The following discussion and analysis reflects the consolidated results of the Company and its subsidiaries for the years ended December 31, 2014, 2013 and 2012.
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 the risk assumption and management business 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. For further discussion of the Company’s Risk Management framework see Risk Management in Item 1 of Part I of this report.
The Company’s long-term objective is to manage a portfolio of diversified risks that will create total shareholder value. The Company measures its success in achieving its long-term objective by targeting a return, which is variable and can be adjusted by Management, in excess of a referenced risk-free rate over the reinsurance cycle. The return is calculated using compound annual growth in diluted tangible book value per common share and common share equivalents outstanding plus dividends per common share (growth in Diluted Tangible Book Value per Share plus dividends) as its prime measure of long-term financial performance and believes this measure aligns the Company’s stated long-term objective with the measure most investors use to evaluate total shareholder value creation. See below in Key Financial Measures for further discussion.
As described in more detail below, the Company's Non-life operations are facing a challenging and limited growth environment, which is driven by 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, relatively low loss experience and a prolonged period of low interest rates. While Management believes that the Company’s strong global franchise and geographical footprint position the Company well for the future, Management has also focused on various initiatives to further diversify the Company's business.
On January 25, 2015, the Company announced that it has signed the Amalgamation Agreement with AXIS. This transaction is expected to provide the Company with an opportunity to enter the primary insurance market, benefit from increased scale and enhanced market presence and to achieve substantial benefits related to capital efficiencies, expense savings and business synergies. The AXIS transaction is further described in Business in Item 1 of Part I of this report.
Among other initiatives, in 2013, Management announced the restructuring of its business support operations into a single integrated worldwide support platform and changes to the structure of certain of its Non-life operations, both of which provided greater operational efficiency. In 2012, the Company completed the acquisition of PartnerRe Health, a U.S. specialty accident and health reinsurance and insurance writer, to diversify into new lines of business and to access and benefit from opportunities relates to the reform of the medical insurance in the U.S.
As a result of the challenging business environment described above, during 2014 the Company returned approximately $551 million to its common shareholders through share repurchases and $134 million through common share dividends. As the Company looks to 2015 and beyond, despite the challenging environment, Management remains confident that with the recently announced merger, its strong global franchise, geographical footprint and technical underwriting skills the Company's operations will continue to provide strong results and remains focused on maintaining its strong relationships with clients.
In terms of the Company's Life portfolio, the active January 1 renewals only impact the short-term in-force premium in the mortality line, which is a relatively limited portion of the overall Life portfolio. For those treaties that actively renewed, pricing conditions and terms were modestly softer from the January 1, 2014 renewals. Management expects moderate continued growth in the Company’s Life portfolio in 2015 from new business initiatives, assuming constant foreign exchange rates.
Net income, net income attributable to noncontrolling interests, net income attributable to ParterRe Ltd., preferred dividends, loss on redemption of preferred shares, net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share for the years ended December 31, 2014, 2013 and 2012 were as follows (in millions of U.S. dollars, except per share data):
The increase in net income, net income attributable to PartnerRe Ltd., net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share in 2014 compared to 2013 was primarily due to:
an increase in income tax expense of $190 million, which was primarily related to the increase in pre-tax net realized and unrealized investment gains.
an increase in pre-tax net realized and unrealized investment losses of $655 million; and
a decrease in net investment income of $87 million and higher other expenses included in Corporate and Other of $68 million; partially offset by
a combined increase in the Non-life and Life underwriting result of $198 million; and
The following key factors affected the year over year comparison of the Company’s results for the year ended December 31, 2014, 2013 and 2012 and may continue to affect our results of operations and financial condition in the future.
The results for the years ended December 31, 2014, 2013 and 2012 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 U.S. $):
In 2014, U.S. and European risk-free interest rates decreased and worldwide equity markets improved, while the U.S. dollar ending exchange rate at December 31, 2014 strengthened against most major currencies compared to December 31, 2013. The net result of these movements was a net realized and unrealized gain on investments recorded in net income.
The combined impact of large catastrophic losses on the Company’s technical result, net realized and unrealized investment gains or losses, pre-tax net income, loss ratio, technical ratio and combined ratio by segment and sub-segment and the large catastrophic losses by event for the years ended December 31, 2013 and 2012 were as follows (in millions of U.S. dollars):
Large catastrophic losses are shown net of any reinsurance, reinstatement premiums and profit commissions.
During the years ended December 31, 2014 and 2013, the Company recorded within Other expenses a pre-tax restructuring charge of $11 million and $58 million, respectively. These restructuring charges were primarily related to the termination plans in 2013 and to certain real estate costs in 2014.
In addition to the Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Income, Management uses certain other key measures, some of which are non-GAAP financial measures within the meaning of Regulation G (see below), to evaluate its financial performance and the overall growth in value generated for the Company’s common shareholders.
