The following discussion and analysis reflects the consolidated results of the Company and its subsidiaries for the years ended December 31, 2015, 2014 and 2013.
On August 2, 2015, after subsequent negotiations with EXOR, the Company entered into the Merger Agreement. Pursuant to the terms of the Merger Agreement, each PartnerRe common share issued and outstanding immediately prior to the effective time of the Merger shall automatically be canceled and converted into the right to receive (i) $137.50 in cash per share and (ii) be entitled to receive a one-time special pre-closing cash dividend in the amount of $3.00 per common share.
As such, following the closing, EXOR will pay a cash payment of approximately $42.7 million in aggregate to the holders of record of the Company’s preferred shares as at the effective time of the Merger and the Company will use commercially reasonable efforts to launch an exchange offer after the closing of the Merger, referred to as the Alternate Exchange Offer in the Merger Agreement, whereby participating preferred shareholders would receive newly issued preferred shares reflecting, subject to certain exceptions contained in the existing preferred shares, an extended call date of the fifth anniversary of the date of issuance and a restriction on payment of dividends on common shares to an amount not exceeding 67% of net income until December 31, 2020. The terms of the newly issued preferred shares would be otherwise identical in all material respects to the Company’s applicable existing preferred shares.
In connection with the execution of the Merger Agreement with EXOR, the Company and AXIS terminated the Amalgamation Agreement. On August 3, 2015, the Company paid the AXIS Termination Fee.
On November 19, 2015, the Merger with EXOR was approved by the Company's shareholders and the consummation of the Merger is pending certain regulatory approvals and other customary closing conditions. In addition, the BOD declared the special dividend, which is conditional and contingent upon the issuance of the certificate of merger by the Bermuda Registrar of Companies. The parties expect to complete the Merger in the first quarter of 2016, although there can be no assurances that the parties will be able to do so.
As described in more detail below, 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, 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.
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 related to the reform of the medical insurance in the U.S.
During 2015, the Company returned to its common shareholders approximately $133 million through common share dividends and $59 million through share repurchases. Following the announcement of the Amalgamation Agreement on January 25, 2015, the Company suspended its repurchase activities and the share repurchase program remains suspended under the terms of the Merger Agreement with EXOR.
The following discussion provides an overview of the Company’s business and trends and commentary regarding the outlook for 2016 in each business.
In its reinsurance portfolio, the Company writes all lines of business in virtually all markets worldwide. In addition, the Company provides certain specialty insurance lines of business. The Company differentiates itself through its risk management strategy, its financial strength and its strong global franchise. 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, its execution capabilities and its local presence in most major markets, the Company is able to achieve a more stable return over the reinsurance cycle, respond quickly to market needs, and capitalize on business opportunities virtually anywhere in the world.
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
During the January 1, 2016 renewals, the Company experienced a decrease of approximately 5% in renewable Non-life treaty business, on a constant foreign exchange basis. The decrease in renewable premium volume was driven by all Non-life sub-segments and reflects a challenging renewal season, with further erosion of prices and terms as a result of excess capital and benign loss activity and limited new opportunities. All of these factors continue to provide a challenge to writing business that meets our profitability requirements. Despite these persistent challenging market conditions, the Company believes that its strong global franchise and geographic footprint, broad yet highly technical capabilities over many lines of business, resulted in the renewal of a high quality portfolio, in some cases at superior market terms, and finding additional pockets of attractive new business.
At the January 1, 2016 renewals, the expected premium volume, at constant foreign exchange rates, decreased compared to the prior year renewal as a result of increased competition across all product lines. Management expects continued market pressure and further modest decreases in the premium volume in 2016.
For the Company’s investment risks, which include both public and private market investments, diversification of risk is critical to achieving the risk and return objectives of the Company. The Company’s investment policy distinguishes between liquid,
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 (see the discussion of liability funds and capital funds in Financial Condition, Liquidity and Capital Resources). 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 near future, subject to limits and guidelines. Similarly, the Company reduces its exposure to risk asset classes where returns are deemed 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 have experienced volatile market conditions since the middle of 2007. The market conditions remained volatile in 2015, primarily due to increases in U.S. interest rates, the widening of credit spreads and decreases in worldwide equity markets. Assuming constant foreign exchange rates, Management expects net investment income to continue to decrease in 2016 compared to 2015 primarily due to lower reinvestment rates. Management expects this decrease to be partially offset by expected positive cash flow from operations (including net investment income).
