgage-backed securities include U.S. residential mortgage-backed securities, which generally have a low risk of default. The issuers of these
securities are U.S. government agencies or GSEs, which set standards on the mortgages before accepting them into the program. Although these U.S. government backed
securities do not carry a formal rating, they are generally considered to have a credit quality equivalent to or greater than AA+ corporate issues. They are considered prime
mortgages and the major risk is uncertainty of the timing of prepayments. While there have been market concerns regarding sub-prime mortgages, the Company did not
have direct exposure to these types of securities in its own investment portfolio at December 31, 2016, other than $12 million of investments in distressed asset vehicles
(included in Other invested assets). At December 31, 2016, the Company’s U.S. residential mortgage-backed securities included approximately $18 million (less than 1%
of U.S. residential mortgage-backed securities) of collateralized mortgage obligations, where the Company deemed the entry point and price of the investment to be
attractive.
Short-term Investments
Short-term investments of $22 million consisted of U.S. and non-U.S. government obligations and foreign corporate bonds. At December 31, 2016, 91% of short-
term investments were rated AA or higher by Standard & Poor’s (or estimated equivalent).
Other Invested Assets
Other invested assets is comprised of investments that are accounted for using the equity method of accounting, cost method of accounting or fair value accounting.
At December 31, 2016, other invested assets primarily include an investment in a privately held real estate investment and development group of $436 million under the
equity method, investments with a fair value of $464 million (mainly third party private equity funds) and notes and loan receivables and notes securitizations of $143
million (mainly part of our Principal Finance portfolio). The other invested assets also include other specialty investments in distressed asset vehicles comprised of sub-
prime mortgages, which were discussed above in the residential mortgage-backed securities category of Investments. In addition, other invested assets include certain
derivatives (see Note 6 to the Consolidated Financial Statements in Item 18 of this report for further details).
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Funds Held—Directly Managed Account
The assets underlying the funds held–directly managed account are maintained by Colisée Re in a segregated investment portfolio and managed by the Company.
Substantially all of the investments in the segregated investment portfolio underlying the funds held–directly managed account are fixed maturity investments carried at
fair value. The fair value of the investment portfolio underlying the funds held–directly managed account decreased from $400 million at December 31, 2015 to $354
million at December 31, 2016 primarily related to the run-off of the underlying liabilities associated with this account and, to a lesser extent, the impact of the
strengthening of the U.S. dollar against most major currencies.
The average credit quality, the year-end yield to maturity and the expected average duration of the fixed maturities underlying the funds held–directly managed
account at December 31, 2016 and 2015 were as follows:
Average credit quality
Year-end yield to maturity
Expected average duration
December 31, 2016
December 31, 2015
AA
1.1 %
3.5 years
AA
1.0 %
3.4 years
The average credit quality remained unchanged while the year-end yield to maturity was comparable for the fixed maturities underlying the funds held–directly
managed account at December 31, 2016 compared to December 31, 2015.
The expected average duration of fixed maturities increased from 3.4 years at December 31, 2015 to 3.5 years at December 31, 2016, primarily due to a reallocation
into longer duration assets.
See Non-life and Life and Health Reserves section below and Notes 5 and 8(b) to the Consolidated Financial Statements in Item 18 of this report for a description
and further details on the funds held–directly managed account and related guaranteed reserves.
The credit risk of Colisée Re in the event of its insolvency or its failure to honor the value of the funds held balances for any other reason is discussed in Quantitative
and Qualitative Disclosures about Market Risk—Counterparty Credit Risk in Item 11 of this report.
Funds Held by Reinsured Companies (Cedants)
The Company writes certain business on a funds held basis. Under funds held contractual arrangements, the cedant retains the net funds that would have otherwise
been remitted to the Company and credits the net fund balance with investment income. The Company does not legally own or directly control the investments underlying
its funds held assets and only has recourse to the cedant for the receivable balances and no claim to the underlying securities that support the balances. Decisions as to
purchases and sales of assets underlying the funds held balances are made by the cedant; in some circumstances, investment guidelines regarding the minimum credit
quality of the underlying assets may be agreed upon between the cedant and the Company as part of the reinsurance agreement, or the Company may participate in an
investment oversight committee regarding the investment of the net funds, but investment decisions are not otherwise influenced by the Company.
At December 31, 2016 and 2015, the Company recorded $685 million and $658 million, respectively, of funds held assets, excluding the funds held–directly
managed account discussed above. The majority of the funds held balance relate to contracts that earned investment income based upon a predetermined interest rate,
either fixed contractually at the inception of the contract or based upon a recognized market index (e.g., LIBOR). Under these contractual arrangements, there are no
specific assets linked to the funds held assets, and the Company is only exposed to the credit risk of the cedant.
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Non-life and Life and Health Reserves
Non-life Reserves
Loss reserves represent estimates of amounts an insurer or reinsurer ultimately expects to pay in the future on claims incurred at a given time, based on facts and
circumstances known at the time that the loss reserves are established. It is possible that the total future payments may exceed, or be less than, such estimates. The
estimates are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends in claim severity, frequency and
other variable factors such as inflation. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward
or downward. Despite such adjustments, the ultimate future liability may exceed or be less than the revised estimates.
As part of the reserving process, insurers and reinsurers review historical data and anticipate the impact of various factors such as legislative enactments and judicial
decisions that may affect potential losses from casualty claims, changes in social and political attitudes that may increase exposure to losses, mortality and morbidity
trends and trends in general economic conditions. This process assumes that past experience, adjusted for the effects of current developments, is an appropriate basis for
anticipating future events.
The Company’s gross reserves by segment and the total ceded and net non-life reserves at December 31, 2016 and 2015 were as follows (in millions of U.S.
dollars):
P&C segment
Specialty segment
Gross non-life reserves
Ceded non-life reserves
Net non-life reserves
2016
2015
$
6,187
2,798
8,985
(267)
8,718
$
6,245
2,819
9,064
(189)
8,875
$
$
Net non-life reserves decreased from December 31, 2015 to December 31, 2016 primarily due to net favorable loss emergence on prior accident years, loss
payments and the impact of foreign exchange, partially offset by current year net losses incurred. The changes in these reserves and the reconciliation of the gross and net
total non-life reserves for the years ended December 31, 2016, 2015 and 2014 are presented and discussed further in Note 8(a) to the Consolidated Financial Statements in
Item 18 of this report.
The net favorable prior year loss development on prior accident years was $677 million for the year ended December 31, 2016, primarily resulting from favorable
loss emergence across all lines of business within the P&C and Specialty segments. See Note 8(a) to the Consolidated Financial Statements in Item 18 for further details
and description of the 2016 net favorable loss development by segment and for comparisons to 2015 and 2014.
See also Note 8(a) to the Consolidated Financial Statements in Item 18 of this report for details of the net incurred and paid losses and loss expenses development by
accident year, the total of incurred but not reported liabilities plus expected development on reported claims, and the net liability as at December 31, 2016 for total Non-
life and each of the P&C and Specialty segments.
The gross reserves reported by cedants (case reserves), those estimated by the Company (ACRs and IBNR) and the total gross, ceded and net loss reserves recorded
at December 31, 2016 by reserving line for the Company’s Non-life operations were as follows (in millions of U.S. dollars):
Reserving lines
P&C
Specialty
Total Non-life reserves
Case reserves
ACRs
IBNR
reserves
Total gross
loss reserves
recorded
Ceded loss
reserves
Net non-life reserves
recorded
$
$
2,741
1,143
3,884
$
$
147
20
167
$
$
3,299
1,635
4,934
$
$
6,187
2,798
8,985
$
$
(99)
(168)
(267)
$
$
6,088
2,630
8,718
The net non-life loss reserves represent the Company’s best estimate of future losses and loss expense amounts based on the information available at December 31,
2016. Loss reserves rely upon estimates involving actuarial and statistical projections at a given time that reflect the Company’s expectations of the costs of the ultimate
settlement and administration of claims. Estimates of ultimate liabilities are contingent on many future events and the eventual outcome of these events may be different
from the assumptions underlying the reserve estimates. In the event that the business environment and
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social trends diverge from historical trends, the Company may have to adjust its loss reserves to amounts falling significantly outside its current estimate. These estimates
are regularly 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 period in which
the need for an adjustment is determined.
The Company’s best estimates are point estimates within a reasonable range of actuarial liability estimates. These ranges are developed using stochastic simulations
and techniques and provide an indication as to the degree of variability of the loss reserves. The Company interprets the ranges produced by these techniques as
confidence intervals around the point estimates for each Non-life sub-segment. However, due to the inherent volatility in the business written by the Company, there can
be no assurance that the final settlement of the loss reserves will fall within these ranges.
The point estimates related to net loss reserves recorded by the Company and the range of actuarial estimates at December 31, 2016 for P&C and Specialty segments
were as follows (in millions of U.S. dollars):
P&C
Specialty
Recorded Point
Estimate
$
$
6,088
2,630
$
$
High
Low
6,286
2,954
$
$
4,927
2,146
It is not appropriate to add together the ranges of each segment in an effort to determine a high and low range around the Company’s total carried loss reserves.
Of the Company’s $8,718 million of net loss reserves related to the P&C and Specialty business at December 31, 2016, net loss reserves for accident years 2005 and
prior of $496 million are guaranteed by Colisée Re, pursuant to the Reserve Agreement. The Company is not subject to any loss reserve variability associated with the
guaranteed reserves. See below for a discussion of the Reserve Agreement.
Included in the business that is considered to have a long reporting tail is the Company’s exposure to asbestos and environmental claims. The Company’s net non-
life reserves at December 31, 2016 included $166 million representing estimates of its net ultimate liability for asbestos and environmental claims. The gross liability for
such claims at December 31, 2016 was $176 million, which primarily relates to Paris Re’s gross liability for asbestos and environmental claims for accident years 2005
and prior of $113 million, with any favorable or adverse loss development being subject to the Reserve Agreement. Of the remaining $63 million in gross reserves, the
majority relates to casualty exposures in the United States arising from business written by the French branch of PartnerRe Europe and PartnerRe U.S.
Ultimate loss estimates 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 legal and tort environment that affect the development of such claims, the uncertainties inherent in
estimating asbestos and environmental claims are not likely to be resolved in the near future. There can be no assurance that the reserves established by the Company will
not be adversely affected by development of other latent exposures, and further, there can be no assurance that the reserves established by the Company will be adequate.
The Company does, however, actively evaluate potential exposure to asbestos and environmental claims and establishes additional reserves as appropriate. The Company
believes that it has made a reasonable provision for these exposures and is unaware of any specific issues that would materially affect its unpaid losses and loss expense
reserves related to this exposure (see Note 8 to the Consolidated Financial Statements in Item 18 of this report).
Non-life Reserving Methodology
Because a significant amount of time can elapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company (the
primary company or the cedant), the subsequent reporting to the reinsurance company (the reinsurer) and the ultimate payment of the claim on the loss event by the
reinsurer, the Company’s non-life reserves (loss reserves) are based largely upon estimates.
The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (case reserves), additional case reserves (ACRs) and amounts
for losses incurred but not yet reported to the Company (IBNR). The Company updates its estimates for each of the aforementioned categories on a quarterly basis using
information received from its cedants.
Case reserves represent unpaid losses reported by the Company’s cedants and recorded by the Company.
ACRs are established for particular circumstances where, on the basis of individual loss reports, the Company estimates that the particular loss or collection of losses
covered by a treaty may be greater than those advised by the cedant.
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IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already
reported, in excess of the case reserves and ACRs. Unlike case reserves and ACRs, IBNR reserves are often calculated at an aggregated level and cannot usually be
directly identified as reserves for a particular loss or treaty.
The Company also estimates the future unallocated loss adjustment expenses (ULAE) associated with the loss reserves and these form part of the Company’s loss
adjustment expense reserves. The Company’s Non-life loss reserves for each category, line and sub-segment are reported in the tables included later in this section.
The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the
reporting tail. Lines of business for which claims are reported quickly are commonly referred to as short-tail lines; and lines of business for which a longer period of time
elapses before claims are reported to the reinsurer are commonly referred to as long-tail lines. In general, for reinsurance, the time lags are longer than for primary
business due to the delay that occurs between the cedant becoming aware of a loss and reporting the information to its reinsurer(s). The delay varies by reinsurance market
(country of cedant), type of treaty, whether losses are first paid by the cedant and the size of the loss. The delay could vary from a few weeks to a year or sometimes
longer. The Company considers agriculture, catastrophe, energy, motor business written in the U.S., proportional motor business written outside of the U.S., property, and
specialty property to be short-tail lines; aviation/space, credit/surety, engineering, marine and multiline to be medium-tail lines; and casualty, non-proportional motor
business written outside of the U.S. and specialty casualty to be long-tail lines of business. For all lines, the Company’s objective is to estimate ultimate losses and loss
expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total
loss reserves.
The Company analyzes its ultimate losses and loss expenses after consideration of the loss experience of various reserving cells. The Company assigns treaties to
reserving cells and allocates losses from the treaty to the reserving cell. The reserving cells are selected in order to ensure that the underlying treaties have homogeneous
loss development characteristics (e.g., reporting tail) but are large enough to make estimation of trends credible. The selection of reserving cells is reviewed annually and
changes over time as the business of the Company evolves. For each reserving cell, the Company tabulates losses in reserving triangles that show the total reported or paid
claims at each financial year end by underwriting year cohort. An underwriting year is the year during which the reinsurance treaty was entered into as opposed to the year
in which the loss occurred (accident year), or the calendar year for which financial results are reported. For each reserving cell, the Company’s estimates of loss reserves
are reached after a review of the results of several commonly accepted actuarial projection methodologies. In selecting its best estimate, the Company considers the
appropriateness of each methodology to the individual circumstances of the reserving cell and underwriting year for which the projection is made. The methodologies that
the Company employs include, but may not be limited to, paid and reported Chain Ladder methods, Expected Loss Ratio method, paid and reported Bornhuetter-Ferguson
(B-F) methods, and paid and reported Benktander methods. In addition, the Company uses other methodologies to estimate liabilities for specific types of claims. For
example, reserves established for the catastrophe line are primarily a function of the presence or absence of catastrophic events during the year, and the complexity and
uncertainty associated with estimating unpaid losses from these large disclosed events. Internal and vendor catastrophe models are typically used in the estimation of loss
and loss expenses at the early stages of catastrophe losses before loss information is reported to the reinsurer. In addition, reserves are also established in consideration of
mid-sized and attritional loss events that occur during a year. In the case of asbestos and environmental claims, the Company has established reserves for future losses and
allocated loss expenses based on the results of periodic actuarial studies, which consider the underlying exposures of the Company’s cedants.
The reserve methodologies employed by the Company are dependent on data that the Company collects. This data consists primarily of loss amounts and loss
payments reported by the Company’s cedants, and premiums written and earned reported by cedants or estimated by the Company. The actuarial methods used by the
Company to project loss reserves that it will pay in the future do not generally include methodologies that are dependent on claim counts reported, claim counts settled or
claim counts open as, due to the nature of the Company’s business, this information is not routinely provided by cedants for every treaty.
A brief description of the reserving methods commonly employed by the Company and a discussion of their particular advantages and disadvantages follows:
Chain Ladder (CL) Development Methods (Reported or Paid)
These methods use the underlying assumption that losses reported (paid) for each underwriting year at a particular development stage follow a stable pattern. For
example, the CL development method assumes that on average, every underwriting year will display the same percentage of ultimate liabilities reported by the Company’s
cedants (say x%) at 24
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months after the inception of the underwriting year. The percentages reported (paid) are established for each development stage (e.g., at 12 months, 24 months, etc.) after
examining historical averages from the loss development data. These are sometimes supplemented by external benchmark information. Ultimate liabilities are estimated
by multiplying the actual reported (paid) losses by the reciprocal of the assumed reported (paid) percentage (e.g., 1/x%). Reserves are then calculated by subtracting paid
claims from the estimated ultimate liabilities.
The main strengths of the method are that it is reactive to loss emergence (payments) and that it makes full use of historical experience on claim emergence
(payments). For homogeneous low volatility lines, under stable economic conditions the method can often produce good estimates of ultimate liabilities and reserves.
However, the method has weaknesses when the underlying assumption of stable patterns is not true. This may be the consequence of changes in the mix of business,
changes in claim inflation trends, changes in claim reporting practices or the presence of large claims, among other things. Furthermore, the method tends to produce
volatile estimates of ultimate liabilities in situations where there is volatility in reported (paid) patterns. In particular, when the expected percentage reported (paid) is low,
small deviations between actual and expected claims can lead to very volatile estimates of ultimate liabilities and reserves. Consequently, this method is often unsuitable
for projections at early development stages of an underwriting year. Finally, the method fails to incorporate any information regarding market conditions, pricing, etc.,
which could improve the estimate of liabilities and reserves. It therefore tends not to perform very well in situations where there are rapidly changing market conditions.
Expected Loss Ratio (ELR) Method
This method estimates ultimate losses for an underwriting year by applying an estimated loss ratio to the earned premium for that underwriting year. Although the
method is insensitive to actual reported or paid losses, it can often be useful at the early stages of development when very few losses have been reported or paid, and the
principal sources of information available to the Company consist of information obtained during pricing and qualitative information supplied by the cedant. However, the
lack of sensitivity to reported or paid losses means that the method is usually inappropriate at later stages of development.
Bornhuetter-Ferguson (B-F) Methods (Reported or Paid)
These methods aim to address the concerns of the CL Development methods, which are the variability at early stages of development and the failure to incorporate
external information such as pricing. However, the B-F methods are more sensitive to reported and paid losses than the Expected Loss Ratio method, and can be seen as a
blend of the Expected Loss Ratio and CL development methods. Unreported (unpaid) claims are calculated using an expected reporting (payment) pattern and an
externally determined estimate of ultimate liabilities (usually determined by multiplying an a priori loss ratio with estimates of premium volume). The accuracy of the a
priori loss ratio is a critical assumption in this method. Usually a priori loss ratios are initially determined on the basis of pricing information, but may also be adjusted to
reflect other information that subsequently emerges about underlying loss experience. Although the method tends to provide less volatile indications at early stages of
development and reflects changes in the external environment, this method can be slow to react to emerging loss development (payment). In particular, to the extent that
the a priori loss ratios prove to be inaccurate (and are not revised), the B-F methods will produce loss estimates that take longer to converge with the final settlement
value of loss liabilities.
Benktander (B-K) Methods (Reported or Paid)
These methods can be viewed as a blend between the CL Development and the B-F methods described above. The blend is based on predetermined weights at each
development stage that depend on the reported (paid) development patterns.
Although mitigated to some extent, this method still exhibits the same advantages and disadvantages as the B-F method, but the mechanics of the calculation imply
that it is more reactive to loss emergence (payment) than the B-F method.
Loss Event Specific Method
The ultimate losses estimated under this method are derived from estimates of specific events based on reported claims, client and broker discussions, review of
potential exposures, market loss estimates, modeled analysis and other event specific criteria.
Method Weights
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In determining the loss reserves, the Company often relies on a blend of the results from two or more methods (e.g., weighted averages). The judgment as to which
of the above method(s) is most appropriate for a particular underwriting year and reserving cell could change over time as new information emerges regarding underlying
loss activity and other data issues. Furthermore, as each line is typically composed of several reserving cells, it is likely that the reserves for the line will be dependent on
several reserving methods. This is because reserves for a line are the result of aggregating the reserves for each constituent reserving cell and that a different method could
be selected for each reserving cell.
The principal reserving methods used for Catastrophe, which is all within P&C, were ELR based on exposure analysis and Loss event specific. The principal
reserving methods used for Specialty and P&C excluding Catastrophe were ELR, Reported/ Paid B-F, Reported/Paid B-K and Reported/Paid CL.
The reserving methods used by the Company are dependent on a number of key parameter assumptions. The principal parameter assumptions underlying the
methods used by the Company are:
•
•
•
•
the loss development factors used to form an expectation of the evolution of reported and paid claims for several years following the inception of the
underwriting year. These are often derived by examining the Company’s data after due consideration of the underlying factors listed below. In some cases,
where the Company lacks sufficient volume to have statistical credibility, external benchmarks are used to supplement the Company’s data;
the tail factors used to reflect development of paid and reported losses after several years have elapsed since the inception of the underwriting year;
the a priori loss ratios used as inputs in the B-F methods; and
the selected loss ratios used as inputs in the Expected Loss Ratio method.
As an example of the sensitivity of the Company’s reserves to reserving parameter assumptions by reserving line, the effect on the Company’s reserves of
higher/lower a priori loss ratio selections, higher/lower loss development factors and higher/lower tail factors based on amounts recorded at December 31, 2016 was as
follows (in millions of U.S. dollars):
Reserving lines selected assumptions
A Priori Loss Ratio +5%
Loss Development Factors (up to 10 years) 6 months longer
Tail Loss Development Factors higher by 5%(1)
A Priori Loss Ratio -5%
Loss Development Factors (up to 10 years) 6 months faster
Tail Loss Development Factors lower by 5%(1)
P&C
Specialty
279
283
249
(279)
(160)
(202)
106
235
137
(106)
(106)
(62)
(1) Tail factors are defined as aggregate development factors after 10 years from the inception of an underwriting year.
The Company believes that the illustrated sensitivities to the reserving parameter assumptions are indicative of the potential variability inherent in the estimation
process of those parameters. Some reserving lines show little sensitivity to a priori loss ratio, loss development factor or tail factor as the Company may use reserving
methods such as the Expected Loss Ratio method in several of its reserving cells within those lines. It is not appropriate to sum the total impact for a specific factor or the
total impact for a specific reserving line as the lines of business are not perfectly correlated.
The validity of all parameter assumptions used in the reserving process is reaffirmed on a quarterly basis. Reaffirmation of the parameter assumptions means that
the actuaries determine that the parameter assumptions continue to form a sound basis for projection of future liabilities. Parameter assumptions used in projecting future
liabilities are themselves estimates based on historical information. As new information becomes available (e.g., additional losses reported), the Company’s actuaries
determine whether a revised estimate of the parameter assumptions that reflects all available information is consistent with the previous parameter assumptions employed.
In general, to the extent that the revised estimate of the parameter assumptions are within a close range of the original assumptions, the Company determines that the
parameter assumptions employed continue to form an appropriate basis for projections and continue to use the original assumptions in its models. In this case, any
differences could be attributed to the imprecise nature of the parameter estimation process. However, to the extent that the deviations between the two sets of estimates are
not within a close range of the original assumptions, the Company reacts by adopting the revised assumptions as a basis for its reserve models. Notwithstanding the above,
even where the Company has experienced no material deviations from its original assumptions
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during any quarter, the Company will generally revise the reserving parameter assumptions at least once a year to reflect all accumulated available information.
In addition to examining the data, the selection of the parameter assumptions is dependent on several underlying factors. The Company’s actuaries review these
underlying factors and determine the extent to which these are likely to be stable over the time frame during which losses are projected, and the extent to which these
factors are consistent with the Company’s data. If these factors are determined to be stable and consistent with the data, the estimation of the reserving parameter
assumptions are mainly carried out using actuarial and statistical techniques applied to the Company’s data. To the extent that the actuaries determine that they cannot
continue to rely on the stability of these factors, the statistical estimates of parameter assumptions are modified to reflect the direction of the change. The main underlying
factors upon which the estimates of reserving parameters are predicated are:
•
•
•
•
the cedant’s business practices will proceed as in the past with no material changes either in submission of accounts or cash flows;
any internal delays in processing accounts received by the cedant are not materially different from that experienced historically, and hence the implicit reserving
allowance made in loss reserves through the methods continues to be appropriate;
case reserve reporting practices, particularly the methodologies used to establish and report case reserves, are unchanged from historical practices;
the Company’s internal claim practices, particularly the level and extent of use of ACRs, are unchanged;
• historical levels of claim inflation can be projected into the future and will have no material effect on either the acceleration or deceleration of claim reporting
and payment patterns;
•
•
•
the selection of reserving cells results in homogeneous and credible future expectations for all business in the cell and any changes in underlying treaty terms are
either reflected in cell selection or explicitly allowed in the selection of trends;
in cases where benchmarks are used, they are derived from the experience of similar business; and
the Company can form a credible initial expectation of the ultimate loss ratio of recent underwriting years through a review of pricing information,
supplemented by qualitative information on market events.
The Company’s best estimate of total loss reserves is typically in excess of the midpoint of the actuarial ultimate liability estimate. The Company believes that there
is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature underwriting years that may not be adequately captured through
traditional actuarial projection methodologies as these methodologies usually rely heavily on projections of prior year trends into the future. In selecting its best estimate
of future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by
a reasonable range of actuarial liability estimates. The selected best estimates of reserves are always within the reasonable range of estimates indicated by the Company’s
actuaries. In determining the appropriate best estimate, the Company reviews (i) the position of overall reserves within the actuarial reserve range, (ii) the result of bottom
up analysis by underwriting year reflecting the impact of parameter uncertainty in actuarial calculations, and (iii) specific qualitative information on events that may have
an effect on future claims but which may not have been adequately reflected in actuarial estimates, such as potential for outstanding litigation, claims practices of cedants,
etc.
During 2016, 2015 and 2014, the Company reviewed its estimate for prior year losses for the P&C and Specialty segments and, in light of developing data, adjusted
its ultimate loss ratios for prior accident years. The net prior year favorable loss development for each segment for the years ended December 31, 2016, 2015 and 2014 is
presented in Note 8 to the Consolidated Financial Statements in Item 18 of this report.
Actual losses paid and reported compared with the Company’s expectations, and the changes of the Company’s reserving parameter assumptions in response to the
emerging development during the year ended December 31, 2016 were as follows:
•
P&C and Specialty: Aggregate losses reported in 2016 for both P&C and Specialty segments were below the Company’s expectations as losses for most
underwriting years continue to emerge below expectations. The better than expected loss emergence within the P&C segment was mainly driven by casualty line
of business. The better than expected loss emergence within the Specialty segment was predominantly driven by Marine, Energy Offshore and Onshore
exposures. The Company reflected this experience by reducing the selected loss ratios for these lines of business.
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Reserve Agreement and Funds Held–Directly Managed Account
The non-life reserves at December 31, 2016 and 2015 include reserves guaranteed by Colisée Re. On December 21, 2006, Colisée Re transferred substantially all of
its assets and liabilities, other than specified reinsurance and retrocession agreements and certain other excluded assets and liabilities (the AXA Transfer), to PARIS RE
Holdings SA’s French operating subsidiary (Paris Re France). The AXA Transfer was immediately followed by the acquisition by Paris Re of all the outstanding capital
stock of Paris Re France (the AXA Acquisition). In connection with the AXA Acquisition, AXA, Colisée Re and Paris Re entered into various agreements (2006
Acquisition Agreements), including a Reserve Agreement. The Reserve Agreement provides that AXA and Colisée Re shall guarantee reserves in respect of Paris Re
France and subsidiaries acquired in the AXA Acquisition. The Reserve Agreement covers losses incurred prior to December 31, 2005, including any adverse development
in respect thereof, by the subsidiaries of Colisée Re transferred to Paris Re France as part of the 2006 Acquisition Agreements, in respect of reinsurance policies issued or
renewed, and in respect of which premiums were earned, on or prior to December 31, 2005 (but excluding any amendments thereto effected after the closing of the 2006
Acquisition Agreements).
Following Paris Re’s acquisition of substantially all of the reinsurance operations of Colisée Re in 2006, Paris Re France and certain subsidiaries entered into an
issuance agreement and a quota share retrocession agreement to assume business written by Colisée Re from January 1, 2006 to September 30, 2007 as well as the in-
force business at December 31, 2005. The agreements provided that the premium related to the transferred business was retained by Colisée Re and credited to a funds
held account. Paris Re France would receive any surplus, and be responsible for any deficits remaining with respect to the funds held–directly managed account, after all
liabilities have been discharged and payments pursuant to the Reserve Agreement have been settled. In addition, realized and unrealized investment gains and losses and
net investment income related to the investment portfolio underlying the funds held–directly managed account inure to the benefit of Paris Re France. The assets
underlying the funds held–directly managed account are maintained by Colisée Re in a segregated investment portfolio and managed by the Company and are discussed
above.
On October 1, 2010, PartnerRe Europe and Paris Re France effected a cross border merger whereby all the assets and liabilities of Paris Re France were transferred
to PartnerRe Europe, including the agreements between Paris Re France and Colisée Re.
At December 31, 2016 and 2015, the Company’s net liability for non-life reserves includes $496 million and $521 million, respectively, of guaranteed reserves and
the decrease during the year was primarily due to the run-off of the underlying liabilities associated with this account and, to a lesser extent, the impact of the
strengthening of the U.S. dollar against most major currencies.
See Notes 5 and 8(b) to the Consolidated Financial Statements in Item 18 of this report for further details of the funds held–directly managed account and related
guaranteed reserves.
Life and Health Reserves
Life and Health reserves relate to the Company’s Life and Health segment, which predominantly includes:
• mortality business, covering death and disability risks (with various riders) primarily written in Continental Europe, TCI primarily written in the U.K. and
Ireland, and GMDB business primarily written in Continental Europe. Following the acquisition of Aurigen, the Company will also write mortality business
originating in Canada;
•
•
reinsurance of longevity, subdivided into standard and non-standard annuities primarily written in the U.K.; and
specialty accident and health business, including Health Maintenance Organizations (HMO) reinsurance, medical reinsurance and provider and employer excess
of loss programs primarily written in the U.S.
The Company categorizes life reserves into three types of reserves: case reserves, IBNR and reserves for future policy benefits. Case reserves represent unpaid
losses reported by the Company’s cedants and recorded by the Company. IBNR reserves represent a provision for claims that have been incurred but not yet reported to
the Company, as well as future loss development on losses already reported, in excess of the case reserves. Reserves for future policy benefits relate to future events
occurring on policies in force over an extended period of time. Reserves for future policy benefits represent an estimate of the amount which, together with estimated
future premiums and investment income, will be sufficient to pay claims and future benefits, expenses and costs on in-force policies, as such claims and expenses are
incurred.
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Reserves for future policy benefits are calculated as the present value of future expected claims, benefits and costs to be paid, reduced by the present value of future
expected premiums. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards.
Principal assumptions used in the establishment of reserves for future policy benefits have been determined based upon information reported by ceding companies,
supplemented by the Company’s actuarial estimates of mortality, critical illness, persistency and future investment income, with appropriate provision to reflect
uncertainty. Case reserves, IBNR reserves and reserves for future policy benefits are generally calculated at the treaty level. The Company updates its estimates for each
of the aforementioned categories on a periodic basis using information received from its cedants.
The Company’s gross and net reserves for the Life and Health segment at December 31, 2016 were as follows (in millions of U.S. dollars):
Total
$
281
$
798
$
905
$
1,984
$
(31)
$
1,953
The changes in these reserves and the reconciliation of the gross and net Life and Health reserves for the years ended December 31, 2016, 2015 and 2014 were as
Case
reserves
IBNR
reserves
Reserves for
future policy
benefits
Total gross Life
and Health
reserves
Ceded
reserves
Net Life
and Health
reserves
follows (in millions of U.S. dollars):
Gross liability at beginning of year
Reinsurance recoverable at beginning of year
Net liability at beginning of year
Net incurred losses related to:
Current year
Prior years
Net paid losses
Effects of foreign exchange rate changes
Net liability at end of year
Reinsurance recoverable at end of year
Gross liability at end of year
2016
2015
2014
$
$
2,052
43
2,009
943
(16)
927
(844)
(139)
1,953
31
1,984
$
$
2,050
29
2,021
1,011
(47)
964
(835)
(141)
2,009
43
2,052
$
$
1,974
7
1,967
1,019
(19)
1,000
(781)
(165)
2,021
29
2,050
The decreases in the net Life and Health reserves, as presented in the table above, were primarily due to net paid losses and the impact of foreign exchange
exceeding net incurred losses during the years ended December 31, 2016 and 2015. The net incurred losses for the Company’s life and health reserves will generally
exceed net paid losses in any one given year due to the long-term nature of the liabilities and the growth in the book of business.
Life and Health Reserving Methodology
The Company’s reserving practices begin with the categorization of the contracts written as short duration, long duration, or universal life business for U.S. GAAP
reserving purposes. This categorization determines the Company’s reserving methodology which is described by line of business below.
• Mortality: The reserves for the short-term mortality business are established in accordance with the provisions for short duration insurance contracts under U.S.
GAAP. They consist of case reserves and IBNR, calculated at the treaty level based upon cedant information. The Company’s reserving methodology includes a
quarterly review of actual experience against expected experience and the use of the Expected Loss Ratio method described in Losses and Loss Expenses above.
Given the very short-term loss development of this portion of the portfolio, this method is considered appropriate.
The reserves for the long-term traditional mortality and TCI reinsurance portfolio are established in accordance with the provisions for long duration insurance
contracts under U.S. GAAP. The Company establishes Reserves for future policy benefits based upon management’s best estimate of claims and policy benefits
and includes a provision for adverse deviation. Management’s best estimate relies upon actuarial indications of future claims and policy benefits. The provision
for adverse deviation contemplates reasonable deviations from the best estimate assumptions for the key risk elements relevant to the product being evaluated,
including mortality, disability,
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critical illness, expenses, and discount rate among others, and are recorded in accordance with U.S. GAAP and applicable actuarial standards. The Company’s
actuaries annually verify the current reserving assumptions in consideration of evolving experience and the actuarial indications for assumptions relating to future
policy benefits, including mortality, disability, critical illness, persistency and future investment income, among others. Management makes no adjustments to
recorded deferred acquisition costs or future policy benefits if the actuarial indications conclude that current recorded U.S. GAAP policy benefits are adequate.
The Company establishes a premium deficiency reserve, or an increase to future policy benefits to the extent that deferred acquisition costs are insufficient to
cover the premium deficiency reserve, if the actuarial indication of life policy benefits is greater than current recorded aggregate amounts for policy benefits,
settlement costs, and deferred acquisition costs. The reserves for the GMDB reinsurance business are established in accordance with the provisions for universal
life contracts under U.S. GAAP. Key actuarial assumptions for this business are mortality, lapses, interest rates, expected returns on cash and bonds and stock
market performance. For the last parameter, a stochastic option pricing approach is used and the benefits used in calculating the liabilities are based on the
average benefits payable over a range of scenarios. The assumptions of investment performance and volatility are consistent with expected future experience of
the respective underlying funds available for policyholder investment options. Recorded reserves for GMDB reflect management’s best estimate which relies
upon the quarterly actuarial indications.
•
•
Longevity: The reserves for the annuity portfolio of reinsurance contracts within the longevity book are established in accordance with the provisions for long
duration insurance contracts under U.S. GAAP. Some of these contracts subject the Company to risks arising from policyholder mortality over a period that
extends beyond the periods in which premiums are collected. The Reserves for future policy benefits follow the reserving methodology discussed under the long-
term traditional mortality section above.
For standard annuities, the main risk is a faster increase in future life span than expected in the medium to long term. Non-standard annuities are annuities sold to
people with aggravated health conditions and are usually medically underwritten on an individual basis and the main risk is the inadequate assessment of the
future life span of the insured.
Accident and Health: The unpaid loss and loss expense reserves for accident and health business are established in accordance with the provisions for short
duration insurance contracts under U.S. GAAP. Reserves are initially calculated using the Expected Loss Ratio method. Subsequently, the Company’s reserving
methodology utilizes actual reported loss experience and the B-F method to calculate IBNR.
As an example of the sensitivity of the Company’s reserves for life and health contracts to reserving parameter assumptions by reserving line, the effect of
different assumption selections based on the gross reserves recorded at December 31, 2016 was as follows (in millions of U.S. dollars):
Reserving lines
Longevity
Factors
Change
Impact on total
net Life and Health reserves
Standard and non-standard annuities
Mortality improvements per annum
Mortality
Long-term and TCI
GMDB
Accident and Health
Mortality
Stock market performance
Expected loss ratio
1% $
10% $
10% / -10% $
10% / -10% $
213
187
(1)/1
29/(29)
It is not appropriate to sum the total impact for a specific reserving line or the total impact for a specific factor because the reinsurance portfolios are not perfectly
correlated.
Refer to Note 8 to the Consolidated Financial Statements in Item 18 of this report for disclosures on Life and Health reserves and to Note 8(d) for a description of
the 2016 net favorable prior year loss development and comparison to 2015 and 2014.
Reinsurance Recoverable on Paid and Unpaid Losses
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The Company has exposure to credit risk related to reinsurance recoverable on paid and unpaid losses. See Note 9 to the Consolidated Financial Statements in
Item 18 and Quantitative and Qualitative Disclosures about Market Risk—Counterparty Credit Risk in Item 11 of this report for a discussion of the Company’s risk
related to reinsurance recoverable on paid and unpaid losses and the Company’s process to evaluate the financial condition of its reinsurers.
At December 31, 2016 and 2015, the Company recorded $332 million and $283 million, respectively, of reinsurance recoverable on paid and unpaid losses in its
Consolidated Balance Sheets, of which $298 million and $233 million, respectively, represents reinsurance recoverable on total non-life and life and health reserves. At
December 31, 2016, the distribution of the Company’s reinsurance recoverable on total non-life and life and health reserves categorized by the reinsurer’s Standard &
Poor’s rating was as follows:
Rating Category
AA- or better
A- to A+
Less than A-/Unrated/Other
Total
% of total reinsurance recoverable on paid and unpaid
losses
14%
45
41
100%
At December 31, 2016, 59% of the Company’s reinsurance recoverable on total non-life and life and health reserves were due from reinsurers with A- or better
rating from Standard & Poor’s, compared to 55% at December 31, 2015.
Currency
The Company’s reporting currency is the U.S. dollar. The Company has exposure to foreign currency risk due to both its ownership of its Irish, French and Canadian
subsidiaries and branches, whose functional currencies are the Euro and the Canadian dollar, and to underwriting reinsurance exposures, collecting premiums and paying
claims and other expenses in currencies other than the U.S. dollar and holding certain net assets in such currencies.
At December 31, 2016, the value of the U.S. dollar strengthened against most major currencies compared to December 31, 2015, which resulted in a decrease in the
U.S. dollar value of the assets and liabilities denominated in non-U.S. dollar currencies. See Operating Results above for a discussion of the impact of foreign exchange
and net foreign exchange gains and losses during the years ended December 31, 2016, 2015 and 2014.
The currency translation adjustment account is a component of accumulated other comprehensive income or loss in shareholders’ equity. This account increased by
$12 million during the year ended December 31, 2016 compared to a decrease of $46 million and $9 million during the years ended December 31, 2015 and 2014,
respectively, due to the translation of the Company’s subsidiaries and branches financial statements into U.S. dollars, whose functional currencies are the Canadian dollar
and the Euro.
The reconciliation of the currency translation adjustment for the years ended December 31, 2016, 2015 and 2014 was as follows (in millions of U.S. dollars):
Currency translation adjustment at beginning of year
Change in foreign currency translation adjustment included in accumulated other comprehensive loss, inclusive of the
impact of designated net investment hedge
Currency translation adjustment at end of year
$
$
2016
2015
2014
(54)
$
(8)
$
12
(42)
$
(46)
(54)
$
1
(9)
(8)
The Company’s gross and net exposure in its Consolidated Balance Sheet at December 31, 2016 to foreign currency as well as the associated foreign currency
derivatives the Company has entered into to manage this exposure is presented in Quantitative and Qualitative Disclosures about Market Risk in Item 11 of this report.
From time to time, the Company enters into net investment hedges. At December 31, 2015, the Company held foreign exchange forward contracts with notional
amounts of €350 million, to hedge a portion of its net investment exposure to the Euro against the U.S. dollar. This hedge was discontinued during 2016 and, at
December 31, 2016, there were no net investment hedges in place.
See Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk in Item 11 for a discussion of the Company’s risk related to changes in
foreign currency movements, and Note 2(m) to the Consolidated Financial Statements in Item 18 of this report for a discussion of currencies to which the Company is
exposed.
68
Effects of Inflation
The effects of inflation are considered implicitly in pricing and estimating non-life reserves. The actual effects of inflation on the results of operations of the
Company cannot be accurately known until claims are ultimately settled.