While growth in Diluted Tangible Book Value per Share plus dividends is the Company’s prime financial measure, Management also uses other key financial measures to monitor performance. At December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 these were as follows:
Diluted tangible book value per common share and common share equivalents outstanding (Diluted Tangible Book Value per Share) is calculated using common shareholders’ equity attributable to PartnerRe Ltd. (total shareholders’ equity less noncontrolling interests and the aggregate liquidation value of preferred shares) less goodwill and intangible assets, net of tax, divided by the number of common shares and common share equivalents outstanding (assuming exercise of all stock-based awards and other dilutive securities). The presentation of Diluted Tangible Book Value per Share is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
Operating earnings or loss attributable to PartnerRe Ltd. common shareholders (operating earnings or loss) is calculated as net income or loss attributable to PartnerRe Ltd. common shareholders excluding net realized and unrealized gains or losses on investments, net of tax (except where the Company has made a strategic investment in an insurance or reinsurance related investee), net foreign exchange gains or losses, net of tax, loss on redemption of preferred shares, the interest in earnings or losses of equity method investments, net of tax (except where the Company has made a strategic investment in an insurance or reinsurance related investee and where the Company does not control the investee’s activities) and certain withholding taxes on inter-company dividends (included in other expenses), net of tax, and is calculated after preferred dividends. Operating earnings or loss per common share and common share equivalent outstanding (diluted operating earnings or loss per share) are calculated using operating earnings or loss for the period divided by the weighted average number of common shares and common share equivalents outstanding. The presentation of operating earnings or loss and diluted operating earnings or loss per share are non-GAAP financial measures within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and are reconciled to the most directly comparable GAAP financial measure below.
Operating return on beginning diluted book value per common share and common share equivalents outstanding (Operating ROE) is calculated using operating earnings or loss, as defined above, per diluted common share and common share equivalents outstanding, divided by diluted book value per common share and common share equivalents outstanding as of the beginning of the year, as defined above. The presentation of Operating ROE is a non-GAAP financial measure within the meaning of Regulation G (see Comment on Non-GAAP Measures below) and is reconciled to the most directly comparable GAAP financial measure below.
Diluted Tangible Book Value per Share at December 31, 2014 and 2013 and the calculation of the growth in Diluted Tangible Book Value per Share plus dividends for the year ended December 31, 2014 were as follows. As described above, this metric is a long-term performance measure, however, the below table shows the total shareholder value creation for the year ended December 31, 2014 in order for the shareholders to monitor performance.
The Company’s Diluted Tangible Book Value per Share increased by 16.5%, from $98.49 at December 31, 2013 to $114.76 at December 31, 2014, primarily due to net income attributable to PartnerRe Ltd. and the accretive impact of share repurchases, which
Diluted book value per common share and common share equivalents outstanding (Diluted Book Value per Share) is calculated using common shareholders’ equity attributable to PartnerRe Ltd. (total shareholders’ equity less noncontrolling interests and the aggregate liquidation value of preferred shares) divided by the number of common shares and common share equivalents outstanding (assuming exercise of all stock-based awards and other dilutive securities).
Operating earnings increased by $33 million, from $722 million in 2013 to $755 million in 2014. The increase in operating earnings was primarily due to:
Diluted operating earnings per share increased from $12.79 in 2013 to $14.76 in 2014, primarily due to the increase in operating earnings and the accretive impact of share repurchases.
Operating earnings increased by $58 million, from $664 million in 2012 to $722 million in 2013. The increase was primarily due to:
an improvement in the Non-life and Life and Health underwriting results, driven by a lower level of large catastrophic and large losses and a higher level of favorable prior year loss development, reduced by a higher level of mid-sized loss activity; partially offset by
a decline in net investment income driven by lower reinvestment rates; and
Operating ROE increased from 12.7% in 2013 to 13.5% in 2014. The increase in Operating ROE was due to higher operating earnings, driven by the reasons described above, partially offset by a higher diluted book value per share at January 1, 2014 compared to January 1, 2013. The factors contributing to increases or decreases in operating earnings are described further in Review of Net Income below.
Operating ROE increased modestly from 12.3% in 2012 to 12.7% in 2013. The increase in Operating ROE was primarily due to higher operating earnings in 2013 compared to 2012, as described above, and the accretive impact of share repurchases, which were partially offset by a higher beginning diluted book value per share at January 1, 2013 compared to January 1, 2012.
The presentation of Operating ROE is a non-GAAP financial measure within the meaning of Regulation G and should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP (see Comment on Non-GAAP Measures). The reconciliation of Operating ROE to the most directly comparable GAAP financial measure for the years ended December 31, 2014, 2013 and 2012 was as follows:
Since 2004, the Company has had underwriting profitability reflected in combined ratios of less than 100% for its Non-life segment in each year, except for 2005 and 2011. In 2005, when the industry recorded its worst year in history in terms of catastrophe losses in the U.S., with Hurricane Katrina being the largest insured event ever, the Company recorded a net underwriting loss and Non-life combined ratio of 116.3%. In 2011, when the industry incurred a high frequency of large losses related to the 2011 catastrophic events the Company recorded a net underwriting loss and Non-life combined ratio of 125.4%.
