The Company’s economic objective is to manage a portfolio of risks that will create total shareholder value and uses annual diluted tangible book value per share and share equivalents outstanding plus dividends to measure its success. Management assesses this economic objective over the reinsurance cycle, rather than any particular quarterly or annual period, given the Company’s profitability is significantly affected by the level of large catastrophic losses that it incurs each period. The Company uses a number of other metrics to monitor its performance in meeting its economic objective, which are discussed further below under Key Financial Measures.
Net income (loss), net income attributable to noncontrolling interests, preferred dividends, loss on redemption of preferred shares, net income (loss) attributable to PartnerRe Ltd. common shareholders and diluted net income (loss) per share for the years ended December 31, 2013, 2012 and 2011 were as follows (in millions of U.S. dollars, except per share data):
The Company’s Diluted Tangible Book Value per Share increased by 8.4% to $98.49 at December 31, 2013 from $90.86 at December 31, 2012 primarily due to net income attributable to PartnerRe Ltd. and the accretive impact of the share repurchases, which were partially offset by dividends on the common and preferred shares. The growth in Diluted Tangible Book Value per Share plus dividends was 11.2% during the year ended December 31, 2013. This growth was driven by net income attributable to PartnerRe Ltd., dividends on the common shares and the accretive impact of share repurchases, which were partially offset by realized and unrealized losses from the Company’s investment portfolio that were attributable to increases in risk-free rates.
The Non-life combined ratio decreased by 37.6 points, from 125.4% in 2011 to 87.8% in 2012. The decrease in the combined ratio in 2012 compared to 2011 primarily reflected a decrease in the impact of large
Property / Specialty Property: Aggregate reported losses in 2013 were lower than expected for North America business and were driven by loss activity related to large property events and attritional property losses from most underwriting years. Aggregate losses reported in 2013 in the Global (Non-U.S.) P&C and Global Specialty property lines were significantly lower than expected for most underwriting years. The Company reflected this experience by reducing its loss ratios for most underwriting years.
Under proportional treaties, which represented 76% of the Company’s total gross premiums written for the year ended December 31, 2013, 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.
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, 2013, approximately 55% 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.
Intangible assets represent the fair value adjustments related to unpaid losses and loss expenses and the fair values of renewal rights, customer relationships, U.S. licenses and fronting arrangements arising from the acquisitions of Paris Re and PartnerRe Health. Definite-lived intangible assets are amortized over their useful lives, generally ranging from eleven to thirteen years. The Company recognizes the amortization of all intangible assets in the Consolidated Statement of Operations. 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. 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.
The Company has also formed a subsidiary with other third party investors, Lorenz Re Ltd. (Lorenz Re), that is considered to be a VIE. The Company determined that it is the primary beneficiary as it has the power to direct and has more than an insignificant economic interest in the activities of Lorenz Re. Lorenz Re is consolidated by the Company and all inter-company balances and transactions are eliminated. Net income or loss and shareholders’ equity attributable to Lorenz Re’s third party investors are recorded in the Consolidated Financial Statements as noncontrolling interests (see Note 13).
The Company’s financial instruments measured at fair value include investments classified as trading securities, certain other invested assets and the segregated investment portfolio underlying the funds held - directly managed account (see Notes 4 and 5). At December 31, 2013 and 2012, 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):
(2) Settlements and sales of U.S. states, territories and municipalities, asset-backed securities, derivatives and annuities and residuals include sales of $223.7 million, $13.7 million, $1.2 million and $6.3 million, respectively.
inception of the contract or based upon a recognized index (e.g., LIBOR). Interest rates ranged from 1.8% to 4.3% for the year ended December 31, 2013 and from 2.0% to 5.0% for the years ended December 31, 2012 and 2011. See Note 5 for additional information on the funds held - directly managed account.
For the Global Specialty sub-segment, the Company reported net favorable loss development for prior accident years in 2013, 2012 and 2011. The net favorable loss development for prior accident years in 2013 was driven by all lines of business, predominantly the aviation/space, marine and specialty property lines. The net favorable loss development for prior accident years in 2012 was driven by most lines of business, predominantly the specialty property, aviation/space and marine lines, while the engineering line experienced adverse loss development for prior accident years of $6 million. The net favorable loss development for prior accident years in 2011 was driven by most lines of business, except for the energy and engineering lines, which experienced combined adverse loss development for prior accident years of $13 million. The net favorable loss development in each year was primarily due to favorable loss emergence.
The EEP permits the grant of up to 8.3 million shares, of which a total of 3.4 million shares can be issued as either RS, RSUs or PSUs and 4.9 million shares can be issued as share options or SSARs. If an award under the EEP is cancelled or forfeited without the delivery of the full number of shares underlying such award, only the net number of shares actually delivered to the participant will be counted against the EEP’s authorized shares. Under the EEP, the exercise price of the award will not be less than the fair value of the award at the time of grant. The fair value is defined in the EEP as the closing price reported on the grant date. RSU and PSU awards granted under the EEP generally cliff vest after three years of continuous service. Share options and SSARs vest ratably over three years of continuous service and have a ten year contractual term. Participants in the EEP are eligible to receive dividend equivalents, which the Company records as an expense, on RSUs and PSUs that are unvested. At December 31, 2013, 4.4 million shares, of which a total of 1.6 million shares can be issued as either RS, RSUs or PSUs and 2.8 million shares can be issued as share options or SSARs, remained available for issuance under this plan.
Prior to 2013, options and RSUs were awarded under the Directors Share Plan while in 2013, only RSUs were awarded. Prior to May 2012, options generally vested at the time of grant, were expensed immediately and had a ten year contractual term. From May 2012, options generally vest and are expensed ratably over three years and have a ten year contractual term. Prior to May 2010, RSUs generally vested at the time of grant with a delivery date restriction of one year and were expensed immediately. From May 2010, RSUs have a five year cliff vest with no delivery restrictions and are expensed over the vesting period. Prior to the RSU grant, directors have the ability to elect to receive their awards in the form of either 100% RSUs, or split, with 60% of the award being RSUs and 40% of the award being cash upon delivery.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PartnerRe Ltd. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.