Critical Accounting Policies and Estimates
The Company’s Consolidated Financial Statements have been prepared in accordance with 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. The following are the Company’s accounting estimates that management believes are the most
critical to its operations and require the most difficult, subjective and complex judgment. If actual events differ significantly from the underlying assumptions and
estimates used by management, there could be material adjustments to prior estimates that could potentially adversely affect the Company’s results of operations, financial
condition and liquidity. These critical accounting policies and estimates should be read in conjunction with the Notes to the Consolidated Financial Statements in Item 18
of this report, including Note 2 (Significant Accounting Policies).
Non-life and Life and Health Reserves
The Company’s Non-life and Life and Health reserves are significant accounting estimates. These estimates are continually reviewed with any adjustments reflected
in the periods in which they are determined, which may affect the Company’s results in future periods. See Liquidity and Capital Resources—Reserves above and Notes 2
(b) and 8 to the Consolidated Financial Statements in Item 18 of this report for further details.
Premium Estimates and Recoverability of Deferred Acquisition Costs
The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). In most cases, cedants seek protection for
business that they have not yet written at the time they enter into reinsurance agreements and thus have to estimate the volume of premiums they will cede to the
Company. Reporting delays are inherent in the reinsurance industry and vary in length by reinsurance market (country of cedant) and type of treaty. As delays can vary
from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and acquisition costs until it receives the cedants’ actual
premium reported data.
Under proportional treaties, which represented 82% of the Company’s total gross premiums written for the year ended December 31, 2016, the Company shares
proportionally in both the premiums and losses of the cedant and pays the cedant a commission to cover the cedant’s acquisition costs. Under this type of treaty, the
Company’s ultimate premiums written and earned and acquisition costs are not known at the inception of the treaty. As such, reported premiums written and earned and
acquisition costs on proportional treaties are generally based upon reports received from cedants and brokers, supplemented by the Company’s own estimates of premiums
written and acquisition costs for which ceding company reports have not been received. Premium and acquisition cost estimates are determined at the individual treaty
level. The determination of premium estimates requires a review of the Company’s experience with cedants, familiarity with each market, an understanding of the
characteristics of each line of business and management’s assessment of the impact of various other factors on the volume of business written and ceded to the Company.
Premium and acquisition cost estimates are updated as new information is received from the cedants and differences between such estimates and actual amounts are
recorded in the period in which estimates are changed or the actual amounts are determined.
Under non-proportional treaties, which represented the remaining 18% of the Company’s total gross premiums written for the year ended December 31, 2016, the
Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a fixed or minimum premium, which is subject to
upward adjustment depending on the premium volume written by the cedant. In addition, many of the non-proportional treaties include reinstatement premium provisions.
Reinstatement premiums are recognized as written and earned at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated
under pre-defined contract terms. The accrual of reinstatement premiums is based on management’s estimate of losses and loss expenses associated with the loss event.
The magnitude and impact of changes in premium estimates differs for proportional and non-proportional treaties. Although proportional treaties may be subject to
larger changes in premium estimates compared to non-proportional treaties, as the Company generally receives cedant statements in arrears and must estimate all
premiums for periods ranging from one month to more than one year (depending on the frequency of cedant statements), the pre-tax impact is mitigated by changes in the
cedant’s related reported acquisition costs and losses. The impact of the change in estimate on premiums earned and net income varies depending on when the change
becomes known during the risk period and the underlying profitability of the treaty. Non-proportional treaties generally include a fixed minimum premium and an
adjustment premium. While the fixed minimum premiums require no estimation, adjustment premiums are estimated and could be subject to changes in estimates.
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Table of Contents
The amounts recorded within net premiums written and earned that related to changes in prior year premium estimates reported by cedants for P&C and Specialty
segments for the year ended December 31, 2016 were as follows (in millions of U.S. dollars:
P&C
Specialty
Total
Net premiums written
Net premiums earned
$
$
(15)
21
6
$
$
(8)
3
(5)
These changes in prior year premium estimates impacting net premiums written and earned, and after the corresponding adjustments to acquisition costs and losses
and loss expenses, did not have a material impact on the Company’s consolidated net income.
The recoverability of deferred acquisition costs is dependent upon the future profitability of the related business and the testing of recoverability to assess valuation
is performed periodically together with a reserve adequacy test based on the latest best estimate assumptions by line of business.
See Notes 2(d), 9(b) and 20 to the Consolidated Financial Statements in Item 18 of this report and Operating Results—Results by Segment in Item 5 of this report
for accounting policies or further details regarding premiums and recoverability of deferred acquisition costs.
Recoverability of Deferred Tax Assets
Under U.S. GAAP, a deferred tax asset or liability is to be recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
U.S. GAAP also establishes procedures to assess whether a valuation allowance should be established for deferred tax assets. All available evidence, both positive and
negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a deferred tax asset.
Management must use its judgment in considering the relative impact of positive and negative evidence.
The Company has projected future taxable income in the tax jurisdictions in which the deferred tax assets arise based on management’s projections of premium and
investment income, capital gains and losses, and technical and expense ratios. Based on these projections and an analysis of the ability to utilize loss and foreign tax
credits carryforwards at the taxable entity level, management evaluates the need for a valuation allowance.
The Company has estimated the future tax effects attributed to temporary differences and has a deferred tax asset at December 31, 2016 of $123 million, after a
valuation allowance of $92 million. The most significant component of the deferred tax asset (after valuation allowance) relates to loss reserve discounting for tax
purposes. See Note 14 to the Consolidated Financial Statements in Item 18 of this report for details.
In accordance with U.S. GAAP, the Company has assumed that the future reversal of deferred tax liabilities will result in an increase in taxes payable in future years.
Underlying this assumption is an expectation that the Company will continue to be subject to taxation in the various tax jurisdictions and that the Company will continue
to generate taxable revenues in excess of deductions.
See Notes 2(l) and 14 in Notes to the Consolidated Financial Statements in Item 18 of this report for further details.
Valuation of Investments Measured Using Significant Unobservable Inputs
As more fully described in Note 3 to the Consolidated Financial Statements in Item 18 of this report, the Company measures the fair value of its financial
instruments according to a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs
and minimizing the use of unobservable inputs by requiring that the most observable inputs be used when available. Unobservable inputs are inputs that reflect the
Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. Level 3
financial instruments have the least use of observable market inputs used to determine fair value. As at December 31, 2016 the Company classified $715 million of
investment and funds held–directly managed as Level 3 as a result of significant unobservable inputs used to determine fair value. See Note 3 to the Consolidated
Financial Statements in Item 18 of this report for a breakdown of these investments by fair value level as well as more detail on the valuation techniques, methods and
assumptions that were used by the Company to estimate the fair value of its fixed maturities, short-term investments, equities, other invested assets (including derivatives)
and the funds held–directly managed account. See Notes 2(n) and 6 to the Consolidated Financial Statements in Item 18 of this report for more discussion of the
Company’s use of derivative financial instruments.
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Table of Contents
See also Quantitative and Qualitative disclosures About Market Risk in Item 11 of this report for a further discussion of interest rate and credit spread risk and a
sensitivity analysis of interest rate and credit spread variances on the valuation of the Company’s investments and funds withheld directly managed.
Valuation of Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination (PartnerRe SA, Winterthur Re, Paris Re
and PartnerRe Health). The Company assesses the appropriateness of its valuation of goodwill on at least an annual basis or more frequently if events or changes in
circumstances indicate that the carrying amount may not be recoverable. If, as a result of the assessment, the Company determines that the value of its goodwill is
impaired, goodwill will be written down in the period in which the determination is made. In making an assessment of the value of its goodwill, the Company uses both
market based and non-market based valuations. The fair value of the reporting units is determined based on the price-to-earnings multiples, book value multiples, and
present value of estimated cash flows methods. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the
Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead
to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred.
Based upon the Company’s assessment, there was no impairment of the Company’s goodwill asset of $456 million at December 31, 2016.
Intangible assets represent the fair value adjustments related to unpaid losses and loss expenses and the fair values of renewal rights, customer relationships and U.S.
licenses arising from the acquisitions referred to above. Definite-lived intangible assets are amortized over their useful lives while indefinite-lived intangible assets are not
subject to amortization. The carrying values of intangible assets are reviewed for indicators of impairment on at least an annual basis, or more frequently if events or
changes in circumstances indicate that impairment may exist. Impairment is recognized if the carrying values of the intangible assets are not recoverable from their
undiscounted cash flows and are measured as the difference between the carrying value and the fair value. Based upon the Company’s assessment, there was no
impairment of its intangible assets of $107 million at December 31, 2016.
See Notes 2(j), 2(k) and 7 to the Consolidated Financial Statements in Item 18 of this report for further details.
New Accounting Pronouncements
See Note 2(r) to the Consolidated Financial Statements included in Item 18 of this report.
C. Research and Development, Patents and Licenses, etc.
Not applicable.
D. Trend Information
For a discussion of known trends, uncertainties and other events that are reasonably likely to have a material impact on the Company, see Operating Results in Item
5, Liquidity and Capital Resources in Item 5 and Tabular Disclosure of Contractual Obligations in Item 5 of this report.
E. Off-balance sheet arrangements
The Company has guaranteed the obligations related to debt issued to third parties by its finance subsidiaries as follows:
In September 2016, PartnerRe Ireland Finance DAC issued senior notes with an aggregate principal amount of €750 million. The Company has fully and
unconditionally guaranteed all obligations of PartnerRe Ireland Finance DAC related to these senior notes.
In March 2010, PartnerRe Finance B LLC issued senior notes with an aggregate principal of $500 million. The Company has fully and unconditionally guaranteed
all obligations of PartnerRe Finance B LLC related to these senior notes.
In November 2006, PartnerRe Finance II Inc. issued Junior Subordinated Capital Efficient Notes (CENts) with a principal amount of $250 million, and on March 13,
2009, under the terms of a tender offer, purchased and retired $187 million of this principal amount. As a result, the remaining aggregate principal amount of the CENts is
$63 million. The Company has fully and unconditionally guaranteed on a subordinated basis all obligations of PartnerRe Finance II Inc. related to the CENts.
For additional information, see Note 10 to the Consolidated Financial Statements in Item 18 of this report.
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F. Tabular Disclosure of Contractual Obligations
In the normal course of its business, the Company is a party to a variety of contractual obligations as summarized below. These contractual obligations are
considered by the Company when assessing its liquidity requirements and the Company is confident in its ability to meet all of its obligations. Contractual obligations at
December 31, 2016 were as follows (in millions):
Total
< 1 year
1-3 years
3-5 years
> 5 years
Contractual obligations:
Operating leases
Other operating agreements
Other invested assets (1)
Non-life reserves (2)
Life and health reserves (3)
Deposit liabilities
Senior notes and Preferred Shares:
2010 senior notes—principal (4)
2010 senior notes—interest
2016 senior notes—principal(5)
2016 senior notes—interest
Capital efficient notes—principal (6)
Capital efficient notes—interest
Series F non-cumulative preferred shares—principal(7)
Series F non-cumulative preferred shares—dividends
Series G cumulative preferred shares—principal(8)
Series G cumulative preferred shares—dividends
Series H cumulative preferred shares—principal(8)
Series H cumulative preferred shares—dividends
Series I non-cumulative preferred shares—principal(7)
Series I non-cumulative preferred shares—dividends
n/a: Not applicable
$
$
$
$
$
$
$
$
€
€
$
$
$
$
$
44.4
13.4
215.0
8,985.4
2,823.1
15.0
500.0
96.3
750.0
47.0
63.4
n/a
67.0
n/a
160.4
n/a
293.8
n/a
183.0
n/a
$
$
$
$
$
$
$
$
€
€
$
$
$
$
$
$
$
$
23.9
9.0
85.0
2,664.3
412.1
10.4
$
$
$
$
$
$
18.1
4.4
106.0
2,563.9
478.3
1.8
$
$
$
$
$
$
1.9
$
— $
$
$
$
$
24.0
1,357.7
259.5
0.8
0.5
—
—
2,399.5
1,673.2
2.0
27.5
— $
$
— €
9.4
€
— $
—(7)
— $
3.9
— $
$
— $
$
— $
$
10.4
21.3
10.8
55.0
18.8
— $
$
— €
€
— $
—(7)
— $
7.8
— $
$
— $
$
— $
$
20.8
42.6
21.6
500.0
13.8
$
$
— €
18.8
— $
—(7)
— $
7.8
— $
20.8
— $
42.6
— $
21.6
—
—
750.0
€9.4 per annum
63.4
—(7)
67.0
$3.9 per annum
160.4
$10.4 per annum
293.8
$21.3 per annum
183.0
$10.8 per annum
(1) The amounts above for other invested assets represent the Company’s expected timing of funding capital commitments related to its strategic investments.
(2) The Company’s Non-life reserves represent management’s best estimate of the cost to settle the ultimate liabilities based on information available at December 31,
2016, and are not fixed amounts payable pursuant to contractual commitments. The timing and amounts of actual loss payments related to these reserves might
vary significantly from the Company’s current estimate of the expected timing and amounts of loss payments based on many factors, including large individual
losses as well as general market conditions.
(3) Life and Health reserves at December 31, 2016 of $1,984 million are computed on a discounted basis, whereas the expected payments by period in the table above
are the estimated payments at a future time and do not reflect a discount of the amount payable.
(4) PartnerRe Finance B LLC, the issuer of the 2010 senior notes, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the
related intercompany debt of $500 million in its Consolidated Balance Sheet at December 31, 2016. The 2010 senior notes of an aggregate principal outstanding
of $500 million mature on June 1, 2020. Interest on the senior notes is payable semi-annually and cannot be deferred. The equity method is used to account for the
investment in PartnerRe Finance B LLC.
(5) PartnerRe Ireland Finance DAC, the issuer of the 2016 senior notes, meets the consolidation requirements under U.S. GAAP. Accordingly, the Company shows
the debt of €750 million in its Consolidated Balance Sheet at December 31, 2016. The 1.250% senior notes with aggregate principal outstanding of €750 million
mature on September 15, 2026. Interest on the senior notes is payable annually commencing on September 15, 2017.
(6) PartnerRe Finance II Inc., the issuer of the CENts, does not meet consolidation requirements under U.S. GAAP. Accordingly, the Company shows the related
intercompany debt of $71 million in its Consolidated Balance Sheets at December 31, 2016 and 2015. The CENts will mature on December 1, 2066 and may be
redeemed at the option of the issuer, in whole or in part, since December 1, 2016 upon occurrence of specific rating agency or tax events. Interest on the CENts is
payable quarterly
72
Table of Contents
until maturity at an annual rate of 3-month LIBOR plus a margin equal to 2.325%. As a result of the variable interest rate, the table above does not show the
interest payable.
(7) The Company’s Series F and I preferred shares are non-cumulative, perpetual and have no mandatory redemption requirement, but may be redeemed at the
Company’s option at any time or in part from time to time on or after March 1, 2018 and May 1, 2021, respectively.
(8) The Company’s Series G and H preferred shares are cumulative, perpetual and have no mandatory redemption requirement, but may be redeemed at the
Company’s option at any time or in part from time to time on or after May 1, 2021, respectively.
The Contractual Obligations and Commitments table above does not include an estimate of the period of cash settlement of its tax liabilities with the respective
taxing authorities given the Company cannot make a reasonably reliable estimate of the timing of cash settlements.
See Notes 10 and 11 to the Consolidated Financial Statements in Item 18 of this report for further details related to debt and preferred shares.
Due to the limited nature of the information presented above, it should not be considered indicative of the Company’s liquidity or capital needs. See Liquidity
section above.
The Company has committed to a 10 year structured letter of credit facility issued by a high credit quality international bank, which has a final maturity of
December 29, 2020. At December 31, 2016, the Company’s participation in the facility was $62 million. At December 31, 2016, the letter of credit facility has not been
drawn down and can only be drawn down in the event of certain specific scenarios, which the Company considers remote. Unless canceled by the bank, the credit facility
automatically extends for one year, each year until maturity.
G. Safe Harbor
PartnerRe Ltd. has made statements in this annual report on Form 20-F that are forward-looking statements. In some cases, you can identify these statements by
forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” the
negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may
include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions
based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those
factors described in Risk Factors in Item 3 of this report.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance
or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are
under no duty to update any of these forward-looking statements after the date of this annual report on Form 20-F to conform our prior statements to actual results or
revised expectations.
H. Non-GAAP Financial Measures
Regulation G and Item 10(e) of Regulation S-K define a “non-GAAP financial measure” as a numerical measure of a company’s historical or future financial
performance, financial position or cash flows that excludes (includes) amounts or is subject to adjustments that have the effect of excluding (including) amounts, that are
included (excluded) in the most directly comparable measure calculated in accordance with GAAP. The definition of non-GAAP financial measures specifically excludes
measures for business segments that are disclosed under ASC 280, Segment Reporting.
“GAAP” means accounting principles generally accepted in the United States (or U.S. GAAP).
In addition to the financial measures included directly in the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income,
management uses certain other financial measures that can be calculated from amounts included in the Consolidated Financial Statements or Notes to the Consolidated
Financial Statements, which are not considered by the Company to be non-GAAP financial measures within the meaning of Regulation G and Item 10(e). These financial
measures are used to evaluate its financial performance and the overall growth in value generated for the Company’s shareholders.
The Company has not presented or discussed any non-GAAP financial measures in this report as an addition to or substitute for measures of financial performance
prepared in accordance with U.S. GAAP.
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
As at 1 January, 2016, the Board consisted of ten directors, Messers. Montupet, Holsboer, Mendoza, Sautter, Seow, Twomey, Willam and Zwiener and Ms. Hanratty
and Ms. Perry. Mr. Montupet also acted as Chairman of Board. There were four committees of the Board; the Audit Committee, the Risk & Finance Committee, the
Compensation & Management Development Committee and the Nominating & Governance Committee. Mr. Zwiener also held the executive role as Interim CEO of the
Company from January 2015 until closing of the Merger.
Upon the closing of the Merger on March 18, 2016, and pursuant to the terms of the Merger Agreement (and not due to any disagreement with the Company), all of
the directors of the Company immediately prior to the closing of the Merger were automatically removed at the effective time of the Merger and replaced with the
following individuals: (i) John Elkann; (ii) Enrico Vellano; (iii) Mario Bonaccorso; (iv) Patrick Thiele; and (v) Brian Dowd. Effective upon the closing of the Merger, the
Board dissolved all existing committees of the Board and established an Audit Committee. Brian Dowd and Patrick Thiele were appointed to the Audit Committee.
Further, in accordance with the terms of Mr. Zwiener’s employment agreement with the Company, his employment terminated upon the closing of the Merger, and
he was deemed to have resigned from any position (including as an officer and a director) with the Company or any of its subsidiaries or affiliates, effective March 18,
2016.
The following are the directors and executive officers of the Company as of April 5, 2017.
Name
John Elkann
Brian Dowd
Patrick A. Thiele
Enrico Vellano
Bilge Ogut
Nikhil Srinivasan
Emmanuel Clarke
Mario Bonaccorso
Laurie Desmet
Theodore C. Walker
Charles Goldie
Marvin Pestcoe
Scott Altstadt
Position with the Company
Director, Chairman of the Board
Director, Chairman of the Audit Committee
Director, Member of the Audit Committee
Director
Director
Director
Director, President and CEO
Executive Vice President and CFO
Executive Vice President and Chief Operations Officer
CEO Worldwide P&C
CEO Worldwide Specialty
Executive Vice President & CEO, Life, Health and Strategic Ventures
Chief Underwriting Officer
Date Appointed
18 March 2016
18 March 2016
18 March 2016
28 March 2016
28 July 2016
5 August 2016
24 March 2016
4 April 2016
1 April 2013
1 July 2016
1 July 2016
1 July 2016
1 July 2016
Biographical information
•
John Elkann, Director, Chairman of the Board
John Elkann is a Director and Chairman of PartnerRe, Chairman and CEO of EXOR and Chairman of Fiat Chrysler Automobiles N.V. Mr. Elkann obtained a
scientific baccalaureate from the Lycée Victor Duruy in Paris, and graduated in Engineering from Politecnico, the Engineering University of Turin. While at
university, he gained work experience in manufacturing, sales and marketing at various companies within the Fiat Group in the U.K., Poland and France. He started
his professional career in 2001 at General Electric as a member of the Corporate Audit Staff, with assignments in Asia, the U.S. and Europe. Mr. Elkann is Chairman
of Giovanni Agnelli e C. Sapaz. and Italiana Editrice. He is a board member of The Economist Group, News Corporation and Ferrari S.p.A. Mr. Elkann is a member
of Museum of Modern Art as well as Vice Chairman of the Italian Aspen Institute and the Giovanni Agnelli Foundation.
•
Brian Dowd, Director, Chairman of the Audit Committee (Independent)
Brian Dowd is a Director and Chairman of the Audit Committee of PartnerRe. Previously, Mr. Dowd was a member of the Office of the Chairman of ACE Group,
focusing on underwriting-related matters, including oversight of the ACE Group’s product boards, the general underwriting disciplines of the company’s profit
centers, outward reinsurance placements and
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run-off operations and special strategic projects. Mr. Dowd also held relevant positions at ACE Group from 1997 until his appointment as Chairman of ACE’s
Insurance – North America business segment in 2006. He also held the role of Vice Chairman of ACE Limited from 2009 until his retirement in 2015. Prior to that,
Mr. Dowd held underwriting positions of increasing responsibility at Arkwright Mutual Insurance Company over a seven-year period. He holds a Bachelor of Science
(B.S.) in Finance from Northern Illinois University, as well as the Chartered Property Casualty Underwriter professional designation.
•
Patrick A. Thiele, Director, Member of the Audit Committee (Independent)
Patrick A. Thiele is a Director and member of the Audit Committee of PartnerRe. Mr. Thiele served as CEO of PartnerRe from 2000 until his retirement in 2010. In
February 2014, Mr. Thiele joined the board of One Beacon Insurance Group, and in February 2015, he joined the boards of the investment companies in the Mairs
and Power family of mutual funds. Mr. Thiele previously held executive roles at CGU plc (now Aviva plc) and at The St. Paul Companies, where he spent the first 20
years of his insurance career, culminating in his appointment as its CEO of Worldwide Insurance Operations. Mr. Thiele began his career in 1975, working as a
securities analyst with the National Bank of Detroit. He holds both a B.S. in Finance and a Master in Business Administration from the University of Wisconsin,
Madison, as well as the Chartered Financial Analyst designation.
•
Enrico Vellano, Director
Enrico Vellano is a Director of PartnerRe. Mr. Vellano is also the Chief Financial Officer (CFO) of EXOR. In 1992, Mr. Vellano started his professional career at
Arthur Andersen LLP. In 1995, he joined SAI Assicurazioni where he specialized in the management of equity and bond portfolios. In 1997, he began working at
Istituto Finanziario Italiano Laniero (IFIL), the investment company controlled by the Agnelli Family. In 2006 when he was named CFO of IFIL, which was merged
with Instituto Finanziario Italiano in 2009 to create EXOR. He is also a board member of Juventus Football Club, Almacantar S.A. and Emittenti Titoli. Mr. Vellano
holds a Bachelor of Arts in Economics at the University of Torino.
•
Bilge Ogut, Director (Independent)
Bilge Ogut is a Director of PartnerRe. Ms. Ogut is Head of Private Equity in Europe at Partners Group, the global private markets investment manager firm, and is a
member of Partners Group’s Private Equity Directs Investment Committee and Private Equity Primaries Europe Investment Committee. Prior to joining Partners
Group she was Deputy Head of Private Equity at Standard Bank International from 2010 to 2011 and was with Warburg Pincus from 1998 to 2009.
•
Nikhil Srinivasan, Director (Independent)
Nikhil Srinivasan is a Director of PartnerRe. Mr. Srinivasan is the former Group Chief Investment Officer and a member of the Group Management Committee of
Generali and Chairman of Generali Real Estate. Prior to joining Generali, he was at Allianz SE for ten years based in Singapore and Munich, where he was Group
Chief Investment Officer and a member of Allianz SE’s International Executive Committee responsible for the firm’s investment strategy.
•
Emmanuel Clarke, Director, President and CEO
Emmanuel Clarke is a Director and President and CEO of PartnerRe. Mr. Clarke is responsible for leading and managing the Company’s operations. He is also a
member of PartnerRe’s Group Executive Committee. Mr. Clarke has 20 years of professional experience in the reinsurance industry. He joined PartnerRe in 1997 and
was appointed as Head of Credit & Surety, PartnerRe Global in 2002 and Head of P&C, PartnerRe Global in 2006. In 2008 Mr. Clarke was appointed as Head of
Specialty Lines, PartnerRe Global and Deputy CEO of PartnerRe Global. Effective September 1, 2010, Mr. Clarke was appointed as CEO of PartnerRe Global On
September 8, 2015, Mr. Clarke was appointed President of PartnerRe and on 24 March, 2016, Mr. Clarke was appointed CEO of PartnerRe. Mr. Clarke has a MBA
from the University Paris, IX - Dauphine, specializing in Finance and Controlling and a MBA in International Business from Baruch College of CUNY.
• Mario Bonaccorso, Executive Vice President and CFO
Mario Bonaccorso is Executive Vice President and CFO of PartnerRe. Mr. Bonaccorso is a member of PartnerRe’s Group Executive Committee and is responsible
for the Company’s financial operations. Prior to joining PartnerRe, Mr. Bonaccorso served as Managing Director of EXOR for nine years where he was responsible
for investments and the management of EXOR’s portfolio companies. Prior to joining EXOR, Mr. Bonaccorso worked as a Research and Development Telecom
Engineer at Qualcomm Inc., as an engagement manager at McKinsey & Co. and as Chief Investment Officer of Jupiter Finance. Mr. Bonaccorso has a Master of
Science cum laude in Telecommunications Engineering at Politecnico di Torino University and a MBA with honors from INSEAD. Mr. Bonaccorso has served on
behalf of EXOR on the board of directors of Cushman & Wakefield, Banijay Holding, Banca Leonardo and EXOR SA.
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•
Laurie Desmet, Executive Vice President and Chief Operations Officer
Laurie Desmet is Executive Vice President and Chief Operations Officer of PartnerRe. Mr. Desmet joined PartnerRe in 2004 as Chief Accounting Officer and was
appointed Chief Operations Officer of PartnerRe’s Global operations in 2010. Effective April 1, 2013, Ms. Desmet was appointed Executive Vice President and Chief
Operations Officer. She has exclusive responsibility for the Company’s Underwriting Support Services. Ms. Desmet has more than 31 years of experience, both in
public accounting and the reinsurance and insurance industries. Prior to joining PartnerRe, Ms. Desmet was employed by Converium as Chief Accounting Officer and
by Ernst & Young as a Senior Manager. Ms. Desmet has a Bachelor of Arts in Accounting from Michigan State University.
•
Theodore C. Walker, CEO Worldwide P&C
Theodore (Tad) Walker is a member of PartnerRe Group’s Executive Committee and is responsible for the executive management of PartnerRe’s P&C worldwide
business segment. Mr. Walker has over 25 years’ worth of experience in the reinsurance and insurance industries and has been with PartnerRe since 2002. He has
held the positions of President and CEO of North America, with executive responsibility for North America, and Executive Vice President and Chief Underwriting
Officer for PartnerRe U.S. with responsibility for all underwriting activities in the U.S. business units. Previously, he was responsible for PartnerRe’s worldwide book
of catastrophe business, in the role of Head of Catastrophe. Prior to joining PartnerRe, Mr. Walker was Senior Vice President at American Re, where he was
responsible for the company’s Latin American operations. Mr. Walker then worked for ten years at Bacardi International as Risk Manager, and then as Vice President
of Bacardi Capital, the Group’s treasury arm. He began his career as in and insurance and reinsurance broker for Sedgwick in London and Boston. Mr. Walker holds
a B.S. from Georgetown University’s School of Foreign Service. He currently serves on the Board of Overseers at St. John’s School of Risk Management, as a Board
Member of Bacardi Limited and as a Board Member of Crane & Co., an international paper and currency manufacturer. Mr. Walker is a past Chairman of the
Reinsurance Association of America and is a current member of their board of directors.
•
Charles Goldie, CEO Worldwide Specialty
Charles Goldie is a member of PartnerRe’s Group Executive Committee and is responsible for the executive management of PartnerRe’s Specialty Lines worldwide
business segment. Mr. Goldie has over 25 years of experience both as an actuary and as a reinsurance underwriting manager. He joined PartnerRe in 2002 as head of
the U.S. Specialty Lines portfolio and in 2009 was named Head of Risk Management and Reserving for PartnerRe Global. Prior to joining PartnerRe, he worked for
Gerling Global Reinsurance Corp of America as Head of Casualty Underwriting and for Milliman as a consulting actuary. Mr. Goldie has a BSc in Economics from
the State University of New York at Binghamton and is a fellow of the Casualty Actuarial Society.
• Marvin Pestcoe, Executive Vice President & CEO, Life, Health and Strategic Ventures
Marvin Pestcoe is a member of PartnerRe’s Group Executive Committee and is responsible for the Company’s worldwide Life and Health business, as well as
strategic investments. Mr. Pestcoe has 30 years of experience in property and casualty insurance, reinsurance, and investments. He joined PartnerRe in 2001 as head
of the Company’s Alternative Risk Operations, and in 2008 was appointed Deputy Head of Capital Markets Group and Head of Capital Assets. In 2010 he assumed
responsibility for all Investment Operations and executive responsibility for the worldwide Life Operations. Following the acquisition of Presidio in 2012 these
responsibilities were expanded to include health insurance and reinsurance. Prior to joining PartnerRe, Mr. Pestcoe was Chief Actuary of Swiss Re New Markets. Mr.
Pestcoe is a fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.
•
Scott Altstadt, Chief Underwriting Officer
Scott Altstadt is a member of PartnerRe’s Group Executive Committee and has executive responsibility for the Company’s underwriting function. Mr. Altstadt has
over 27 years of professional experience in the insurance and reinsurance industries. He joined PartnerRe in 2001, as Senior Pricing Actuary of P&C and was
appointed as Chief Pricing Actuary for Specialty Lines in 2002, becoming Deputy Head of P&C in 2008. He was appointed to the position of Chief Underwriting
Officer PartnerRe Global in 2013. Prior to joining PartnerRe, Mr. Altstadt worked in the U.S. and Europe with Zurich Financial Services and CNARe. Mr. Altstadt
has a B.S. in Mathematics and Statistics from Purdue University.
The Directors referred to above as "Independent" are considered independent in accordance with the definition of the applicable NYSE and SEC Rules.
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B. Compensation
Director Compensation
During 2016, the four independent directors received approximately $561 thousand as compensation for their services as directors, the nine independent directors
who resigned or were automatically removed pursuant to the terms of the Merger Agreement on March 18, 2016 received approximately $619 thousand as compensation
for their services as directors and the two non-independent, non-employee directors (as well as PartnerRe’s Chief Financial Officer who was a director prior to joining the
Company) received approximately $562 thousand as compensation for their services as directors. Compensation includes cash directors’ fees and stock based
compensation (paid to the directors in office immediately prior to the Merger). Mr. Clarke did not receive any compensation for his services as a director in 2016. All
directors are reimbursed for travel and other related expenses personally incurred while attending Board or committee meetings.
Executive Compensation
During 2016, PartnerRe’s executive officers earned $27.1 million in aggregate compensation. This is comprised of base salary of approximately $3.7 million, annual
bonus of $5.0 million, pension and other benefits of $1.8 million and severance of $16.6 million. Long-term incentive (LTI compensation) is excluded from these totals
and is described in more detail below.
Long-term incentive (LTI) Program
The 2016 LTI Program consisted of cash awards made in local currencies with a two-year cliff vest. During 2016, PartnerRe’s executive officers had target LTI
values in local currencies and were awarded an aggregate of $8.0 million in LTI compensation. Upon vesting, target awards will be adjusted based on the Company’s
performance measure which is a two-year compound Return on Underwriting Capital metric.
C. Board Practices
The Board currently consists of seven directors, Messers. Elkann, Vellano, Thiele, Dowd, Clarke and Srinivasan and Ms. Ogut and has a majority of independent
directors. The current Board have been elected to serve until the next Annual General Meeting of the Company or until their respective successors are appointed. As
provided in our Bye-Laws, the number of Directors shall be such number not less than three as the Company by Resolution may, from time to time, determine.
There are no service contracts between the Company and any of the Company’s directors providing for benefits upon termination of their employment or service.
Audit Committee
The Board has established an Audit Committee comprised of Messers. Thiele and Dowd who are independent in accordance with the definition of the applicable
NYSE and SEC Rules. See also Item 16A of this report for a further discussion regarding the Audit Committee financial expert.
Pursuant to its charter, the Audit Committee’s primary responsibilities are to assist Board oversight of:
•
the integrity of PartnerRe’s financial statements;
• PartnerRe’s compliance with legal and regulatory requirements, including the receipt of reports arising in respect of the Code of Business Conduct and Ethics;
•
•
the independent auditor’s qualifications and independence; and
the performance of PartnerRe’s internal audit function and independent auditors.
The Audit Committee regularly meets with management, the Chief Audit Officer and our independent registered public accounting firm to review matters relating to
the quality of financial reporting and internal accounting controls, including the nature, extent and results of their audits. In addition, the Audit Committee discusses
PartnerRe’s policies with respect to risk assessment and risk management processes.
D. Employees
The Company had 957 employees at December 31, 2016. The following table show the breakdown of the number of employees by geographic location as of
December 31, 2016, 2015 and 2014:
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Geographic location
Asia, Australia and New Zealand
Europe
Latin America, Caribbean and Africa
North America
Total
E. Share ownership
2016
2015
2014
46
539
7
365
957
40
568
5
422
1,035
34
593
4
438
1,069
Not applicable. 100% of the common shares are owned by EXOR Nederland N.V. (previously named Exor N.V.) and there are no other common shares issued and
no stock-based compensation issued as at December 31, 2016.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Following the completion of the Merger on March 18, 2016, each publicly traded common share of the Company issued and outstanding was cancelled, the common
shares were delisted from the NYSE, and one common share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the Company. In
November 2016, the one common share of $1.00 par value was subdivided into 100 million authorized and issued common shares of $0.00000001 par value each. In
December 2016, Exor N.V. was renamed EXOR Nederland N.V. As a result, at December 31, 2016, the issued and outstanding share capital was $1.00.
Prior to the acquisition of 100% of the common shares of the Company, the Exor Group held 9.9% of the publicly held common shares of the Company, which were
acquired in 2015 in contemplation of the acquisition.
B. Related Party Transactions
As at December 31, 2016, EXOR Nederland N.V. (previously named Exor N.V.) held 100% of the voting common shares of the Company and therefore had power
to make decisions that impact the Company. In addition, the Company has entered into certain related party transactions as disclosed in Notes 10 and 19 to the
Consolidated Financial Statements in Item 18 of this report.
For 2016, the Board determined that there were no related party transactions involving our directors, executive officers or any of their immediate family members
requiring disclosure.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See the Consolidated Financial Statements, Notes to the Consolidated Financial Statements and Financial Statements Schedules in Item 18 of this report, which
includes details of changes in shareholders’ equity included in the Statement of Shareholders’ Equity.
B. Significant Changes
On February 28 and March 31, 2017 PartnerRe subscribed $50 million and $100 million, respectively, to funds managed by an entity within the Exor Group which
invests in publicly listed equities. The funds are registered in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier, or CSSF.
On April 3, 2017, after receiving all necessary regulatory approvals, PartnerRe completed the acquisition of 100% of the outstanding ordinary shares of Aurigen
Capital Limited, a North American life reinsurance company, for CAD 375 million (or approximately $286 million).
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There were no other material subsequent events or significant changes requiring disclosure for the period from January 1 to April 5, 2017.
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ITEM 9.
THE OFFER AND LISTING
A. Offer and Listing Details
The Company’s common shares are no longer listed as a result of the acquisition by Exor N.V. in March 2016. The Company’s preferred shares are listed on the
NYSE under the symbols PRE-F, PRE-G, PRE-H, and PRE-I. Refer to Note 11 to the Consolidated Financial Statements in Item 18 of this report for further details.
The following table sets forth, for the periods indicated, the high and low market prices per share of the Company’s preferred shares that remain outstanding as of
December 31, 2016 as reported on the NYSE (in U.S. dollars):
High
Low
For the Year Ended:
December 31, 2013
5.875% Series F Non-Cumulative Preferred Shares
December 31, 2014
5.875% Series F Non-Cumulative Preferred Shares
December 31, 2015
5.875% Series F Non-Cumulative Preferred Shares
December 31, 2016
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
For the Quarter Ended in 2015:
5.875% Series F Non-Cumulative Preferred Shares
First quarter
Second quarter
Third quarter
Fourth quarter
For the Quarter Ended in 2016:
First quarter
5.875% Series F Non-Cumulative Preferred Shares
Second quarter
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
Third quarter
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
Fourth quarter
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
80
25.15
25.61
26.56
27.48
30.33
32.40
28.94
25.73
25.82
26.45
26.56
26.92
26.18
29.86
30.98
26.19
27.48
30.33
32.40
28.94
26.54
28.99
30.82
19.88
20.12
23.90
22.95
25.32
25.02
22.97
24.62
23.90
24.25
24.77
24.81
24.50
26.00
26.76
24.91
25.66
28.16
29.52
26.10
22.95
25.32
25.02
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5.875% Series I Non-Cumulative Preferred Shares
27.83
22.97
For the Month ended in the Fourth Quarter of 2016 and Subsequently:
September 30, 2016
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
October 31, 2016
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
November 30, 2016
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
December 31, 2016
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
January 31, 2017
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
February 28, 2017
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
March 31, 2017
5.875% Series F Non-Cumulative Preferred Shares
6.50% Series G Cumulative Preferred Shares
7.25% Series H Cumulative Preferred Shares
5.875% Series I Non-Cumulative Preferred Shares
B. Plan of Distribution
Not applicable.
C. Markets
26.90
30.20
31.48
27.94
26.54
28.99
30.82
27.83
25.96
28.70
30.31
27.40
24.74
27.27
27.55
24.40
24.98
26.82
28.89
25.36
25.39
26.54
28.97
25.21
25.87
26.79
28.64
25.63
25.72
28.20
29.52
27.32
25.77
27.77
29.01
26.08
24.65
25.77
25.02
23.67
22.95
25.32
26.21
22.97
24.07
25.47
27.11
23.56
24.77
25.73
27.16
24.26
24.50
25.67
27.43
24.28
Each series of the Company’s preferred shares is listed and traded on the NYSE. The 5.875% Series F Non-Cumulative Preferred Shares began trading on February
19, 2013 and the 6.50% Series G Cumulative Preferred Shares, the 7.25% Series H Cumulative Preferred Shares and the 5.875% Series I Non-Cumulative Preferred
Shares began trading on May 6, 2016.
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D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The Company’s Amended Memorandum of Association has been filed as exhibit 3.1 to Form F-3 (File no 333-7094) filed with the SEC on June 20, 1997, and is
hereby incorporated by reference into this Annual Report.
The Company’s Bye-laws were adopted on March 18, 2016 and filed as exhibit 3.1 to our Report on Form 8-K (File No 001-14536) filed with the SEC on March
18, 2016, and are hereby incorporated by reference into this Annual Report.
Corporate Registration and Objectives
PartnerRe Ltd. is incorporated under the laws of Bermuda. The Company is registered at the Bermuda Registrar under the number 18620. The purposes and powers
of the Company are set forth in Items 6 and 7 (b) through (n) and (p) to (u) inclusive of the Second Schedule of the Bermuda Companies Act of 1981, as amended.
Board of Directors
The Bye-Laws provide that the Board shall be such number not less than three as the Company by resolution may, from time to time, determine. The Directors shall
be elected or appointed at the Annual General Meeting, at any Special General Meeting called for that purpose or by Resolution. Directors shall hold office for such term
as the Shareholders may determine or, in the absence of such determination, until the next Annual General Meeting or until their successors are elected or appointed or
their office is otherwise vacated.
Under the Company’s Bye-laws and subject to the Companies Act, a Director is not prohibited from being a party to or otherwise have an interest in, any transaction
or arrangement with the Company or in which the Company is otherwise interested. A Director who has complied with the Companies Act and with the Company’s Bye-
laws with regard to declaring the nature of his interest in a transaction or arrangement with the Company, or in which the Company is otherwise interested, may be
counted in the quorum and vote at any meeting at which such transaction or arrangement is considered by the Board.