The Non-life combined ratio increased by 0.9 points, from 85.3% in 2013 to 86.2% in 2014. The increase in the combined ratio in 2014 compared to 2013 was mainly driven by a decrease in the current accident year technical result and a decrease in favorable prior year loss development. These decreases in the combined ratio were partially offset by the absence of large catastrophic losses in 2014 compared to losses related to the German Hailstorm, Alberta Floods and European Floods in 2013. The impact on the combined ratio of the catastrophic events for each year is analyzed above. Additional detail of the Non-life underwriting result is provided in the discussion of individual sub-segments in Results by Segment and Review of Net Income below.
The Non-life combined ratio decreased by 2.5 points, from 87.8% in 2012 to 85.3% in 2013. The decrease in the combined ratio in 2013 compared to 2012 was primarily due to a lower level of large catastrophic losses and large losses and a lower other expense ratio driven by an increased level of net premiums earned, which were partially offset by a higher level of mid-sized loss activity. The impact on the combined ratio of the catastrophic events for each year is analyzed above.
The Company’s Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following presents a discussion of those accounting policies and estimates that Management believes are the most critical to its operations and require the most
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 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 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.
Tail factors are defined as aggregate development factors after 10 years from the inception of an underwriting year.
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 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 2014, 2013 and 2012, the Company reviewed its estimate for prior year losses for the Non-life segment (defined below in Results by Segment) and, in light of developing data, adjusted its ultimate loss ratios for prior accident years. The net prior year favorable loss development for each sub-segment of the Company’s Non-life segment for the years ended December 31, 2014, 2013 and 2012 was as follows (in millions of U.S. dollars):
The net Non-life prior year favorable loss development for the years ended December 31, 2014, 2013 and 2012 was driven by the following factors (in millions of U.S. dollars):
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 for each reserving line during the year ended December 31, 2014 were as follows:
Aviation / Space: Aggregate losses reported in 2014 were significantly lower than the Company’s expectations. The Company reflected this experience by selecting lower loss ratios for underwriting years 2013 and prior.
Credit / Surety: Aggregate losses reported in 2014 were higher than expected for the Company’s Global (Non-U.S.) surety business mainly on underwriting years 2009 and prior, which led the Company to increase its loss ratios accordingly. This was partially offset by favorable activity in the Company’s Global (Non-U.S.) credit business and North America surety business. For the Company’s Global (Non-U.S.) credit business, loss development during 2014 which was significantly better than expected across several underwriting years but mainly from underwriting years 2011 and 2012. The Company reduced its loss ratios for these underwriting years to reflect the lower than expected loss emergence. Aggregate losses reported in 2014 were slightly lower than expected for North America Surety business, giving rise to a modest level of favorable development.
Energy Onshore: Aggregate losses reported in 2014 were lower than expected across most underwriting years. The Company reflected the favorable development by reducing its loss ratios for these underwriting years.
Marine / Energy Offshore: Aggregate losses reported in 2014 were significantly lower than expected across all underwriting years driven entirely by the Energy Offshore business. The Company reduced its loss ratios for these underwriting years to reflect the lower than expected loss emergence.
Non-U.S. Non Proportional: Aggregate losses reported in 2014 for the Global (Non-U.S.) P&C motor non-proportional line were lower than expected across all underwriting years but primarily for underwriting years 2009 and prior resulting in the Company reducing its loss ratios for these underwriting years.
North America: Aggregate losses reported in 2014 for the North America motor line were higher than expected primarily from underwriting years 2011 to 2013 resulting in the Company increasing its loss ratios for these underwriting years.
Property / Specialty Property: Aggregate reported losses in 2014 were significantly lower than expected for Global (Non-U.S.) P&C, Global Specialty and North America property lines business and were driven by loss activity related to large property events and attritional property losses primarily from underwriting years 2012 and 2013. The Company reflected this experience by reducing its loss ratios for these underwriting years.
The net loss reserves represent the Company’s best estimate of future losses and loss expense amounts based on the information available at December 31, 2014. 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 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.
While the Company remains cautious regarding the estimated ultimate losses from the Japan Earthquake, as time has passed the estimates received from the Company’s cedants have stabilized, paid losses have increased and the remaining complexities have been reduced.