The Company measures its performance in several ways. Among the performance measures accepted under U.S. GAAP is diluted net income or loss per share, a measure that focuses on the return provided to the Company’s common shareholders. Diluted net income or loss per share is obtained by dividing net income or loss attributable to PartnerRe Ltd. common shareholders by the weighted average number of common shares and common share equivalents outstanding. Net income or loss attributable to PartnerRe Ltd. common shareholders is defined as net income or loss attributable to PartnerRe Ltd. less preferred dividends and loss on redemption of preferred shares. The Company's net income, net income attributable to PartnerRe Ltd., net income attributable to PartnerRe Ltd. common shareholders and diluted net income per share are discussed below in Review of Net Income.
The Company also utilizes certain non-GAAP measures to assess performance (see the discussion of these non-GAAP measures and the reconciliation to the most directly comparable GAAP measures in Key Financial Measures below).
The following key factors affected the year over year comparison of the Company’s results for the year ended December 31, 2015, 2014 and 2013 and may continue to affect our results of operations and financial condition in the future.
During the year ended December 31, 2015, the Company also recorded $63 million, pre-tax, of other transaction costs associated with the Amalgamation Agreement and Merger Agreement (Transaction Costs) within Other expenses primarily related to professional fees and severance costs.
On April 17, 2015, PartnerRe U.S. Corporation (PRUS), a subsidiary of the Company, agreed a negotiated earn-out consideration to be paid to the former shareholders of Presidio Reinsurance Group, Inc. (Presidio) in the amount of $29 million pursuant to an earn-out agreement (Earn-out Agreement) dated December 31, 2012. The Company previously accrued $4 million in connection with the Earn-out Agreement through December 31, 2014, and the remaining $25 million, pre-tax, was recorded in Other expenses during the year ended December 31, 2015.
The results for the years ended December 31, 2015, 2014 and 2013 were significantly impacted by the volatility in the capital markets with the Company reporting net realized and unrealized (losses) gains on investments, pre-tax, in net income as follows (in millions of U.S. dollars):
Large losses of $59 million related to the Tianjin Explosion, net of any reinsurance.
During the year ended December 31, 2015, the U.S. dollar strengthened significantly against other currencies. The strengthening of the U.S. dollar had a significant impact on certain individual line items of the Company's Consolidated Financial Statements, primarily on the value of the investments, unpaid losses and loss expenses and policy benefits for life and annuity contracts, the currency translation account within accumulated other comprehensive loss, gross and net premiums written and earned and net foreign exchange losses. 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.
The restructuring included involuntary and voluntary employee termination plans in certain jurisdictions (collectively, termination plans) and certain real estate related costs. 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.
an increase in pre-tax net realized and unrealized investment losses of $669 million, as described in Volatility in Capital Markets above;
an increase in net foreign exchange losses of $27 million, primarily due to the impact of the strengthening of the U.S. dollar on certain unhedged non-U.S. denominated investment portfolios; and
a decrease in income tax expense of $159 million, which was primarily related to the increase in net realized and unrealized investment losses.
For diluted net income per share specifically, the increase was also due to the accretive impact of a reduction in the diluted number of common shares and common share equivalents outstanding as a result of share repurchases.
Given the Company’s profitability in any particular quarterly or annual period can be significantly affected by the level of large catastrophic losses, Management assesses this long-term objective over the reinsurance cycle as the Company’s performance during any particular quarterly or annual period is not necessarily indicative of its performance over the longer-term reinsurance cycle.
Growth in diluted tangible book value per common share and common share equivalents outstanding plus dividends (growth in Diluted Tangible Book Value per Share plus dividends) is calculated using Diluted Tangible Book Value per Share plus dividends per common share divided by Diluted Tangible Book Value per Share at the beginning of the year. The presentation of growth in Diluted Tangible Book Value per Share plus dividends 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.
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.
Over the past five years, since December 31, 2010, the Company has generated a compound annual growth in Diluted Tangible Book Value per Share plus dividends in excess of 7%. Over the past ten years, since December 31, 2005, the Company has generated a compound annual growth in Diluted Tangible Book Value per Share plus dividends in excess of 13%.