In addition to its powers under Bye-Law 27, the Board on behalf of the Company may provide benefits, whether by the payment of gratuities or pensions or
otherwise, for any person including any Director or former Director who has held any executive office or employment with the Company or with any body corporate
which is or has been a subsidiary or Affiliate of the Company or a predecessor in the business of the Company or of any such subsidiary or Affiliate, and to any member
of his family or any person who is or was dependent on him, and may contribute to any fund and pay premiums for the purchase or provision of any such gratuity, pension
or other benefit, or for the insurance of any such person.
The Company may in a Special General Meeting called for that purpose remove a Director, provided notice of any such meeting shall be served upon the Director
concerned not less than fourteen (14) days before such meeting and s/he shall be entitled to be heard at such meeting. The Shareholders may authorize the Directors to fill
any vacancy in their number, from time to time.
Under the Company’s Bye-Laws the quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other
number, shall be three (3) individuals and requires the presence of at least one Majority Shareholder Director Designee for so long as the Board consists of at least one
Majority Shareholder Director Designee. Any Director who ceases to be a Director at a meeting of the Board may continue to be present and to act as a Director and be
counted in
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the quorum until the termination of the meeting if no other Director objects and if otherwise a quorum of Directors would not be present.
A resolution in writing signed by all the Directors for the time being entitled to received notice of a meeting of the Board shall be valid and effectual as a resolution
pass at a meeting of the Board.
A meeting of the Board or a committee appointed by the Board may be held by means of such telephone, electronic or other communication facilities (including,
without limiting the generality of the foregoing, by telephone or by video conferencing) as permit all persons participating in the meeting to communicate with each other
simultaneously and instantaneously and participation in such a meeting shall constitute presence in person at such meeting. Such a meeting shall be deemed to take place
where the largest group of those Directors participating in the meeting is physically assembled, or, if there is no such group, where the chairman of the meeting then is.
Among the powers of the company which the Board may exercise, the Board is allowed to borrow money and to mortgage or charge all or any part of the
undertaking, property and assets (present and future) and uncalled capital of the company. The Board may also issue debentures and other securities (whether outright or
as collateral security for any debt, liability or obligation of the company or of any other persons).
Bermuda law provides that directors and officers in exercising their powers and discharging their duties shall act honestly and in good faith for the benefit of the
company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Generally the duties of a Director are
owed to the Company as whole and not to the Shareholders. Subject to the provisions of the Companies Acts and these Bye-Laws, the Board shall manage the business of
the Company and may pay all expenses incurred in promoting and incorporating the Company and may exercise all the powers of the Company. The Board may exercise
all the powers of the Company except those powers that are required by the Companies Acts or these Bye-Laws to be exercised by the Shareholders.
Shares and Share Rights
Subject to any special rights conferred on the holders of any Share or class of Shares, any Share in the Company may be issued with or have attached thereto such
preferred, deferred, qualified or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise, as the Board may determine.
The Board may, at its discretion and without the sanction of a Resolution, authorize the acquisition by the Company of its own Shares, of any class, at any price
(whether at par or above or below par), and any Shares to be so purchased may be selected in any manner whatsoever, to be held as Treasury Shares or otherwise, upon
such terms as the Board may in its discretion determine, provided always that such acquisition is effected in accordance with the provisions of the Companies Acts. The
whole or any part of the amount payable on any such acquisition may be paid or satisfied otherwise than in cash, to the extent permitted by the Companies Acts.
As provided in our Bye-Laws and subject to the Companies Acts, all or any of the special rights for the time being attached to any class of Shares for the time being
issued may from time to time (whether or not the Company is being wound up) be altered or abrogated with the consent in writing of the holders of not less than seventy
five percent (75%) of the issued Shares of that class or with the sanction of a resolution passed at a separate general meeting of the holders of not less than seventy five
percent (75%) of the issued Shares of that class, voting in person or by proxy. To any such separate general meeting, all the provisions of these Bye-Laws as to general
meetings of the Company shall mutatis mutandis apply, but so that the necessary quorum shall be two (2) or more persons holding or representing by proxy any of the
Shares of the relevant class, that every holder of Shares of the relevant class shall be entitled on a poll to one vote for every such Share held by him and that any holder of
Shares of the relevant class present in person or by proxy may demand a poll; provided however, that if the Company or a class of Shareholders shall have only one
Shareholder, one Shareholder present in person or by proxy shall constitute the necessary quorum.
Except insofar as the rights attaching to, or the terms of issue of, any Share otherwise provide, the Board may from time to time declare dividends or distributions
out of contributed surplus to be paid to the Shareholders according to their rights and interests, including such interim dividends as appear to the Board to be justified by
the position of the Company. The Board, in its discretion, may determine that any dividend shall be paid in cash or shall be satisfied, subject to the Bye-Laws, in paying
up in full Shares in the Company to be issued to the Shareholders credited as fully paid or partly paid or partly in one way and partly the other. The Board may also pay
any fixed cash dividend which is payable on any Shares of the Company half yearly or on such other dates, whenever the position of the Company, in the opinion of the
Board, justifies such payment.
The Board may from time to time resolve to capitalize all or any part of any amount for the time being standing to the credit of any reserve or fund which is
available for distribution or to the credit of any Share premium account and accordingly that such amount be set free for distribution amongst the Shareholders or any
class of Shareholders who would be entitled thereto.
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If the Company shall be wound up, the liquidator may, with the sanction of a Resolution of the Company and any other sanction required by the Companies Acts,
divide amongst the Shareholders in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and
may for such purposes set such values as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between
the Shareholders or different classes of Shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trust for
the benefit of the contributories as the liquidator, with the like sanction, shall think fit, but so that no Shareholder shall be compelled to accept any Shares or other assets
upon which there is any liability.
General Meetings of Shareholders and Voting Rights
If required under the Companies Act, the Board shall convene and the Company shall hold general meetings as Annual General Meetings in accordance with the
requirements of the Companies Acts at such times and places as the Board shall appoint or, if requested in writing signed by the Majority Common Shareholder, at such
times and places as the Majority Common Shareholder shall request. The Board may, whenever it thinks fit, and shall, when required by the Companies Acts or when
requested by the Majority Common Shareholder, convene general meetings other than Annual General Meetings which shall be called Special General Meetings, at such
time and place as the Board may appoint or, if requested in writing signed by the Majority Common Shareholder, at such time and place as the Majority Common
Shareholder shall request. Except as required by the Companies Acts or when requested by the Majority Common Shareholder, Special General Meetings may not be
called by any person other than the Board. Save where a greater majority is required by the Companies Acts or these Bye-Laws, any question proposed for consideration
at any general meeting shall be decided on by a simple majority of votes cast.
Except in the case of the removal of auditors or Directors, anything which may be done by resolution of the Shareholders in general meeting or by resolution of any
class of Shareholders in a separate general meeting may be done by resolution in writing. Any such Resolution shall be signed by such number of Shareholders (or the
holders of such class of Shares) as provided in the Companies Acts. Such resolution in writing may be signed by the Shareholder or its proxy, or in the case of a
Shareholder that is a corporation (whether or not a company within the meaning of the Companies Acts) by its representative on behalf of such Shareholder, in as many
counterparts as may be necessary.
Under our Bye-laws should any person (other than any EXOR Group Member) be a Ten Percent Shareholder, notwithstanding any provision to the contrary in these
Bye-Laws, the votes conferred by the Controlled Shares of such person are hereby reduced (and shall be automatically reduced in the future) by whatever amount is
necessary so that after any such reduction such person shall not be a Ten Percent Shareholder. Notwithstanding the foregoing, the Board may waive the restrictions in its
discretion and on a case by case basis.
Change in Control
Subject to the Companies Act and pursuant our Bye-Laws, in addition to the approval of the Board, any resolution proposed for consideration at any general meeting
to approve the amalgamation or merger of the Company with any other company, wherever incorporated, shall require the approval of a simple majority of votes cast at
such meeting. A poll may be demanded in respect of such resolution in accordance with the Bye-Laws. Under Bermuda law, in the event of an amalgamation or a merger
of a Bermuda Company with another, a shareholder of the Bermuda company who has not voted in favor of the amalgamation or merger and is not satisfied that a fair
value has been offered for such shareholder’s shares, may apply to the Supreme Court of Bermuda, within one month’s notice of the special general meeting, to appraise
the fair value of the shares.
Changes in Capital
Subject to the Companies Act, Bye-Laws and Amended Memorandum of Association, the Company may from time to time by Resolution authorize the reduction of
its issued Share Capital or any Share premium account in any manner.
C. Material Contracts
On January 25, 2015, the Company entered into the Amalgamation Agreement with AXIS, pursuant to which, upon the consummation of the transactions
contemplated by the Amalgamation Agreement, the two companies were expected to amalgamate and continue as a single Bermuda exempted company. On August 2,
2015, the Company and AXIS entered into the Termination Agreement to terminate their respective obligations under the Amalgamation Agreement (the Termination).
Pursuant to the terms of the Termination Agreement, in consideration of the Termination, the Company agreed to pay the AXIS Amalgamation Agreement Termination
Fee referred to above in Item 5. The Termination Agreement also provided for the mutual release by the parties of all claims of each party under the Amalgamation
Agreement. In connection with the execution of the Merger Agreement, the Company and AXIS terminated the Amalgamation Agreement. On August 3, 2015, in
accordance with the terms of the Amalgamation Agreement, the Company paid the AXIS Amalgamation Agreement Termination Fee of $315 million.
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On August 2, 2015, the Company entered into the Merger Agreement with Exor N.V., Pillar Ltd., a wholly-owned subsidiary of Exor N.V., and solely with respect
to certain specified sections thereof, EXOR S.p.A. Pursuant to the Merger Agreement, EXOR S.p.A. acquired all of the outstanding common shares of the Company for
an all-cash consideration of $137.50 per share and the Merger Special Dividend of $3.00 per share. The transaction was effected by a merger of Pillar Ltd. with and into
the Company, with the Company continuing as the surviving entity and a wholly-owned subsidiary of Exor N.V. Pursuant to the terms of the Merger Agreement, each
common share of the Company issued and outstanding immediately prior to the effective time of the merger was (i) automatically canceled and converted into the right to
receive the acquisition consideration and (ii) entitled to receive the Merger Special Dividend. The declaration of the Merger Special Dividend occurred prior to the
effective time of the merger. The Merger was approved by the Company’s shareholders on November 19, 2015 and subject to certain regulatory clearance and other
customary closing conditions. On March 18, 2016, the Company announced completion of the acquisition following regulatory clearance and completion of other
customary closing conditions.
D. Exchange Controls
Securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003, the Exchange Control Act 1972, and
related regulations of Bermuda that regulate the sale of securities in Bermuda. In addition, specific permission is required from the BMA, pursuant to the provisions of the
Exchange Change Control Act 1972 and related regulations (Exchange Control Act), for all issuances and transfers of securities of Bermuda companies, other than in
cases where the BMA has granted a general permission. The BMA, in its policy dated June 1, 2005, provides that where any equity securities of a Bermuda company are
listed on an appointed stock exchange (the NYSE is deemed to be an appointed stock exchange under Bermuda law), general permission is given for the issue and
subsequent transfer of any equity securities of such company from and/or to a non-resident of Bermuda, for as long as any equity securities of the company remain so
listed.
The BMA has also granted us permission for the issue, sale and transfer of up to 20% of any security as defined in the Exchange Control Act including (without
limitation) the grant or creation of options, warrants, coupon, rights and depository receipts (collectively, Securities) to and among persons who are resident of Bermuda
for exchange control purposes, whether or not the Securities are listed on an appointed stock exchange.
Under the Insurance Act, where the shares of a parent company of an insurer registered under the Insurance Act are not traded on any stock exchange, no person
shall become a 10%, 20%, 33% or 50% shareholder controller of the insurer unless (a) he has filed a notice in writing to the BMA that he intends to become a controller
of the insurer and (b) the BMA has, not later than 45 days beginning on the date of service of that notice, notified him in writing that there is no objection to him
becoming such a controller of the insurer or the 45 days have elapsed without the BMA having served written notice of objection. As described herein, our Bye-Laws
contain restrictions on the transfer of shares that generally would have the effect of prohibiting any shareholder, other than any EXOR Group Member, from owning 10%
or more of our common shares.
E. Taxation
The Company and PartnerRe Bermuda are not subject to taxation on profits in Bermuda. See Business Overview—Taxation of the Company and its Subsidiaries in
Item 4 for further details.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
It is possible to read and copy documents that have been filed by the Company with the U.S. Securities and Exchange Commission (SEC) at the SEC’s office of
Investor Education and Advocacy located at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference
rooms and their copy charges by calling the SEC at 1-800-SEC-0330
services, and from the website maintained by the SEC at http://www.sec.gov.
. Filings with the SEC are also available to the public from commercial document retrieval
I. Subsidiary Information
Not applicable.
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ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
Management believes that the Company is principally exposed to five types of market related risk: interest rate risk, credit spread risk, foreign currency risk,
counterparty credit risk and equity price risk. How these risks relate to the Company, and the process used to manage them, is discussed below.
The Company’s investment philosophy distinguishes between assets that are generally matched against the estimated net reinsurance liabilities (liability funds) and
those assets that represent shareholder capital (capital funds). Liability funds are invested in a way that generally matches them to the corresponding liabilities in both
duration and currency composition to provide a natural hedge against changes in interest rates and foreign exchange rates.
The Company’s investment philosophy is to reduce foreign currency risk on capital funds by investing primarily in U.S. dollar denominated investments. In
considering the market risk of capital funds, it is important to recognize the benefits of portfolio diversification. Although these asset classes in isolation may introduce
more risk into the portfolio, market forces have a tendency to influence each class in different ways and at different times. Consequently, the aggregate risk introduced by
a portfolio of these assets should be less than might be estimated by summing the individual risks.
Although the focus of this discussion is to identify risk exposures that impact the market value of assets alone, it is important to recognize that the risks discussed
herein are significantly mitigated to the extent that the Company’s investment strategy allows market forces to influence the economic valuation of assets and liabilities in
a way that is generally offsetting.
As described above in this report, the Company’s investment strategy allows the use of derivative investments, subject to strict limitations. The Company also
imposes a high standard for the credit quality of counterparties in all derivative transactions and aims to diversify its counterparty credit risk exposure. See Note 6 to the
Consolidated Financial Statements in Item 18 of this report for additional information related to derivatives.
The following addresses those areas where the Company believes it has exposure to material market risk in its operations.
Interest Rate Risk
The Company’s fixed maturity portfolio and the fixed maturity securities in the investment portfolio underlying the funds held–directly managed account are
exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. The Company manages interest rate risk on
liability funds by constructing bond portfolios in which the economic impact of a general interest rate shift is comparable to the impact on the related liabilities. The
Company believes that this process of matching the duration mitigates the overall interest rate risk on an economic basis. For non-life business and the mortality line of
the life business, the estimated duration of the Company’s liabilities is based on projected claims payout patterns. For policy benefits related to annuity business, the
Company estimates duration based on its commitment to annuitants. The Company manages the exposure to interest rate volatility on capital funds by choosing a duration
profile that it believes will optimize the risk-reward relationship.
This matching of duration insulates the Company from the economic impact of interest rate changes. The Company’s liabilities are carried at their nominal value,
and are not adjusted for changes in interest rates, with the exception of certain policy benefits for life and annuity contracts and deposit liabilities that are interest rate
sensitive. However, substantially all of the Company’s invested assets (including the investments underlying the funds held–directly managed account) are carried at fair
value, which reflects such changes. As a result, an increase in interest rates will result in a decrease in the fair value of the Company’s investments (including the
investments underlying the funds held–directly managed account) and a corresponding decrease, net of applicable taxes, in the Company’s shareholders’ equity. A
decrease in interest rates would have the opposite effect.
At December 31, 2016, the Company held approximately $2,365 million of its total invested assets in mortgage/asset-backed securities. These assets are exposed to
prepayment risk, the adverse impact of which is more evident in a declining interest rate environment.
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At December 31, 2016, the Company estimates that the hypothetical case of an immediate 100 basis points or 200 basis points parallel shift in global bond curves
would result in a change in the fair value of investments exposed to interest rate risk, total invested assets, and shareholders’ equity attributable to PartnerRe Ltd. as
follows (in millions of U.S. dollars):
-200 Basis
Points
%
Change
-100 Basis
Points
%
Change
December 31,
2016
+100 Basis
Points
%
Change
+200 Basis
Points
%
Change
Fair value of investments exposed to
interest rate risk (1)(2)
Total invested assets (3)
Shareholders’ equity attributable to
PartnerRe Ltd.
$
$
$
16,666
18,361
9% $
9% $
15,944
17,624
5% $
4% $
15,222
16,887
8,162
22% $
7,425
11% $
6,688
$
$
$
14,500
16,150
(5)% $
(4)% $
13,778
15,413
(9)%
(9)%
5,951
(11)% $
5,214
(22)%
(1) Includes certain other invested assets, certain cash and cash equivalents and funds holding fixed income securities.
(2) Excludes accrued interest.
(3) Includes total investments, cash and cash equivalents, the investment portfolio underlying the funds held–directly managed account and accrued interest.
The changes do not take into account any potential mitigating impact from the equity market, taxes or the corresponding change in the economic value of the
Company’s reinsurance liabilities, which would substantially offset the economic impact on invested assets, although the offset would not be reflected in the Consolidated
Balance Sheet.
The Company strives to match the foreign currency exposure in its fixed income portfolio to its multi-currency liabilities. The Company believes that this matching
process creates a diversification benefit. Consequently, the exact market value effect of a change in interest rates will depend on which countries experience interest rate
changes and the foreign currency mix of the Company’s fixed maturity portfolio at the time of the interest rate changes. See Foreign Currency Risk below.
The impact of an immediate change in interest rates on the fair value of investments and on investments within the funds held–directly managed account exposed to
interest rate risk, the Company’s total invested assets and shareholders’ equity attributable to PartnerRe Ltd., in both absolute terms and as a percentage of total invested
assets and shareholders’ equity attributable to PartnerRe Ltd., has not changed significantly at December 31, 2016 compared to December 31, 2015.
Interest rate movements also affect the economic value of the Company’s outstanding debt obligations and preferred securities in the same way that they affect the
Company’s fixed maturity investments. This can result in a liability whose economic value is different from the carrying value reported in the Consolidated Balance Sheet
given the Company records the carrying value of its outstanding debt obligations and preferred securities at the original issued principal amount. The Company believes
that the economic fair value of its outstanding senior notes, CENts and preferred shares at December 31, 2016 was as follows (in millions of U.S. dollars):
Debt related to senior notes
Intercompany debt related to Capital Efficient Notes
Preferred shares
Carrying Value
Fair Value
$
$
$
1,274
71
704
$
$
$
1,301
67
724
For the Company’s preferred shares, fair value is based on quoted market prices, while carrying value is based on the aggregate liquidation value of the shares.
See Note 3(b) to the Consolidated Financial Statements in Item 18 of this report for further details regarding debt and for a description on how the fair value of
debt was determined.
See also Notes 10 and 11 to Consolidated Financial Statements in Item 18 of this report for further details regarding debt and preferred shares respectively as at
December 31, 2016 and 2015 and related changes during the year.
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Credit Spread Risk
The Company’s fixed maturity portfolio and the fixed maturity securities in the investment portfolio underlying the funds held–directly managed account are
exposed to credit spread risk. Fluctuations in market credit spreads have a direct impact on the market valuation of these securities. The Company manages credit spread
risk by the selection of securities within its fixed maturity portfolio. Changes in credit spreads directly affect the market value of certain fixed maturity securities, but do
not necessarily result in a change in the future expected cash flows associated with holding individual securities. Other factors, including liquidity, supply and demand,
and changing risk preferences of investors, may affect market credit spreads without any change in the underlying credit quality of the security.
As with interest rates, changes in credit spreads impact the shareholders’ equity of the Company as invested assets are carried at fair value, which includes changes
in credit spreads. As a result, an increase in credit spreads will result in a decrease in the fair value of the Company’s investments (including the investment portfolio
underlying the funds held–directly managed account) and a corresponding decrease, net of applicable taxes, in the Company’s shareholders’ equity. A decrease in credit
spreads would have the opposite effect.
At December 31, 2016, the Company estimates that the hypothetical case of an immediate 100 basis points or 200 basis points parallel shift in global credit spreads
would result in a change in the fair value of investments exposed to interest rate risk (as presented in the table above), total invested assets and shareholders’ equity
attributable to PartnerRe Ltd. as follows (in millions of U.S. dollars):
-200 Basis
Points
%
Change
-100 Basis
Points
%
Change
December 31,
2016
+100 Basis
Points
%
Change
+200 Basis
Points
%
Change
Fair value of investments exposed to
interest rate risk(1)(2)
Total invested assets (3)
Shareholders’ equity attributable to
PartnerRe Ltd.
$
$
$
16,274
17,946
7% $
6% $
15,748
17,416
3% $
3% $
15,222
16,887
7,747
16% $
7,217
8% $
6,688
$
$
$
14,696
16,358
(3)% $
(3)% $
14,170
15,828
(7)%
(6)%
6,159
(8)% $
5,629
(16)%
(1) Included within the fair value of investments exposed to interest rate risk is $10.1 billion of fair value of investments exposed to credit spreads risk. Includes
certain other invested assets, certain cash and cash equivalents and funds holding fixed income securities.
(2) Excludes accrued interest.
(3) Includes total investments, cash and cash equivalents, the investment portfolio underlying the funds held–directly managed account and accrued interest.
The changes above also do not take into account any potential mitigating impact from the taxes and the change in the economic value of the Company’s reinsurance
liabilities, which may offset the economic impact on invested assets.
The impact of an immediate change in credit spreads on the overall fair value of investments and funds held–directly managed account exposed to credit spread risk,
the Company’s total invested assets and shareholders’ equity attributable to PartnerRe Ltd., as a percentage of total invested assets and shareholders’ equity attributable to
PartnerRe Ltd. has not changed significantly at December 31, 2016 compared to December 31, 2015.
Foreign Currency Risk
Through its multinational reinsurance operations, the Company conducts business in a variety of non-U.S. currencies, with the principal exposures being the Euro,
Canadian dollar, Swiss Franc, British pound and Australian dollar. As the Company’s reporting currency is the U.S. dollar, foreign exchange rate fluctuations may
materially impact the Company’s Consolidated Financial Statements.
The Company is generally able to match its liability funds against its net reinsurance liabilities both by currency and duration to protect the Company against
foreign exchange and interest rate risks. However, a natural offset does not exist for all currencies. For the non-U.S. dollar currencies for which the Company deems the
net asset or liability exposures to be material, the Company employs a hedging strategy utilizing foreign exchange forward contracts and other derivative financial
instruments, as appropriate, to reduce exposure and more appropriately match the liability funds by currency. The Company does not hedge currencies for which its asset
or liability exposures are not material or where it is unable or impractical to do so. In such cases, the Company is exposed to foreign currency risk. However, the Company
does not believe that the foreign currency risks corresponding to these unhedged positions are material, except for those related to the Company’s capital funds.
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For the Company’s capital funds, including its net investment in foreign subsidiaries and branches and equity securities, the Company does not typically employ
hedging strategies. However, from time to time the Company does enter into net investment hedges to offset foreign exchange volatility (see Liquidity and Capital
Resources—Currency in Item 5 of this report). Derivatives are included in other invested assets in the Consolidated Balance Sheet (see Note 6 to the Consolidated
Financial Statements in Item 18 of this report for further details).
The Company’s gross and net exposure in its Consolidated Balance Sheet at December 31, 2016 to foreign currency as well as the associated foreign currency
derivatives the Company has entered into to manage this exposure, was as follows (in millions of U.S. dollars):
Total assets
Total liabilities
Total gross foreign currency exposure
Total derivative amount
Net foreign currency exposure
$
Euro
1,995
(3,830)
(1,835)
1,437
CAD
CHF
$
814
(416)
398
(292)
$
18
(332)
(314)
—
$
GBP
1,188
(1,208)
(20)
—
(20)
AUD
65
(158)
(93)
92
$
$
$
Other
644
(1,308)
$
(664)
89
(575)
Total (1)
4,724
(7,252)
(2,528)
1,326
$
(398)
$
106
$ (314)
$
(1)
$
$ (1,202)
(1) As the U.S. dollar is the Company’s reporting currency, there is no currency risk attached to the U.S. dollar and it is excluded from this table. The U.S. dollar
accounted for the difference between the Company’s total foreign currency exposure in this table and the total assets and total liabilities in the Company’s
Consolidated Balance Sheet at December 31, 2016.
The above numbers include the Company’s investment in certain of its subsidiaries and branches, whose functional currencies are the Euro or Canadian dollar, and
the foreign exchange forward contracts that the Company entered into during the year to hedge a portion of its translation exposure in light of the significant volatility in
foreign exchange markets.
At December 31, 2016, the Company’s most significant net foreign currency exposures presented in the table above reflect the unhedged net investment in its
European subsidiaries and branches and Canadian branches.
At December 31, 2016, assuming all other variables remain constant and disregarding any tax effects, a change in the U.S. dollar of 10% or 20% relative to all of the
other currencies held by the Company simultaneously would result in a change in the Company’s net foreign currency exposure of $120 million and $240 million,
respectively, inclusive of the effect of foreign exchange forward contracts and other derivative financial instruments.
Counterparty Credit Risk
Investments and Cash
The Company has exposure to credit risk primarily as a holder of fixed maturity securities. The Company controls this exposure by emphasizing investment grade
credit quality in the fixed maturity securities it purchases. At December 31, 2016, approximately 58% of the Company’s fixed maturity portfolio (including the funds
held–directly managed account and funds holding fixed maturity securities) was rated AA (or equivalent rating) or better.
At December 31, 2016, approximately 73% of the Company’s fixed maturity and short-term investments (including funds holding fixed maturity securities and
excluding the funds held–directly managed account) were rated A- or better and 3% were rated below investment grade or not rated. The Company believes this high
quality concentration reduces its exposure to credit risk on fixed maturity investments to an acceptable level. At December 31, 2016, the Company was not exposed to any
significant credit concentration risk on its investments, excluding securities issued by the U.S. government which are rated AA+. The single largest corporate issuer and
the top 10 corporate issuers accounted for less than 3% and less than 19% of the Company’s total corporate fixed maturity securities (excluding the funds held–directly
managed account), respectively, at December 31, 2016.
The Company keeps cash and cash equivalents in several banks and ensures that there are no significant concentrations of credit risk in any one bank.
Funds held–directly managed account
The funds held–directly managed account due to the Company is related to one cedant, Colisée Re. The Company is subject to the credit risk of this cedant in the
event of insolvency or Colisée Re’s failure to honor the value of the funds held balances for any other reason. However, the Company’s credit risk is somewhat mitigated
by the fact that the Company generally has the right to offset any shortfall in the payment of the funds held balances with amounts owed by the Company to the cedant for
losses payable
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and other amounts contractually due. See also Risk Factors in Item 3 of this report for additional discussion of the Company’s exposure if Colisée Re, or its affiliates,
breach or do not satisfy their obligations. In addition to exposure to Colisée Re, the Company is also subject to the credit risk of AXA or its affiliates in the event of their
insolvency or their failure to honor their obligations under the acquisition agreements. See Note 5 to the Consolidated Financial Statements in Item 18 of this report for
further details regarding the funds held–directly managed account.
Derivatives
To a lesser extent, the Company also has credit risk exposure as a party to foreign exchange forward contracts and other derivative contracts. The Company’s
investment strategy allows the use of derivative investments, subject to strict limitations. The Company imposes a high standard for the credit quality of counterparties in
all derivative transactions. To mitigate credit risk, the Company monitors its exposure by counterparty, aims to diversify its counterparty credit risk and ensures that
counterparties to these contracts are high credit quality international banks or counterparties. These contracts are generally of short duration (approximately 90 days) and
settle on a net basis, which means that the Company is exposed to the movement of one currency against the other, as opposed to the notional amount of the contracts. At
December 31, 2016, the Company’s net notional exposure of foreign exchange forward contracts was $1,929 million, while the net fair value of those contracts was a
liability position of $2 million. See Note 6 to the Consolidated Financial Statements in Item 18 of this report for additional information related to derivatives.
Underwriting Operations
The Company is also exposed to credit risk in its underwriting operations, most notably in the credit/surety line. Loss experience in these lines of business is cyclical
and is affected by the general economic environment. The Company provides its clients in these lines of business with protection against credit deterioration, defaults or
other types of financial non-performance of or by the underlying credits that are the subject of the protection provided and, accordingly, the Company is exposed to the
credit risk of those credits. As with all of the Company’s business, these risks are subject to rigorous underwriting and pricing standards. In addition, the Company strives
to mitigate the risks associated with these credit-sensitive lines of business through the use of risk management techniques such as risk diversification, careful monitoring
of risk aggregations and accumulations and, at times, through the use of retrocessional reinsurance protection and the purchase of credit default swaps and total return and
interest rate swaps.
The Company is subject to the credit risk of its cedants in the event of their insolvency or their failure to honor the value of the funds held balances due to the
Company for any other reason. However, the Company’s credit risk in some jurisdictions is mitigated by a mandatory right of offset of amounts payable by the Company
to a cedant against amounts due to the Company. In certain other jurisdictions the Company is able to mitigate this risk, depending on the nature of the funds held
arrangements, to the extent that the Company has the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by the
Company to cedants for losses payable and other amounts contractually due. Funds held balances for which the Company receives an investment return based upon either
the results of a pool of assets held by the cedant or the investment return earned by the cedant on its investment portfolio are exposed to an additional layer of credit risk.
The Company is also exposed, to some extent, to the underlying financial market risk of the pool of assets, inasmuch as the underlying policies may have guaranteed
minimum returns.
The Company has exposure to credit risk as it relates to its business written through brokers if any of the Company’s brokers are unable to fulfill their contractual
obligations with respect to payments to the Company. In addition, in some jurisdictions, if the broker fails to make payments to the insured under the Company’s policy,
the Company might remain liable to the insured for the deficiency. The Company’s exposure to such credit risk is somewhat mitigated in certain jurisdictions by
contractual terms. See Risk Factors in Item 3 and Business Overview in Item 4 of this report for information related to two brokers that accounted for approximately 44%
of the Company’s gross premiums written for the year ended December 31, 2016.
The Company has exposure to credit risk as it relates to its reinsurance balances receivable and reinsurance recoverable on paid and unpaid losses.
Reinsurance balances receivable from the Company’s cedants at December 31, 2016 were $2,492 million, including balances both currently due and accrued. The
Company believes that credit risk related to these balances is mitigated by several factors, including but not limited to, credit checks performed as part of the underwriting
process and monitoring of aged receivable balances. In addition, as the majority of its reinsurance agreements permit the Company the right to offset reinsurance balances
receivable from clients against losses payable to them, the Company believes that the credit risk in this area is substantially reduced. Provisions are made for amounts
considered potentially uncollectible and the allowance for uncollectible premiums receivable was $5 million at December 31, 2016.
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The Company purchases retrocessional reinsurance and requires its reinsurers to have adequate financial strength. The Company evaluates the financial condition of
its reinsurers and monitors its concentration of credit risk on an ongoing basis. Provisions are made for amounts considered potentially uncollectible. At December 31,
2016, the balance of reinsurance recoverable on paid and unpaid non-life and life reserves was $298 million, which is net of the allowance provided for uncollectible
reinsurance recoverables of $12 million. At December 31, 2016, 59% of the Company’s reinsurance recoverable on paid and unpaid non-life and life reserves were either
due from reinsurers with an A- or better rating from Standard & Poor’s. See Liquidity and Capital Resources—Reinsurance Recoverable on Paid and Unpaid Losses in
Item 5 of this report for details of the Company’s reinsurance recoverable on paid and unpaid losses categorized by the reinsurer’s Standard & Poor’s rating.
Other than the items discussed above, the concentrations of the Company’s counterparty credit risk exposures have not changed materially at December 31, 2016
compared to December 31, 2015.
Equity Price Risk
The Company invests a portion of its capital funds in equity securities with a fair market value of $39 million at December 31, 2016, which represents less than
0.3% of total investments. These equity investments are exposed to equity price risk, defined as the potential for loss in market value due to a decline in equity prices. The
Company believes that the effects of diversification and the relatively small size of its investments in equities relative to total invested assets mitigate its exposure to
equity price risk and that a 10% and 20% movement in the S&P 500 Index would result in little or no change in the fair value of the Company’s total invested assets and
shareholders’ equity attributable to PartnerRe Ltd. at December 31, 2016.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.
DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
None.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
In accordance with the terms of the Merger Agreement, upon effecting the Merger, EXOR S.p.A. paid cash of $1.25 per share for an aggregate payment of
approximately $43 million to the preferred shareholders and agreed to launch an exchange offer. On April 1, 2016, the Company launched the exchange offer whereby
participating preferred shareholders could exchange any or all existing preferred shares for newly issued preferred shares reflecting, subject to certain exceptions
contained in the existing preferred shares, an extended call date of the fifth anniversary from the date of issuance and a restriction on payment of dividends on common
shares declared with respect to any fiscal quarter to an amount not exceeding 67% of net income during such fiscal quarter until December 31, 2020. The terms of the
newly issued preferred shares would otherwise remain identical in all material respects to the Company’s existing preferred shares, as described below. The exchange
offer expired on April 29, 2016 and on May 1, 2016, 6,415,264 Series D, 11,753,798 Series E and 7,320,574 Series F preferred shares were exchanged for an equivalent
number of Series G, Series H and Series I preferred shares, respectively. There was no consideration paid and no increase in fair value of the preferred shares as a result of
the exchange and, as a result, the exchange was considered a modification of the preferred shares with no gain or loss or deemed dividend arising as a result of the
exchange. As a result of the exchange offer, the Company cancelled the Series D, E and F preferred shares tendered in the exchange offer. Non-tendered preferred shares
not exchanged and the new Series G, H and I preferred shares remain outstanding and will continue to trade on the NYSE until redeemed.
On November 1, 2016, the Company redeemed the Series D and E preferred shares at $25 per share for an aggregate liquidation value of $150 million. In addition,
unpaid preferred dividends accrued to the redemption date totaling $2 million were paid. In connection with the redemption, the Company recognized a loss of $5 million
related to the deferred issuance costs paid upon issuance which were included in additional paid-in capital related to the Series D and E preferred shares. There was no
additional gain or loss on redemption to recognize as the redemption price and the initial consideration received on the issue of preferred shares were both $25 per share.
The loss of $5 million was recognized as a deemed preferred dividend in retained earnings and in determining the net income attributable to the PartnerRe Ltd. common
shareholder.
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The redemption price of all preferred shares is $25 per share plus accrued and unpaid dividends without interest at any time or in part from time to time on or after
the fifth anniversary from the date of issuance.
The Company may redeem the Series F preferred shares at any time or in part from time to time on or after March 1, 2018. The Company may also redeem the
Series F preferred shares at any time upon the occurrence of a certain “capital disqualification event” or certain changes in tax law.
The Company may redeem each of the Series G, H and I preferred shares on or after May 1, 2021.
Dividends on the Series F and I preferred shares are non-cumulative and are payable quarterly. Dividends on the Series G and H preferred shares are cumulative
from the date of issuance and are payable quarterly in arrears.
In the event of liquidation of the Company, Series F, G, H and I preferred shares rank on parity with each other but rank senior to the common shares. The holders of
the Series F, G, H and I preferred shares would receive a distribution of $25 per share, or the aggregate liquidation value. In addition, upon liquidation, non-cumulative
Series F and I preferred shares would receive any declared but unpaid dividends while the cumulative Series G and H preferred shares would receive any accrued but
unpaid dividends.
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ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of management, including the CEO and CFO, as of December 31, 2016, of
the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the CEO and CFO concluded that, as of December 31, 2016, the disclosure controls and procedures are effective such that
information required to be disclosed by the Company in reports that it files or submits pursuant to the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and
principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to
provide reasonable assurance regarding the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2016. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).
Based on our assessment and those criteria management believes that the Company maintained effective internal control over financial reporting as of December 31,
2016.
Ernst & Young Ltd. (Ernst & Young), the Company’s independent registered public accounting firm, has issued a report on the effectiveness of the Company’s
internal control over financial reporting, and that report is included herein.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2016 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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To the Board of Directors and Shareholder of PartnerRe Ltd.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited PartnerRe Ltd. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
PartnerRe Ltd. and subsidiaries management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, PartnerRe Ltd. and subsidiaries, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of
PartnerRe Ltd. and subsidiaries as of December 31, 2016, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash
flows in the year ended December 31, 2016 of PartnerRe Ltd. and subsidiaries and our report dated April 5, 2017 expressed an unqualified opinion thereon.
/S/ Ernst & Young Ltd.
Ernst & Young Ltd.
Hamilton, Bermuda
April 5, 2017
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ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company’s Board has determined that Mr. Patrick Thiele is an independent director and audit committee financial expert in accordance with the NYSE listing
rules.
ITEM 16B.
CODE OF ETHICS
The Board of PartnerRe has adopted the Code of Business Conduct and Ethics, which applies to all directors, officers and employees. Any specific waiver of its
provisions requires the approval of the Board or a Committee of the Board, and any such waiver must be disclosed to shareholders promptly. We will disclose any such
waiver on our website at www.partnerre.com within four business days of such waiver being granted. There were no waivers of the Code of Business Conduct and Ethics
in fiscal 2016. Any reported violation to the Code of Business Conduct and Ethics require investigation and may result in disciplinary action, as appropriate.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Upon acquisition of the Company’s common shares by Exor N.V. and in order for PartnerRe to have the same independent auditors as its new ultimate parent,
EXOR S.p.A., on March 24, 2016, PartnerRe engaged Ernst & Young as the Company’s independent registered public accounting firm for the fiscal year ending
December 31, 2016, and dismissed Deloitte Ltd. (Deloitte). See Change in Registrant’s Certifying Accountant in Item 16F below for further details regarding the change
in the certifying accountant.
The Audit Committee is directly responsible for the appointment, retention, compensation and oversight of the work of the Company’s independent registered
public accounting firm. The Audit Committee also pre-approves the audit services and non-audit services to be provided, including the fees and terms for such services,
before the public accounting firm is engaged to render such services. The Audit Committee may delegate the authority to grant such approval to one or more designated
members of the Audit Committee, provided that the decisions of any member to whom authority is delegated shall be presented to the full Audit Committee at its next
meeting. The Audit Committee has sole authority to approve all audit fees and terms. All services of Ernst & Young and their respective affiliates (collectively, the Ernst
& Young Entities), and previously Deloitte and their respective affiliates (collectively, the Deloitte Entities), were pre-approved by the Audit Committee.
During fiscal year 2016, the Audit Committee had eight meetings, including informational calls, to discuss (among other things) the Company’s quarterly results. The
meetings were conducted to encourage communication among the members of the Audit Committee, management, the internal auditors and Ernst & Young. The Audit
Committee also discussed with Ernst & Young the overall scope and plans for Ernst & Young’s audits and the results of such audits. The Audit Committee met with
representatives from Ernst & Young, both with and without management present.
The following table presents fees for professional services rendered by the Ernst & Young Entities for the year ended December 31, 2016 and the Deloitte Entities
related to the year ended December 31, 2015 (in U.S. dollars):
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Total
$
$
2016
2015
$
5,296,000
257,000
654,576
109,361
6,316,937
$
5,468,620
560,567
—
—
6,029,187
(1) For the year ended December 31, 2016, audit fees relate to professional services rendered by the Ernst & Young Entities for the audit of the Company’s annual
financial statements included in this annual report on Form 20-F, the review of the financial statements included in the quarterly report on Form 10-Q for the
quarterly period ended March 31, 2016, and other audit services provided in connection with statutory and regulatory filings. For the year ended December 31,
2015, these fees relate to professional services rendered by the Deloitte Entities for the audit of our annual financial statements included in the Company’s annual
report on Form 10-K for the year ended December 31, 2015, the review of the financial statements included in the quarterly reports on Form 10-Q in 2015 and
audit services provided in connection with statutory and regulatory filings for the years ended December 31, 2015.