In addition to the sum of the point estimates originally recorded for each of the New Zealand Earthquakes and Japan Earthquake, at December 31, 2011 the Company recorded additional gross reserves of $50 million (net reserves of $48 million after the impact of retrocession) specifically related to these events within its Catastrophe sub-segment. The additional gross reserves recorded were in consideration of the number of events, the complexity of certain events and the continuing uncertainties in estimating the ultimate losses for these events in the aggregate. The Company continues to evaluate the additional gross reserves that were recorded as part of its periodic reserving process and changes to the amounts recorded may either result in: (i) the reallocation of some or all of the additional reserves to one or more of the these events; or (ii) the release of some or all of the additional reserves to net income in future periods; or (iii) an increase in additional reserves recorded.
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 Consolidated Financial Statements in Item 8 of Part II of this report).
the Longevity section above. In addition to the assumptions discussed above, persistency and critical illness assumptions are considered in the reserving process for mortality lines.
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, 2014 was as follows (in millions of U.S. dollars):
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. Approximately 46%, 48% and 43% of the Company’s reported net premiums written for the years ended December 31, 2014, 2013 and 2012, respectively, were based upon estimates.
As an example of the sensitivity of the Company’s Non-life net premiums written and acquisition costs to changes in estimates, the effect of different assumption selections on pre-tax net income based on amounts recorded for the year ended December 31, 2014 was as follows (in millions of U.S. dollars):
The Company has estimated the future tax effects attributed to temporary differences and has a deferred tax asset at December 31, 2014 of $157 million, after a valuation allowance of $68 million. The most significant component of the deferred tax asset (after valuation allowance) relates to loss reserve discounting for tax purposes.
As an example of the sensitivity of the Company’s unrecognized tax benefit related to uncertain tax positions, deferred tax asset and net deferred tax liability, the impact of different assumption selections on the Company’s net income and the corresponding impact on net assets based on amounts recorded at December 31, 2014 was as follows (in millions of U.S. dollars):
In addition to other invested assets included in the table above for Level 3 of $116 million and the combined fair value of Level 1 and Level 2 derivative liabilities of $4 million, the Company’s other invested assets also include various investments which are accounted for using the cost method of accounting or equity method of accounting of $187 million at December 31, 2014. The Company does not measure its investments that are accounted for using any of these methods at fair value. For investments that are accounted for using the cost method of accounting or equity method of accounting, a 10% decline in the carrying value of these investments at December 31, 2014 would result in a $19 million pre-tax charge to net income or loss and a corresponding reduction in investments and total assets.
The Company utilizes derivatives for a variety of purposes. The Company’s derivatives are carried at fair value, which is based on quoted market prices or internal valuation models where quoted market prices are not available. Most of the Company’s derivatives are fair valued using significant other observable inputs (fair value of $5 million net liability position at December 31, 2014), referred to as Level 2 assets, and included foreign exchange forward contracts, interest rate swaps, foreign currency options and to-be-announced mortgage-backed securities (TBAs). The Company’s derivatives that are fair valued using quoted prices in active markets, referred to as Level 1 assets, had fair value of less than $1 million at December 31, 2014, and included treasury and equity futures. In addition, the Company has certain total return swaps and insurance-linked securities that are fair valued using significant other unobservable inputs, and are included in the Level 3 other invested assets. The total return swaps and insurance-linked securities that are classified as Level 3 were in a net liability position with a combined fair value of $2 million at December 31, 2014, based on a combined notional exposure of $188 million.
In aggregate, the Company is not significantly exposed to changes in the valuation of its total return and interest rate swap portfolio due to changes in the general level of interest rates. At December 31, 2014, the Company estimated that a 100 basis point increase or decrease in all risk spread assumptions used in the Company’s internal valuation models would result in a $3 million decrease or increase, respectively, in the fair value of its total return and interest rate swap portfolio categorized as Level 3.
The Company is exposed to changes in the expected amount of future cash flows of the reference assets in its total return swap portfolio. The Company’s total return swap portfolio primarily references certain bonds issued by U.S. municipalities. At December 31, 2014, the notional value of the total return swap portfolio categorized as Level 3 was $43 million and the fair value of the assets underlying the total return swap portfolio categorized as Level 3 was $41 million. The Company estimated that each 1% increase or decrease in the amount of all expected future cash flows related to the reference assets would result in a $2 million increase or decrease, respectively, in the fair value of its total return swap portfolio at December 31, 2014.
swaps would result in a $4 million decrease in the fair value of its longevity swap portfolio. The weather derivatives categorized as Level 3 are exposed to wind events, and any change in the assumptions used in the Company’s internal models would have an insignificant impact on the fair value of weather derivatives at December 31, 2014.
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 acquisitions. Definite-lived intangible assets are amortized over their useful lives. 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, 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 $160 million at December 31, 2014.
the U.S. dollar average exchange rate was weaker against most currencies, except the Japanese yen and Canadian dollar, in 2014 compared to 2013 and was stronger against most currencies, except the euro and Swiss franc, in 2013 compared to 2012; and
the U.S. dollar ending exchange rate strengthened against most currencies at December 31, 2014 compared to December 31, 2013.
Management analyzes the Company’s net income or loss in three parts: underwriting result, investment result and other components of net income or loss. Underwriting result consists of net premiums earned and other income or loss less losses and loss expenses and life policy benefits, acquisition costs and other expenses. 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
The components of net income for the years ended December 31, 2014, 2013 and 2012 were as follows (in millions of U.S. dollars, except per share data):
The components of the underwriting result and combined ratio for the Non-life segment for the years ended December 31, 2014, 2013 and 2012 were as follows (in millions of U.S. dollars):
The underwriting result for the Non-life segment decreased by $16 million (corresponding to an increase of 0.9 points in the combined ratio), from $626 million (85.3 points on the combined ratio) in 2013 to $610 million (86.2 points on the combined ratio) in 2014 primarily due to:
The current accident year technical result, adjusted for large catastrophic losses-a decrease in the technical result (and corresponding increase in the technical ratio) primarily due to the North America, Global (Non-U.S.) P&C and Catastrophe sub-segments. These decreases were driven by higher acquisition cost ratio in the North America and Global (Non-U.S.) P&C sub-segments and a decrease in net premiums earned, which in the absence of catastrophic losses directly impacts the technical result, in the Catastrophe sub-segment.
Net favorable prior year loss development-a decrease of $61 million from $721 million (17.0 points on the technical ratio) in 2013 to $660 million (15.1 points on the technical ratio) in 2014. The decrease in net favorable prior year loss development was due to decreases in the Catastrophe and Global (Non-U.S.) P&C sub-segments, which were partially offset by increases in the Global Specialty and North America sub-segments. The components of the net favorable prior year loss development are described in more detail in the discussion of individual sub-segments in Results by Segment below.
These factors driving the decrease in the Non-life underwriting result and the corresponding increase in the combined ratio in 2014 compared to 2013 were partially offset by:
Net investment income decreased by $4 million, from $484 million in 2013 to $480 million in 2014. The decrease was primarily due to lower reinvestment rates and lower net investment income from the funds held - directly managed account, related to the lower average balance. These decreases were partially offset by higher dividend income, the impact of the increase in the U.S. Consumer Price Index on the Company's Treasury Inflation-Protected Securities portfolio and certain other favorable non-recurring items. See Corporate and Other - Net Investment Income below for more details.
On January 25, 2015, the Company entered into an Agreement and Plan of Amalgamation (the Amalgamation Agreement) with Axis Capital Holdings Limited, a Bermuda exempted company (AXIS), pursuant to which the Company will amalgamate with AXIS (the Amalgamation) and the two companies will continue as a single Bermuda exempted company (Amalgamated Company). The Amalgamation has been approved by the Company's Board of Directors (Board) and is subject to shareholder and regulatory approvals with respect to the Company and AXIS. See Note 23 for further details.
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.
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.
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 and losses in the Consolidated Statements of Operations.
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 acquisitions. Definite-lived intangible assets are amortized over their useful lives. The Company recognizes the amortization of all definite-lived intangible assets 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. 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.
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 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 and losses.
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 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 and 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 and 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 is involved in the normal course of business with variable interest entities (VIEs) as a passive investor in certain limited partnerships, fixed maturity investments and asset-backed securities, that are issued by third party VIEs. The Company performs a qualitative assessment at the date when it becomes initially involved in the VIE followed by ongoing reassessments related to its involvement in VIEs. The Company’s maximum exposure to loss with respect to these investments is limited to the amounts invested in and advanced to the VIEs at December 31, 2014 that are reported within fixed maturities and other invested assets in the Company’s Consolidated Balance Sheets and any unfunded commitments.
In June 2014, the FASB issued updated guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this guidance to have a significant impact on its Consolidated Financial Statements or disclosures.
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.
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, 2014 and 2013, the fair values of financial instrument assets recorded in the Consolidated Balance Sheets not described above, approximate their carrying values.
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, 2014 and 2013, were as follows (in thousands of U.S. dollars):
There were no sales for the year ended December 31, 2014.
The significant unobservable inputs used in the valuation of financial instruments measured at fair value using Level 3 inputs at December 31, 2014 and 2013 were as follows (fair value in thousands of U.S. dollars):
Changes in the fair value of the Company’s financial instruments subject to the fair value option during the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands of U.S. dollars):
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.
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
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, credit default swaps, interest rate swaps and TBAs are generally classified as Level 2 within the fair value hierarchy and are priced by independent pricing services.
At December 31, 2014 and 2013, the fair values of financial instrument liabilities recorded in the Consolidated Balance Sheets approximate their carrying values, with the exception of the debt related to senior notes (Senior Notes) and the debt related to CENts.
the fair value of the CENts was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $63 million from PartnerRe Finance II Inc. at December 31, 2014 and 2013.
The carrying values and fair values of the Senior Notes and CENts at December 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):
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, 2014 and 2013.