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(2) Audit-related fees relate to services performed that are reasonably related to the performance of the audit or review of the Company’s financial statements but are
not described in (1) above. For the year ended December 31, 2016, these fees include: i) fees of $98,000 for services performed by the Ernst & Young Entities
related to issuance of a comfort letter related to the Company’s Euro debt offering and an employee benefit plan audit and ii) fees of $159,000 paid to Deloitte
Entities related to the reissuance of their consent for the preferred share exchange offer and related to issuance of a comfort letter related to the Company’s Euro
debt offering. For the year ended December 31, 2015, these fees relate to services performed by the Deloitte Entities related to the terminated Amalgamation with
AXIS and Merger with EXOR, agreed upon procedures related to certain of the Company’s subsidiaries and an employee benefit plan audit.
(3) Tax fees relate to services performed by Ernst & Young Entities for annual U.S. tax preparation, compliance and filing assistance and certain on-going projects
(including on-call advisory).
(4) All other fees relate to services provided by the Ernst & Young Entities other than the services reported in (1), (2), and (3) above. The fees for 2016 related to due
diligence assistance related to the Aurigen acquisition and specific procedures in relation to a pro-forma filing related to the re-domicile of the parent company
from Italy to the Netherlands.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Upon acquisition of the Company’s common shares by Exor N.V., PartnerRe, after careful deliberations, dismissed its independent registered public accounting
firm, Deloitte, in order for PartnerRe to have the same independent auditors as its new ultimate parent, EXOR S.p.A. The Audit Committee approved the dismissal of
Deloitte and on March 24, 2016 PartnerRe engaged Ernst & Young as the Company’s independent registered public accounting firm for the fiscal year ending December
31, 2016.
The reports of Deloitte on the Company’s financial statements for each of the two fiscal years ended December 31, 2014 and 2015 did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended December 31,
2014 and 2015, respectively, and in the subsequent interim period through March 24, 2016, there were (i) no “disagreements” as that term is defined in Item 304 of
Regulation S-K between the Company and Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to the subject matter of the disagreement in their reports
on the financial statements for such years, and (ii) no "reportable events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
In deciding to engage Ernst & Young, the Board of PartnerRe reviewed auditor independence and existing commercial relationships with Ernst & Young and
concluded that Ernst & Young has no commercial relationship with the Company that would impair its independence. During the two most recent fiscal years and in the
subsequent interim period through March 24, 2016, neither the Company nor anyone on its behalf has consulted with Ernst & Young with respect to the application of
accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that would have been rendered on the Company’s consolidated
financial statements, or any other matters set forth in Item 304(a)(2) of Regulation S-K.
ITEM 16G.
CORPORATE GOVERNANCE
Pursuant to an exception under the NYSE listing standards available to foreign private issuers, we are not required to comply with all of the corporate governance
practices followed by U.S. companies under the NYSE listing standards, which are available at www.nyse.com. Pursuant to Section 303.A.11 of the NYSE Listed
Company Manual, we are required to list the significant differences between our corporate governance practices and the NYSE standards applicable to listed U.S.
companies. Set forth below is a list of those differences:
•
Nominating/Corporate Governance Committee: The NYSE requires that listed companies must have a nominating /corporate governance committee composed
entirely of independent directors and a committee charter detailing the committee’s purpose and responsibilities and an annual performance evaluation of the
committee. Under Bermuda law and our Bye-Laws, we are not required to have, and do not have, a nominating or corporate governance committee.
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•
Compensation Committee: The NYSE requires that listed companies must have a compensation committee composed entirely of independent directors and a
committee charter detailing the committee’s purpose and responsibilities, an annual performance evaluation of the committee and the rights and responsibilities
of the committee with respect to retaining or obtaining advice from an independent adviser. Under Bermuda law and our Bye-Laws, we are not required to have,
and do not have, a compensation committee.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
See Item 18 of this report.
ITEM 18.
FINANCIAL STATEMENTS
PART III
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PartnerRe Ltd.
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars, except parenthetical share data)
Assets
Investments:
Fixed maturities, at fair value (amortized cost: 2016, $13,386,557; 2015, $13,313,819)
Short-term investments, at fair value (amortized cost: 2016, $21,697; 2015, $46,689)
Equities, at fair value (cost: 2016, $28,376; 2015, $418,428)
Other invested assets
Total investments
Funds held–directly managed (cost: 2016, $510,057; 2015, $537,661)
Cash and cash equivalents
Accrued investment income
Reinsurance balances receivable
Reinsurance recoverable on paid and unpaid losses
Funds held by reinsured companies
Deferred acquisition costs
Deposit assets
Net tax assets
Goodwill
Intangible assets
Other assets
Total assets
Liabilities
Non-life reserves
Life and health reserves
Unearned premiums
Other reinsurance balances payable
Deposit liabilities
Net tax liabilities
Accounts payable, accrued expenses and other
Debt related to senior notes
Debt related to capital efficient notes
Total liabilities
Shareholders’ Equity
Common shares (2016, par value $0.00000001; issued: 100,000,000 shares; 2015, par value $1.00; issued: 87,237,220 shares)
Preferred shares (par value $1.00; issued and outstanding: 2016, 28,169,062 shares; 2015, 34,150,000 shares; aggregate
liquidation value: 2016, $704,227; 2015, $853,750)
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Common shares held in treasury, at cost (2016, nil shares; 2015, 39,303,068 shares)
Total shareholders’ equity attributable to PartnerRe Ltd.
Noncontrolling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
98
December 31,
2016
December 31,
2015
$
$
$
$
$
$
13,432,501
21,697
38,626
1,075,637
14,568,461
511,324
1,773,328
112,580
2,492,069
331,704
685,069
597,239
74,273
194,170
456,380
107,092
35,105
21,938,794
8,985,434
1,984,096
1,623,796
281,973
15,026
166,113
849,572
1,273,883
70,989
13,448,262
46,688
443,861
399,204
14,338,015
539,743
1,577,097
141,672
2,428,020
282,916
657,815
629,372
88,152
102,596
456,380
133,011
31,254
21,406,043
9,064,711
2,051,935
1,644,757
246,089
44,420
218,652
411,539
750,000
70,989
15,250,882
14,503,092
—
87,237
28,169
2,396,530
(74,569)
4,337,782
—
6,687,912
—
6,687,912
34,150
3,982,147
(83,283)
6,146,802
(3,266,552)
6,900,501
2,450
6,902,951
$
21,938,794
$
21,406,043
Table of Contents
PartnerRe Ltd.
Consolidated Statements of Operations and Comprehensive Income
(Expressed in thousands of U.S. dollars)
For the year ended
December 31, 2016
For the year ended
December 31, 2015
For the year ended
December 31, 2014
Revenues
Gross premiums written
Net premiums written
Decrease (increase) in unearned premiums
Net premiums earned
Net investment income
Net realized and unrealized investment gains (losses)
Other income
Total revenues
Expenses
Losses and loss expenses
Acquisition costs
Other expenses
Interest expense
Loss on redemption of senior notes
Amortization of intangible assets
Net foreign exchange (gains) losses
Total expenses
Income before taxes and interest in (loss) earnings of equity method investments
Income tax expense
Interest in (losses) earnings of equity method investments
Net income
Net income attributable to noncontrolling interests
Net income attributable to PartnerRe Ltd.
Preferred dividends
Loss on redemption of preferred shares
Net income attributable to PartnerRe Ltd. common shareholders
Comprehensive income
Net income attributable to PartnerRe Ltd.
Change in currency translation adjustment
Change in unfunded pension obligation, net of tax
Change in unrealized losses on investments, net of tax
Total other comprehensive income (loss), net of tax
Comprehensive income attributable to PartnerRe Ltd.
$
$
$
$
$
$
$
$
$
5,356,942
4,953,470
16,126
4,969,596
410,864
26,266
15,232
5,421,958
3,248,091
1,186,602
471,905
48,603
22,203
25,919
(77,515)
4,925,808
496,150
25,923
(22,919)
447,308
—
447,308
55,043
4,908
387,357
447,308
12,201
(1,909)
(1,579)
8,713
$
$
$
$
5,547,525
5,229,548
39,630
5,269,178
449,784
(297,479)
9,144
5,430,627
3,157,420
1,217,003
790,723
48,988
—
26,593
9,461
5,250,188
180,439
79,664
6,375
107,150
(2,769)
104,381
56,735
—
47,646
104,381
(46,055)
(2,285)
(860)
(49,200)
456,021
$
55,181
$
5,932,003
5,719,884
(110,689)
5,609,195
479,696
371,796
16,190
6,476,877
3,462,770
1,213,822
449,688
48,963
—
27,486
(18,201)
5,184,528
1,292,349
239,506
15,270
1,068,113
(13,139)
1,054,974
56,735
—
998,239
1,054,974
(8,892)
(12,067)
(886)
(21,845)
1,033,129
On March 18, 2016, Exor N.V. acquired 100% of the Company’s common shares; as such, earnings per share data is no longer considered meaningful and has been
excluded.
See accompanying Notes to Consolidated Financial Statements.
99
PartnerRe Ltd.
Consolidated Statements of Shareholders’ Equity
(Expressed in thousands of U.S. dollars)
Table of Contents
Common shares
Balance at beginning of year
Issuance of common shares
Cancellation of treasury shares
Cancellation of outstanding common shares
Balance at end of year
Preferred shares
Balance at beginning of year
Redemption of preferred shares
Balance at end of year
Additional paid-in capital
Balance at beginning of year
Stock compensation expense, net of taxes paid
Reissuance of common shares
Cancellation of treasury shares
Cancellation of outstanding common shares
Settlement of stock options and SSARs
Redemption of preferred shares
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Currency translation adjustment
Balance at beginning of year
Change in foreign currency translation adjustment
Change in designated net investment hedge
Balance at end of year
Unfunded pension obligation
Balance at beginning of year
Change in unfunded pension obligation, net of tax
Balance at end of year (net of tax: 2016, $9,512; 2015, $8,804; 2014, $8,301)
Unrealized gain on investments
Balance at beginning of year
Change in unrealized losses on investments, net of tax
Balance at end of year (net of tax: 2016, 2015 and 2014: $nil)
Balance at end of year
Retained earnings
Balance at beginning of year
Net income
Net income attributable to noncontrolling interests
Reissuance of common shares
Cancellation of treasury shares
Dividends on common shares
Dividends on preferred shares
Loss on redemption of preferred shares
Balance at end of year
100
For the year ended
December 31, 2016
For the year ended
December 31, 2015
For the year ended
December 31, 2014
$
$
87,237
—
(39,082)
(48,155)
—
34,150
(5,981)
28,169
3,982,147
48,731
(2,193)
(1,466,363)
48,155
(75,311)
(138,636)
2,396,530
$
87,237
—
—
—
87,237
34,150
—
34,150
3,949,665
32,482
—
—
—
—
—
3,982,147
86,657
580
—
—
87,237
34,150
—
34,150
3,901,627
25,519
22,519
—
—
—
—
3,949,665
(83,283)
(34,083)
(12,238)
(53,970)
6,175
6,027
(41,768)
(31,861)
(1,909)
(33,770)
2,548
(1,579)
969
(74,569)
6,146,802
447,308
—
(17,229)
(1,742,718)
(436,430)
(55,043)
(4,908)
4,337,782
(7,915)
(36,750)
(9,305)
(53,970)
(29,576)
(2,285)
(31,861)
3,408
(860)
2,548
(83,283)
6,270,811
107,150
(2,769)
(38,051)
—
(133,604)
(56,735)
—
6,146,802
977
(8,892)
—
(7,915)
(17,509)
(12,067)
(29,576)
4,294
(886)
3,408
(34,083)
5,406,797
1,068,113
(13,139)
—
—
(134,225)
(56,735)
—
6,270,811
Table of Contents
PartnerRe Ltd.
Consolidated Statements of Shareholders’ Equity
(Expressed in thousands of U.S. dollars)
Common shares held in treasury
Balance at beginning of year
Repurchase of common shares
Reissuance of common shares
Cancellation of treasury shares
Balance at end of year
Total shareholders’ equity attributable to PartnerRe Ltd.
Noncontrolling interests
Total shareholders’ equity
For the year ended
December 31, 2016
For the year ended
December 31, 2015
For the year ended
December 31, 2014
(3,266,552)
—
18,390
3,248,162
—
6,687,912
—
6,687,912
$
$
(3,258,870)
(59,266)
51,584
—
(3,266,552)
6,900,501
2,450
6,902,951
$
$
(2,707,461)
(551,409)
—
—
(3,258,870)
7,048,910
55,501
7,104,411
$
$
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
PartnerRe Ltd.
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premium on investments
Amortization of intangible assets
Net realized and unrealized investment (gains) losses
Changes in:
Reinsurance balances, net
Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable
Funds held by reinsured companies and funds held–directly managed
Deferred acquisition costs
Net tax assets and liabilities
Non-life and life and health reserves
Unearned premiums
Other net changes in operating assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities
Sales of fixed maturities
Redemptions of fixed maturities
Purchases of fixed maturities
Sales and redemptions of short-term investments
Purchases of short-term investments
Sales of equities
Purchases of equities
Other, net
Net cash (used in) provided by investing activities
Cash flows from financing activities
Dividends paid to common and preferred shareholders
Settlement of share-based awards upon change in control
Repurchase of common shares
Reissuance of treasury shares, net of taxes
Redemption of preferred shares
Distributions to noncontrolling interests
Issuance of senior notes
Redemption of senior notes
Net cash used in financing activities
Effect of foreign exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of year
Supplemental cash flow information:
Taxes paid
Interest paid
For the year ended
December 31, 2016
For the year ended
December 31, 2015
For the year ended
December 31, 2014
$
447,308
$
107,150
$
1,068,113
96,402
25,919
(26,266)
(95,737)
(46,235)
(59,069)
2,000
(135,153)
214,071
(16,126)
38,195
445,309
12,404,085
595,381
(12,704,275)
148,665
(124,079)
402,481
(7,119)
(749,194)
(34,055)
(491,473)
(75,531)
—
10,965
(149,523)
—
824,002
(271,961)
(153,521)
(61,502)
196,231
1,577,097
93,754
26,593
297,479
(122,866)
55,172
131,713
(5,784)
(105,635)
(118,976)
(39,630)
(158)
318,812
7,796,537
743,743
(8,608,288)
178,166
(200,533)
1,184,380
(647,533)
(151,198)
295,274
(190,339)
—
(71,376)
7,996
—
(55,820)
—
—
(309,539)
(40,918)
263,629
1,313,468
1,773,328
$
1,577,097
$
107,047
27,486
(371,796)
(142,268)
46,857
188,902
(55,786)
(10,951)
(168,490)
110,689
52,796
852,599
8,730,831
696,301
(9,844,660)
92,956
(106,364)
691,970
(452,201)
(58,840)
(250,007)
(190,960)
—
(547,120)
16,785
—
(14,265)
—
—
(735,560)
(50,049)
(183,017)
1,496,485
1,313,468
188,650
46,417
$
220,336
49,259
$
284,798
49,259
$
$
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
1. Organization
PartnerRe Ltd.
Notes to Consolidated Financial Statements
PartnerRe Ltd. (PartnerRe or the Company) predominantly provides reinsurance and certain specialty insurance lines on a worldwide basis through its principal
wholly-owned subsidiaries, including Partner Reinsurance Company Ltd. (PartnerRe Bermuda), Partner Reinsurance Europe SE (PartnerRe Europe), Partner Reinsurance
Company of the U.S. (PartnerRe U.S.) and Partner Reinsurance Asia Pte. Ltd. (PartnerRe Asia). Risks reinsured include, but are not limited to, property, casualty, motor,
agriculture, aviation/space, catastrophe, credit/surety, engineering, energy, marine, specialty property, specialty casualty, multiline and other lines, mortality, longevity,
accident and health and alternative risk products. The Company’s alternative risk products include weather and credit protection to financial, industrial and service
companies on a worldwide basis.
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.
The Company completed the acquisition of SAFR (subsequently renamed PartnerRe SA and reinsurance business transferred into PartnerRe Europe) in 1997, the
acquisition of the reinsurance operations of Winterthur Group (Winterthur Re) in 1998, and the acquisition of PARIS RE Holdings Limited (Paris Re) in 2009.
Effective December 31, 2012, the Company completed the acquisition of Presidio Reinsurance Group, Inc. (Presidio), a U.S. specialty accident and health
reinsurance and insurance writer.
As of April 1, 2015, PartnerRe Asia became the principal reinsurance carrier for the Company’s non-life and life business underwritten in the Asia Pacific region.
The establishment of PartnerRe Asia has enabled the Company’s Asian reinsurance operations to be consolidated into one regional, well-capitalized entity and will
support its growing underwriting presence in the region.
On August 2, 2015, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Exor N.V., Pillar Ltd., a wholly-owned subsidiary of
Exor N.V., and solely with respect to certain specified sections thereof, EXOR S.p.A., a European investment company controlled by the Agnelli family, whereby Pillar
Ltd. would be merged with and into the Company, with the Company continuing as the surviving company and a wholly-owned subsidiary of Exor N.V. (the Merger). On
March 18, 2016, the acquisition was completed following receipt of all regulatory approvals. Each PartnerRe common share issued and outstanding immediately prior to
the effective time of the Merger was cancelled and one common share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the
Company. Pursuant to the terms of the Merger Agreement, PartnerRe common shares are no longer traded on the NYSE. The Company’s preferred shares continue to be
traded on the NYSE following the closing of the transaction.
On October 20, 2016, the Company entered into a definitive agreement to acquire 100% of the outstanding ordinary shares of Aurigen Capital Limited, a North
American life reinsurance company. The acquisition was subject to customary closing conditions including the receipt of required regulatory approvals, which was
completed on April 3, 2017 (see Note 22). This acquisition enables the Company to expand its life reinsurance footprint in Canada and the U.S. with limited overlap in
market coverage.
On October 27, 2016, Exor N.V. changed its name to EXOR Nederland N.V. On December 10, 2016, EXOR S.p.A. merged with and into EXOR HOLDING N.V.,
a newly formed entity organized in the Netherlands. In conjunction with the merger, EXOR HOLDING N.V. was renamed EXOR N.V. EXOR N.V. is listed on the Milan
Stock Exchange.
On November 24, 2016, the one common share at $1.00 par value was subdivided into 100 million common shares at $0.00000001 par value with the common share
capital remaining at a total of $1.00 (see Note 11).
2. 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 Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.
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. While management believes
that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ from those estimates. The
Company’s principal estimates include:
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•
•
•
•
•
•
•
Non-life reserves;
Life and health reserves;
Gross and net premiums written and net premiums earned;
Recoverability of deferred acquisition costs;
Recoverability of deferred tax assets;
Valuation of goodwill and intangible assets; and
Valuation of certain assets and derivative financial instruments that are measured using significant unobservable inputs.
The following are the Company’s significant accounting policies:
(a) Premiums
Gross premiums written and earned are based upon reports received from ceding companies, supplemented by the Company’s own estimates of premiums written
and earned for which ceding company reports have not been received. The determination of premium estimates requires a review of the Company’s experience with
cedants, familiarity with each market, an understanding of the characteristics of each line of business and management’s assessment of the impact of various other factors
on the volume of business written and ceded to the Company. Premium estimates are updated as new information is received from cedants and differences between such
estimates and actual amounts are recorded in the period in which the estimates are changed or the actual amounts are determined. Net premiums written and earned are
presented net of ceded premiums, which represent the cost of retrocessional protection purchased by the Company. Premiums are earned on a basis that is consistent with
the risks covered under the terms of the reinsurance contracts, which is generally one to two years. For U.S. and European wind and certain other risks, premiums are
earned commensurate with the seasonality of the underlying exposure. Reinstatement premiums are recognized as written and earned at the time a loss event occurs,
where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The accrual of reinstatement premiums is based on
management’s estimate of losses and loss expenses associated with the loss event. Unearned premiums represent the portion of premiums written which is applicable to
the unexpired risks under contracts in force.
Premiums related to individual life and annuity business are recorded over the premium-paying period on the underlying policies. Premiums on annuity and
universal life contracts for which there is no significant mortality or critical illness risk 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 and Non-life and Life and Health Reserves
The liability for non-life reserves includes amounts determined from loss reports on individual treaties (case reserves), additional case reserves when the Company’s
loss estimate is higher than reported by the cedants (ACRs) and amounts for losses incurred but not yet reported to the Company (IBNR). 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 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. Any adjustments are reflected in the periods in which they are determined, which may affect the Company’s
operating results in future periods.
The liability for life and health reserves have been established based upon information reported by ceding companies, supplemented by the Company’s actuarial
estimates of mortality, critical illness, persistency and future investment income, with appropriate provision to reflect uncertainty. Future policy benefit reserves for
annuity and universal life contracts are carried at their accumulated values. Reserves for policy claims and benefits include both mortality and critical illness claims in the
process of settlement, and claims that have been incurred but not yet reported.
The Company purchases retrocessional contracts to reduce its exposure to risk of losses on reinsurance assumed. Reinsurance recoverable on paid and unpaid losses
involves actuarial estimates consistent with those used to establish the associated liabilities for non-life and life and health reserves.
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(c) Deferred Acquisition Costs
Acquisition costs, comprising incremental brokerage fees, commissions and excise taxes, which vary directly with, and are related to, the acquisition of reinsurance
contracts, are capitalized and charged to expense as the related premium is earned. All other acquisition related costs, including all indirect costs, are expensed as incurred.
Acquisition costs related to individual life and annuity contracts 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 for which
there is no significant mortality or critical illness risk are deferred and amortized over the lives of the contracts as a percentage of the estimated gross profits expected to
be realized on the contracts.
Actual and anticipated losses and loss expenses, other costs, and investment income related to underlying premiums are considered in determining the recoverability
of deferred acquisition costs related to the Company’s Non-life business. Actual and anticipated loss experience, together with the present value of future gross premiums,
the present value of future benefits, and settlement and maintenance costs are considered in determining the recoverability of deferred acquisition costs related to the
Company’s Life business.
(d) Funds Held by Reinsured Companies (Cedants)
The Company writes certain business on a funds held basis. Under such contractual arrangements, the cedant retains the premiums that would have otherwise been
paid to the Company and the Company earns interest on these funds. With the exception of those arrangements discussed below, the Company generally earns investment
income on the funds held balances based upon a predetermined interest rate, either fixed contractually at the inception of the contract or based upon a recognized index
(e.g. LIBOR).
In certain circumstances, the Company may receive an investment return based upon either the result of a pool of assets held by the cedant, generally used to
collateralize the funds held balance, or the investment return earned by the cedant on its entire investment portfolio. In these arrangements, gross investment returns are
typically reflected in net investment income with a corresponding increase or decrease (net of a spread) being recorded in losses and loss expenses in the Company’s
Consolidated Statements of Operations. In these arrangements, the Company is exposed, to a limited extent, to the underlying credit risk of the pool of assets inasmuch as
the underlying life policies may have guaranteed minimum returns. In such cases, an embedded derivative exists and its fair value is recorded by the Company as an
increase or decrease to the funds held balance.
(e) Deposit Assets and Liabilities
In the normal course of its operations, the Company writes certain contracts that do not meet the risk transfer provisions of U.S. GAAP. While these contracts do not
meet risk transfer provisions for accounting purposes, there is a remote possibility that the Company will suffer a loss. The Company accounts for these contracts using
the deposit accounting method, originally recording deposit liabilities for an amount equivalent to the consideration received. The consideration to be retained by the
Company, irrespective of the experience of the contracts, is earned over the expected settlement period of the contracts, with any unearned portion recorded as a
component of deposit liabilities. Actuarial studies are used to estimate the final liabilities under these contracts and the appropriate accretion rates to increase or decrease
the liabilities over the term of the contracts. The change for the period is recorded in other income or loss in the Consolidated Statements of Operations.
Under some of these contracts, cedants 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 net investment income in the Consolidated Statements of Operations.
(f) Investments
The Company elects the fair value option for all of its fixed maturities, short-term investments, equities and certain other invested assets (excluding those that are
accounted for using the cost or equity methods of accounting). All changes in the fair value of investments are recorded in net realized and unrealized investment gains or
losses in the Consolidated Statements of Operations. The Company defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Company measures the fair value of financial instruments according to a fair value hierarchy that
prioritizes the information used to measure fair value into three broad levels. The Company’s policy is to recognize transfers between the hierarchy levels at the beginning
of the period. See Note 3 for additional information on fair value.
Short-term investments comprise securities with a maturity greater than three months but less than one year from the date of purchase.
Other invested assets consist primarily of investments in non-publicly traded companies, private placement equity and fixed maturity investments, derivative
financial instruments and other specialty asset classes. Non-publicly traded entities in which the
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Company has an ownership of more than 20% and less than 50% of the voting shares, and limited partnerships in which the Company has more than a minor interest, are
accounted for using either the equity method or the fair value option. The remaining other invested assets are recorded based on valuation techniques depending on the
nature of the individual assets. The valuation techniques used by the Company are generally commensurate with standard valuation techniques for each asset class.
Net investment income includes interest and dividend income, amortization of premiums and discounts on fixed maturities and short-term investments and
investment income on funds held and funds held–directly managed, and is net of investment expenses and withholding taxes. Investment income is recognized when
earned. Realized gains or losses on the disposal of investments are determined on a first-in, first-out basis. Investment purchases and sales are recorded on a trade-date
basis.
(g) Funds Held–Directly Managed
The Company elects the fair value option for substantially all of the fixed maturities, short-term investments and certain other invested assets in the segregated
investment portfolio underlying the funds held–directly managed account. Accordingly, all changes in the fair value of the segregated investment portfolio underlying the
funds held–directly managed account are recorded in net realized and unrealized investment gains or losses in the Consolidated Statements of Operations.
(h) Cash and Cash Equivalents
Cash equivalents are carried at fair value and include fixed income securities that, at purchase, have a maturity of three months or less.
(i) Business Combinations
The Company accounts for transactions in which it obtains control over one or more businesses using the acquisition method. The purchase price is allocated to
identifiable assets and liabilities, including any intangible assets, based on their estimated fair value at the acquisition date. The estimates of fair values for assets and
liabilities acquired are determined based on various market and income analyses and appraisals. Any excess of the purchase price over the fair value of net assets acquired
is recorded as goodwill in the Company’s Consolidated Balance Sheets. All costs associated with an acquisition are expensed as incurred.
(j) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. The Company assesses the
appropriateness of its valuation of goodwill on at least an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount may not
be recoverable. If, as a result of the assessment, the Company determines that the value of its goodwill is impaired, goodwill will be written down in the period in which
the determination is made. In 2016, the Company changed its annual impairment testing date from September 30 to December 31, primarily due to the key inputs and
assumptions used to assess the fair value of reporting units being based on the Company’s annual business plan which is approved by the Board in November each year.
(k) Intangible Assets
Intangible assets represent the fair value adjustments related to non-life reserves and the fair values of renewal rights, customer relationships and U.S. licenses
arising from acquisitions. Definite-lived intangible assets are amortized over their useful lives and the amortization expense is recorded in the Consolidated Statement of
Operations. Indefinite-lived intangible assets are not subject to amortization. The carrying values of indefinite-lived intangible assets are reviewed for indicators of
impairment on at least an annual basis or more frequently if events or changes in circumstances indicate that impairment may exist. In 2016, the Company changed its
annual impairment testing date from October 1 to December 31 to align with the goodwill impairment testing date. Impairment is recognized if the carrying values of the
intangible assets are not recoverable from their undiscounted cash flows and is measured as the difference between the carrying value and the fair value.
(l) Income Taxes
Certain subsidiaries and branches of the Company operate in jurisdictions where they are subject to taxation. Current and deferred income taxes are charged or
credited to net income or loss or, in certain cases, to accumulated other comprehensive income or loss, based upon enacted tax laws and rates applicable in the relevant
jurisdiction in the period in which the tax becomes accruable or realizable. Deferred income taxes are provided for all temporary differences between the bases of assets
and liabilities used in the Consolidated Balance Sheets and those used in the various jurisdictional tax returns. When management’s assessment indicates that it is more
likely than not that deferred tax assets will not be realized, a valuation allowance is recorded against the deferred tax assets.
The Company recognizes a tax benefit relating to uncertain tax positions only where the position is more likely than not to be sustained assuming examination by
tax authorities. A liability is recognized for any tax benefit (along with any interest and penalty,
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if applicable) claimed in a tax return in excess of the amount recognized in the financial statements under U.S. GAAP. Any changes in amounts recognized are recorded in
the period in which they are determined.
(m) Translation of Foreign Currencies
The reporting currency of the Company is the U.S. dollar. The national currencies of the Company’s subsidiaries and branches are generally their functional
currencies, except for the Company’s Bermuda subsidiaries, its Swiss branch and its Singapore subsidiary and branches, whose functional currency is the U.S. dollar. In
translating the financial statements of those subsidiaries or branches 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 foreign exchange rates for the period.
The effect of translation adjustments are reported in the Consolidated Balance Sheets as currency translation adjustment, a separate component of accumulated other
comprehensive income or loss.
In recording foreign currency transactions, revenue and expense items are converted into the functional currency at the average rates of exchange for the period.
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 foreign exchange gains or losses are included in net foreign exchange gains or losses in the Consolidated Statements of Operations. The
Company also records realized and unrealized foreign exchange gains or losses on certain hedged items in net foreign exchange gains or losses in the Consolidated
Statements of Operations (see Note 2(n)).
(n) Derivatives
Derivatives Used in Hedging Activities
The Company utilizes derivative financial instruments as part of its overall currency risk management strategy. The Company recognizes all derivative financial
instruments, including embedded derivative instruments, as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value. On
the date the Company enters into a derivative contract, management designates whether the derivative is to be used as a hedge of an identified underlying exposure (a
designated hedge). The accounting for gains and losses associated with changes in the fair value of a derivative and the effect on the Consolidated Financial Statements
depends on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of the asset or liability being hedged.
The derivatives employed by the Company to hedge currency exposure related to fixed income securities and other reinsurance assets and liabilities are not
designated as hedges. The changes in fair value of these derivatives not designated as hedges are recognized in Net foreign exchange gains or losses in the Consolidated
Statements of Operations.
As part of its overall strategy to manage its level of currency exposure, from time to time the Company uses forward foreign exchange derivatives to hedge or
partially hedge the net investment in certain subsidiaries and branches whose functional currencies are not the U.S. dollar. These derivatives are designated as net
investment hedges, and accordingly, the changes in fair value of the derivative and the hedged item related to foreign currency are recognized in currency translation
adjustment in the Consolidated Balance Sheets. The Company also uses, from time to time, interest rate derivatives to mitigate exposure to interest rate volatility.
The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the asset or liability that has been designated as a hedged
item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its designated
hedging relationships both at the hedge inception and on an ongoing basis. The Company assesses the effectiveness of its designated hedges using the period-to-period
dollar offset method on an individual currency basis. If the ratio obtained with this method is within the range of 80% to 125%, the Company considers the hedge
effective. The time value component of the designated net investment hedges is included in the assessment of hedge effectiveness.
The Company will discontinue hedge accounting prospectively if it is determined that the derivative is no longer effective in offsetting changes in the fair value of a
hedged item. To the extent that the Company discontinues hedge accounting related to its net investment in subsidiaries and branches whose functional currencies are not
the U.S. dollar, because, based on management’s assessment, the derivative no longer qualifies as an effective hedge, the derivative will continue to be carried in the
Consolidated Balance Sheets at its fair value, with changes in its fair value recognized in Net foreign exchange gains or losses in the Consolidated Statements of
Operations.
Other Derivatives
The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. The Company utilizes various derivative instruments
such as foreign exchange forward contracts, foreign currency option contracts, futures contracts, to-be-announced mortgage-backed securities (TBAs) and credit default
swaps for the purpose of managing overall
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currency risk, market exposures and portfolio duration, for hedging certain investments, or for enhancing investment performance that would be allowed under the
Company’s investment policy if implemented in other ways. These instruments are recorded at fair value as assets and liabilities in the Consolidated Balance Sheets.
Changes in fair value are included in net realized and unrealized investment gains or losses in the Consolidated Statements of Operations, except changes in the fair value
of foreign currency option contracts and foreign exchange forward contracts which are included in net foreign exchange gains or losses in the Consolidated Statements of
Operations. Margin balances required by counterparties, which are equal to a percentage of the total value of open futures contracts, are included in cash and cash
equivalents.
The Company enters from time to time into weather and longevity related transactions that are structured as derivatives, which are recorded at fair value with the
changes in fair value reported in net realized and unrealized investment gains or losses in the Consolidated Statements of Operations.
The Company enters from time to time into total return and interest rate swaps. Margins related to these swaps are included in other income or loss in the
Consolidated Statements of Operations and any changes in the fair value of the swaps are included in net realized and unrealized investment gains or losses in the
Consolidated Statements of Operations.
(o) Pensions
The Company recognizes an asset or a liability in the Consolidated Balance Sheets for the funded status of its defined benefit plans that are overfunded or
underfunded, respectively, measured as the difference between the fair value of plan assets and the pension obligation and recognizes changes in the funded status of
defined benefit plans in the year in which the changes occur as a component of accumulated other comprehensive income or loss, net of tax.
(p) Variable Interest Entities
The Company is involved in the normal course of business with variable interest entities (VIEs). An assessment is performed as of the date the Company becomes
initially involved in the VIE followed by a reassessment upon certain events related to its involvement in the VIE. The Company consolidates a VIE when it is the primary
beneficiary having a controlling financial interest as a result of having the power to direct the activities that most significantly impact the economic performance of the
VIE and the obligation to absorb losses, or right to receive benefits, that could potentially be significant to the VIE.
(q) Segment Reporting
Effective July 1, 2016, the Company monitors the performance of its operations in three segments: Property & Casualty (P&C), Specialty, and Life and Health
(previously Non-life, Life and Health, and Corporate and Other). Segments represent markets that are reasonably homogeneous in terms of client types, buying patterns,
underlying risk patterns or approach to risk management.
Since the Company does not manage its assets by segment, net investment income is not allocated to the P&C and Specialty segments. However, because of the
interest-sensitive nature of some of the Company’s Life and Health products, net investment income is considered in management’s assessment of the profitability of the
Life and Health segment. The following items are not considered in evaluating the results of the P&C, Specialty and Life and Health segments: net realized and unrealized
investment gains or losses, interest expense, loss on redemption of senior notes, amortization of intangible assets, net foreign exchange gains or losses, income tax
expense or benefit and interest in earnings and losses of equity method investments. These items are included in the Corporate and Other component, which is comprised
of the Company’s investment and corporate activities, including other expenses.
(r) Recent Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (FASB) issued updated guidance on the consolidation of voting interest entities and variable interest
entities. The update required the Company to reevaluate the conclusions regarding consolidation of certain legal entities. This guidance was effective for annual periods
beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance on January 1, 2016 did not result in any non-consolidated VIEs having
to be consolidated; however, it did result in the deconsolidation of one VIE, Lorenz Re Ltd., which did not have a significant impact on the Company’s Condensed
Consolidated Financial Statements and disclosures. Refer to Note 12 for further details.
In May 2015, the FASB issued updated guidance on disclosure requirements for insurance companies that issue short-duration contracts, which requires additional
disclosures, including claims development tables. This information is required to be disaggregated to provide useful information avoiding aggregation of items that have
significantly different characteristics. This guidance is effective for annual periods beginning after December 15, 2015 with retrospective application required. The new
disclosures have been included in Note 8 to the Consolidated Financial Statements.
In February 2016, the FASB issued updated guidance on the accounting for leases. This update requires the recognition of lease assets and lease liabilities by lessees
for those leases classified as operating leases under previous guidance and expands
108
Table of Contents
required disclosures. The guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is
currently evaluating the impact of the adoption of this guidance on its Consolidated Financial Statements and disclosures.
In March 2016, the FASB issued updated guidance on the transition to the equity method of accounting. This update eliminates the requirement to retroactively
adjust the carrying value of an investment when it qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence.
The guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The adoption of this guidance on January 1,
2016 did not have a significant impact on the Company’s Consolidated Financial Statements and disclosures.
In August 2016, the FASB issued updated guidance on the classification of certain cash receipts and payments. This update addresses the presentation and
classification of certain cash receipts and cash payments in the statement of cash flows. The guidance is effective for fiscal periods beginning after December 15, 2017,
with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued updated guidance on income taxes with respect to intra-entity transfers of assets. This update requires recognition of the income
tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance is effective for fiscal periods beginning after
December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s Consolidated
Financial Statements.
In October 2016, the FASB issued updated guidance on consolidation with respect to interests held through related parties that are under common control. This
update requires that a reporting entity, in determining whether it satisfies the primary beneficiary criteria, include all of its direct variable interests in a VIE as well as its
indirect variable interests on a proportionate basis in a VIE held through related parties, including related parties that are under common control with the reporting entity.
The guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this guidance
to have a material impact on the Company’s Consolidated Financial Statements.
3. Fair Value
(a) Fair Value of Financial Instrument Assets
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs and minimizing the use
of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an
asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about
what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The level in the hierarchy within which a
given fair value measurement falls is determined based on the lowest level input that is significant to the measurement.
The Company determines the appropriate level in the hierarchy for each financial instrument that it measures at fair value. In determining fair value, the Company
uses various valuation approaches, including market, income and cost approaches. The hierarchy is broken down into three levels based on the observability of inputs as
follows:
•
•
Level 1 inputs—Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
The Company’s financial instruments that it measures at fair value using Level 1 inputs generally include: equities and real estate investment trusts listed on a
major exchange, exchange traded funds and exchange traded derivatives, including futures that are actively traded.
Level 2 inputs—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and
significant directly or indirectly observable inputs, other than quoted prices, used in industry accepted models.
The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. government issued bonds; U.S. government
sponsored enterprises bonds; U.S. state, territory and municipal entities bonds; non-U.S. sovereign government, supranational and government related bonds
consisting primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations;
investment grade and high yield corporate bonds; asset-backed securities; mortgage-backed securities; short-term investments; certain common and preferred
equities; notes and loans receivable; foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, interest rate
swaps and TBAs.
•
Level 3 inputs—Unobservable inputs.
109
Table of Contents
The Company’s financial instruments that it measures at fair value using Level 3 inputs generally include: inactively traded fixed maturities including U.S. state,
territory and municipal bonds; special purpose financing asset-backed bonds; unlisted equities; real estate and certain other mutual fund investments; inactively
traded weather derivatives; notes and loan receivables, notes securitizations, annuities and residuals, private equities and longevity and other total return swaps.
The Company’s financial instruments measured at fair value include investments and the segregated investment portfolio underlying the funds held–directly
managed account (see Notes 4, 5, and 6). At December 31, 2016 and 2015, the Company’s financial instruments measured at fair value were classified between Levels 1,
2 and 3 as follows (in thousands of U.S. dollars):
110
Table of Contents
December 31, 2016
Fixed maturities
U.S. government and government sponsored enterprises
U.S. states, territories and municipalities
Non-U.S. sovereign government, supranational and government related
Corporate
Asset-backed securities
Residential mortgage-backed securities
Fixed maturities
Short-term investments
Equities
Finance
Technology
Insurance
Consumer noncyclical
Mutual funds and exchange traded funds
Equities
Other invested assets
Derivative assets
Foreign exchange forward contracts
Insurance-linked securities
Total return swaps
TBAs
Other
Notes and loan receivables and notes securitization
Private equities
Derivative liabilities
Foreign exchange forward contracts
Insurance-linked securities
Total return swaps
Interest rate swaps
TBAs
Other invested assets
Funds held–directly managed
U.S. government and government sponsored enterprises
Non-U.S. sovereign government, supranational and government related
Corporate
Short-term investments
Other invested assets
Funds held–directly managed
Total
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
— $
—
—
—
—
—
— $
— $
973
—
—
6
—
979
$
$
— $
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
— $
3,541,433
560,728
1,136,034
5,705,522
24,709
2,240,897
13,209,323
21,697
4,960
—
1,800
—
—
6,760
5,263
—
—
1,369
1,500
—
(7,142)
—
—
(13,403)
(185)
(12,598)
171,975
104,512
71,365
1,603
—
349,455
979
$
13,574,637
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
111
Total
3,541,433
684,555
1,136,034
5,705,522
124,060
2,240,897
— $
123,827
—
—
99,351
—
223,178
$
— $
13,432,501
21,697
20,934
9,800
—
—
153
30,887
$
$
— $
10,130
1,989
—
141,693
305,729
—
(97)
(3,217)
—
—
456,227
$
— $
—
—
—
4,540
4,540
714,832
$
$
26,867
9,800
1,800
6
153
38,626
5,263
10,130
1,989
1,369
143,193
305,729
(7,142)
(97)
(3,217)
(13,403)
(185)
443,629
171,975
104,512
71,365
1,603
4,540
353,995
14,290,448
Table of Contents
December 31, 2015
Fixed maturities
U.S. government and government sponsored enterprises
U.S. states, territories and municipalities
Non-U.S. sovereign government, supranational and government related
Corporate
Asset-backed securities
Residential mortgage-backed securities
Other mortgage-backed securities
Fixed maturities
Short-term investments
Equities
Insurance
Finance
Real estate investment trusts
Consumer noncyclical
Industrials
Technology
Consumer cyclical
Communications
Other
Mutual funds and exchange traded funds
Equities
Other invested assets
Derivative assets
Foreign exchange forward contracts
Futures contracts
Insurance-linked securities
Total return swaps
Other
Notes and loan receivables and notes securitization
Annuities and residuals
Private equities
Derivative liabilities
Foreign exchange forward contracts
Futures contracts
Insurance-linked securities
Total return swaps
Interest rate swaps
TBAs
Other invested assets
Funds held–directly managed
U.S. government and government sponsored enterprises
Non-U.S. sovereign government, supranational and government related
Corporate
Short-term investments
Other invested assets
Funds held–directly managed
Total
$
$
$
$
$
$
$
$
$
$
112
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
— $
—
—
—
—
—
—
— $
— $
2,872,845
639,479
1,332,925
5,086,199
668,117
2,290,640
49,511
12,939,716
46,688
$
72,226
29,422
46,379
43,375
26,863
21,177
25,871
20,939
28,197
71,159
7,799
5,497
—
—
7,401
—
—
—
—
—
$
— $
138,847
—
—
369,699
—
—
Total
2,872,845
778,326
1,332,925
5,086,199
1,037,816
2,290,640
49,511
$
$
$
508,546
$
— $
13,448,262
46,688
— $
$
22,760
—
—
—
8,207
—
1,985
—
4,604
80,025
57,679
46,379
43,375
34,264
29,384
25,871
22,924
28,197
75,763
385,608
$
20,697
$
37,556
$
443,861
— $
5,675
—
—
$
15,311
—
—
—
— $
—
9,428
2,745
15,311
5,675
9,428
2,745
125,922
8,436
71,298
(15,109)
(140)
(3,944)
(2,878)
(24,383)
(1,462)
125,922
8,436
71,298
—
—
(3,944)
(2,878)
—
—
$
$
$
$
211,007
$
190,899
— $
—
—
—
10,146
10,146
767,255
$
$
169,951
119,487
99,349
966
10,146
399,899
14,529,609
—
—
—
—
(140)
—
—
—
—
5,535
$
— $
—
—
—
—
— $
—
—
—
(15,109)
—
—
—
(24,383)
(1,462)
(25,643)
169,951
119,487
99,349
966
—
389,753
391,143
$
13,371,211
Table of Contents
At December 31, 2016 and 2015, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were
$632 million and $208 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting or equity method of
accounting. The increase in Other invested assets not at fair value was primarily due to the purchase of a 36% shareholding on Almacantar S.A. (see Note 19), which has
been accounted for under the equity method of accounting. The purchase price paid for this investment has been included in the Consolidated Statement of Cash Flows
within Other, net investing cash flows.
In addition to the investments underlying the funds held–directly managed account held at fair value of $354 million and $400 million at December 31, 2016 and
2015, respectively, the funds held–directly managed account also included cash and cash equivalents, carried at fair value, of $76 million and $65 million, respectively,
and accrued investment income of $4 million and $5 million, respectively. At December 31, 2016 and 2015, the aggregate carrying amounts of items included in the funds
held–directly managed account that the Company did not measure at fair value were $77 million and $71 million, respectively, which primarily related to other assets and
liabilities held by Colisée Re related to the underlying business, which are carried at cost (see Note 5).
At December 31, 2016 and 2015, substantially all of the accrued investment income in the Consolidated Balance Sheets relate to the Company’s investments and the
investments underlying the funds held–directly managed account for which the fair value option was elected.
During the years ended December 31, 2016 and 2015, there were no transfers between Level 1 and Level 2.
Disclosures about the fair value of financial instruments that the Company does not measure at fair value exclude insurance contracts and certain other financial
instruments. At December 31, 2016 and 2015, the fair values of financial instrument assets recorded in the Consolidated Balance Sheets not described above, approximate
their carrying values.
113
Table of Contents
The reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the years ended December 31,
2016 and 2015, were as follows (in thousands of U.S. dollars):
For the year ended
December 31, 2016
Fixed maturities
U.S. states, territories and
municipalities
Asset-backed securities
Fixed maturities
Equities
Finance
Technology
Communications
Mutual funds and exchange traded
funds
Equities
Other invested assets
Derivatives, net
Notes and loan receivables and
notes securitization
Annuities and residuals
Private equities
Other invested assets
Funds held–directly managed
Total
$
$
$
$
$
$
$
$
Realized and
unrealized
investment
gains (losses)
included in
net income
Balance at
beginning
of year
Purchases
and
issuances
Settlements
and
sales (1)
Net
transfers
into (out of)
Level 3
Balance
at end of
year
Change in
unrealized
investment gains
(losses)
relating to
assets held at
end of year
138,847
369,699
508,546
22,760
8,207
1,985
4,604
37,556
5,351
125,922
8,436
71,298
211,007
10,146
767,255
$
$
$
$
$
$
$
$
(14,240)
21
(14,219)
3,438
1,143
209
(242)
4,548
(3,314)
2,599
262
6,764
6,311
1,698
(1,662)
$
$
$
$
$
$
$
$
— $
191,048
(780)
(461,417)
191,048
$
(462,197)
— $
450
—
—
450
2,256
71,828
—
236,022
310,106
1,011
502,615
$
$
$
$
$
(5,264)
—
(2,194)
(4,209)
(11,667)
4,512
(58,656)
(8,698)
(8,355)
(71,197)
(8,315)
(553,376)
$
$
$
$
$
$
$
$
— $
—
— $
— $
—
—
—
— $
123,827
99,351
223,178
20,934
9,800
—
153
30,887
— $
8,805
—
—
—
— $
— $
— $
141,693
—
305,729
456,227
4,540
714,832
$
$
$
$
$
$
$
$
(14,240)
(4,628)
(18,868)
3,211
1,143
55
14
4,423
(1,772)
2,278
—
2,827
3,333
1,678
(9,434)
(1) Settlements and sales of fixed maturities, equities, other invested assets and funds held - directly managed include sales of $276 million, $12 million, $43 million and
$8 million, respectively.
114
Table of Contents
For the year ended
December 31, 2015
Fixed maturities
U.S. states, territories and
municipalities
Asset-backed securities
Fixed maturities
Equities
Finance
Technology
Communications
Mutual funds and exchange traded
funds
Equities
Other invested assets
Derivatives, net
Notes and loan receivables and notes
securitization
Annuities and residuals
Private equities
Other invested assets
Funds held–directly managed
Total
Realized and
unrealized
investment
gains (losses)
included in
net income
Balance at
beginning
of year
Purchases
and
issuances (1)
Settlements
and
sales (2)
Net
transfers
into (out of)
Level 3
Balance
at end of
year
Change in
unrealized
investment gains
(losses)
relating to
assets held at
end of year
$
$
$
$
$
$
$
$
149,728
449,918
599,646
20,353
8,555
2,640
8,586
40,134
(1,858)
44,817
13,243
59,872
116,074
13,530
769,384
$
$
$
$
$
$
$
$
16,660
(11,208)
5,452
2,540
(348)
(655)
471
2,008
804
(2,223)
(866)
1,239
(1,046)
(3,184)
3,230
$
$
$
$
$
$
$
$
16,440
171,249
187,689
$
$
(43,981)
(240,260)
(284,241)
— $
—
—
$
$
249,340
249,340
(2,051)
88,675
—
14,484
101,108
$
— $
(133)
—
—
(253,793)
(253,926)
8,456
(5,347)
(3,941)
(4,297)
(5,129)
(200)
538,137
$
(543,496)
$
$
$
$
$
$
$
$
— $
—
138,847
369,699
— $
508,546
— $
—
—
—
— $
22,760
8,207
1,985
4,604
37,556
— $
5,351
—
—
—
— $
— $
125,922
8,436
71,298
211,007
10,146
— $
767,255
$
$
$
$
$
$
$
$
16,650
(10,368)
6,282
2,540
(348)
(655)
(1,009)
528
7,648
(2,223)
(472)
1,119
6,072
(3,252)
9,630
(1) Purchases and issuances of derivatives include issuances of $2 million.
(2) Settlements and sales of mutual funds and exchange traded funds include sales of $4 million.
115
December 31, 2016
Fixed maturities
U.S. states, territories and
municipalities
Asset-backed securities
Equities
Finance
Technology
Other invested assets
Total return swaps, net
Insurance-linked securities –
longevity swaps
Notes and loan receivables
Notes and loan receivables
Notes securitization
Private equity – direct
Table of Contents
The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at December 31, 2016 and 2015 were
as follows (fair value in thousands of U.S. dollars):
Fair value
Valuation techniques
Unobservable inputs
Range
(Weighted average)
$
123,827
Discounted cash flow
Credit spreads
1.5% – 10.5% (6.3%)
99,351
Discounted cash flow
Credit spreads
4.1% – 18.5% (14.9%)
20,934 Weighted market
comparables
9,800
Reported market value
Net income multiple
Tangible book value multiple
Liquidity discount
Comparable return
Tangible book value multiple
(1,228) Discounted cash flow
Discounted cash flow
9,218
Credit spreads
Credit spreads
131,176
8,953
Discounted cash flow
Discounted cash flow
1,564
5,019
Discounted cash flow
Discounted cash flow and
weighted market comparables
Credit spreads
Credit spreads
Gross revenue/fair value
Credit spreads
Net income multiple
Tangible book value multiple
Recoverability of intangible assets
Net asset value, as reported
Market adjustments
Effective yield
Net asset value, as reported
Market adjustments
20.3 (20.3)
1.9 (1.9)
25.0% (25.0%)
36.9% (36.9%)
100.0% (100.0%)
2.9% – 29.4% (19.3%)
2.6% (2.6%)
4.2% – 24.4% (5.2%)
17.5% (17.5%)
1.2 (1.2)
3.3% (3.3%)
8.6 (8.6)
2.0 (2.0)
0% (0%)
100.0% (100.0%)
-0.7% (-0.7%)
5.8% (5.8%)
100.0% (100.0%)
0% (0%)
Private equity funds
11,064
Reported market value
Private equity – other
Funds held–directly managed
Other invested assets
29,949
Discounted cash flow
4,540
Reported market value
116
Table of Contents
December 31, 2015
Fixed maturities
U.S. states, territories and
municipalities
Asset-backed securities
Equities
Finance
Finance
Technology
Communications
Other invested assets
Total return swaps, net
Insurance-linked securities –
longevity swaps
Notes and loan receivables
Notes and loan receivables
Fair value
Valuation techniques
Unobservable inputs
$
138,847
Discounted cash flow
Credit spreads
369,699
Discounted cash flow
Credit spreads
16,627 Weighted market
comparables
Profitability analysis
6,133
8,207 Weighted market
comparables
1,985 Weighted market
comparables
Net income multiple
Tangible book value multiple
Liquidity discount
Comparable return
Projected return on equity
Revenue multiple
Adjusted earnings multiple
Adjusted earnings multiple
Comparable return
(133) Discounted cash flow
Discounted cash flow
9,428
Credit spreads
Credit spreads
84,080
10,415
Discounted cash flow
Discounted cash flow
Notes securitization
Annuities and residuals
31,427
8,436
Discounted cash flow
Discounted cash flow
Private equity – direct
8,792
Discounted cash flow and
weighted market comparables
Private equity funds
29,222
Reported market value
Private equity – other
Funds held–directly managed
Other invested assets
33,284
Discounted cash flow
10,146
Reported market value
Credit spreads
Credit spreads
Gross revenue/fair value
Credit spreads
Credit spreads
Prepayment speed
Constant default rate
Net income multiple
Tangible book value multiple
Recoverability of intangible assets
Net asset value, as reported
Market adjustments
Effective yield
Net asset value, as reported
Market adjustments
Range
(Weighted average)
1.2% – 10.3% (4.1%)
4.1% – 11.4% (7.7%)
14.4 (14.4)
1.5 (1.5)
25.0% (25.0%)
7.9% (7.9%)
14.0% (14.0%)
1.2 (1.2)
8.4 (8.4)
9.4 (9.4)
0% (0%)
3.0% – 29.3% (16.5%)
2.4% (2.4%)
6.0% – 26.8% (7.4%)
17.5% (17.5%)
1.1 – 1.5 (1.5)
2.4% – 7.1% (6.9%)
5.1% – 15.4% (12.7%)
0% – 15.0% (2.1%)
0.3% – 17.5% (4.4%)
9.2 (9.2)
1.9 (1.9)
0% (0%)
100.0% (100.0%)
-4.9% – 5.2% (-0.5%)
5.8% (5.8%)
100.0% (100.0%)
-16.0% – 0% (-15.0%)
The tables above do not include financial instruments that are measured using unobservable inputs (Level 3) where the unobservable inputs were obtained from
external sources and used without adjustment. These financial instruments include mutual fund investments (included within equities), certain private equity funds and
certain derivatives (included within other invested assets).
The Company has established a Valuation Committee which is responsible for determining the Company’s invested asset valuation procedures, reviewing
significant changes in the fair value measurements of securities classified as Level 3 and ensuring that there is an appropriate independent internal peer analysis, on at
least an annual basis, on the fair value measurements of significant securities that are classified as Level 3. The Valuation Committee is comprised of members of the
Company’s senior management team. The Company’s Group Enterprise Risk Management Financial Risk Policy which covers, amongst other items, invested asset
valuation, is monitored by the Company’s Board of Directors (Board).
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Changes in the fair value of the Company’s financial instruments subject to the fair value option during the years ended December 31, 2016, 2015 and 2014 were as
follows (in thousands of U.S. dollars):
Fixed maturities and short-term investments
Equities
Other invested assets
Funds held–directly managed
Total
2016
2015
2014
$
$
$
$
(90,334)
(14,850)
11,066
(721)
$
(276,776)
(187,561)
(1,835)
(6,323)
(94,839)
$
(472,495)
$
228,781
2,605
(2,664)
1,382
230,104
Substantially all of the above changes in fair value are included in the Consolidated Statements of Operations under the caption Net realized and unrealized
investment gains (losses).
The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument recorded in the Consolidated
Balance Sheets. There have been no material changes in the Company’s valuation techniques during the periods presented.
Fixed maturities
•
•
•
•
•
U.S. government and government sponsored enterprises—U.S. government and government sponsored enterprises securities consist primarily of bonds issued by
the U.S. Treasury and corporate debt securities issued by government sponsored enterprises and federally owned or established corporations. These securities are
generally priced by independent pricing services. The independent pricing services may use actual transaction prices for securities that have been actively traded.
For securities that have not been actively traded, each pricing source has its own proprietary method to determine the fair value, which may incorporate option
adjusted spreads (OAS), interest rate data and market news. The Company generally classifies these securities in Level 2.
U.S. states, territories and municipalities—U.S. states, territories and municipalities securities consist primarily of bonds issued by U.S. states, territories and
municipalities and the Federal Home Loan Mortgage Corporation. These securities are generally priced by independent pricing services using the techniques
described for U.S. government and government sponsored enterprises above. The Company generally classifies these securities in Level 2. Certain of the bonds
that are issued by municipal housing authorities and the Federal Home Loan Mortgage Corporation are not actively traded and are priced based on internal
models using unobservable inputs. Accordingly, the Company classifies these securities in Level 3. The significant unobservable input used in the fair value
measurement of these U.S. states, territories and municipalities securities classified as Level 3 is credit spreads. A significant increase (decrease) in credit spreads
in isolation could result in a significantly lower (higher) fair value measurement.
Non-U.S. sovereign government, supranational and government related—Non-U.S. sovereign government, supranational and government related securities
consist primarily of bonds issued by non-U.S. national governments and their agencies, non-U.S. regional governments and supranational organizations. These
securities are generally priced by independent pricing services using the techniques described for U.S. government and government sponsored enterprises above.
The Company generally classifies these securities in Level 2.
Corporate—Corporate securities consist primarily of bonds issued by U.S. and foreign corporations covering a variety of industries and issuing countries.
Corporate securities also include real estate investment trusts, catastrophe bonds, longevity and mortality bonds and government guarantee corporate debt. These
securities are generally priced by independent pricing services and brokers. The pricing provider incorporates information including credit spreads, interest rate
data and market news into the valuation of each security. The Company generally classifies these securities in Level 2. When a corporate security is inactively
traded or the valuation model uses unobservable inputs, the Company classifies the security in Level 3.
Asset-backed securities—Asset-backed securities primarily consist of bonds issued by U.S. and foreign corporations that are predominantly backed by student
loans, automobile loans, credit card receivables, equipment leases, and special purpose financing. With the exception of special purpose financing securities,
these asset-backed securities are generally priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available
trade information, prepayment speeds, yield curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2. Special
purpose financing securities are generally inactively traded and are priced based on valuation models using unobservable inputs. The Company generally
classifies these securities in Level 3. The significant unobservable input used in the fair value measurement of these asset-backed securities classified as Level 3
is credit spreads. A significant increase (decrease) in credit spreads in isolation could result in a significantly lower (higher) fair value measurement.
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•
•
Residential mortgage-backed securities—Residential mortgage-backed securities primarily consist of bonds issued by the Government National Mortgage
Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, as well as private, non-agency issuers. These residential
mortgage-backed securities are generally priced by independent pricing services and brokers. When current market trades are not available, the pricing provider
or the Company will employ proprietary models with observable inputs including other trade information, prepayment speeds, yield curves and credit spreads.
The Company generally classifies these securities in Level 2.
Other mortgage-backed securities—Other mortgage-backed securities primarily consist of commercial mortgage-backed securities. These securities are generally
priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield
curves and credit spreads to the valuation. The Company generally classifies these securities in Level 2.
In general, the methods employed by the independent pricing services to determine the fair value of the securities that have not been actively traded primarily
involve the use of “matrix pricing” in which the independent pricing source applies the credit spread for a comparable security that has traded recently to the current yield
curve to determine a reasonable fair value. The Company generally uses one pricing source per security and uses a pricing service ranking to consistently select the most
appropriate pricing service in instances where it receives multiple quotes on the same security. When fair values are unavailable from these independent pricing sources,
quotes are obtained directly from broker-dealers who are active in the corresponding markets. Most of the Company’s fixed maturities are priced from the pricing services
or dealer quotes. The Company will typically not make adjustments to prices received from pricing services or dealer quotes; however, in instances where the quoted
external price for a security uses significant unobservable inputs, the Company will classify that security as Level 3. The methods used to develop and substantiate the
unobservable inputs used are based on the Company’s valuation policy and are dependent upon the facts and circumstances surrounding the individual investments which
are generally transaction specific. The Company’s inactively traded fixed maturities are classified as Level 3. For all fixed maturity investments, the bid price is used for
estimating fair value.
To validate prices, the Company compares the fair value estimates to its knowledge of the current market and will investigate prices that it considers not to be
representative of fair value. The Company also reviews an internally generated fixed maturity price validation report which converts prices received for fixed maturity
investments from the independent pricing sources and from broker-dealers quotes and plots OAS and duration on a sector and rating basis. The OAS is calculated using
established algorithms developed by an independent risk analytics platform vendor. The OAS on the fixed maturity price validation report are compared for securities in a
similar sector and having a similar rating, and outliers are identified and investigated for price reasonableness. In addition, the Company completes quantitative analyses
to compare the performance of each fixed maturity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and
investigated.
Short-term investments
Short-term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.
Equities
Equity securities include U.S. and foreign common and preferred stocks, real estate investment trusts, mutual funds and exchange traded funds. Equities, real estate
investment trusts and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted
prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on
a daily basis, and certain common and preferred equities. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of
publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable inputs used in
the fair value measurement of inactively traded common stocks classified as Level 3 include market return information, weighted using management’s judgment, from
comparable selected publicly traded companies in the same industry, in a similar region and of a similar size, including net income multiples, tangible book value
multiples, comparable returns, revenue multiples, adjusted earnings multiples and projected return on equity ratios. Significant increases (decreases) in any of these inputs
could result in a significantly higher (lower) fair value measurement. Significant unobservable inputs used in measuring the fair value measurement of inactively traded
common stocks also include a liquidity discount. A significant increase (decrease) in the liquidity discount could result in a significantly lower (higher) fair value
measurement.
To validate prices, the Company completes quantitative analyses to compare the performance of each equity investment portfolio to the performance of an
appropriate benchmark, with significant differences identified and investigated.
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Table of Contents
Other invested assets
The Company’s exchange traded derivatives, such as futures, are generally classified as Level 1 as their fair values are quoted prices in active markets. The
Company’s foreign exchange forward contracts, foreign currency option contracts, interest rate swaps and TBAs are generally classified as Level 2 within the fair value
hierarchy and are priced by independent pricing services.
Included in the Company’s Level 3 classification, in general, are certain inactively traded weather derivatives, notes and loan receivables, notes securitizations,
annuities and residuals, private equities and longevity and other total return swaps. For Level 3 instruments, the Company will generally (i) receive a price based on a
manager’s or trustee’s valuation for the asset; (ii) develop an internal discounted cash flow model to measure fair value; or (iii) use market return information, adjusted if
necessary and weighted using management’s judgment, from comparable selected publicly traded equity funds in a similar region and of a similar size. Where the
Company receives prices from the manager or trustee, these prices are based on the manager’s or trustee’s estimate of fair value for the assets and are generally audited on
an annual basis. Where the Company develops its own discounted cash flow models, the inputs will be specific to the asset in question, based on appropriate historical
information, adjusted as necessary, and using appropriate discount rates. The significant unobservable inputs used in the fair value measurement of other invested assets
classified as Level 3 include credit spreads, prepayment speeds, constant default rates, gross revenue to fair value ratios, net income multiples, effective yields, tangible
book value multiples and other valuation ratios. Significant increases (decreases) in any of these inputs in isolation could result in a significantly lower (higher) fair value
measurement. Significant unobservable inputs used in the fair value measurement of other invested assets classified as Level 3 also include an assessment of the
recoverability of intangible assets and market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the
same industry, in a similar region and of a similar size. Significant increases (decreases) in these inputs in isolation could result in a significantly higher (lower) fair value
measurement. As part of the Company’s modeling to determine the fair value of an investment, the Company considers counterparty credit risk as an input to the model,
however, the majority of the Company’s counterparties are investment grade rated institutions and the failure of any one counterparty would not have a significant impact
on the Company’s consolidated financial statements.
To validate prices, the Company will compare them to benchmarks, where appropriate, or to the business results generally within that asset class and specifically to
those particular assets.
Funds held–directly managed
The segregated investment portfolio underlying the funds held–directly managed account is comprised of fixed maturities, short-term investments and other invested
assets which are fair valued on a basis consistent with the methods described above. Substantially all fixed maturities and short-term investments within the funds held–
directly managed account are classified as Level 2 within the fair value hierarchy.
The other invested assets within the segregated investment portfolio underlying the funds held–directly managed account, which are classified as Level 3
investments, are primarily real estate mutual fund investments carried at fair value. For the real estate mutual fund investments, the Company receives a price based on the
real estate fund manager’s valuation for the asset and further adjusts the price, if necessary, based on appropriate current information on the real estate market. A
significant increase (decrease) to the adjustment to the real estate fund manager’s valuation could result in a significantly lower (higher) fair value measurement.
To validate prices within the segregated investment portfolio underlying the funds held–directly managed account, the Company utilizes the methods described
above.
(b) Fair Value of Financial Instrument Liabilities
At December 31, 2016 and 2015, the carrying values of financial instrument liabilities recorded in the Consolidated Balance Sheets approximate their fair values,
with the exception of the long-term debt related to senior notes and capital efficient notes (CENts). The fair value of the debt related to senior notes as of December 31,
2016 and 2015, and the fair value of the debt related to CENTs as of December 31, 2015, was calculated based on discounted cash flow models using observable market
yields and contractual cash flows based on the aggregate principal amount outstanding. In December 2016, the interest rate on the debt related to CENts converted from a
fixed interest rate to a floating interest rate (see Note 10). As a result, it was not considered practicable to calculate the fair value of the debt related to CENts as of
December 31, 2016 based on a discounted cash flow model as the future interest payments is not reasonably estimatable. The fair value of the debt related to CENTs as of
December 31, 2016 was calculated based on market data valuation models using observable inputs based on the aggregate principal amount outstanding of the
intercompany debt.
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The carrying values and fair values of the senior notes and CENts at December 31, 2016 and 2015 were as follows (in thousands):
U.S. dollar intercompany debt related to senior notes(1)
Euro senior notes(2)
U.S. dollar intercompany debt related to CENts(1)
December 31, 2016
December 31, 2015
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
500,000
773,883
70,989
$
547,145
753,499
66,817
$
750,000
—
70,989
829,755
—
70,856
(1) PartnerRe Finance A LLC and PartnerRe Finance B LLC, the issuers of the U.S. dollar senior notes, and PartnerRe Finance II Inc., the issuer of the CENts, do not
meet the consolidation criteria under U.S. GAAP. Accordingly, the debt issued externally is not reflected as a liability in the Consolidated Balance Sheet. The
carrying value reflected in the table above reflects the intercompany debt recognized which is not eliminated in the Consolidated Balance Sheet. The carrying value
of the CENTs that is not reflected in the Company’s Consolidated Balance Sheet was $63 million at December 31, 2016 and 2015 (see Note 10).
(2) PartnerRe Ireland Finance DAC, the issuer of the Euro senior notes issued in 2016, meets the consolidation criteria under U.S. GAAP. Accordingly, the Company
recognizes the debt issued to third parties of €750 million in its Consolidated Balance Sheet at December 31, 2016. The intercompany debt has been eliminated on
consolidation (see Note 10).
At December 31, 2016 and 2015, the Company’s debt related to the senior notes and CENts was classified as Level 2 in the fair value hierarchy. Refer to Note 10
for further details related to Debt.
Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments.
4. Investments
(a) Net Realized and Unrealized Investment Gains (Losses)
The components of the net realized and unrealized investment gains (losses) for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands
of U.S. dollars):
Net realized investment gains on fixed maturities and short-term investments
Net realized investment gains on equities
Net realized investment gains (losses) on other invested assets
Net realized investment gains on funds held–directly managed
Net realized investment gains
Change in net unrealized investment (losses) gains on fixed maturities and short-term investments
Change in net unrealized investment (losses) gains on equities
Change in unrealized investment gains (losses) on other invested assets
Change in net unrealized investment (losses) gains on funds held–directly managed
Net other realized and unrealized investment gains (losses)
Change in net unrealized investment (losses) gains
$
$
2016
96,994
157
5,365
1,355
103,871
(90,334)
(14,850)
25,488
(676)
2,767
(77,605)
$
2015
66,296
137,609
(33,317)
536
171,124
(276,776)
(187,561)
844
(6,163)
1,053
(468,603)
2014
120,734
98,733
(20,686)
2,012
200,793
228,781
2,605
(58,180)
1,421
(3,624)
171,003
Net realized and unrealized investment gains (losses)
$
26,266
$
(297,479)
$
371,796
(b) Net Investment Income
The components of net investment income for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands of U.S. dollars):
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Fixed maturities
Short-term investments and cash and cash equivalents
Equities
Funds held and other
Funds held–directly managed
Investment expenses
Net investment income
$
$
2016
395,831
1,915
4,382
34,161
9,993
(35,418)
$
2015
425,541
854
30,739
27,406
11,676
(46,432)
2014
443,414
868
40,326
33,192
13,841
(51,945)
$
410,864
$
449,784
$
479,696
Other than the funds held–directly managed account, the Company generally earns investment income on funds held by reinsured companies based upon a
predetermined interest rate, either fixed contractually at the inception of the contract or based upon a recognized index (e.g., LIBOR). Interest rates ranged from 0.0% to
5.4% for the year ended December 31, 2016, from 0.1% to 8.0% for the year ended December 31, 2015 and from 2.1% to 5.4% for the year ended December 31, 2014.
See Note 5 for additional information on the funds held–directly managed account.
(c) Pledged and Restricted Assets
At December 31, 2016 and 2015, approximately $157 million and $165 million, respectively, of cash and cash equivalents and approximately $2,241 million and
$2,168 million, respectively, of securities were deposited, pledged or held in escrow accounts in favor of ceding companies and other counterparties or government
authorities to comply with reinsurance contract provisions and insurance laws.
(d) Net Payable for Securities Purchased
Included within Accounts payable, accrued expenses and other in the Consolidated Balance Sheets at December 31, 2016 and 2015 were amounts of gross
receivable balances for securities sold and gross payable balances for securities purchased as follows (in thousands of U.S. dollars):
Receivable for securities sold
Payable for securities purchased
Net payable for securities purchased
(e) Variable Interest Entities
2016
2015
$
$
52,189
(648,813)
(596,624)
$
$
34,497
(219,707)
(185,210)
The Company holds variable interests in VIEs including certain limited liability companies or partnerships, trusts, fixed maturity investments and asset-backed
securities. The holdings in these VIEs are reported within fixed maturities and other invested assets in the Company’s Consolidated Balance Sheets. The Company’s
involvement in these entities is, for the most part, passive in nature. The Company’s maximum exposure to loss with respect to these investments is limited to the amounts
invested in and advanced to the VIEs, and any unfunded commitments. The Company’s non-consolidated VIEs include variable interests in catastrophe bonds within
fixed maturity investments and certain other invested assets.
5. Funds held–directly Managed
Following Paris Re’s acquisition of substantially all of the reinsurance operations of Colisée Re (previously known as AXA RE), a subsidiary of AXA SA (AXA),
in 2006, Paris Re and its subsidiaries entered into an issuance agreement and a quota share retrocession agreement to assume business written by Colisée Re from
January 1, 2006 to September 30, 2007 as well as the in-force business at December 31, 2005. The agreements provided that the premium related to the transferred
business was retained by Colisée Re and credited to a funds held account. The assets underlying the funds held–directly managed account are maintained by Colisée Re in
a segregated investment portfolio and managed by the Company. Realized and unrealized investment gains and losses and net investment income related to this account
inure to the benefit of the Company.
The fair value of the investment portfolio underlying the funds held–directly managed account decreased from $400 million at December 31, 2015 to $354 million
at December 31, 2016 primarily due to the run-off of the underlying loss reserves associated with this account and, to a lesser extent, the impact of the strengthening of the
U.S. dollar against most major currencies.
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6. Derivatives
The Company’s derivative instruments are recorded in the Consolidated Balance Sheets at fair value, with changes in fair value recognized in either net foreign
exchange gains or losses or net realized and unrealized investment gains or losses in the Consolidated Statements of Operations or accumulated other comprehensive
income or loss in the Consolidated Balance Sheets, depending on the nature of the derivative instrument. The Company’s objectives for holding or issuing these
derivatives are as follows:
Foreign Exchange Forward Contracts
The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. From time to time, the
Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and
branches whose functional currency is other than the U.S. dollar.
Foreign Currency Option Contracts and Futures Contracts
The Company utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts to
manage portfolio duration and equity futures to hedge certain investments.
Insurance-Linked Securities
The Company enters into various weather derivatives and longevity total return swaps for which the underlying risks reference parametric weather risks for the
weather derivatives and longevity risk for the longevity total return swaps.
Total Return and Interest Rate Swaps and Interest Rate Derivatives
The Company enters into total return swaps referencing various project, investments and principal finance obligations. The Company enters into interest rate swaps
to mitigate the interest rate risk on certain of the total return swaps and certain fixed maturity investments. The Company also uses other interest rate derivatives to
mitigate exposure to interest rate volatility.
To-Be-Announced Mortgage-Backed Securities
The Company utilizes TBAs as part of its overall investment strategy and to enhance investment performance.
The net fair values and the related net notional values of derivatives included in the Company’s Consolidated Balance Sheets at December 31, 2016 and 2015 were
as follows (in thousands of U.S. dollars):
December 31, 2016
Derivatives not designated as hedges
Foreign exchange forward contracts
Insurance-linked securities (1)
Total return swaps
Interest rate swaps (2)
TBAs
Total derivatives not designated as hedges
Total derivatives
Asset
derivatives
at fair value
Liability
derivatives
at fair value
Net derivatives
Net notional
exposure
Fair value
$
$
$
5,263
10,130
1,989
—
1,369
18,751
18,751
$
$
$
(7,142)
(97)
(3,217)
(13,403)
(185)
(24,044)
(24,044)
$
1,929,033
145,011
42,304
194,585
386,500
$
$
$
(1,879)
10,033
(1,228)
(13,403)
1,184
(5,293)
(5,293)
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December 31, 2015
Derivatives designated as hedges
Foreign exchange forward contracts (net investment hedge)
Total derivatives designated as hedges
Derivatives not designated as hedges
Foreign exchange forward contracts
Foreign currency option contracts
Futures contracts
Insurance-linked securities (1)
Total return swaps
Interest rate swaps (2)
TBAs
Total derivatives not designated as hedges
Total derivatives
Asset
derivatives
at fair value
Liability
derivatives
at fair value
Net derivatives
Net notional
exposure
Fair value
$
$
$
$
$
— $
— $
15,311
—
5,675
9,428
2,745
—
—
33,159
33,159
$
$
$
(9,305)
$
392,523
(9,305)
(5,804)
—
(140)
(3,944)
(2,878)
(24,383)
(1,462)
(38,611)
(47,916)
$
1,708,285
82,148
3,610,658
140,320
42,438
196,804
447,315
$
$
$
$
$
(9,305)
(9,305)
9,507
—
5,535
5,484
(133)
(24,383)
(1,462)
(5,452)
(14,757)
(1) At December 31, 2016 and 2015, insurance-linked securities include a longevity swap for which the notional amount is not reflective of the overall potential exposure
of the swap. As such, the Company has included the probable maximum loss under the swap within the net notional exposure as an approximation of the notional
amount.
(2) The Company enters into interest rate swaps to mitigate notional exposures on certain total return swaps and certain fixed maturities. Only the notional value of
interest rate swaps on fixed maturities is presented separately in the table.
The fair value of all derivatives at December 31, 2016 and 2015 is recorded in Other invested assets in the Company’s Consolidated Balance Sheets. At
December 31, 2015, the Company held foreign exchange forward contracts with notional amounts of €350 million, to hedge a portion of its net investment exposure to the
Euro against the U.S. dollar. The effective portion of the net investment hedging derivatives recognized in Accumulated other comprehensive loss at December 31, 2016
and 2015 was $6 million and $9 million, respectively. There were no derivatives designated as hedges at December 31, 2016.
The gains and losses in the Consolidated Statements of Operations for derivatives not designated as hedges for the years ended December 31, 2016, 2015 and 2014
were as follows (in thousands of U.S. dollars):
Foreign exchange forward contracts
Foreign currency option contracts
Total included in net foreign exchange (losses) gains
Futures contracts
Insurance-linked securities
Total return swaps
Interest rate swaps
TBAs
Other
Total included in net realized and unrealized investment gains (losses)
Total derivatives not designated as hedges
Offsetting of Derivatives
2016
2015
2014
$
$
$
$
$
(53,437)
2,583
(50,854)
(5,195)
3,813
(1,096)
10,981
6,366
—
14,869
(35,985)
$
$
$
$
$
(29,217)
(3,472)
(32,689)
(32,004)
(1,556)
1,390
(8,101)
2,877
2,493
(34,901)
(67,590)
$
$
$
$
$
39,399
(810)
38,589
(72,146)
230
(1,002)
(15,871)
13,166
(3)
(75,626)
(37,037)
The gross and net fair values of derivatives that are subject to offsetting in the Consolidated Balance Sheets at December 31, 2016 and 2015 were as follows (in
thousands of U.S. dollars):
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December 31, 2016
Total derivative assets
Total derivative liabilities
December 31, 2015
Total derivative assets
Total derivative liabilities
Gross
amounts
recognized (1)
18,751
(24,044)
33,159
(47,916)
$
$
$
$
$
$
$
$
Gross
amounts
offset in the
balance sheet
Net amounts of
assets/liabilities
presented in the
balance sheet
— $
— $
18,751
(24,044)
— $
— $
33,159
(47,916)
Gross amounts not offset
in the balance sheet
Financial
instruments
Cash collateral
received/pledged
$
$
$
$
(794)
794
(1,037)
1,037
$
$
$
$
(34,120)
22,923
(10,222)
25,904
$
$
$
$
Net amount
(16,163)
(327)
21,900
(20,975)
(1) Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
7. Goodwill and Intangible Assets
The Company’s goodwill related to the acquisitions of PartnerRe SA, Winterthur Re, Paris Re and Presidio and intangible assets related to the acquisitions of Paris
Re and Presidio at December 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):
2016
Balance at January 1
Intangible assets amortization
Balance at December 31
2015
Balance at January 1
Intangible assets amortization
Balance at December 31
n/a: Not applicable
Goodwill
456,380
n/a
456,380
Goodwill
456,380
n/a
456,380
$
$
$
$
$
$
$
$
Definite-
lived intangible
assets
Indefinite-
lived intangible
asset
Total
intangible assets
125,661
(25,919)
99,742
Definite-
lived intangible
assets
152,254
(26,593)
125,661
$
$
$
$
7,350
n/a
7,350
$
$
133,011
(25,919)
107,092
Indefinite-
lived intangible
asset
Total
intangible assets
7,350
n/a
7,350
$
$
159,604
(26,593)
133,011
Definite-lived intangible assets are amortized over a period of either eleven or thirteen years. The gross carrying value and accumulated amortization of intangible
assets by type that are yet to be fully amortized at December 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):
Definite-lived intangible assets:
Unpaid losses and loss expenses
Renewal rights
Customer relationships
Total definite-lived intangible assets
Indefinite-lived intangible asset:
U.S. insurance licenses
Total intangible assets
n/a: Not applicable
December 31, 2016
December 31, 2015
Gross carrying
value
Accumulated
amortization
Gross carrying
value
Accumulated
amortization
$
$
$
$
191,196
48,163
63,408
$
157,842
23,404
21,779
$
191,196
48,163
63,408
302,767
$
203,025
$
302,767
$
145,808
18,226
13,072
177,106
7,350
n/a
7,350
n/a
310,117
$
203,025
$
310,117
$
177,106
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Effective July 1, 2016, the Company changed its segments (see Note 20). As a result, the allocation of goodwill changed for non-life segments. The allocation of the
goodwill to the Company’s segments at December 31, 2016 was as follows (in thousands of U.S. dollars):
P&C segment
Specialty segment
Life and Health segment
Total goodwill
$
$
Amount
241,530
196,047
18,803
456,380
The estimated amortization expense for each of the five succeeding fiscal years related to the Company’s definite-lived intangible assets was as follows (in
thousands of U.S. dollars):
Year
2017
2018
2019
2020
2021
Total
8. Non-life and Life and Health Reserves
(a) Non-life reserves
$
$
Amount
22,818
21,247
18,153
10,823
6,921
79,962
Non-life reserves are categorized into three types of reserves: case reserves, ACRs and IBNR reserves. Case reserves represent unpaid losses reported by the
Company’s cedants and recorded by the Company. ACRs are established for particular circumstances where, on the basis of individual loss reports, the Company
estimates that the particular loss or collection of losses covered by a treaty may be greater than those advised by the cedant. IBNR reserves represent a provision for
claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves and
ACRs.