Cost is amortized cost for fixed maturities and short-term investments and cost for equity securities.
The distribution of fixed maturities and short-term investments at December 31, 2014, by contractual maturity date, is shown below (in thousands of U.S. dollars). 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.
The components of net investment income for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands of U.S. dollars):
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 2.1% to 5.4% for the year ended December 31, 2014, from 1.8% to 4.3% for the year ended December 31, 2013 and from 2.0% to 5.0% for the year ended December 31, 2012. See Note 5 for additional information on the funds held - directly managed account.
At December 31, 2014 and 2013, approximately $172.3 million and $200.6 million, respectively, of cash and cash equivalents and approximately $2,455.6 million and $2,477.8 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.
The Company has agreed, subject to certain exceptions, not to dispose of or hedge any of the common shares in an investment with a fair value of $120 million, which is included in equities. As of February 19, 2015, this restriction no longer exists.
In addition to the investments underlying the funds held - directly managed account in the above table at December 31, 2014 and 2013, were cash and cash equivalents of $42.3 million and $84.8 million, respectively, other assets and liabilities of $88.2 million and $132.9 million, respectively, and accrued investment income of $5.7 million and $6.7 million, respectively. The other assets and liabilities represent working capital assets held by Colisée Re related to the underlying business.
The distribution of fixed maturities underlying the funds held - directly managed account at December 31, 2014, by contractual maturity date, is shown below (in thousands of U.S. dollars). 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.
The components of the net realized and unrealized investment gains (losses) on the funds held - directly managed account for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands of U.S. dollars):
The components of net investment income underlying the funds held - directly managed account for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands of U.S. dollars):
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.
The gross and net fair values of derivatives that are subject to offsetting in the Consolidated Balance Sheets at December 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
Definite-lived intangible assets are amortized over a period ranging from eleven to thirteen years. The gross carrying value and accumulated amortization of intangible assets by type that are yet to be fully amortized at December 31, 2014 and 2013 is as follows (in thousands of U.S. dollars):
At December 31, 2014 and 2013, the allocation of the goodwill to the Company’s segments and sub-segments was as follows (in thousands of U.S. dollars):
The reconciliation of the beginning and ending gross and net liability for unpaid losses and loss expenses, excluding policy benefits for life and annuity contracts, for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands of U.S. dollars):
For the Company’s North America sub-segment, the Company reported net favorable loss development for prior accident years in 2014, 2013 and 2012. The net favorable loss development for prior accident years in 2014, 2013 and 2012 was driven by most lines of business, with the casualty line being the most pronounced. The net favorable loss development in each year was primarily due to favorable loss emergence.
For the Global (Non-U.S.) P&C sub-segment, the Company reported net favorable loss development for prior accident years in 2014, 2013 and 2012. The net favorable loss development for prior accident years in 2014, 2013 and 2012 was driven by all lines of business, with the property line being the most pronounced. The net favorable loss development in each year was primarily due to favorable loss emergence.
For the Global Specialty sub-segment, the Company reported net favorable loss development for prior accident years in 2014, 2013 and 2012. The net favorable loss development for prior accident years in 2014 was driven by most lines of business, predominantly the marine, specialty property and aviation/space lines, while the credit/surety and engineering lines experienced combined adverse loss development for prior accident years of $26 million. 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. The net favorable loss development in each year was primarily due to favorable loss emergence.
Colisée Re, which is included within the Funds held - directly managed account in the Consolidated Balance Sheets at December 31, 2014 and 2013, respectively. Accordingly, the reconciliation of the beginning and ending gross and net liability for unpaid losses and loss expenses for the years ended December 31, 2014, 2013 and 2012 includes the change in the Reserve Agreement. At December 31, 2014 and 2013, the Company’s net liability for unpaid losses and loss expenses includes $575 million and $727 million, respectively, of guaranteed reserves, with the decrease from December 31, 2013 to December 31, 2014 being primarily related to the commutation of a portion of the Reserve Agreement with Colisée Re, 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.
Net premiums written, net premiums earned and losses and loss expenses and life policy benefits are reported net of reinsurance in the Company’s Consolidated Statements of Operations. Assumed, ceded and net amounts for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands of U.S. dollars):
For each of the years ended December 31, 2014, 2013 and 2012, the Company incurred interest expense and paid interest of $17.2 million in relation to the 2008 Senior Notes issued by PartnerRe Finance A.