The Company’s gross liability for non-life reserves reported by cedants (case reserves) and those estimated by the Company (ACRs and IBNR reserves) at
December 31, 2016 and 2015 was as follows (in thousands of U.S. dollars):
Case reserves
ACRs
IBNR reserves
Non-life reserves
2016
2015
$
$
$
3,883,926
166,913
4,934,595
8,985,434
$
3,716,195
190,183
5,158,333
9,064,711
The reconciliation of the beginning and ending gross and net liability for non-life reserves for the years ended December 31, 2016, 2015 and 2014 was as follows (in
thousands of U.S. dollars):
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Gross liability at beginning of year
Reinsurance recoverable at beginning of year
Net liability at beginning of year
Net incurred losses related to:
Current year
Prior years
Change in Paris Re Reserve Agreement
Net paid losses related to:
Current year
Prior years
Effects of foreign exchange rate changes
Net liability at end of year
Reinsurance recoverable at end of year
Gross liability at end of year
$
$
2016
9,064,711
189,234
8,875,477
2,997,394
(676,574)
2,320,820
5,518
331,785
1,931,131
2,262,916
(220,207)
8,718,692
266,742
2015
9,745,806
214,349
9,531,457
3,023,704
(830,705)
2,192,999
(8,771)
250,720
2,171,883
2,422,603
(417,605)
8,875,477
189,234
$
8,985,434
$
9,064,711
$
$
2014
10,646,318
267,384
10,378,934
3,122,981
(660,413)
2,462,568
(25,412)
267,806
2,530,743
2,798,549
(486,084)
9,531,457
214,349
9,745,806
The reconciliation of losses and loss expenses for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands of U.S. dollars):
Net incurred losses related to:
Non-life
Life and Health
Losses and loss expenses
2016
2015
2014
$
$
2,320,820
927,271
3,248,091
$
$
2,192,999
964,421
3,157,420
$
$
2,462,568
1,000,202
3,462,770
The net favorable prior year loss development for each of the Company’s non-life segments (see Note 20) for the years ended December 31, 2016, 2015 and 2014
was as follows (in thousands of U.S. dollars):
P&C
Specialty
Total net favorable prior year loss development
2016
2015
2014
$
$
389,672
286,902
676,574
$
$
473,564
357,141
830,705
$
$
468,422
191,991
660,413
For the year ended December 31, 2016, the Company reported net favorable loss development for prior accident years in 2016 resulting from favorable loss
emergence across all lines of business within the P&C and Specialty segments. The favorable loss emergence within the P&C segment was across multiple accident years,
mainly driven by the casualty line of business. The favorable loss emergence within the Specialty segment was predominantly from the previous two accident years,
mainly driven by Marine, Energy Offshore and Onshore lines of business.
For the years ended December 31, 2015 and 2014, the Company also reported net favorable loss development due to favorable loss emergence from most lines of
business, in particular from the casualty line within the P&C segment and from the marine and offshore and aviation and space lines within the Specialty segment.
Changes in Non-life reserves
The gross, retroceded and net non-life reserves for the Company’s Non-life business, and the portion of the gross, retroceded and net reserves that relates to the
reserves subject to the Reserve Agreement (Guaranteed Reserves), at December 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):
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Gross reserves
Less: Guaranteed Reserves
Gross reserves, excluding Guaranteed Reserves
Retroceded reserves
Less: Guaranteed Reserves
Retroceded reserves, excluding Guaranteed Reserves
Net reserves
Net reserves, excluding Guaranteed Reserves
2016
2015
$
$
$
8,985,434
495,861
8,489,573
266,742
5,547
261,195
8,718,692
8,228,378
$
$
$
9,064,711
521,178
8,543,533
189,234
7,110
182,124
8,875,477
8,361,409
The reconciliation of the net paid losses related to prior years and the net paid losses related to prior years, excluding the Guaranteed Reserves, for the years ended
December 31, 2016, 2015 and 2014 was as follows (in thousands of U.S. dollars):
Net paid losses related to prior years
Less: net paid losses on Guaranteed Reserves
Net paid losses related to prior years, excluding Guaranteed Reserves
2016
2015
2014
$
$
1,931,131
23,765
1,907,366
$
$
2,171,883
28,225
2,143,658
$
$
2,530,743
97,407
2,433,336
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The net incurred and paid losses and loss expenses development by accident year and the total of incurred but not reported liabilities plus expected development on
reported claims included within the net incurred claims amounts were as follows at year end December 31, 2016, 2015, 2014, 2013 and 2012 (in thousands of U.S.
dollars). The information presented below for incurred and paid claims development at December 31, 2015, 2014, 2013 and 2012 is presented as supplementary
information and is unaudited.
Accident year
2012
2013
2014
2015
2016
NET INCURRED LOSSES AND LOSS EXPENSES DEVELOPMENT TABLE - NON-LIFE
For the year ended December 31,
December 31, 2016
Total of IBNR plus expected development
on reported claims
2012
2013
2014
2015
2016
Total
$
2,588,173
$
2,401,362
$
2,250,210
$
2,144,791
$
2,115,132
$
2,818,004
2,643,219
2,788,023
2,471,881
2,545,991
2,871,468
2,414,214
2,449,459
2,557,987
2,891,480
$
12,428,272
$
190,258
311,122
470,977
838,249
1,994,179
3,804,785
NET PAID LOSSES AND LOSS EXPENSES DEVELOPMENT TABLE - NON-LIFE
For the year ended December 31,
Accident year
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Total
$
275,857
$
1,028,340
$
1,407,829
$
1,573,202
$
235,804
1,267,496
299,168
1,612,860
1,291,587
300,085
Net reserves for Accident Years and exposures included in the
triangles
All outstanding liabilities before Accident Year 2012, net of
reinsurance
All other outstanding liabilities
Net liability at end of year
AVERAGE ANNUAL PERCENTAGE PAYOUT OF INCURRED CLAIMS BY AGE, NET OF REINSURANCE - NON-LIFE (unaudited supplementary information)
Years
Non-life
1
12%
2
39%
3
15%
4
8%
5
5%
129
1,675,875
1,810,911
1,591,054
1,204,997
324,952
6,607,789
5,820,483
2,265,037
633,172
8,718,692
$
$
$
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NET INCURRED LOSSES AND LOSS EXPENSES DEVELOPMENT TABLE - PROPERTY and CASUALTY
For the year ended December 31,
Accident year
2012
2013
2014
2015
2016
December 31, 2016
Total of IBNR plus expected development
on reported claims
2012
2013
2014
2015
2016
Total
$
1,417,787
$
1,334,967
$
1,232,904
$
1,173,315
$
1,143,338
$
1,442,874
1,338,498
1,388,823
1,261,233
1,296,177
1,489,391
1,222,649
1,267,174
1,358,316
1,568,772
$
6,560,249
$
151,933
242,752
353,483
540,812
998,063
2,287,043
NET PAID LOSSES AND LOSS EXPENSES DEVELOPMENT TABLE - PROPERTY and CASUALTY
For the year ended December 31,
Accident year
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Total
$
147,824
$
486,302
$
652,662
$
762,780
$
134,353
478,613
160,016
683,566
517,624
159,894
Net reserves for Accident Years and exposures included in the
triangles
All outstanding liabilities before Accident Year 2012, net of
reinsurance
All other outstanding liabilities
Net liability at end of year
AVERAGE ANNUAL PERCENTAGE PAYOUT OF INCURRED CLAIMS BY AGE, NET OF REINSURANCE - PROPERTY and CASUALTY (unaudited supplementary information)
Years
Property and
Casualty
1
12%
2
28%
3
15%
4
9%
5
6%
130
831,054
797,991
683,202
529,200
171,085
3,012,532
3,547,717
2,004,921
536,105
6,088,743
$
$
$
Table of Contents
Accident year
2012
2013
2014
2015
2016
NET INCURRED LOSSES AND LOSS EXPENSES DEVELOPMENT TABLE - SPECIALTY
For the year ended December 31,
December 31, 2016
Total of IBNR plus expected development
on reported claims
2012
2013
2014
2015
2016
Total
$
1,170,386
$
1,066,395
$
1,017,306
$
971,476
$
971,794
$
1,375,130
1,304,721
1,399,200
1,210,648
1,249,814
1,382,077
1,191,565
1,182,285
1,199,671
1,322,708
$
5,868,023
$
38,325
68,370
117,494
297,437
996,116
1,517,742
NET PAID LOSSES AND LOSS EXPENSES DEVELOPMENT TABLE - SPECIALTY
For the year ended December 31,
Accident year
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Total
$
128,033
$
542,038
$
755,167
$
810,422
$
101,451
788,883
139,152
929,294
773,963
140,191
Net reserves for Accident Years and exposures included in the triangles
All outstanding liabilities before Accident Year 2012, net of
reinsurance
All other outstanding liabilities
Net liability at end of year
844,821
1,012,920
907,852
675,797
153,867
3,595,257
2,272,766
260,116
97,067
2,629,949
$
$
$
AVERAGE ANNUAL PERCENTAGE PAYOUT OF INCURRED CLAIMS BY AGE, NET OF REINSURANCE - SPECIALTY (unaudited supplementary information)
Years
Specialty
1
11%
2
50%
3
15%
4
6%
5
4%
The Company is predominantly a reinsurer of primary insurers and does not have access to claim frequency information held by our cedants due to the majority of
the Company’s business being written on a proportional basis. As such, the Company considers it impracticable to disclose information on the frequency of claims.
The Company has concluded that it is impracticable to provide net incurred and paid losses and loss expenses development data for 10 years and has concluded that
5 years data is practicable. Going forward, an additional year of data will be provided such that by 2021 a full 10 years of data will be disclosed.
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The reconciliation of the net incurred and paid claims development information above to the Non-life reserves in the Consolidated Balance Sheet at December 31,
2016 was as follows (in thousands of U.S. dollars):
Reserving lines
Property and Casualty
Specialty
Net liability at end of year
Net liability at end of
year
$
$
6,088,743
2,629,949
8,718,692
$
$
Reinsurance
recoverable on
unpaid claims
Gross liability at end
of year
98,717
168,025
266,742
$
$
6,187,460
2,797,974
8,985,434
The reserving methods commonly employed by the Company are summarized as follows:
Chain Ladder (CL) Development Methods (Reported or Paid)
These methods use the underlying assumption that losses reported (paid) for each underwriting year at a particular development stage follow a stable pattern. The
CL development method assumes that on average, every underwriting year will display the same percentage of ultimate liabilities reported by the Company’s cedants at
24 months after the inception of the underwriting year. The percentages reported (paid) are established for each development stage after examining historical averages
from the loss development data. These are sometimes supplemented by external benchmark information. Ultimate liabilities are estimated by multiplying the actual
reported (paid) losses by the reciprocal of the assumed reported (paid) percentage. Reserves are then calculated by subtracting paid claims from the estimated ultimate
liabilities.
Expected Loss Ratio (ELR) Method
This method estimates ultimate losses for an underwriting year by applying an estimated loss ratio to the earned premium for that underwriting year. Although the
method is insensitive to actual reported or paid losses, it can often be useful at the early stages of development when very few losses have been reported or paid, and the
principal sources of information available to the Company consist of information obtained during pricing and qualitative information supplied by the cedant. However, the
lack of sensitivity to reported or paid losses means that the method is usually inappropriate at later stages of development.
Bornhuetter-Ferguson (B-F) Methods (Reported or Paid)
These methods aim to address the variability at early stages of development and incorporates external information such as pricing. The B-F methods are more
sensitive to reported and paid losses than the Expected Loss Ratio method, and can be seen as a blend of the Expected Loss Ratio and Chain Ladder development
methods. Unreported (unpaid) claims are calculated using an expected reporting (payment) pattern and an externally determined estimate of ultimate liabilities (usually
determined by multiplying an a priori loss ratio with estimates of premium volume). The accuracy of the a priori loss ratio is a critical assumption in this method. Usually
a priori loss ratios are initially determined on the basis of pricing information, but may also be adjusted to reflect other information that subsequently emerges about
underlying loss experience.
Benktander (B-K) Methods (Reported or Paid)
These methods can be viewed as a blend between the Chain Ladder Development and the B-F methods described above. The blend is based on predetermined
weights at each development stage that depend on the reported (paid) development patterns.
Loss Event Specific Method
The ultimate losses estimated under this method are derived from estimates of specific events based on reported claims, client and broker discussions, review of
potential exposures, market loss estimates, modeled analysis and other event specific criteria.
Method Weights
In determining the loss reserves, the Company often relies on a blend of the results from two or more methods (e.g., weighted averages). The judgment as to which
of the above method(s) is most appropriate for a particular underwriting year and reserving cell could change over time as new information emerges regarding underlying
loss activity and other data issues. Furthermore, as each line is typically composed of several reserving cells, it is likely that the reserves for the line will be dependent on
several reserving methods. This is because reserves for a line are the result of aggregating the reserves for each constituent reserving cell and that a different method could
be selected for each reserving cell.
The principal reserving methods used for each of the Specialty segment and P&C segment were ELR, Reported/Paid B-F, Reported/Paid B-K and Reported/Paid
CL, with the exception of catastrophe risks within the P&C segment where the principal reserving methods used were ELR based on exposure analysis and Loss event
specific.
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(b) Paris Re Reserve Agreement
Following Paris Re’s acquisition of substantially all of the reinsurance operations of Colisée Re in 2006, Paris Re’s French operating subsidiary (Paris Re France)
entered into a reserve agreement (Reserve Agreement), which provides that AXA and Colisée Re shall guarantee reserves in respect of Paris Re France and subsidiaries
acquired in the acquisition. The Reserve Agreement relates to losses incurred prior to December 31, 2005. Accordingly, the Company’s Consolidated Statements of
Operations do not include any favorable or adverse development related to these guaranteed reserves. The reserve guarantee provided by AXA and Colisée Re is
conditioned upon, among other things, the guaranteed business, including all related ceded reinsurance, being managed by AXA Liabilities Managers, an affiliate of
Colisée Re.
Favorable or adverse development related to the guaranteed reserves is recorded as a change in non-life reserves in the Consolidated Balance Sheets and as a change
in the Reserve Agreement payable or receivable balance to/from Colisée Re, which is included within the Funds held–directly managed account in the Consolidated
Balance Sheets at December 31, 2016 and 2015, respectively. Accordingly, the reconciliation of the beginning and ending gross and net liability for non-life reserves for
the years ended December 31, 2016, 2015 and 2014 includes the change in the Reserve Agreement. At December 31, 2016 and 2015, the Company’s gross liability for
non-life reserves includes $496 million and $521 million, respectively, of guaranteed reserves, with the decrease from December 31, 2015 to December 31, 2016 being
primarily related to the run-off of the underlying loss reserves associated with this account and, to a lesser extent, the impact of the strengthening of the U.S. dollar against
most major currencies.
(c) Asbestos and Environmental Claims
The Company’s net non-life reserves at December 31, 2016 and 2015 included $166 million and $181 million, respectively, that represent estimates of its net
ultimate liability for asbestos and environmental claims. The gross liability for such claims at December 31, 2016 and 2015 was $176 million and $191 million,
respectively, which primarily relate to Paris Re’s gross liability for asbestos and environmental claims for accident years 2005 and prior of $113 million and $121 million,
respectively, with any favorable or adverse development being subject to the Reserve Agreement. Of the remaining $63 million and $70 million in gross reserves at
December 31, 2016 and 2015, respectively, the majority relates to casualty exposures in the United States arising from business written by the French branch of PartnerRe
Europe and PartnerRe U.S.
Ultimate loss estimates 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 legal and tort environment that affect the development of such claims, the uncertainties inherent in
estimating asbestos and environmental claims are not likely to be resolved in the near future. There can be no assurance that the reserves established by the Company will
not be adversely affected by development of other latent exposures, and further, there can be no assurance that the reserves established by the Company will be adequate.
The Company does, however, actively evaluate potential exposure to asbestos and environmental claims and establishes additional reserves as appropriate. The Company
believes that it has made a reasonable provision for these exposures and is unaware of any specific issues that would materially affect its unpaid losses and loss expense
reserves related to this exposure.
(d) Life and Health Reserves
The Life and Health segment reported net favorable prior year loss development for prior accident years of $16 million, $47 million and $19 million for the years
ended December 31, 2016, 2015 and 2014, respectively.
The net favorable prior year loss development of $16 million in 2016 was primarily related to the PartnerRe Health business and the guaranteed minimum death
benefit (GMDB) business.
The net favorable prior year loss development of $47 million in 2015 was primarily related to the PartnerRe Health business, the short-term mortality business and
the GMDB business.
The net favorable prior year loss development of $19 million in 2014 was primarily related to the GMDB business, PartnerRe Health and certain short-term treaties
in the mortality line of business.
The Company used interest rate assumptions to estimate its liabilities for policy benefits for life and annuity contracts which ranged from 0% to 7% at December 31,
2016 and 2015.
9. Reinsurance
(a) Reinsurance Recoverable on Paid and Unpaid Losses
The Company uses retrocessional agreements to reduce its exposure to risk of loss on reinsurance assumed. These agreements provide for recovery from
retrocessionaires of a portion of losses and loss expenses. The Company remains liable to its cedants to
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the extent that 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 on an ongoing basis. The Company actively manages its reinsurance exposures by generally selecting retrocessionaires having a
credit rating of A- or higher. In certain cases where an otherwise suitable retrocessionaire has a credit rating lower than A-, the Company generally requires the posting of
collateral, including escrow funds and letters of credit, as a condition to its entering into a retrocession agreement. The Company regularly reviews its reinsurance
recoverable balances to estimate an allowance for uncollectible amounts based on quantitative and qualitative factors. The allowance for uncollectible reinsurance
recoverable was $12 million and $9 million at December 31, 2016 and 2015, respectively.
(b) Ceded Reinsurance
Net premiums written, net premiums earned and losses and loss expenses are reported net of reinsurance in the Company’s Consolidated Statements of Operations.
Assumed, ceded and net amounts for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands of U.S. dollars):
2016
Assumed
Ceded
Net
2015
Assumed
Ceded
Net
2014
Assumed
Ceded
Net
10. Debt
Premiums
Written
Premiums
Earned
Losses and Loss
Expenses
$
$
$
$
$
$
5,356,942
403,472
4,953,470
5,547,525
317,977
5,229,548
5,932,003
212,119
5,719,884
$
$
$
$
$
$
5,343,831
374,235
4,969,596
5,570,321
301,143
5,269,178
5,824,398
215,203
5,609,195
$
$
$
$
$
$
3,412,648
164,557
3,248,091
3,215,665
58,245
3,157,420
3,503,060
40,290
3,462,770
The debt outstanding and the carrying value recorded in the Consolidated Balance Sheets at December 31, 2016 and 2015 was comprised as follows (in thousands):
Debt related to
2008 senior notes
2010 senior notes
2016 senior notes
Issuer
PartnerRe Finance A LLC
PartnerRe Finance B LLC
PartnerRe Ireland Finance DAC
Capital efficient notes (CENts)
PartnerRe Finance II Inc.
Carrying Value
Commitment
2016
2015
Redemption or Maturity
Date
$
$
€
$
250,000
500,000
750,000
63,384
$
$
$
$
$
— $
250,000
November 1, 2016
500,000
773,883
1,273,883
70,989
$
$
$
$
500,000
—
750,000
70,989
June 1, 2020
September 15, 2026
December 1, 2066
PartnerRe Finance A LLC, PartnerRe Finance B LLC and PartnerRe Finance II Inc. (collectively, U.S. finance entities) are indirect 100% owned subsidiaries of the
Company which were utilized to issue the Company’s debt related to U.S. dollar denominated senior notes and CENts. The Company determined that these U.S. finance
entities are VIEs; however, the Company is not the primary beneficiary and, as a result, has not consolidated these entities. The U.S. finance entities are accounted for
under the equity method of accounting and therefore the debt issued externally by these entities is not recorded as a liability on the Consolidated Balance Sheet. Upon
issuing the senior notes and the CENts, a consolidated subsidiary of the Company, PartnerRe U.S. Corporation, issued notes in exchange for cash to each of the finance
entities, as more fully described below. The notes are recognized within liabilities in the Consolidated Balance Sheets as debt related to the senior notes and CENts. The
interest on the debt related to the senior notes and CENts is reported as interest expense in the Consolidated Statements of Operations.
The debt issued by PartnerRe Finance A LLC was redeemed in November 2016, as discussed below, and, as a result, the debt has been removed from the
Consolidated Financial Statements with no other activity remaining in this entity.
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In 2016, the Company formed a new 100% indirectly owned Irish subsidiary, PartnerRe Ireland Finance DAC, in order to issue Euro denominated senior notes. The
notes were issued at a price of 99.144% of the principal amount of the notes, are listed in the main securities market of the Irish Stock Exchange, and are fully and
unconditionally guaranteed by PartnerRe Ltd. PartnerRe Ireland Finance DAC is a VIE and the Company determined that it was the primary beneficiary and, as a result,
the debt issued externally has been recorded as a liability in the Consolidated Balance Sheet as of December 31, 2016.
Senior Notes
2008 Senior Notes
In May 2008, PartnerRe Finance A LLC issued 6.875% senior notes with an aggregate principal of $250 million (2008 senior notes) due on June 1, 2018, which
were redeemed early on November 1, 2016. Contemporaneously, with the issuance of the 2008 senior notes, PartnerRe U.S. Corporation, a wholly-owned subsidiary of
the Company, issued a 6.875% promissory note, with a principal amount of $250 million to PartnerRe Finance A LLC, which were redeemed upon the redemption of the
2008 senior notes. The Company paid a redemption price of $272 million and, as a result, the Company recorded a loss of $22 million on redemption of these notes which
represented a make whole provision, related to future interest foregone as a result of the early retirement.
2010 Senior Notes
In March 2010, PartnerRe Finance B LLC issued 5.500% senior notes with an aggregate principal of $500 million (2010 senior notes), which may be redeemed at
the option of the issuer, in whole or in part, at any time. Contemporaneously, with the issuance of 2010 senior notes, PartnerRe U.S. Corporation, an indirect wholly-
owned subsidiary of the Company, issued a 5.500% promissory note, with a principal amount of $500 million to PartnerRe Finance B LLC. Under the terms of the
promissory note, PartnerRe U.S. Corporation promises to pay to PartnerRe Finance B LLC any unpaid principal amount on June 1, 2020.
The 2010 senior notes are ranked as senior unsecured obligations of PartnerRe Finance B LLC. The Company has fully and unconditionally guaranteed all
obligations of PartnerRe Finance B LLC related to the 2010 senior notes. The Company’s obligations under this guarantee are senior and unsecured and rank equally with
all other senior unsecured indebtedness.
Interest on both the 2010 senior notes and the intercompany promissory note is payable semi-annually at an annual fixed rate of 5.500% and cannot be deferred. For
each of the years ended December 31, 2016, 2015 and 2014, the Company incurred and paid interest expense of $27.5 million per annum.
2016 Senior Notes
In September 2016, PartnerRe Ireland Finance DAC issued 1.250% senior notes with an aggregate principal amount of €750 million (2016 senior notes). The 2016
senior notes may be redeemed at the option of the issuer, in whole or in part, at any time five years after the issuance date. Prior to September 2021, any redemption of the
2016 senior notes is subject to regulatory approval. Interest on the 2016 senior notes is payable annually commencing on September 15, 2017. The 2016 senior notes are
ranked as senior unsecured obligations of PartnerRe Ireland Finance DAC. The Company has fully and unconditionally guaranteed all obligations of PartnerRe Ireland
Finance DAC under the 2016 senior notes. The Company’s obligations under this guarantee are senior and unsecured and rank equally with all other senior unsecured
indebtedness.
Subsequent to the issuance of the 2016 senior notes, in October 2016, PartnerRe Ireland Finance DAC entered into two separate loan agreements with the Company
and PartnerRe U.S. Corporation with a principal amount of €490 million and $272 million, respectively, and an interest rate of 1.25% and 3.75%, respectively. Any
unpaid principal amount is due on September 15, 2026. Interest payments on the loan agreement commence on September 15, 2017 and interest is payable annually.
The proceeds from the 2016 senior notes were used to redeem Series D 6.5% and Series E 7.25% preferred shares (see Note 11 below), to redeem the 2008 senior
notes referred to above, and for general corporate purposes.
Capital Efficient Notes (CENts)
In November 2006, PartnerRe Finance II Inc. issued 6.440% Junior Subordinated CENts with a principal amount of $250 million and on March 13, 2009, under the
terms of a tender offer, purchased and retired $187 million of this principal amount. As a result, the remaining aggregate principal amount of the CENts, which is not
reflected as a liability in the Consolidated Balance Sheet, is $63 million.
Contemporaneously with the issuance of the CENts in November 2006, PartnerRe U.S. Corporation issued a 6.440% Fixed-to-Floating Rate promissory note, with a
principal amount of $258 million to PartnerRe Finance II Inc. Under the terms of the promissory note, PartnerRe U.S. Corporation promises to pay to PartnerRe Finance
II Inc. any unpaid principal amount on December 1, 2066. In March 2009, under the terms of a cross receipt agreement, $187 million of the principal amount of the
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promissory note was extinguished. All other terms and conditions of the remaining CENts and promissory note remained unchanged. As a result, the remaining principal
amount of the intercompany promissory note, which is included as a liability in the Consolidated Balance Sheet, is $71 million.
The CENts have been redeemable at the option of the issuer, in whole or in part, since December 1, 2016 and are ranked as junior subordinated unsecured
obligations of PartnerRe Finance II Inc. The Company has fully and unconditionally guaranteed on a subordinated basis all obligations of PartnerRe Finance II Inc. under
the CENts. The Company’s obligations under this guarantee are unsecured and rank junior in priority of payments to the Company’s senior notes.
Interest on both the CENts and the promissory note was payable semi-annually through to December 1, 2016 at an annual fixed rate of 6.440% and payable
quarterly thereafter until maturity at an annual rate of 3-month LIBOR plus a margin equal to 2.325%, reset quarterly. PartnerRe Finance II Inc. may elect to defer one or
more interest payments for up to ten years from December 1, 2016.
11. Shareholders’ Equity
Authorized Shares
At December 31, 2016 and 2015, the total authorized share capital (common and preferred) of the Company was $200 million.
Common Shares
Following the completion of the Merger on March 18, 2016, each publicly traded common share issued and outstanding was cancelled and converted
into $137.50 in cash per share and a one-time special pre-closing cash dividend of $3.00 per common share was paid. The common shares were delisted from the NYSE
and one common share at $1.00 par value was issued to Exor N.V., representing 100% common share ownership of the Company.
On October 27, 2016, Exor N.V. was renamed EXOR Nederland N.V.
On November 24, 2016, the one common share of $1.00 par value was subdivided into 100 million authorized and issued common shares of $0.00000001 par value
each.
At December 31, 2016, the issued and outstanding common share capital was $1.00.
Redeemable Preferred Shares
At December 31, 2016 and 2015, the issued and outstanding redeemable preferred shares of the Company, each with a par value of $1.00 per share, and the changes
in the preferred shares during the year, were as follows:
Series D 6.5% cumulative
Series E 7.25% cumulative
Series F 5.875% non-cumulative
Series G 6.5% cumulative
Series H 7.25% cumulative
Series I 5.875% non-cumulative
December 31, 2015
Exchanged May
2016
After exchange May
2016
Redeemed
November 2016
December 31, 2016
9,200,000
14,950,000
10,000,000
—
—
—
34,150,000
(6,415,264)
(11,753,798)
(7,320,574)
6,415,264
11,753,798
7,320,574
—
2,784,736
3,196,202
2,679,426
6,415,264
11,753,798
7,320,574
34,150,000
(2,784,736)
(3,196,202)
—
—
—
—
(5,980,938)
—
—
2,679,426
6,415,264
11,753,798
7,320,574
28,169,062
The deferred issuance costs paid included in additional paid-in capital, comprised of underwriting discounts and commissions, and the aggregate liquidation value of
each series of preferred shares outstanding at December 31, 2016 were as follows (in millions of U.S. dollars):
Date of issuance
Underwriting discounts and commissions (1)
Aggregate liquidation value, at $25 per share
Series F
Series G
Series H
Series I
February 2013
May 2016
May 2016
May 2016
2.3
67.0
$
$
5.4
160.4
$
$
9.5
293.8
$
$
6.4
183.0
$
$
136
Table of Contents
(1)
Underwriting discounts and commissions for Series F and I represent the original amounts paid to issue Series F shares. Underwriting discounts and
commissions for Series G and H represent the original amounts paid to issue Series D and E which were redeemed in November 2016, as described below. These
amounts were reallocated as a result of the shares that were exchanged in May 2016 of December 31, 2016 for $nil consideration or cost.
In accordance with the terms of the Merger Agreement, upon effecting the Merger, EXOR S.p.A. paid cash of $1.25 per share for an aggregate payment of
approximately $43 million in the aggregate to the preferred shareholders and agreed to launch an exchange offer. On April 1, 2016, the Company launched the exchange
offer whereby participating preferred shareholders could exchange any or all existing preferred shares for newly issued preferred shares reflecting, subject to certain
exceptions contained in the existing preferred shares, an extended call date of the fifth anniversary from the date of issuance and a restriction on payment of dividends on
common shares declared with respect to any fiscal quarter to an amount not exceeding 67% of net income during such fiscal quarter until December 31, 2020. The terms
of the newly issued preferred shares would otherwise remain identical in all material respects to the Company’s existing preferred shares, as described below. The
exchange offer expired on April 29, 2016 and on May 1, 2016, 6,415,264 Series D, 11,753,798 Series E and 7,320,574 Series F preferred shares were exchanged for an
equivalent number of Series G, Series H and Series I preferred shares, respectively. There was no consideration paid and no increase in fair value of the preferred shares
as a result of the exchange and, as a result, the exchange was considered a modification of the preferred shares with no gain or loss or deemed dividend arising as a result
of the exchange. As a result of the exchange offer, the Company cancelled the Series D, E and F preferred shares tendered in the exchange offer. Non-tendered preferred
shares not exchanged and the new Series G, H and I preferred shares remain outstanding and will continue to trade on the NYSE until redeemed.
On November 1, 2016, the Company redeemed the Series D and E preferred shares at $25 per share for an aggregate liquidation value of $150 million. In addition,
unpaid preferred dividends accrued to the redemption date totaling $2 million were paid. In connection with the redemption, the Company recognized a loss of $5 million
related to the deferred issuance costs paid upon issuance which were included in additional paid-in capital related to the Series D and E preferred shares. There was no
additional gain or loss on redemption to recognize as the redemption price and the initial consideration received on the issue of preferred shares were both $25 per share.
The loss of $5 million was recognized as a deemed preferred dividend in retained earnings and in determining the net income attributable to the PartnerRe Ltd. common
shareholder.
The redemption price of all preferred shares is $25 per share plus accrued and unpaid dividends without interest at any time or in part from time to time on or after
the fifth anniversary from the date of issuance.
The Company may redeem the Series F preferred shares at any time or in part from time to time on or after March 1, 2018. The Company may also redeem the
Series F preferred shares at any time upon the occurrence of a certain “capital disqualification event” or certain changes in tax law.
The Company may redeem each of the Series G, H and I preferred shares on or after May 1, 2021.
Dividends on the Series F and I preferred shares are non-cumulative and are payable quarterly. Dividends on the Series G and H preferred shares are cumulative
from the date of issuance and are payable quarterly in arrears.
In the event of liquidation of the Company, Series F, G, H and I preferred shares rank on parity with each other but rank senior to the common shares. The holders of
the Series F, G, H and I preferred shares would receive a distribution of $25 per share, or the aggregate liquidation value. In addition, upon liquidation, non-cumulative
Series F and I preferred shares would receive any declared but unpaid dividends while the cumulative Series G and H preferred shares would receive any accrued but
unpaid dividends.
12. Noncontrolling Interests
In March 2013, the Company formed, with other third-party investors, Lorenz Re Ltd. (Lorenz Re), a Bermuda domiciled special purpose insurer. Lorenz Re is a
segregated accounts company under the laws of Bermuda and distinct segregated accounts are formed and capitalized within Lorenz Re in order to enter into reinsurance
agreements with the Company on a fully collateralized basis.
At December 31, 2015, included in the Company’s Consolidated Balance Sheets, were assets of $42 million, primarily consisting of investments and cash, and
liabilities of $8 million, primarily consisting of other reinsurance balances payable and non-life reserves. These balances related to the 2013 segregated accounts that were
deconsolidated in 2016, as the Company’s investment in Lorenz Re no longer met the U.S. GAAP consolidation criteria.
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The reconciliation of the beginning and ending balance of the noncontrolling interests in Lorenz Re for the years ended December 31, 2016 and 2015 was as follows
(in thousands of U.S. dollars):
Balance at January 1
Net income attributable to noncontrolling interests
Distribution to noncontrolling interests
Balance at December 31
13. Dividend Restrictions and Statutory Requirements
2016
2015
$
2,450
—
(2,450)
— $
55,501
2,769
(55,820)
2,450
$
$
The Company’s ability to pay common and preferred shareholders’ dividends and its corporate expenses is dependent mainly on cash dividends from PartnerRe
Bermuda, PartnerRe Europe, PartnerRe U.S. and PartnerRe Asia (collectively, the reinsurance subsidiaries), which are the Company’s most significant subsidiaries. The
payment of such dividends by the reinsurance subsidiaries to the Company is limited under Bermuda and Irish laws and certain statutes of various U.S. states in which
PartnerRe U.S. is licensed to transact business. 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. In accordance with the terms of the Merger Agreement, subsequent to preferred share exchange (see Note 11),
the payment of dividends on common shares declared with respect to any fiscal quarter are restricted to an amount not exceeding 67% of net income per fiscal quarter
until December 31, 2020. At December 31, 2016, there were no other restrictions on the Company’s ability to pay common and preferred shareholders’ dividends from its
retained earnings, except for the reinsurance subsidiaries’ dividend restrictions described below.
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. At
December 31, 2016, the reinsurance subsidiaries’ solvency, liquidity and risk-based capital amounts were in excess of the minimum levels required. The typical
adjustments to insurance statutory basis amounts to convert to U.S. GAAP include elimination of certain statutory reserves, deferral of certain acquisition costs,
recognition of goodwill, intangible assets and deferred income taxes, valuation of bonds at fair value and presentation of ceded reinsurance balances gross of assumed
balances.
PartnerRe Bermuda may declare dividends subject to it continuing to meet its minimum solvency and capital requirements, which are to hold statutory capital and
surplus equal to or exceeding the Target Capital Level, which is equivalent to 120% of the Enhanced Capital Requirement (ECR). The ECR is calculated with reference to
the Bermuda Solvency Capital Requirement model, which is a risk-based capital model. At December 31, 2016, the maximum dividend that PartnerRe Bermuda could
pay without prior regulatory approval was approximately $758 million.
Since January 1, 2016 PartnerRe Europe is subject to the Solvency II European Directive (Solvency II regulations). The Solvency II regulations relate to the
solvency standards applicable to insurers and reinsurers and lays down, at the level of PartnerRe Europe, the minimum amounts of financial resources required in order to
cover the risks to which it is exposed and the principles that should guide its overall risk management and reporting. PartnerRe Europe may declare dividends subject to it
continuing to meet its Solvency II requirements, which are to hold available capital, calculated on a Solvency II economic balance sheet basis, in excess of the solvency
capital requirement (“SCR”). The maximum dividend is limited to “profits available for distribution”, which consist of accumulated realized profits less accumulated
realized losses. The reporting deadline for the annual Solvency II submission is May 20, 2017.
PartnerRe U.S. may declare dividends subject to it continuing to meet its minimum solvency and capital requirements and is generally limited to paying dividends
from earned surplus. The maximum dividend that can be declared and paid without prior approval is limited, together with all dividends declared and paid during the
preceding twelve months, to the lesser of net investment income for the previous twelve months or 10% of its total statutory capital and surplus. However, as a condition
of the acquisition by Exor N.V., PartnerRe U.S. committed that it would not take action to pay any dividend for the two-year period from March 18, 2016 to March 18,
2018 without the prior approval of the New York State Department of Financial Services and the Delaware Commissioner of Insurance.
PartnerRe Asia may declare dividends from unappropriated profits subject to meeting the capital requirements, as laid out by the Monetary Authority of Singapore.
As a licensed reinsurer, PartnerRe Asia is required to maintain minimum capital of SGD25 million In addition, PartnerRe Asia is required to establish and maintain
separate insurance funds for each class of business that it writes, for both Singapore and offshore policies. The solvency requirement in respect of each insurance fund
shall at all times be not less than the total risk requirement of the fund (determined by reference to three components being insurance risks, asset portfolio risks and asset
concentration risks) and above 120% of the total risk requirement on a Company basis. The declaration of a dividend
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by PartnerRe Asia may be subject to relevant conditions and requirements being met as specified under the Insurance Act (Singapore) its associated regulations and the
Companies Act. The filing date for the annual submission is March 31, 2017.
The statutory financial statements and returns of the Company’s reinsurance subsidiaries at, and for the year ended, December 31, 2016 are due to be submitted to
the relevant regulatory authorities later in 2017, with different filing dates in each jurisdiction. In certain jurisdictions, the statutory financial statements and returns are
subject to the review and final approval of the relevant regulatory authorities.
The statutory net income of PartnerRe Bermuda and PartnerRe U.S. for the years ended December 31, 2016, 2015 and 2014 was as follows (in millions of U.S.
dollars):
PartnerRe Bermuda
PartnerRe U.S.
2016
2015
2014
$
$
533
72
$
444
219
660
236
The required and actual statutory capital and surplus of PartnerRe Bermuda and PartnerRe U.S. at December 31, 2016 and 2015 was as follows (in millions of U.S.
dollars):
Required statutory capital and surplus
Actual statutory capital and surplus
PartnerRe Bermuda
PartnerRe U.S.
2016
2015
2016
2015
$
$
1,518
4,159
$
1,944
3,032
$
672
1,464
701
1,405
At December 31, 2016 and 2015, the Company has Swiss and French branches of PartnerRe Europe that are regulated by the Central Bank of Ireland, as prescribed
by the EU Reinsurance Directive.
In addition to the required statutory capital and surplus requirements in the table above, the Company is required to assess its own solvency capital needs both at a
Group and subsidiary level. The Company’s capital requirements determine the amount of capital available to be declared as dividends to its shareholders. As Group
Supervisor, the BMA is tasked with assessing the financial condition of the Group and coordinates the dissemination of information to other relevant competent
authorities for the purpose of assisting in their regulatory functions and the enforcement of regulatory action against the Company or any of its subsidiaries, including the
power to impose restrictions on the ability of the relevant subsidiaries to declare dividends to the Company. In addition, the Company is required to maintain the Group
ECR imposed by the BMA under Bermuda law.
14. Taxation
The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income or capital gains tax under current Bermuda law. In the event that there is a
change in current law such that taxes on income or capital gains are imposed, the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until
March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966.
The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they
operate. The significant jurisdictions in which the Company’s subsidiaries and branches are subject to tax are Canada, France, Ireland, Singapore, Switzerland and the
United States.
Income tax returns are open for examination for the tax years 2012-2016 in Canada, Ireland, Singapore and Switzerland, 2013-2016 in the United States and 2014-
2016 in France. As a global organization, the Company may be subject to a variety of transfer pricing or permanent establishment challenges by taxing authorities in
various jurisdictions. While management believes that adequate provision has been made in the Consolidated Financial Statements for any potential assessments that may
result from tax examinations for all open tax years, the completion of tax examinations for open years may result in changes to the amounts recognized in the
Consolidated Financial Statements.
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Table of Contents
Income tax expense for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands of U.S. dollars):
Current income tax expense
U.S.
Non U.S.
Total current income tax expense
Deferred income tax (benefit) expense
U.S.
Non U.S.
Total deferred income tax (benefit) expense
Unrecognized tax expense (benefit)
U.S.
Non U.S.
Total unrecognized tax (benefit) expense
Total income tax expense
U.S.
Non U.S.
Total income tax expense
2016
2015
2014
2,798
26,913
29,711
10,070
(127)
9,943
$
$
$
$
81,066
95,720
176,786
(59,624)
(44,125)
(103,749)
$
$
$
$
— $
— $
(13,731)
(13,731)
12,868
13,055
25,923
$
$
$
6,627
6,627
21,442
58,222
79,664
$
$
$
51,615
184,367
235,982
20,410
(17,636)
2,774
—
750
750
72,025
167,481
239,506
$
$
$
$
$
$
$
$
Income before taxes attributable to the Company’s domestic and foreign operations and a reconciliation of the actual income tax rate to the amount computed by
applying the effective tax rate of 0% under Bermuda (the Company’s domicile) law to income before taxes was as follows for the years ended December 31, 2016, 2015
and 2014 (in thousands of U.S. dollars):
Domestic (Bermuda)
Foreign
Income before taxes
Reconciliation of effective tax rate (% of income before taxes)
Expected tax rate
Foreign taxes at local expected tax rates
Impact of foreign exchange gains (losses)
Unrecognized tax expense
Tax-exempt income and expenses not deductible
Foreign branch tax
Valuation allowance
Other
Actual tax rate
140
2016
2015
$
$
334,559
138,672
473,231
$
$
(63,603)
250,417
186,814
$
$
2014
686,538
621,081
1,307,619
0.0 %
6.9
2.2
(2.9)
(3.2)
0.3
0.3
1.9
5.5 %
0.0 %
0.0 %
58.3
1.1
3.5
(8.0)
(26.8)
15.2
(0.7)
15.8
2.2
0.1
(2.2)
1.4
(0.6)
1.6
42.6 %
18.3 %
Table of Contents
Deferred tax assets and liabilities 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 assets and liabilities at December 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):
Deferred tax assets
Discounting of loss reserves and adjustment to life policy reserves
Foreign tax credit carryforwards
Tax loss carryforwards
Unearned premiums
Other deferred tax assets
Valuation allowance
Deferred tax assets
Deferred tax liabilities
Deferred acquisition costs
Goodwill and other intangibles
Equalization reserves
Unrealized appreciation and timing differences on investments
Unrealized appreciation and timing differences on foreign exchange revaluations
Other deferred tax liabilities
Deferred tax liabilities
Net deferred tax liabilities
$
2016
2015
$
49,029
80,390
35,708
25,518
24,012
214,657
(91,819)
122,838
50,313
79,606
39,812
5,946
49,645
5,600
61,712
94,560
28,663
23,319
49,545
257,799
(94,176)
163,623
48,759
85,185
55,715
23,240
32,592
22,123
230,922
267,614
$
(108,084)
$
(103,991)
The components of net tax assets and liabilities at December 31, 2016 and 2015 were as follows (in thousands of U.S. dollars):
Net tax assets
Net tax liabilities
Net tax assets (liabilities)
Net current tax assets
Net deferred tax liabilities
Net unrecognized tax benefit
Net tax assets (liabilities)
2016
2015
$
$
$
$
$
$
$
194,170
(166,113)
28,057
2016
145,831
(108,084)
(9,690)
28,057
$
102,596
(218,652)
(116,056)
2015
11,773
(103,991)
(23,838)
(116,056)
Realization of the deferred tax assets is dependent on generating sufficient taxable income in future periods. Although realization is not assured, management
believes that it is more likely than not that the deferred tax assets will be realized. The valuation allowance recorded at December 31, 2016 related to a foreign tax credit
carryforward of $80 million and other deferred foreign tax of $7 million in Ireland and to tax loss carryforwards of $4 million in Canada, and $1 million in the United
States. The valuation allowance recorded at December 31, 2015 related to a foreign tax credit carryforward of $89 million in Ireland and to tax loss carryforwards of $4
million in Canada, and $1 million in the United States.
At December 31, 2016, the deferred tax assets (after valuation allowance) included tax loss carryforwards of $20 million in Singapore, $5 million in France, $1
million in Ireland, and $1 million in Hong Kong, which can be carried forward for an unlimited period of time, and $2 million in Canada, which can be carried forward for
20 years. At December 31, 2015, the deferred tax assets (after valuation allowance) included tax loss carryforwards of $19 million in Singapore, which can be carried
forward for an unlimited period of time, $3 million in Ireland, which can be carried forward for an unlimited period of time, and $0.3 million in the United States, which
can be carried forward for 20 years, and foreign tax credit carryforwards of $5 million in Ireland, which can be carried forward for an unlimited period of time.
The total amount of unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands of U.S. dollars):
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Table of Contents
Unrecognized tax benefits that, if recognized,
would impact the effective tax rate
Interest and penalties recognized on the above
Total unrecognized tax benefits, including
interest and penalties
Unrecognized tax benefits that, if recognized,
would impact the effective tax rate
Interest and penalties recognized on the above
Total unrecognized tax benefits, including
interest and penalties
Unrecognized tax benefits that, if recognized,
would impact the effective tax rate
Interest and penalties recognized on the above
Total unrecognized tax benefits, including
interest and penalties
January 1,
2016
Changes in tax
positions taken
during a prior
period
Tax positions
taken
during the
current period
Change as a
result of a lapse
of the statute
of limitations
Impact of the
change in
foreign currency
exchange rates
December 31,
2016
$
22,255
1,583
(13,728)
(573)
$
$
688
5
$
(112)
(11)
$
(381)
(36)
23,838
$
(14,301)
$
693
$
(123)
$
(417)
$
8,722
968
9,690
January 1,
2015
Changes in tax
positions taken
during a prior
period
Tax positions
taken
during the
current period
Change as a
result of a lapse
of the statute
of limitations
Impact of the
change in
foreign currency
exchange rates
December 31,
2015
$
18,266
566
$
29
716
$
8,683
261
$
(3,039)
(24)
$
(1,684)
64
22,255
1,583
18,832
$
745
$
8,944
$
(3,063)
$
(1,620)
$
23,838
January 1,
2014
Changes in tax
positions taken
during a prior
period
Tax positions
taken
during the
current period
Change as a
result of a lapse
of the statute
of limitations
Impact of the
change in
foreign currency
exchange rates
December 31,
2014
$
19,353
1,215
$
1,338
259
$
5,142
—
$
(5,197)
(792)
$
(2,370)
(116)
18,266
566
20,568
$
1,597
$
5,142
$
(5,989)
$
(2,486)
$
18,832
$
$
$
$
$
$
For the years ended December 31, 2016, 2015 and 2014, there were no unrecognized tax benefits that, if recognized, would create a temporary difference between
the reported amount of an item in the Company’s Consolidated Balance Sheets and its tax basis. The Company recognizes interest and penalties as income tax expense in
its Consolidated Statements of Operations.
At December 31, 2016, the unrecognized tax benefit which is reasonably possible to change within twelve months is $2 million primarily relating to the expected
expiration of the statute of limitations on certain tax positions.
15. Share-Based Awards
In accordance with the Company’s share-based award plans and the Merger Agreement, all of the Company’s share-based awards fully vested and were converted
into $137.50 in cash per share plus a special dividend of $3.00 per common share upon the change in control of the Company on March 18, 2016. As a result, the total
unrecognized share-based compensation expense related to unvested awards was expensed and no share-based awards remain outstanding at December 31, 2016.
For the years ended December 31, 2016, 2015 and 2014, the Company’s share-based compensation expense was $36 million, $42 million and $34 million,
respectively, with a tax benefit of $40 million, $7 million and $7 million, respectively. The tax benefit in 2016 resulted from the accelerated vesting and exercise of all
outstanding share-based awards upon the change in control which resulted in tax deductions.
The Company’s share-based compensation expense for 2016 primarily related to the vesting of the share-based awards upon the change in control.
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Share Options
The activity related to the Company’s share options for the year ended December 31, 2016 was as follows:
Outstanding at January 1, 2016
Exercised prior to March 18, 2016
Settled in cash by the Company upon change in control
Outstanding at December 31, 2016
Options
267,918
(15,997)
(251,921)
—
The activity related to share options exercised for the years ended December 31, 2016, 2015 and 2014 was as follows:
Options exercised
Total intrinsic value of options exercised (in millions of U.S. dollars)
Proceeds from option exercises (in millions of U.S. dollars)
Restricted Share Units (RSUs) and Performance Share Units (PSUs)
2016
2015
2014
15,997
1.1
1.2
$
$
142,429
8.5
9.8
$
$
225,329
8.7
14.7
$
$
The activity related to the Company’s RSUs and PSUs for the year ended December 31, 2016 was as follows:
Outstanding at January 1, 2016
Performance based adjustment
Vested prior to March 18, 2016
Converted to common shares and settled in cash by Exor upon change in control
Outstanding at December 31, 2016
RSUs and PSUs
861,608
76,889
(270,986)
(667,511)
—
Pursuant to the terms of the Merger Agreement, upon acquisition of the Company’s common shares, Exor N.V. funded the settlement of the Company’s RSUs and
PSUs. As a result, at December 31, 2016, no RSUs or PSUs remained outstanding.
During the years ended December 31, 2015 and 2014, the Company issued 264,018 RSUs and PSUs and 333,358 RSUs and PSUs with a weighted average grant
date fair value of $119.06 and $98.86, respectively. The Company valued RSUs and PSUs issued under all plans at the fair value of its common shares at the date of grant
date.
The RSUs and PSUs that vested during the year ended December 31, 2016, 2015 and 2014 had a fair value of $95 million, $22 million and $21 million,
respectively.
Share-Settled Share Appreciation Rights (SSARs)
The activity related to the Company’s SSARs for the year ended December 31, 2016 was as follows:
Outstanding at January 1, 2016
Exercised prior to March 18, 2016
Settled in cash by the Company upon change in control
Outstanding at December 31, 2016
SSARs
991,724
(12,294)
(979,430)
—
Pursuant to the terms of the Merger Agreement, the Company funded the settlement of the share options and SSARs of $75 million, which was recorded as a
reduction in additional paid-in capital during the year ended December 31, 2016. As a result, at December 31, 2016, no share options or SSARs remained outstanding.
During the years ended December 31, 2015 and 2014, the Company issued 72,918 SSARs and 153,797 SSARs with a weighted average grant date fair value of
$17.03 and $14.62, respectively.
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The Company valued SSARs issued with a Black-Scholes valuation model and used the following assumptions for the years ended December 31, 2015 and 2014:
Expected life
Expected volatility
Risk-free interest rate
Dividend yield
2015
6 years
2014
6 years
17.7%
1.9%
2.2%
18.1%
1.9%
2.2%
Expected volatility was based on the historical volatility of the Company’s common shares over a period equivalent to the expected life of the Company’s SSARs.
The risk-free interest rate was based on the market yield of U.S. treasury securities with maturities equivalent to the expected life of the Company’s SSARs. The dividend
yield was based on the average dividend yield of the Company’s shares over the expected life of the Company’s SSARs.
Warrants
At December 31, 2015, 557 warrants were outstanding and fully vested. During the year ended December 31, 2016, 371 warrants were exercised and the remaining
186 warrants were settled in cash by the Company upon the change in control. As a result, at December 31, 2016, no warrants were outstanding.
16. Retirement Benefit Arrangements
For employee retirement benefits, the Company maintains certain defined contributions plans and other active and frozen defined benefit plans. The majority of the
defined benefit obligation at December 31, 2016 relates to the active defined benefit plan for the Company’s Zurich office employees (the Zurich Plan).
Defined Contribution Plans
Contributions are made by the Company, and in some locations, these contributions are supplemented by the local plan participants. Contributions are based on a
percentage of the participant’s base salary depending upon competitive local market practice and vesting provisions meeting legal compliance standards and market
trends. The accumulated benefits for the majority of these plans vest immediately or over a four-year period. As required by law, certain retirement plans also provide for
death and disability benefits and lump sum indemnities to employees upon retirement.
The Company incurred expenses for these defined contribution arrangements of $13 million, $13 million and $16 million for the years ended December 31, 2016,
2015 and 2014, respectively.
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Active Defined Benefit Plan
The Company maintains the Zurich Plan, which is classified as a hybrid plan and accounted for as a defined benefit plan under U.S. GAAP. At December 31, 2016
and 2015, the funded status of the Zurich Plan was as follows (in thousands of U.S. dollars):
Funded status
Unfunded pension obligation at beginning of year
Change in pension obligation
Service cost
Interest cost
Plan participants’ contributions
Actuarial loss
Plan amendments
Benefits paid
Foreign currency adjustments
Change in pension obligation
Change in fair value of plan assets
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Foreign currency adjustments
Change in fair value of plan assets
Funded status
Unfunded pension obligation at end of year
Additional information:
Projected benefit obligation at end of year
Accumulated pension obligation at end of year
Fair value of plan assets at end of year
2016
2015
$
50,405
$
41,365
6,906
1,501
2,704
8,467
85
1,756
(5,965)
15,454
2,011
5,319
2,704
1,756
(3,872)
7,918
$
$
$
$
57,941
166,569
156,803
108,628
6,945
1,682
2,504
7,550
—
(1,730)
(465)
16,486
1,594
5,337
2,504
(1,730)
(259)
7,446
50,405
151,115
141,716
100,710
At December 31, 2016 and 2015, the funded status was included in Accounts payable, accrued expenses and other in the Consolidated Balance Sheets. The total
amounts recognized in Accumulated other comprehensive loss at December 31, 2016 and 2015 were $32 million (net of $9 million of taxes) and $29 million (net of $8
million of taxes), respectively.
The net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014 was $10 million, $10 million and $7 million, respectively.
The investment strategy of the Zurich Plan’s Pension Committee is to achieve a consistent long-term return, which will provide sufficient funding for future pension
obligations while limiting risk. The expected long-term rate of return on plan assets is based on the expected asset allocation and assumptions concerning long-term
interest rates, inflation rates and risk premiums for equities above the risk-free rates of return. These assumptions take into consideration historical long-term rates of
return for the relevant asset categories. The investment strategy is reviewed regularly.
The fair value of the Zurich Plan’s assets at December 31, 2016 and 2015 were insured funds and cash (Level 2) of $109 million and $101 million, respectively. The
insured funds comprise the accumulated pension plan contributions and investment returns thereon, which are held in an insurance arrangement that provides at least a
guaranteed minimum investment return. The insured funds are held by a collective foundation of AXA Life Ltd. and are guaranteed under the insurance arrangement.
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The assumptions used to determine the Zurich Plan’s pension obligation and net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014 were
as follows:
Discount rate
Expected return on plan assets
Rate of compensation increase
2016
2015
2014
Pension
obligation
Net periodic
benefit cost
Pension
obligation
Net periodic
benefit cost
Pension
obligation
Net periodic
benefit cost
0.75%
—
2.00%
1.00%
1.00%
2.25%
1.00%
—
2.25%
1.25%
1.25%
2.25%
1.25%
—
2.25%
2.25%
2.25%
2.50%
At December 31, 2016, estimated employer contributions to be paid in 2017 related to the Zurich Plan were $5 million and future benefit payments were estimated
to be paid as follows (in thousands of U.S. dollars):
Year
2017
2018
2019
2020
2021
2022 to 2026
Amount
$
4,365
4,279
4,244
4,403
5,376
32,860
The Company does not believe that any of the Zurich Plan’s assets will be returned to the Company during 2017.
17. Commitments and Contingencies
(a) Concentration of Credit Risk
Fixed maturities
The Company’s investment portfolio is managed following prudent standards of diversification and a prudent investment philosophy. The Company is not exposed
to any significant credit concentration risk on its investments, except for debt securities issued by the U.S. government and other highly rated non-U.S. sovereign
governments’ securities. At December 31, 2016 and 2015, other than the U.S. government, the Company’s fixed maturity investment portfolio did not contain exposure to
any non-U.S. sovereign government or any other issuer that accounted for more than 10% of the Company’s shareholders’ equity attributable to PartnerRe. The Company
keeps cash and cash equivalents in several banks and ensures that there are no significant concentrations of credit risk in any one bank.
Derivatives
The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. Derivative instruments may be used to replicate
investment positions and for the purpose of managing overall currency risk, market exposures and portfolio duration, for hedging certain investments, or for enhancing
investment performance that would be allowed under the Company’s investment policy if implemented in other ways. The Company is exposed to credit risk in the event
of non-performance by the counterparties to the Company’s derivative contracts. However, the Company diversifies the counterparties to its derivative contracts to reduce
credit risk, and because the counterparties to these contracts are high credit quality international banks, the Company does not anticipate non-performance. These contracts
are generally of short duration and settle on a net basis. The difference between the contract amounts and the related market value represents the Company’s maximum
credit exposure.
Underwriting operations
The Company is also exposed to credit risk in its underwriting operations, most notably in the credit/surety line. Loss experience in these lines of business is cyclical
and is affected by the state of the general economic environment. The Company provides its clients in these lines of business with reinsurance protection against credit
deterioration, defaults or other types of financial non-performance of or by the underlying credits that are the subject of the reinsurance provided and, accordingly, the
Company is exposed to the credit risk of those credits. The Company mitigates the risks associated with these credit-sensitive lines of business through the use of risk
management techniques such as risk diversification, careful monitoring of risk aggregations and accumulations and, at times, through the use of retrocessional reinsurance
protection and the purchase of credit default, total return and interest rate swaps.
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The Company has exposure to credit risk as it relates to its business written through brokers, if any of the Company’s brokers is unable to fulfill their contractual
obligations with respect to payments to the Company. In addition, in some jurisdictions, if the broker fails to make payments to the insured under the Company’s policy,
the Company might remain liable to the insured for the deficiency. The Company’s exposure to such credit risk is somewhat mitigated in certain jurisdictions by
contractual terms.
The Company has exposure to credit risk related to reinsurance balances receivable and reinsurance recoverable on paid and unpaid losses. The credit risk exposure
related to these balances is mitigated by several factors, including but not limited to, credit checks performed as part of the underwriting process, monitoring of aged
receivable balances and the contractual right to offset premiums receivable or funds held balances against non-life reserves. The Company regularly reviews its
reinsurance recoverable balances to estimate an allowance for uncollectible amounts based on quantitative and qualitative factors. At December 31, 2016 and 2015, the
Company recorded a provision for uncollectible premiums receivable of $5 million and $8 million, respectively. See also Note 9 for discussion of credit risk related to
reinsurance recoverable on paid and unpaid losses.
The Company is also subject to the credit risk of its cedants in the event of insolvency or the cedant’s failure to honor the value of funds held balances for any other
reason. The funds held–directly managed account is with one cedant and is supported by an underlying portfolio of investments, which are managed by the Company (see
Note 5). However, the Company’s credit risk in some jurisdictions is mitigated by a mandatory right of offset of amounts payable by the Company to a cedant against
amounts due to the Company. In certain other jurisdictions the Company is able to mitigate this risk, depending on the nature of the funds held arrangements, to the extent
that the Company has the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by the Company to cedants for losses
payable and other amounts contractually due.
(b) Lease Arrangements
The Company leases office space under operating leases expiring in various years through 2022. 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 noncancelable leases and future sub-lease rental
income on noncancelable leases at December 31, 2016 (in thousands of U.S. dollars):
Year
2017
2018
2019
2020
2021
2022
Total future minimum rental payments
Total future sub-lease rental income through 2019
$
$
$
Amount
23,887
12,580
5,517
984
907
493
44,368
4,751
Rent expense for the years ended December 31, 2016, 2015 and 2014 was $25 million, $23 million and $34 million, respectively, excluding any reorganization
charges related to real estate.
(c) 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, annual incentive payments, the reimbursement of certain expenses, retention incentive payments, and certain severance and change in control provisions.
The Company incurred a pre-tax charge of approximately $34 million in 2016 related to certain executive changes.
(e) Other Agreements
The Company has entered into service agreements and lease contracts that provide for business and information technology support and computer equipment. Future
payments under these contracts amount to $13 million through 2019.
The Company has entered into strategic investments with unfunded capital commitments. In the next five years, the Company expects to fund capital commitments
totaling $215 million with $85 million, $68 million, $38 million and $24 million to be paid during 2017, 2018, 2019 and 2020, respectively, with no further commitments
for 2021 as of December 31, 2016.
The Company has committed to a 10 year structured letter of credit facility issued by a high credit quality international bank, which has a final maturity of
December 29, 2020. At December 31, 2016 and 2015, the Company’s participation in the facility was
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$62 million and $81 million, respectively. At December 31, 2016, the letter of credit facility has not been drawn down and can only be drawn down in the event of certain
specific scenarios, which the Company considers remote. Unless canceled by the bank, the credit facility automatically extends for one year, each year until maturity.
(f) Legal Proceedings
Litigation
The Company’s reinsurance subsidiaries, and the insurance and reinsurance industry in general, are subject to litigation and arbitration in the normal course of their
business operations. In addition to claims litigation, the Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business
that do not arise from or directly relate to claims on reinsurance treaties. This category of business litigation typically involves, among other things, allegations of
underwriting errors or omissions, employment claims or regulatory activity. While the outcome of business litigation cannot be predicted with certainty, the Company will
dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
At December 31, 2016, the Company was not a party to any litigation or arbitration that it believes could have a material effect on the financial condition, results of
operations or liquidity of the Company.
18. Credit Agreements
In the normal course of its operations, the Company enters into agreements with financial institutions to obtain unsecured and secured letter of credit facilities. At
December 31, 2016, the total amount of such credit facilities available to the Company was approximately $664 million, with each of the significant facilities described
below. Under the terms of certain reinsurance agreements, irrevocable letters of credit were issued on an unsecured and secured basis in the amount of $135 million and
$379 million, respectively, at December 31, 2016, in respect of reported loss and unearned premium reserves.
The Company maintains a $300 million combined credit facility, with the first $100 million being unsecured and any utilization above the initial $100 million being
secured. This credit facility matures each year on November 14, unless canceled by either counterparty, this credit facility automatically extends for a further year.
In addition, the Company maintains committed secured letter of credit facilities. These facilities are used for the issuance of letters of credit, which must be fully
secured with cash and/or government bonds and/or investment grade bonds. The agreements include default covenants, which could require the Company to fully secure
the outstanding letters of credit to the extent that the facility is not already fully secured, and disallow the issuance of any new letters of credit. Included in the Company’s
secured credit facilities at December 31, 2016 is a $200 million secured credit facility, which matures on December 31, 2019, and a $80 million secured credit facility,
which matures on December 31, 2017. At December 31, 2016, no conditions of default existed under these facilities.
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19. Agreements with Related Parties
The Company was party to agreements with certain entities on an arm’s-length basis as follows:
Lorenz Re
In the normal course of its underwriting activities, the Company entered into reinsurance and underwriting agreements with Lorenz Re, a special purpose insurer
segregated accounts company organized under the laws of Bermuda. Distinct segregated accounts are formed and capitalized within Lorenz Re on a fully collateralized
basis. All transactions entered into with Lorenz Re were completed on market terms.
EXOR Nederland N.V. and Affiliates
Effective April 1, 2016, the Company entered into a Services Agreement with EXOR Nederland N.V., whereby EXOR Nederland N.V. (or its affiliates) provides
certain advisory services to the Company for a fixed annual fee of €300 thousand.
After the closing of the acquisition by Exor N.V. in March 2016, the Company declared and paid to EXOR Nederland N.V. (previously Exor N.V.) common share
dividends totaling $250 million.
Almacantar Group S.A.
On March 24, 2016, the Company agreed to purchase from Exor S.A. a 36% shareholding in the privately held United Kingdom real estate investment and
development group, Almacantar Group S.A. (Almacantar), as well as certain financial investments, mainly third-party equity funds, based upon the net asset value of
these investments. In the second quarter of 2016, the Company paid total cash consideration of approximately $741 million for these investments, $539 million of which
was for Almacantar. These transactions between related parties were entered into at arms-length. At December 31, 2016 the total carrying value of these investments of
$668 million were comprised of $436 million equity method valuation of Almacantar and $232 million fair value included within Other invested assets in the
Consolidated Balance Sheet.
Other Agreements
In the normal course of its investment operations, the Company bought or held securities of companies affiliated with the Company. All transactions entered into as
part of the investment portfolio were completed on market terms.
20. Segment Information
Effective July 1, 2016, the Company’s business units have been consolidated into three worldwide business segments: Property and Casualty (P&C), Specialty and
Life and Health. As a result, the Company monitors the performance of its operations in these three segments. The business in the P&C and Specialty segments is
collectively referred to as Non-life business. P&C, Specialty and Life and Health each separately represent markets that are reasonably homogeneous in terms of client
types, buying patterns, underlying risk patterns and approach to risk management.
The P&C segment provides holistic access to property and casualty risks, including property catastrophe and facultative through five regions: North America;
Europe; Asia; Latin America; and Middle East, Africa and Russia. The Specialty segment is a centralized specialty unit offering specialty lines treaty and facultative
solutions. The Life and Health segment operates as a worldwide specialist unit, taking an integrated approach to client needs.
Management measures results for the P&C and Specialty segments on the basis of the loss ratio, acquisition ratio, technical ratio, other expense ratio and combined
ratio (all defined below). Management measures results for the Life and Health segment on the basis of the allocated underwriting result, which includes revenues from
net premiums earned, other income or loss and allocated net investment income for Life and Health, and expenses from life policy benefits, acquisition costs and other
expenses.
The segment results for the years ended December 31, 2016, 2015 and 2014 are presented below (in millions of U.S. dollars, except ratios). The results for the
years ended December 31, 2015 and 2014 have been recast to conform to the current segment presentation.
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Gross premiums written
Net premiums written
Decrease (increase) in unearned premiums
Net premiums earned
Losses and loss expenses
Acquisition costs
Technical result
Other income
Other expenses
Underwriting result
Net investment income
Allocated underwriting result (1)
Net realized and unrealized investment gains
Interest expense
Loss on redemption of senior notes
Amortization of intangible assets
Net foreign exchange gains
Income tax expense
Interest in losses of equity method investments
Net income
Loss ratio (2)
Acquisition ratio (3)
Technical ratio (4)
Other expense ratio (5)
Combined ratio (6)
Segment Information
For the year ended December 31, 2016
P&C
segment
Specialty
segment
Total
Non-life
Life
and Health
segment
Corporate
and Other
$
$
$
$
2,269
2,061
25
2,086
(1,248)
(556)
282
$
$
$
$
1,920
1,776
(9)
1,767
(1,073)
(500)
194
$
$
$
$
$
4,189
3,837
16
3,853
(2,321)
(1,056)
476
2
(229)
249
$
$
$
$
$
$
$
$
$
$
1,168
1,117
—
1,117
(927)
(131)
59
10
(66)
3
58
61
59.8%
26.7
86.5%
60.8%
28.3
89.1%
60.3%
27.4
87.7%
5.9
93.6%
Total
5,357
4,954
16
4,970
(3,248)
(1,187)
535
15
(472)
78
411
n/a
26
(49)
(22)
(26)
78
(26)
(23)
— $
— $
—
— $
—
—
— $
$
3
(177)
n/a
353
n/a
26
(49)
(22)
(26)
78
(26)
(23)
n/a
$
447
(1) Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs
and other expenses.
(2) Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
(3) Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.
(4) Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.
(5) Other expense ratio is obtained by dividing other expenses by net premiums earned.
(6) Combined ratio is defined as the sum of the technical ratio and the other expense ratio.
n/a: Not applicable
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Gross premiums written
Net premiums written
Decrease in unearned premiums
Net premiums earned
Losses and loss expenses
Acquisition costs
Technical result
Other income
Other expenses
Underwriting result
Net investment income
Allocated underwriting result
Net realized and unrealized investment losses
Interest expense
Amortization of intangible assets
Net foreign exchange losses
Income tax expense
Interest in earnings of equity method investments
Net income
Loss ratio
Acquisition ratio
Technical ratio
Other expense ratio
Combined ratio
Segment Information
For the year ended December 31, 2015
P&C
segment
Specialty
segment
Total
Non-life
Life
and Health
segment
Corporate
and Other
$
$
$
$
2,371
2,236
4
2,240
(1,129)
(570)
541
$
$
$
$
1,906
1,786
34
1,820
(1,064)
(494)
262
$
$
$
$
$
4,277
4,022
38
4,060
(2,193)
(1,064)
803
—
(219)
584
$
$
$
$
$
$
$
$
$
$
1,271
1,208
1
1,209
(964)
(153)
92
6
(63)
35
59
94
— $
— $
—
— $
—
—
— $
$
3
(509)
n/a
391
n/a
(297)
(49)
(27)
(9)
(80)
6
n/a
$
Total
5,548
5,230
39
5,269
(3,157)
(1,217)
895
9
(791)
113
450
n/a
(297)
(49)
(27)
(9)
(80)
6
107
50.4%
25.4
75.8%
58.5%
27.1
85.6%
54.0%
26.2
80.2%
5.4
85.6%
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For the year ended December 31, 2014
Segment Information
P&C
segment
Specialty
segment
Total
Non-life
Life
and Health
segment
Corporate
and Other
Gross premiums written
Net premiums written
(Increase) decrease in unearned premiums
Net premiums earned
Losses and loss expenses
Acquisition costs
Technical result
Other income
Other expenses
Underwriting result
Net investment income
Allocated underwriting result
Net realized and unrealized investment gains
Interest expense
Amortization of intangible assets
Net foreign exchange gains
Income tax expense
Interest in earnings of equity method investments
Net income
Loss ratio
Acquisition ratio
Technical ratio
Other expense ratio
Combined ratio
$
$
$
$
2,539
2,467
(66)
2,401
(1,136)
(599)
666
$
$
$
$
2,128
2,033
(47)
1,986
(1,327)
(466)
193
$
$
$
$
$
$
4,667
4,500
(113)
4,387
(2,463)
(1,065)
859
3
(252)
610
$
$
$
$
$
$
$
$
$
$
1,265
1,220
2
1,222
(1,000)
(149)
73
8
(68)
13
60
73
— $
— $
— $
— $
—
—
— $
5
(130)
$
n/a
420
n/a
372
(49)
(27)
18
(239)
15
Total
5,932
5,720
(111)
5,609
(3,463)
(1,214)
932
16
(450)
498
480
n/a
372
(49)
(27)
18
(239)
15
n/a
$
1,068
47.3%
24.9
72.2%
66.8%
23.5
90.3%
56.1%
24.3
80.4%
5.8
86.2%
The following table provides the geographic distribution of gross premiums written based on the location of the underlying risk for the years ended December 31, 2016,
2015 and 2014:
Asia, Australia and New Zealand
Europe
Latin America, Caribbean and Africa
North America
Total
2016
2015
2014
12%
36
8
44
100%
12%
37
10
41
100%
11%
40
10
39
100%
The Company produces its business both through brokers and through direct relationships with insurance company clients. None of the Company’s cedants
individually accounted for more than 4%, 3% and 4% of total gross premiums written during the years ended December 31, 2016, 2015 and 2014, respectively.
The Company has two brokers that individually accounted for 10% or more of its gross premiums written during the years ended December 31, 2016, 2015 and
2014. The brokers accounted for 22%, 19% and 20% and 22%, 22% and 20% of gross premiums written for the years ended December 31, 2016, 2015 and 2014,
respectively.
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The following table summarizes the percentage of gross premiums written through these two brokers by segment for the years ended December 31, 2016, 2015 and
2014:
P&C
Specialty
Life and Health
21. Other Expenses
2016
2015
2014
57%
46
16
54%
42
16
53%
40
12
On January 25, 2015, the Company entered into an Agreement and Plan of Amalgamation (Amalgamation Agreement) with Axis Capital Holdings Limited (AXIS).
In connection with the execution of the Merger Agreement with Exor N.V. and EXOR S.p.A, the Company and AXIS terminated the Amalgamation Agreement and the
Company paid AXIS a termination fee and reimbursement of expenses of $315 million (AXIS Amalgamation Agreement Termination Fee) which is included within
Other expenses in 2015.
In 2015, pursuant to an earn-out agreement, PartnerRe U.S. Corporation paid to the former shareholders of Presidio Reinsurance Group, Inc. $29 million, of which
$25 million and $4 million was expensed in 2015 and 2014, respectively.
In accordance with Company’s share-based award plans and the Merger Agreement, all of the Company’s share-based awards fully vested and were settled in cash
upon the change in control of the Company on March 18, 2016 (see Note 15). As a result, the Company recorded $38 million in Other expenses during the year ended
December 31, 2016.
During the years ended December 31, 2016 and 2015, the Company recorded $90 million and $71 million, respectively, of other transaction and severance related
costs within Other expenses. These costs for the year ended December 31, 2016 were comprised of $45 million in transaction costs and $45 million in severance expenses
associated with the restructuring of the Company’s business units, certain changes to the Company’s investment operations and executive changes.
22. Subsequent Events
On February 28 and March 31, 2017 PartnerRe subscribed $50 million and $100 million, respectively, to funds managed by an entity within the Exor Group which
invests in publicly listed equities. The funds are registered in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier, or CSSF.
On April 3, 2017, after receiving all necessary regulatory approvals, PartnerRe completed the acquisition of 100% of the outstanding ordinary shares of Aurigen
Capital Limited, a North American life reinsurance company for CAD 375 million (or approximately $286 million).
153
Table of Contents
To the Board of Directors and Shareholder of PartnerRe Ltd.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the Company) as of December 31, 2016, and the related
consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the year ended December 31, 2016. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PartnerRe Ltd. and subsidiaries
at December 31, 2016, and the consolidated results of their operations and their cash flows for the year ended December 31, 2016 in conformity with U.S. generally
accepted accounting principles.
We also have audited the adjustments to retrospectively reflect the change in the composition of reportable segments as described in Note 20. In our opinion, such
adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2015 and 2014 consolidated financial
statements of PartnerRe Ltd. and subsidiaries other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on
the 2015 and 2014 consolidated financial statements taken as a whole.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PartnerRe Ltd.’s internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) and our report dated April 5, 2017 expressed an unqualified opinion thereon.
/S/ Ernst & Young Ltd.
Ernst & Young Ltd.
Hamilton, Bermuda
April 5, 2017
154
Table of Contents
To the Board of Directors and Shareholders of PartnerRe Ltd.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 20
to the consolidated financial statements, the consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the “Company”) as of December 31, 2015, and the related
consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the two years ended December 31, 2015 and 2014 (the
2015 and 2014 consolidated financial statements before the effects of the adjustments discussed in Note 20 to the consolidated financial statements are not presented
herein). Our audits also included the financial statement schedules included in the Company’s Form 10-K as of, and for the year ended December 31, 2015. These
consolidated financial statements and financial statement schedules 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 the standards of the Public Company Accounting Oversight Board (United States). 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 2015 and 2014 consolidated financial statements, before the effects of the retrospective adjustments to the disclosures for a change in the
composition of reportable segments discussed in Note 20 to the consolidated financial statements, present fairly, in all material respects, the financial position of
PartnerRe Ltd. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for each of the two years ended December 31, 2015 and
December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules
as of and for the year ended December 31, 2015, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments to the disclosures for a change in the composition of reportable
segments discussed in Note 20 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such
retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.
/S/ DELOITTE LTD.
Deloitte Ltd.
Hamilton, Bermuda
February 25, 2016
155
Table of Contents
To the Board of Directors and Shareholder of PartnerRe Ltd.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the consolidated financial statements of PartnerRe Ltd. and subsidiaries (the Company) as of and for the year ended December 31, 2016, and have
issued our report thereon dated April 5, 2017 (included elsewhere in this Annual Report on Form 20-F). Our audit also included the financial statement schedules listed in
Item 18 of this Annual Report on Form 20-F for the year ended December 31, 2016. These schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/S/ Ernst & Young Ltd.
Ernst & Young Ltd.
Hamilton, Bermuda
April 5, 2017
156
Table of Contents
Type of investment
Fixed maturities
PartnerRe Ltd.
Consolidated Summary of Investments
Other Than Investments in Related Parties
at December 31, 2016
(Expressed in thousands of U.S. dollars)
SCHEDULE I
U.S. government and government sponsored enterprises
U.S. states, territories and municipalities
Non-U.S. sovereign government, supranational and government related
Corporate
Asset-backed securities
Residential mortgage-backed securities
$
Fixed maturities
Equities
Banks, trust and insurance companies
Industrial, miscellaneous and all other
Equities
Short-term investments
Other invested assets (3)
Total
Cost (1) (2)
Fair Value (2)
Amount at which shown in
the balance sheet (2)
$
3,571,242
670,028
1,089,125
5,674,817
125,159
2,256,186
13,386,557
19,137
9,239
28,376
21,697
3,541,433
684,555
1,136,034
5,705,522
124,060
2,240,897
13,432,501
$
$
$
$
$
$
28,667
9,959
38,626
21,697
443,629
3,541,433
684,555
1,136,034
5,705,522
124,060
2,240,897
13,432,501
28,667
9,959
38,626
21,697
443,629
$
13,936,453
$
13,936,453
(1) Original cost of fixed maturities reduced by repayments and adjusted for amortization of premiums or accrual of discounts. Original cost of equity securities.
(2) Excludes the investment portfolio underlying the funds held–directly managed account. While the net investment income and net realized and unrealized gains and
losses inure to the benefit of the Company, the Company does not legally own the investments.
(3) Other invested assets excludes the Company’s investments accounted for using the cost method of accounting and the equity method of accounting of $632 million.
157
Table of Contents
Condensed Balance Sheets—Parent Company Only
(Expressed in thousands of U.S. dollars, except parenthetical share and per share data)
PartnerRe Ltd.
SCHEDULE II
Assets
Fixed maturities, at fair value (amortized cost: 2016, $78,104; 2015, $254,486)
Cash and cash equivalents
Investments in subsidiaries
Intercompany loans and balances receivable
Other
Total assets
Liabilities
Intercompany loans and balances payable (1)
Accounts payable, accrued expenses and other
Total liabilities
Shareholders’ Equity
Common shares (par value $1.00; issued: 2016, 1 share and 2015, 87,237,220 shares)
Preferred shares (par value $1.00; issued and outstanding: 2016, 28,169,062 shares; 2015, 34,150,000 shares; aggregate
liquidation value: 2016, $704,227; 2015, $853,750)
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Common shares held in treasury, at cost (2015, 39,303,068 shares)
Total shareholders’ equity attributable to PartnerRe Ltd.
Total liabilities and shareholders’ equity attributable to PartnerRe Ltd.
December 31, 2016
December 31, 2015
$
$
$
$
77,170
23,150
8,558,696
700,965
4,394
9,364,375
$
252,538
94,835
8,187,691
605,697
2,955
9,143,716
$
2,652,060
24,403
2,676,463
2,211,106
32,109
2,243,215
—
87,237
28,169
2,396,530
(74,569)
4,337,782
—
6,687,912
$
9,364,375
$
34,150
3,982,147
(83,283)
6,146,802
(3,266,552)
6,900,501
9,143,716
(1) The parent has fully and unconditionally guaranteed on a subordinated basis all obligations of PartnerRe Finance II Inc., an indirect 100% owned finance
subsidiary of the parent, related to the remaining $63 million aggregate principal amount of 6.440% Fixed-to-Floating Rate Junior Subordinated Capital Efficient
Notes (CENts). The parent’s obligations under this guarantee are unsecured and rank junior in priority of payments to the parent’s senior notes.
The parent has fully and unconditionally guaranteed all obligations of PartnerRe Finance A and PartnerRe Finance B, indirect 100% owned finance subsidiaries
of the parent, and PartnerRe Finance Ireland DAC, direct 100% owned subsidiary of the parent, related to the issuance of $250 million aggregate principal
amount of 6.875% senior notes (redeemed in November 2016), $500 million aggregate principal amount of 5.500% senior notes and €750 million aggregate
principal amount of 1.250% senior notes, respectively. The parent’s obligations under these guarantees are senior and unsecured and rank equally with all other
senior unsecured indebtedness of the parent.
158
Table of Contents
Condensed Statements of Operations and Comprehensive Income—Parent Company Only
(Expressed in thousands of U.S. dollars)
PartnerRe Ltd.
SCHEDULE II
For the year ended
December 31, 2016
For the year ended
December 31, 2015
For the year ended
December 31, 2014
Revenues
Net investment income
Interest income on intercompany loans
Net realized and unrealized investment gains (losses)
Other income
Total revenues
Expenses
Other expenses
Interest expense on intercompany loans
Net foreign exchange gains
Total expenses
Loss before equity in net income of subsidiaries
Equity in net income of subsidiaries
Net income attributable to PartnerRe Ltd.
Preferred dividends
Loss on redemption of preferred shares
Net income attributable to PartnerRe Ltd. common shareholders
Comprehensive income
Net income attributable to PartnerRe Ltd.
Total other comprehensive income (loss), net of tax
Comprehensive income attributable to PartnerRe Ltd.
2,690
12,109
2,993
2,483
20,275
116,758
7,016
(10,788)
112,986
(92,711)
540,019
447,308
55,043
4,908
387,357
447,308
8,714
456,022
$
$
$
$
3,516
12,295
(1,104)
—
14,707
435,404
6,243
(3,199)
438,448
(423,741)
528,122
104,381
56,735
—
47,646
104,381
(49,200)
55,181
$
$
$
$
—
14,669
—
—
14,669
58,076
1,696
(3,192)
56,580
(41,911)
1,096,885
1,054,974
56,735
—
998,239
1,054,974
(21,845)
1,033,129
$
$
$
$
159
Table of Contents
PartnerRe Ltd.