On March 13, 2009, PartnerRe Finance II, under the terms of a tender offer, paid holders $500 per $1,000 principal amount of CENts tendered, and purchased approximately 75% of the issue, or $186.6 million, for $93.3 million. Contemporaneously, under the terms of a cross receipt agreement, PartnerRe U.S. Holdings paid PartnerRe Finance II consideration of $93.3 million for the extinguishment of $186.6 million of the principal amount of PartnerRe U.S. Holdings’ 6.440% Fixed-to-Floating Rate promissory note due December 1, 2066. All other terms and conditions of the remaining CENts and promissory note remain unchanged. A pre-tax gain of $88.4 million, net of deferred issuance costs and fees, was realized on the foregoing transactions during the year ended December 31, 2009. At December 31, 2014 and 2013, the aggregate principal amount of the CENts and promissory note outstanding was $63.4 million and $71.0 million, respectively.
For each of the years ended December 31, 2014, 2013 and 2012, the Company incurred interest expense and paid interest of $4.6 million in relation to the CENts.
At December 31, 2014 and 2013, the total authorized shares of the Company were 200 million shares, par value $1.00 per share, as follows (in millions of shares):
During 2012, the Company repurchased, under its authorized share repurchase program, 7.1 million of its common shares at a total cost of $532.9 million, representing an average cost of $75.00 per share.
On March 18, 2013, the Company redeemed the Series C preferred shares for the aggregate liquidation value of $290 million plus accrued and unpaid dividends. In connection with the redemption, the Company recognized a loss of $9.1 million related to the original issuance costs of the Series C preferred shares and calculated as a difference between the redemption price and the consideration received after underwriting discounts and commissions. The loss was recognized in determining the net income attributable to PartnerRe Ltd. common shareholders.
The Company may redeem each of the Series D, E and F preferred shares at $25.00 per share plus accrued and unpaid dividends without interest as follows: (i) the Series D preferred shares can be redeemed at the Company’s option at any time or in part from time to time; (ii) the Series E preferred shares can be redeemed at the Company’s option on or after June 1, 2016 or at any time upon certain changes in tax law and (iii) the Series F preferred shares can be redeemed at the Company’s option 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. Dividends on the Series F preferred shares are non-cumulative and are payable quarterly.
In the event of liquidation of the Company, each of the Series D, E and F preferred shares rank on parity with each of the other series of preferred shares and would rank senior to the common shares. The holders of the Series D and E preferred shares would receive a distribution of $25.00 per share, or the aggregate liquidation value, plus accrued but unpaid dividends, if any. The holders of the Series F would receive a distribution of $25.00 per share, or the aggregate liquidation value, plus declared and unpaid dividends, if any.
Within Lorenz Re, distinct segregated accounts are formed, and capitalized, in order to enter into reinsurance agreements with the Company on a fully collateralized basis. In 2013, Lorenz Re issued non-voting redeemable preferred share capital on behalf of two segregated accounts which are redeemable at the option of the Company and are expected to be redeemed following the commutation of the portfolio back to the Company on or before June 1, 2016.
The assets of Lorenz Re can only be used to settle the liabilities of Lorenz Re and there is no recourse to the Company for any liabilities of Lorenz Re.
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 and PartnerRe U.S. (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. At December 31, 2014, there were no 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, 2014, 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, 2014, the maximum dividend that PartnerRe Bermuda could pay without prior regulatory approval was approximately $1,080 million.
PartnerRe Europe 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 Required Solvency Margin (RSM). The RSM is calculated with reference to Solvency I regulations. The maximum dividend is limited to “profits available for distribution”, which consist of accumulated realized profits less accumulated realized losses. At December 31, 2014, the maximum dividend that PartnerRe Europe could pay without prior regulatory approval was approximately $533 million.
The statutory financial statements and returns of the Company’s reinsurance subsidiaries at, and for the year ended, December 31, 2014 are due to be submitted to the relevant regulatory authorities later in 2015, 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.
Income tax expense for the years ended December 31, 2014, 2013 and 2012 was as follows (in thousands of U.S. dollars):
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, 2014 and 2013 were as follows (in thousands of U.S. dollars):
The components of net tax assets and liabilities at December 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):
For the years ended December 31, 2014, 2013 and 2012, 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.
The activity related to the Company’s share options for the year ended December 31, 2014 was as follows:
The weighted average remaining contractual term and the aggregate intrinsic value of share options outstanding, exercisable, vested and expected to vest at December 31, 2014, was 4.7 years and $17.5 million, respectively.
The RSUs that vested during the years ended December 31, 2014, 2013 and 2012 had a fair value of $20.6 million, $22.8 million and $5.5 million, respectively.
The total unrecognized share-based compensation expense related to unvested RSUs and PSUs was approximately $32.7 million at December 31, 2014, which is expected to be recognized over a weighted-average period of 1.8 years.
During the years ended December 31, 2014, 2013 and 2012, the Company issued 153,797 SSARs, 125,561 SSARs and 356,900 SSARs with a weighted average grant date fair value of $14.62, $11.25 and $7.34, respectively.
The total unrecognized share-based compensation expense related to unvested SSARs was approximately $2.0 million at December 31, 2014, which is expected to be recognized over a weighted-average period of 1.7 years.