Condensed Statements of Cash Flows—Parent Company Only
(Expressed in thousands of U.S. dollars)
SCHEDULE II
Cash flows from operating activities
Net income attributable to PartnerRe Ltd.
Adjustments to reconcile net income to net cash used in operating activities:
Equity in net income of subsidiaries
Other, net
Net cash used in operating activities
Cash flows from investing activities
Advances to/from subsidiaries, net
Net issue of intercompany loans receivable and payable
Sales and redemptions of fixed maturities
Purchases of fixed maturities
Dividends received from subsidiaries
Other, net
Net cash provided by (used in) investing activities
Cash flows from financing activities
Cash dividends paid to common and preferred shareholders (1)
Reissuance of treasury shares and issuance of common shares, net of taxes paid
Redemption of preferred shares
Reissuance of treasury shares, net of taxes
Settlement of share-based awards upon change in control
Net cash (used in) provided by financing activities
Effect of foreign exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of year
For the year ended December
31, 2016
For the year ended December
31, 2015
For the year ended December
31, 2014
$
447,308
$
104,381
$
1,054,974
(540,019)
11,205
(81,506)
(167,254)
542,193
99,888
(7,839)
—
(2,408)
464,580
(240,725)
—
(149,523)
10,965
(75,531)
(454,814)
55
(71,685)
94,835
(528,122)
32,725
(391,016)
97,532
5,955
16,818
(25,758)
418,789
13,292
526,628
(47,582)
7,996
—
—
—
(39,586)
(1,562)
94,464
371
$
23,150
$
94,835
$
(1,096,885)
33,598
(8,313)
(12,635)
2,500
—
—
—
60
(10,075)
—
16,785
—
—
—
16,785
688
(915)
1,286
371
(1) During the years ended December 31, 2016, 2015 and 2014, dividends paid to common and preferred shareholders of $251 million, $143 million and $191
million, respectively and the repurchase of common shares of nil, $71 million and $547 million, respectively, were paid by a subsidiary on behalf of the parent and
have been excluded from the Condensed Statements of Cash Flows—Parent Company Only.
160
Table of Contents
2016
Non-life
Life and Health
Corporate and
Other
Total
2015
Non-life
Life and Health
Corporate and
Other
Total
2014
Non-life
Life and Health
Corporate and
Other
Total
PartnerRe Ltd.
Supplementary Insurance Information
For the years ended December 31, 2016, 2015 and 2014
(Expressed in thousands of U.S. dollars)
SCHEDULE III
Deferred
Policy
Acquisition
Costs
Gross
Reserves
Unearned
Premiums
Other Benefits
Payable
Premium
Revenue
Net
Investment
Income(1)
Losses
Incurred
Amortization
of DAC
Other
Expenses(2) (3)
Premiums
Written
$ 439,195
158,044
$ 8,985,434
—
$ 1,608,880
14,916
$
— $ 3,852,336
1,117,260
1,984,096
$ N/A
57,664
$ 2,320,820
927,271
$ 1,055,638
130,964
$ 228,806
66,003
$ 3,836,654
318,052
—
—
—
—
—
353,200
—
—
177,096
—
$ 597,239
$ 8,985,434
$ 1,623,796
$ 1,984,096
$ 4,969,596
$ 410,864
$ 3,248,091
$ 1,186,602
$ 471,905
$ 4,154,706
$ 449,216
180,156
$ 9,064,711
—
$ 1,629,537
15,220
$
— $ 4,059,665
1,209,513
2,051,935
$ N/A
58,537
$ 2,193,449
964,421
$ 1,063,693
153,318
$ 218,319
63,451
$ 4,022,067
321,278
—
—
—
—
—
391,247
(450)
(8)
508,953
—
$ 629,372
$ 9,064,711
$ 1,644,757
$ 2,051,935
$ 5,269,178
$ 449,784
$ 3,157,420
$ 1,217,003
$ 790,723
$ 4,343,345
$ 463,958
197,228
$ 9,745,806
—
$ 1,731,212
19,395
$
— $ 4,387,406
1,221,751
2,050,107
$ N/A
60,369
$ 2,462,568
1,000,202
$ 1,065,117
148,689
$ 252,322
67,811
$ 4,500,214
265,693
—
—
—
—
38
419,327
—
16
129,555
—
$ 661,186
$ 9,745,806
$ 1,750,607
$ 2,050,107
$ 5,609,195
$ 479,696
$ 3,462,770
$ 1,213,822
$ 449,688
$ 4,765,907
(1) Because the Company does not manage its assets by segment, net investment income is not allocated to the Non-life business of the reinsurance operations.
However, because of the interest-sensitive nature of some of the Company’s Life products, net investment income is considered in management’s assessment of the
profitability of the Life and Health segment.
(2) Other expenses are a component of underwriting result for the Non-life business and Life and Health segment. Other expenses included in Corporate and Other
represent corporate expenses and other expenses related to the Company’s principal finance transactions, insurance-linked securities and strategic investments.
(3) Other expenses for the year ended December 31, 2016 include transaction costs related to acquisition by Exor N.V. and severance expenses associated with the
restructuring of the Company’s business units, certain changes to the Company’s investment operations and executive changes.
(4) Other expenses for the year ended December 31, 2015 include the AXIS Amalgamation Termination Fee and transaction costs related to the Amalgamation
Agreement with AXIS and Merger Agreement with EXOR.
161
Table of Contents
2016
Life reinsurance in force
Premiums earned
Life
Accident and health
Property and casualty
Total premiums
2015
Life reinsurance in force
Premiums earned
Life
Accident and health
Property and casualty
Total premiums
2014
Life reinsurance in force
Premiums earned
Life
Accident and health
Property and casualty
Total premiums
PartnerRe Ltd.
Reinsurance
For the years ended December 31, 2016, 2015 and 2014
(Expressed in thousands of U.S. dollars)
SCHEDULE IV
Gross amount
Ceded to other
companies
Assumed from other
companies
Net amount
Percentage of amount
assumed to net
$
$
$
$
$
$
— $
1,930,291
$
167,198,163
$
165,267,872
—
89,623
161,869
4,695
46,568
322,972
778,754
300,145
4,013,440
251,492
$
374,235
$
5,092,339
$
774,059
343,200
3,852,337
4,969,596
— $
2,189,254
$
180,825,066
$
178,635,812
—
89,535
163,042
4,802
57,978
238,363
873,854
308,904
4,134,986
252,577
$
301,143
$
5,317,744
$
869,052
340,461
4,059,665
5,269,178
— $
2,322,845
$
198,284,805
$
195,961,960
—
66,090
143,389
5,031
40,065
170,107
943,054
257,703
4,414,162
209,479
$
215,203
$
5,614,919
$
938,023
283,728
4,387,444
5,609,195
162
101%
101%
87%
104%
102%
101%
101%
91%
102%
101%
101%
101%
91%
101%
100%
Table of Contents
SCHEDULE VI
PartnerRe Ltd.
Supplemental Information
Concerning Property-Casualty Insurance Operations
For the years ended December 31, 2016, 2015 and 2014
(Expressed in thousands of U.S. dollars)
Affiliation with Registrant
Consolidated subsidiaries
2016
2015
2014
Deferred Policy
Acquisition
Costs
Liability for
Unpaid Losses
and Loss
Expenses
Unearned
Premiums
Premiums
Earned
Losses and Loss
Expenses
Incurred
Amortization of
Deferred Policy
Acquisition
Costs
Paid Losses and
Loss Expenses
Premiums
Written
$
439,195
449,216
463,958
$ 8,985,434
9,064,711
9,745,806
$ 1,608,880
1,629,537
1,731,212
$ 3,852,336
4,059,665
4,387,444
$ 2,320,820
2,192,999
2,462,568
$ 1,055,638
1,063,685
1,065,133
$ 2,262,916
2,422,603
2,798,549
$ 3,836,654
4,022,067
4,500,214
163
Table of Contents
ITEM 19.
EXHIBITS
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
SIGNATURE
PARTNERRE LTD.
By:
Name:
Title:
164
/S/ MARIO BONACCORSO
Mario Bonaccorso
Chief Financial Officer
Table of Contents
EXHIBIT INDEX
Form
Original
Number
Exhibit
Number
1.1
1.2
2.4
2.4.1
2.5
2.6
2.7
2.8.1
2.8.2
2.9.1
2.9.2
2.12.1
2.12.2
2.13.1
2.13.2
4.1
4.2
4.3
4.4
Exhibit Description
Amended Memorandum of Association
Bye-laws of PartnerRe Ltd.
Specimen Share Certificate for the 5.875% Series F Non-Cumulative
Redeemable Preferred Shares
Certificate of Designation, Preferences and Rights of the Company’s
5.875% Series F Non-Cumulative Redeemable Preferred Shares
Certificate of Designation of 6.50% Series G Cumulative
Redeemable Preferred Shares
Certificate of Designation of 7.25% Series H Cumulative
Redeemable Preferred Shares
Certificate of Designation of 5.875% Series I Non-Cumulative
Redeemable Preferred Shares
Junior Subordinated Indenture dated November 2, 2006 among
PartnerRe Finance II Inc., the Company, J.P. Morgan Securities Inc.,
Lehman Brothers Inc. and the other underwriters named therein
First Supplemental Junior Subordinated Indenture (including the
form of the CENts) among PartnerRe Finance II Inc., the Company
and The Bank of New York
Junior Subordinated Debt Securities Guarantee Agreement dated
November 7, 2006 between the Company and The Bank of New
York
First Supplemental Junior Subordinated Debt Securities Guarantee
Agreement dated November 7, 2006 between the Company and The
Bank of New York
Indenture dated March 15, 2010 among PartnerRe Finance B LLC,
PartnerRe Ltd. and The Bank of New York Mellon
First Supplemental Indenture dated March 15, 2010 among
PartnerRe Finance B LLC, PartnerRe Ltd. and The Bank of New
York Mellon
Senior Debt Securities Guarantee Agreement dated March 15, 2010
between PartnerRe Ltd. and The Bank of New York Mellon
First Supplemental Senior Debt Securities Guarantee Agreement
dated March 15, 2010 between PartnerRe Ltd. and The Bank of New
York Mellon
Agreement and Plan of Merger by and among Exor N.V., Pillar Ltd.,
PartnerRe Ltd. and solely with respect to Sections 4.01 and 4.05,
Section 6.13 and Section 7.13, EXOR S.p.A.
Amended and Restated Employment Agreement between PartnerRe
Holdings Europe Limited, Zurich Branch and Emmanuel Clarke,
effective as of December 16, 2015
Amended and Restated Employment Agreement between PartnerRe
Ltd. and William Babcock, effective as of December 16, 2015
Amended and Restated Employment Agreement between PartnerRe
Ltd. and Laurie Desmet, effective as of October 23, 2014
F-3
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
3.1
3.1
4.1
3.1
4.1
4.2
4.3
4.1
4.2
4.3
4.4
4.1
4.2
4.3
4.4
2.1
Incorporated by Reference
Date Filed
June 20, 1997
March 18, 2016
SEC File
Reference
Number
333-7094
001-14536
Filed
Herewith
February 14, 2013
001-14536
February 14, 2013
001-14536
May 3, 2016
001-14536
May 3, 2016
001-14536
May 3, 2016
001-14536
November 7, 2006
001-14536
November 7, 2006
001-14536
61194484
November 7, 2006
001-14536
November 7, 2006
001-14536
March 15, 2010
001-14536
March 15, 2010
001-14536
March 15, 2010
001-14536
March 15, 2010
001-14536
August 3, 2015
001-14536
10-K
3.2
February 25, 2016
001-14536
3.2
10.7
February 25, 2016
001-14536
October 31, 2014
001-14536
10-K
10-Q
165
Table of Contents
Exhibit
Number
Exhibit Description
Form
Original
Number
Date Filed
SEC File
Reference
Number
Filed
Herewith
Incorporated by Reference
10-Q
10.8
October 31, 2014
001-14536
10-Q
10-Q
8-K
10.3
October 31, 2014
001-14536
10.16
November 4, 2009
001-14536
10.2
August 3, 2015
001-14536
10-K
10.3.8
February 25, 2016
001-14536
4.5
4.6
4.7
4.8
4.9
8.1
11.1
12.1
12.2
13.1
15.1
15.2
101.1
Amended and Restated Employment Agreement between Partner
Reinsurance Company of the U.S and Theodore C. Walker, effective
as of October 23, 2014
Amended and Restated Consulting Agreement between PartnerRe
Ltd. and Marvin Pestcoe, effective as of April 16, 2014
Form of Indemnification Agreement between PartnerRe Ltd. and its
directors
Termination Agreement, dated August 2, 2015, by and among
PartnerRe Ltd. and Axis Capital Holdings Limited
Capital Management Maintenance Agreement, effective January 1,
2015, between PartnerRe Ltd. and Partner Reinsurance Asia Pte. Ltd.
Subsidiaries of the Company
Code of Business Conduct and Ethics
Certification of Emmanuel Clarke, Chief Executive Officer, as
required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934
Certification of Mario Bonaccorso, Chief Financial Officer, as
required by Rule 13a-14(a) of the Securities Exchange Act of 1934
Certifications of Emmanuel Clarke, Chief Executive Officer, and
Mario Bonaccorso, Chief Financial Officer, as required by Rule 13a-
14(b) or 15d-14(b) of the Securities Exchange Act of 1934
Consent of Ernst & Young Ltd.
Consent of Deloitte Ltd.
The following financial information from PartnerRe Ltd.’s Annual
Report on Form 20–F for the year ended December 31, 2016
formatted in XBRL: (i) Consolidated Balance Sheets at December
31, 2016 and 2015; (ii) Consolidated Statements of Operations and
Comprehensive Income for the years ended December 31, 2016,
2015 and 2014; (iii) Consolidated Statements of Shareholders’
Equity for the years ended December 31, 2016, 2015 and 2014; (iv)
Consolidated Statements of Cash Flows for the years ended
December 31, 2016, 2015 and 2014; (v) Notes to Consolidated
Financial Statements and (vi) Financial Statements Schedules.
(Back To Top)
Section 2: EX-8.1 (EXHIBIT 8.1)
166
PartnerRe Ltd.
Subsidiaries of the Company
PartnerRe Ltd.
PartnerRe Services Ltd.
Partner Reinsurance Company Ltd.
PartnerRe Servicios Y Compañia Limitada
PartnerRe Americas Services Company, S.A. de C.V.
PPF Holdings I Ltd.
PPF Holdings II Ltd.
PPF Holdings III Ltd.
PartnerRe Capital Investments Corp.
LFR Collections LLC
Almandine I LLC
Mercalli Investment Holding company Ltd.
Mercalli ILS Master Fund Ltd.
Mercalli Re Ltd.
Mercalli ILS Bermuda Feeder Fund Ltd.
Mercalli ILS Feeder Fund LLC
PartnerRe Underwriting Management Ltd.
Lorenz Re Ltd.
Raccoon River Re Ltd
Partner Reinsurance Life Company of Bermuda Ltd.
PartnerRe Corporate Member Limited
PartnerRe Corporate Member 2 Limited
Partner Reinsurance Asia Pte. Ltd.
PartnerRe Holdings Europe Limited
PartnerRe Holdings Switzerland GmbH
PartnerRe Financing Ltd.
PartnerRe Connecticut Inc.
Jurisdiction
Bermuda
Bermuda
Bermuda
Chile
Mexico
Bermuda
Bermuda
Bermuda
Delaware, United States
Delaware, United States
Delaware, United States
Bermuda
Bermuda
Bermuda
Bermuda
Delaware
Bermuda
Bermuda
Bermuda
Bermuda
United Kingdom
United Kingdom
Singapore
Ireland
Switzerland
Bermuda
Connecticut, United States
X
X
X
X
X
X
X
X
Exhibit 8.1
Percentage
Interest Held
100%
100%
100%
100%
100%
100%
100%
100%
100%
95%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
PartnerRe Holdings Ireland Limited
PartnerRe Ireland Insurance dac
PartnerRe Ireland Finance dac
PartnerRe Holdings B.V.
PartnerRe Holdings SA
Partner Reinsurance Europe SE
PartnerRe Escritório de Representação no Brasil Ltda.
PartnerRe Miami Inc.
PartnerRe U.S. Corporation
PartnerRe America Insurance Company
PPF Finance LLC
Peninsula Coinvestment II, LLC
PartnerRe Finance A LLC
Ireland
Ireland
Ireland
Netherlands
France
Ireland
Brazil
Florida, United States
Delaware, United States
Delaware, United States
Delaware, United States
Delaware, United States
Delaware, United States
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
PartnerRe Finance B LLC
PartnerRe Finance C LLC
PartnerRe Principal Finance Inc.
PartnerRe Asset Management Corporation
Mercalli Investment Management Inc.
Partner Reinsurance Company of the U.S.
PartnerRe Insurance Company of New York
PartnerRe Finance I Inc.
PartnerRe Finance II Inc.
PartnerRe Capital Trust II
PartnerRe Capital Trust III
Presidio Reinsurance Group, Inc.
Presidio Excess Insurance Services Inc.
PartnerRe Management Ltd.
Presidio Reinsurance Corporation
Jurisdiction
Delaware, United States
Delaware, United States
Delaware, United States
Delaware, United States
Delaware, United States
New York, United States
New York, United States
Delaware, United States
Delaware, United States
Delaware, United States
Delaware, United States
Delaware, United States
California, United States
United Kingdom
Montana, United States
Percentage
Interest Held
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
(Back To Top)
Section 3: EX-11.1 (EXHIBIT 11.1)
Code of Business
Conduct and Ethics
To All PartnerRe Employees:
Dear Colleagues,
PartnerRe has undergone many profound changes over the past year– we have new leadership and a new organizational structure and we are evolving our
approach to our business by striking the right balance between expertise and client focus. As we move forward, I hope we will see further changes:
different ways of thinking and doing things as we start to set a new course towards a successful future under private ownership.
When I was appointed CEO of PartnerRe, I said that there was no other company I would rather work for but that I wanted to make PartnerRe a truly great
company by restoring pride and ambition, building on our strengths and by committing to integrity and openness.
For those reasons, I have selected new values of trust, responsibility, openness and initiative that better represent the company we want to be. These are of
course just words – it is up to all of us to turn these words into actions. Through our collective and persistent efforts, over time those actions will shape our
reputation and the way prospective clients, brokers, future employees and our communities perceive us.
Over the years, our strong reputation for integrity, financial strength and technical expertise has served us extremely well and has been an important part of
our success. Now it is time to move forward as a company, embracing the new reality we find ourselves in and the changes ahead, without losing touch
with the sound ethical foundation that made us great.
I therefore urge each one of you to read the Code of Conduct, to think about what our values mean to you and how you can apply them in your everyday
work. I also expect you to have the courage to speak up if you witness any infringements of the Code of Conduct. Find out how to identify and report a
violation by reading PartnerRe’s Whistleblowing Procedure, which can be found together with the Reporting Hotline and the Code of Conduct, on the
home page of Relink.
If you have any further questions or concerns relating to ethics, the application of our core values or how to report a violation, contact a member of the
Legal team.
Thank you for your support,
Emmanuel Clarke
CEO and President
PartnerRe Ltd.
Our PartnerRe Vision 4
Our Core Purpose
Our Strategy
Our Values
Code of Business Conduct and Ethics5
Governance6
Work Environment 6
Reporting Violations7
Conflicts of Interest8
Legal and Regulatory Integrity 10
Financial and Non-Financial Integrity10
Insider Trading10
Sanctions and Anti-Money Laundering11
Anti-Trust and Fair Dealing11
Bribery and Corruption12
Fraud13
Protection and Proper Use of PartnerRe Resources14
Corporate Opportunities and Resources14
Electronic Communications15
Confidentiality 15
Our vision
Our vision is to be the best reinsurance partner to our clients and brokers.
Our Core Purpose
We help insurance companies succeed by making risk manageable for our clients. We combine technical expertise and strong
relationships to help fuel their success and their peace of mind.
Our Strategy
We complement our technical capabilities with a client focused approach, to develop successful partnerships with our clients.
We create value through:
(cid:34) Sourcing diversified and profitable risks by being the go-to reinsurer for our clients
and brokers
(cid:34) Executing intelligent and responsible underwriting
(cid:34) Managing risk and capital for strength and flexibility
(cid:34) Maintaining an efficient, effective platform
(cid:34) Attracting, retaining and developing talent
Our Values
Trust
(cid:34) Ethics first, every time
(cid:34) Partnership in words and actions
(cid:34) Committed to earning client trust every day
Responsabilities
(cid:34) Passionate about results for our business and clients
(cid:34) Acting like owners – always accountable for our actions
(cid:34) Mindful, multicultural citizens of the world
Openness
(cid:34) Transparency in the face of complexity
(cid:34) Collaboration over competition
(cid:34) Speaking up and standing out
Initiative
(cid:34) Proactive solutions, not reactive repairs
(cid:34) Empowering people to seize opportunities every day
(cid:34) Extraordinary acts, both big and small
Code of Business
Conduct and Ethics
This Code of Business Conduct and Ethics (the “Code of Conduct”) applies to all PartnerRe Group directors, officers and employees
(referred to herein as “Employee(s)”). References to “Employee(s)” also include any third party connected to PartnerRe who is notified
that the Code of Conduct applies to them.
PartnerRe’s reputation is critical to the success of its business and organization and comes from the everyday actions of Employees
when dealing with clients, suppliers, regulators, competitors and fellow Employees. Consistent and sound business practices contribute
to building a reputation that has created value and a sustainable competitive advantage.
We are committed to a culture of trust and responsibility; therefore, the highest level of ethical conduct should be reflected in all of our
business activities.
At PartnerRe we have common values that apply to the entire organization and that underpin our business activities and behavior.
This Code of Conduct is designed to provide a high-level overview of these core values in practice. It is supplemented by additional
policies and guidelines that fully explain the application of these values. Employees are required to read, understand, accept and apply
the values contained in the Code of Conduct and in all other policies and guidelines applicable to them, in their everyday workand
behavior.
It is not possible for the Code of Conduct to cover every possible situation that may arise; therefore, in the case of doubt, there is one
simple question to ask: “If the act or omission were made public, would PartnerRe’s reputation be questioned or damaged?”
If a situation seems questionable with respect to the application of the principles outlined in this Code of Conduct, Employees are
encouraged to seek guidance from their Manager, Human Resources Manager, Corporate Audit, Legal Department or Executive
Management.
Governance
This Code of Conduct has been approved by the Audit Committee of PartnerRe Ltd. The Audit Committee is made up entirely of independent directors.
Any specific waiver of the provisions of this Code of Conduct or material amendment requires the approval of the Audit Committee.
Any violation of the Code of Conduct will result in appropriate disciplinary measures, up to and including dismissal. Criminal misconduct may be referred to the
appropriate legal authorities.
If a principle in this Code of Conduct infringes the law, the law shall prevail. If a local custom or policy conflicts with this Code of Conduct, the Code of Conduct
shall prevail. Any questions in connection with conflicts should be addressed to the Legal Department.
Q
If I comply with local laws and regulations, will this ensure my compliance with the Code of Conduct?
A
Not necessarily. Our Code of Conduct may impose standards that are more rigorous than those imposed by local laws and regulations. In these situations, and
provided that the Code of Conduct does not conflict with laws and regulations, you should make sure that you comply with the Code of Conduct.
Work Environment
PartnerRe strives to provide each Employee with a healthy and safe work environment. It is the responsibility of each Employee to maintain this healthy and safe
workplace by following environmental, health and safety rules and practices and by reporting accidents, injuries and unsafe equipment, practices or conditions.
We expect our work environment to be free from all forms of discrimination, harassment or intimidation and will therefore not tolerate any prejudice, whether
based on race, color, age, religion, gender, sexual orientation, national origin or otherwise.
All Employees are expected to perform their duties in a safe manner, free from the influence of alcohol, illegal drugs or other controlled substances (except for
prescription medication for medical treatment). The use of illegal drugs in the workplace will not be tolerated.
Although alcohol may be consumed at work-related events when the local custom and occasion make it appropriate to do so, it is the responsibility of each
Employee to consume no more than moderate amounts and to ensure that his/her performance, judgment and behavior are unimpaired.
PartnerRe encourages direct and open communication among and between Employees and management. Employees are free to discuss issues with their Managers
without fear of reprisal or the need for third-party representation. Any form of retaliation will result in appropriate disciplinary measures.
Reporting Violations
Whistleblowing Procedure
An Employee who becomes aware of any activities that appear to violate the laws, rules, regulations or provisions of this Code of Conduct or any other PartnerRe
policy and guidelines, is expected to promptly report the possible violation. PartnerRe has a process that governs how Employees may openly, confidentially or
anonymously report an actual or potential violation without fear of retaliation. This process is described in the Whistleblowing Procedure which can be accessed
via the homepage of Relink.
Employees are encouraged to report an actual or potential violation firstly through the normal business channels i.e. (i) their direct Manager or, if the employees
do not feel that this is appropriate, (ii) the Human Resources, the Corporate Audit department, the Legal department, or any member of the Executive Committee.
If an Employee, for any reason, is uncomfortable with making a report through the above channels or if the responses that he/she has received are not satisfactory,
the Employee may
report the Violation anonymously by using the “Reporting Hotline” button located on the home page of Relink (the “Hotline”). All reports made through the
Hotline are sent directly to the Chairman of the Audit Committee.
Q
I am concerned that someone may have breached the Code of Conduct, but I am not really sure. What should I do?
A
Even in circumstances where you are unsure but have questions or concerns, we encourage you to report the perceived breach of the Code of Conduct. In order
to facilitate the reporting of employee concerns, we have established a Whistleblowing Procedure, which provides certain mechanisms for Employees to submit
concerns in good faith. There are no repercussions for any Employee with respect to good faith reporting of complaints or questions. Retaliation of any type
against an Employee who reports a violation or potential violation in good faith will not be tolerated and is prohibited by principles outlined in the Code of
Conduct. Anyone who attempts to retaliate against an Employee for reporting a Violation or potential violation will face discipline, which may include
termination.
Conflicts of Interest
PartnerRe is committed to an environment free from conflicts of interest. A conflict of interest occurs when the private interests of an Employee or the private
interests of his/her Immediate Family Member interfere, or appear to interfere, with the interests of PartnerRe.
Employees should discuss any circumstance that creates a real or potential conflict of interest with their Manager. For Employees, all decisions regarding the
Company’s interests must be based solely on what is best for the Company and must not be improperly influenced by personal interests. Employees shall not
divulge or personally benefit from any information about the Company or its clients that is not available to the public.
Employees shall not accept commissions, gifts, gratuities, credit, loans or favors of any kind (“Special Treatment”) from any person, firm or corporation doing
business or seeking to do business with the Company under circumstances from which it could be reasonably inferred that the Special Treatment could interfere or
appear to interfere with the interests of the Company.
Employees must avoid all other employment and activities which involve obligations which may conflict with the interests of the Company.
Q
Every year one of our suppliers sends me a couple of bottles of wine in the festive season – can I accept them?
A
You have to decide if the gift is reasonable and appropriate in the circumstances. Gifts of a nominal value are acceptable, but you must be sure that such a gift
will in no way influence your business judgment or could be perceived as favoring the giver. If you are unsure how to respond to a receipt of a gift, contact the
Legal department.
Some examples of prohibited behavior that are considered to be conflicts of interest are listed below. Employees may not:
• Accept fees, commissions or any other personal benefit from a person or business involved in any transaction with PartnerRe.
• Accept gifts, discounts, services, transportation or any other form of services or goods or favors of value from contractors, vendors, brokers, agents, client
companies or persons providing services/materials to PartnerRe other than of nominal value.
• Offer favors, gifts or services other than those that are reasonable and appropriate for the individuals involved and supported by appropriate documentation
and approvals.
• Offer or accept cash (or cash equivalent), loans or guarantees (other than in an approved corporate capacity) in any amount to/from a supplier, client,
potential supplier or potential client.
• Arrange or facilitate any business transaction between their Immediate Family Member and any client or supplier.
• Have a financial interest in clients, suppliers, competitors or any enterprise that is known to have a business relationship with PartnerRe, except where the
financial interest is less than 1% of a publicly traded company.
• Borrow from or lend to clients, suppliers or fellow Employees except for normal banking transactions with financial institutions conducted on a commercial
basis.
Any activity that an Employee is aware of that has similar characteristics to the above, or could be perceived to have similar characteristics, and any material
transaction or relationship that could reasonably be expected to give rise to a conflict of interest, requires disclosure to the Legal Department.
Entertainment
Accepting normal business entertainment, at which the giver is present, such as lunch, dinner, theater, a sporting event or other customary business entertainment,
is appropriate if it is not frequent and is of a reasonable nature, in the course of a meeting or to foster better business relations. Sound judgment must always be
used when deciding whether to attend any event, keeping in mind how your attendance may be viewed by others within and outside the organization.
Q
One of my clients has invited me to stay at his holiday home whenever I want – is this permitted under the Code of Conduct?
A
No. You may not accept any “favors of value” from a supplier, client, potential supplier, client or competitor, other than of nominal value.
Legal and Regulatory Integrity
Guidelines: Anti-Trust, Trading, Sanctions and Anti-Money Laundering, Anti-Bribery, Anti-Fraud
PartnerRe operates in multiple jurisdictions around the world. PartnerRe and all of its Employees must comply fully with the laws, rules and regulations of the
cities, states and countries in which we operate (the “Regulations”). Although Employees are not expected to know the details of each of these Regulations, it is
important to know enough to determine when to seek advice from the Legal Department or other appropriate persons.
Employees may under no circumstance knowingly mislead or misrepresent any PartnerRe information specifically but without limitation to auditors, regulators or
any other official bodies.
Financial and Non-Financial Integrity
All financial transactions must be accurately and fairly recorded in a timely manner in accordance with applicable accounting standards and the policies and
guidelines of PartnerRe. All periodic reports that PartnerRe is required to prepare and PartnerRe’s other public communications shall contain full, fair, accurate,
timely and understandable disclosure.
Insider Trading
Guidelines: Trading
All Employees must comply with all applicable securities laws on the sale and purchase of any PartnerRe preference shares. All Employees are strictly prohibited
from trading any securities, not just PartnerRe preference shares, while in possession of Material Non-Public Information (as defined in the Trading guidelines),
including shares in EXOR SPA. Trading shares of EXOR SPA is permitted but any Employee wishing to do so should first obtain approval from the Legal
Department.
Sanctions and Anti-Money Laundering
Guidelines: Sanctions and Anti-Money Laundering
Jurisdictions in which PartnerRe operates often impose legal restrictions against doing business with certain designated countries, people and organizations (the
“Applicable Sanctions”).
It is generally PROHIBITED to directly or indirectly engage in trade, financial or commercial transactions and other dealings (“Transaction(s)”):
• in a country subject to total embargo in accordance with Applicable Sanctions;
• with or that would benefit individuals, entities and vessels that are the subject of Applicable Sanctions or that are owned or controlled by individuals and/or
entities that are the subject of Applicable Sanctions; or
• for activities prohibited by the Applicable Sanctions.
PartnerRe undertakes to take reasonable measures to detect and prevent money laundering and related activities. PartnerRe and its Employees are prohibited from
knowingly laundering money and shall be vigilant before engaging in a Transaction with a Counterparty.
Employees are required to familiarize themselves and to comply with the instructions set forth in PartnerRe’s Sanctions and Anti-Money Laundering Guidelines
and other supporting documents in order to detect and prevent money laundering, terrorism financing or transactions with prohibited countries, people and
organizations.
Q
Where can I find a list of the designated countries that have restrictions in place that may prevent PartnerRe from doing business there?
A
A list of the designated countries can be found on Relink.
Anti-Trust and Fair Dealing
Guidelines: Anti-Trust
PartnerRe is committed to preserving free competition according to all anti-trust and competition laws and regulations applicable to the jurisdictions in which we
conduct business.
Employees are required to compete independently, in an ethical manner and must endeavor to deal fairly with PartnerRe’s clients, suppliers, service providers,
competitors and other Employees. No Employee should take unlawful advantage of anyone through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts or any other unfair dealing practice.
Q
Am I permitted to talk to our competitors about pricing trends as long as I don’t talk specifically about PartnerRe pricing or our competitors’ products?
A
General discussions on publicly known industry trends may be permitted. You must however be mindful of how these discussions may be perceived and how
this information may be used by others. As a rule, you should always decline to discuss specific pricing and terms with competitors.
Bribery and Corruption
Guidelines: Anti-Bribery
PartnerRe is committed to fighting corruption, in compliance with applicable laws and regulations. Employees must not accept or offer, directly or indirectly,
during the course of their duties, any benefit (including money, gifts or services) from or to public officials, politicians, political parties, or any other person or
organization with a view to inducing them to do or not do something within the scope of, or facilitated by, their job or position.
Employees should also at all times be mindful of cultural and geographic differences in the different countries we operate in and disregard any local practice, rule
or custom unless in line with the standards set forth in the Code of Conduct or required by local law. Any such situation should be referred to the Legal
Department.
Fraud
Guidelines: Anti-Fraud, Data Privacy, Information Security
There is no tolerance of fraud involving any Employees or third party with a business association with PartnerRe. Many of the actions that are prohibited under
this Code of Conduct may constitute fraudulent activity, including, but not limited to:
• Any dishonest or intentionally misleading act.
• Misappropriation of funds, securities, supplies, or other PartnerRe assets.
•
Impropriety in the handling or reporting of money or financial transactions and statements.
• Profiting as a result of being in possession of Material Non-Public Information relating to PartnerRe activities.
• Disclosing confidential or proprietary information to outside parties.
• Disclosing securities activities or acquisitions engaged in or contemplated by PartnerRe.
• Accepting or seeking anything of material value from contractors, vendors, brokers, agents, client companies, MGAs/TPAs, or persons providing
services/materials to PartnerRe.
• Destruction, removal or inappropriate use of records and intellectual property (electronic or physical), furniture, fixtures or equipment.
• Recording of fictitious journal entries or
similar adjustments.
•
Intentionally biasing assumptions and judgments used to estimate certain account balances such as loss reserves.
• Entering into transactions that are outside PartnerRe’s normal or approved course of business and lacking in economic substance.
• Any similar or related irregularity.
Q
Should I report a suspicion of fraud even if I don’t have any proof?
A
If you report a breach of the Code of Conduct, you should be as specific as possible about the possible violation you have witnessed and provide as much
detailed information as you can to help facilitate an investigation. Even if you don’t have evidence, you should still report suspected fraudulent behavior.
Protection and Proper Use
of PartnerRe Resources
Guidelines: Information Technology, Anti-Bribery
Employees have a responsibility to safeguard and make proper and efficient use of PartnerRe’s assets (both tangible and intangible) and systems (“PartnerRe
Resources”).
Each Employee has an obligation to prevent PartnerRe Resources from being lost, damaged, misused, stolen, embezzled or destroyed.
PartnerRe Resources are intended to be used
for legitimate business purposes. Limited personal use of PartnerRe Resources is permissible when such use does not lead to inappropriate expense, interfere with
business operations or violate the Code of Conduct or
any other PartnerRe guidelines.
Corporate Opportunities and Resources
Employees have a duty to promote PartnerRe’s legitimate interests when the opportunity to do so arises and to use PartnerRe Resources exclusively for that
purpose. Corporate opportunities and resources must not be taken or used for personal gain.
Employees shall not take personal advantage of PartnerRe’s property, information or their position and shall not compete directly or indirectly with PartnerRe.
Q
One of my relatives is looking for a new insurer and has asked me to set up a meeting with one of our cedants. Is this acceptable under the Code of Conduct?
A
No. You may not arrange or facilitate any business transaction between any Immediate Family Members and any client or supplier.
In certain circumstances, it is acceptable to make recommendations to third parties in a personal capacity, provided that you are not involved in arranging or
facilitating any meeting and you have no involvement with any relationship that may ensue.
Electronic Communications
Guidelines: Electronic Communications
PartnerRe provides information systems and computer networks to employees. All information conveyed by any type of Electronic Communications (as defined
in the Electronic Communications Guidelines) must be conducted lawfully, in an appropriate manner and, consequently, must be clear, concise and unambiguous
and at all times respectful of other individuals.
Confidentiality
Guidelines: Data Privacy, Information Security, External Communications, Information Technology
Employees must maintain the confidentiality of all information entrusted to them and shall not use confidential information unless in possession of express and
explicit authorization. With respect to personal data, information must always be held in strict compliance of the applicable legislation concerning the protection
of personal data.
Any disclosure of confidential information must be either authorized internally or required by applicable law, regulation or legal process.
Confidential information includes any type of non-public business or personal information with respect to PartnerRe, its Employees, clients, prospective clients,
suppliers, shareholder and any other persons or entities with whom PartnerRe has a relationship and that have an expectation of confidentiality.
The obligation to preserve confidential information continues even after Employees leave PartnerRe.
Q
I meet after work with a number of friends who work for competitor organizations. How do I decide what is and isn’t confidential information?
A
You must use your own judgment, but be aware that confidential information is any non-public information that, if it became public, might be beneficial to
competitors or harmful to PartnerRe or its clients. If in doubt, be cautious, and don’t discuss specific business issues.
This Code of Conduct is supplemented by various documents, many of which are referenced
herein. Employees are required to read, understand, accept and apply the principles contained
in the Code of Conduct and in all other documents applicable to them in their everyday work
and behavior.
www.partnerre.com
(Back To Top)
Section 4: EX-12.1 (EXHIBIT 12.1)
I, Emmanuel Clarke, certify that:
1.
I have reviewed this annual report on Form 20-F of PartnerRe Ltd.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: April 5, 2017
By:
Name:
Title:
/S/ EMMANUEL CLARKE
Emmanuel Clarke
President & Chief Executive Officer
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Section 5: EX-12.2 (EXHIBIT 12.2)
I, Mario Bonaccorso, certify that:
1.
I have reviewed this annual report on Form 20-F of PartnerRe Ltd.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s
auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: April 5, 2017
,
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By:
Name:
Title:
/S/ MARIO BONACCORSO
Mario Bonaccorso
Executive Vice President & Chief Financial Officer
Section 6: EX-13.1 (EXHIBIT 13.1)
SECTION 906 CERTIFICATIONS
The certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended December 31, 2016 (the “Report”) of
PartnerRe Ltd. (the “Company”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and
Section 1350 of Chapter 63 of Title 18 of the United States Code.
Emmanuel Clarke, the Chief Executive Officer, and Mario Bonaccorso, the Chief Financial Officer, each certifies that, to the best of his knowledge:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 5, 2017
By:
Name:
Title:
By:
Name:
Title:
/S/ EMMANUEL CLARKE
Emmanuel Clarke
President & Chief Executive Officer
/S/ MARIO BONACCORSO
Mario Bonaccorso
Executive Vice President & Chief Financial Officer
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Section 7: EX-15.1 (EXHIBIT 15.1)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statements (Form S-8 No. 333-11998, 333-107242, 333-129762, 333-157585, 333-161207, 333-163445, 333-163446, 333-176968 and 333-182045)
of PartnerRe Ltd. and subsidiaries, and
(2) Registration Statement No. 333-203234 on Form S-3 of PartnerRe Ltd. and subsidiaries;
of our reports dated April 5, 2017, with respect to the consolidated financial statements and schedules of PartnerRe Ltd. and subsidiaries and the effectiveness of internal
control over financial reporting of PartnerRe Ltd. and subsidiaries, included in this Annual Report (Form 20-F) of PartnerRe Ltd. and subsidiaries for the year ended
December 31, 2016.
/S/ Ernst & Young Ltd.
Ernst & Young Ltd.
Hamilton, Bermuda
April 5, 2017
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Section 8: EX-15.2 (EXHIBIT 15.2)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 333-11998, 333-107242, 333-129762, 333-157585, 333-161207, 333-163445, 333-
163446, 333-176968 and 333-182045 on Form S-8, and in Registration Statement No. 333-203234 on Form S-3 of our report dated February 25, 2016, relating to the
December 31, 2015 consolidated financial statements and financial statement schedules of PartnerRe Ltd. and subsidiaries, appearing in this Annual Report on Form 20-F
of PartnerRe Ltd. and subsidiaries for the year ended December 31, 2016.
Exhibit 15.2
/S/ DELOITTE LTD.
Deloitte Ltd.
Hamilton, Bermuda
April 5, 2017
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