The Company incurred expenses for these defined contribution arrangements of $15.9 million, $14.5 million and $15.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2014 and 2013, 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, 2014 and 2013 were $25.4 million (net of $6.8 million of taxes) and $12.9 million (net of $3.4 million of taxes), respectively.
The net periodic benefit cost for the years ended December 31, 2014, 2013 and 2012 was $7.3 million, $10.7 million and $8.3 million, respectively.
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, 2014 and 2013, 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 at any point in time, in any one bank.
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.
Rent expense for the years ended December 31, 2014, 2013 and 2012 was $33.6 million, $33.0 million and $36.3 million, respectively, excluding any restructuring charges related to real estate.
In April 2013, the Company announced the restructuring of its business support operations into a single integrated worldwide support platform and changes to the structure of its Global Non-life Operations. The restructuring included involuntary and voluntary employee termination plans in certain jurisdictions (collectively, termination plans) and certain real estate costs. Employees affected by the termination plans had varying leaving dates, with the majority leaving by December 31, 2014.
During the year ended December 31, 2014 and 2013, the Company recorded a pre-tax charge of $11 million and $58 million, respectively, related to the costs of the restructuring, which was primarily related to the termination plans and certain real estate costs, within other expenses. The continuing salary and other employment benefit costs related to the affected employees will be expensed as the employee remains with the Company and provides service.
The Company has entered into strategic investments with unfunded capital commitments. In the next five years, the Company expects to fund capital commitments totaling $132 million with $49 million, $39 million, $34 million, $7 million and $3 million to be paid during 2015, 2016, 2017, 2018 and 2019, respectively.
At December 31, 2014, 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.
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 on November 14, 2015.
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, 2014 is a $300 million secured credit facility, which matures on December 31, 2018, and a $140 million secured credit facility, which matures on December 31, 2017. At December 31, 2014, no conditions of default existed under these facilities.
In the normal course of its underwriting activities, the Company and certain subsidiaries entered into reinsurance contracts with ING Group N.V. (a company in which a board member of the Company was a supervisory director until July 2014). The activity included in the Consolidated Statements of Operations related to ING Group N.V. for the years ended December 31, 2014, 2013 and 2012 includes net premiums earned of $1.9 million, $2.6 million and $3.4 million, respectively, and losses and loss expenses and life policy benefits of $0.6 million, $1.3 million and $0.8 million, respectively. Included in the Consolidated Balance Sheets at December 31, 2014 and 2013 were unpaid losses and loss expenses of $10.0 million and $12.9 million, respectively.
Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.
Other expense ratio is obtained by dividing other expenses by net premiums earned.
The following table summarizes the percentage of gross premiums written through these two brokers by segment and sub-segment for the years ended December 31, 2014, 2013 and 2012:
On January 25, 2015, the Company entered into the Amalgamation Agreement with AXIS, pursuant to which the Company will amalgamate with AXIS and the two companies will continue as a single Bermuda exempted company (Amalgamated Company). The transaction, which is structured as a merger of equals, has been unanimously approved by the Boards of Directors of both companies. Under the terms of the Amalgamation Agreement, the Company’s shareholders will receive 2.18 shares of the Amalgamated Company’s common shares for each share of the Company’s common shares they own and AXIS’ shareholders will receive one share of the Amalgamated Company’s common shares for each share of AXIS’ common shares they own. Upon completion of the transaction, shareholders of the Company and shareholders of AXIS will own approximately 51.6 percent and 48.4 percent of the Amalgamated Company, respectively. The Amalgamated Company's headquarters will be located in Bermuda. The transaction is expected to close in the second half of 2015, subject to approval by the shareholders of both companies, regulatory clearance and customary closing conditions. Both companies will continue to operate as two independent entities until all such approvals are obtained.
In connection with the Amalgamation, Costas Miranthis stepped down as the Chief Executive Officer (CEO) of the Company and as a member of the Company's Board effective January 25, 2015. At that time, David Zwiener, a member of the Company's Board, assumed the position of interim CEO of the Company until completion of the Amalgamation. As a result of the CEO
stepping down, the Company expects to recognize an additional pre-tax charge of approximately $22 million during the three months ending March 31, 2015.
Under the terms of the Amalgamation Agreement, the Company suspended its share repurchase program until completion of the Amalgamation.
Following the announcement of the Amalgamation, Moody's affirmed the Company's rating with a stable outlook. Standard & Poor's (S&P), A.M. Best and Fitch placed the Company’s rating on credit watch negative, under review with negative implications and ratings watch negative, respectively. All three agencies cited concerns over the transaction, including the risks associated with the execution and integration, along with management retention risk in light of the complexity and scale of the Amalgamation. The Company is in dialogue with each rating agency to address their rating concerns. The status of any further changes to ratings or outlooks will depend on various factors, including the timing of the closing, if and when it occurs, and success of the integration.
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, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.