Operating earnings decreased by $97 million, from $755 million in 2014 to $658 million in 2015. The decrease in operating earnings was primarily due to the Transaction Costs and the Presidio Earn-out Agreement of $88 million, as described above.
Diluted operating earnings per share decreased from $14.76 in 2014 to $13.45 in 2015.The decrease was primarily due to the decrease in operating earnings, partially offset by a lower weighted average number of shares outstanding in 2015 compared to 2014.
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 the restructuring charge recorded in 2013 and a decrease in operating tax expense, primarily driven by a higher distribution of the Company's pre-tax net income recorded in non-taxable jurisdictions in 2014 compared to 2013. These increases were partially offset by a decrease in the Non-life underwriting result. 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.
Diluted operating earnings per share increased from $12.79 in 2013 to $14.76 in 2014. The increase was primarily due to the increase in operating earnings and the accretive impact of share repurchases.
The other lesser factors contributing to the increases or decreases in operating earnings and diluted operating earnings per share in 2015 compared to 2014 and in 2014 compared to 2013 are further described in Review of Net Income below.
Operating earnings or loss attributable to PartnerRe Ltd. common shareholders and diluted operating earnings or loss per share are non-GAAP financial measures 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 earnings and diluted operating earnings per share to the most directly comparable GAAP financial measure for the years ended December 31, 2015, 2014 and 2013 was as follows (in millions of U.S. dollars):
Operating ROE decreased from 13.5% in 2014 to 10.7% in 2015. The decrease in Operating ROE was due to a higher beginning diluted book value per share at January 1, 2015 compared to January 1, 2014 and lower diluted operating earnings per share, as described above.
The average Operating ROE for the last five years and ten years was 7.8% and 13.1%, respectively. Both the five-year and the ten-year averages primarily reflect some years that were impacted by significant catastrophic losses and other years that were not impacted by catastrophes. Due to the volatility related to the level of catastrophic losses incurred, Management believes that it is more appropriate to measure performance based on an average Operating ROE target over the reinsurance cycle rather than focusing on the results for single periods.
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 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 Consolidated Financial Statements, including Note 2 - Significant Accounting Policies, for a full understanding of the Company’s accounting policies. The sensitivity estimates that follow are based on outcomes that the Company considers reasonably likely to occur.
The principal reserving methods used for the major components of each reserving line are as follows:
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, 2015 was as follows:
The net Non-life prior year favorable loss development for the years ended December 31, 2015, 2014 and 2013 was driven by the following factors (in millions of U.S. dollars):
Net prior year loss development due to all other factors includes, but is not limited to, loss experience, changes in assumptions and changes in methodology.
Aviation / Space: Aggregate losses reported in 2015 were significantly lower than the Company’s expectations. The Company reflected this experience by selecting lower loss ratios for underwriting years 2014 and prior.
Casualty / Specialty Casualty: Aggregate losses reported in 2015 for North America business were below the Company’s expectations as losses for most underwriting years continue to emerge below expectations. Aggregate losses reported in 2015 for both Global (Non-U.S.) P&C and Global Specialty sub-segments were below the Company’s expectations for most prior underwriting years. The Company reflected this experience by reducing the selected loss ratios for these underwriting years.
Catastrophe: In aggregate, the Company has recorded reductions in ultimate loss estimates during 2015 for a number of prior year loss events across several underwriting years to reflect lower loss emergence. This was partially offset by an increase in the loss estimates for the 2010 New Zealand Earthquake during 2015.
Engineering: Aggregate losses reported in 2015 were significantly lower than the Company’s expectations. The Company reflected this experience by selecting lower loss ratios for underwriting years 2014 and prior.
Non-U.S. Non-proportional: Aggregate losses reported in 2015 for the Global (Non-U.S.) P&C motor non-proportional line were lower than expected across underwriting years 2013 and prior, resulting in the Company reducing its loss ratios for these underwriting years.
Multiline: Aggregate losses reported in 2015 were lower than expected across most underwriting years for the North America business, resulting in the Company reducing its loss ratios for these underwriting years. Aggregate losses reported in 2015 for the Global Specialty business were close to expectations, which resulted in insignificant changes in loss ratios.
Of the Company’s $8,875 million of net Non-life loss reserves at December 31, 2015, net loss reserves for accident years 2005 and prior of $514 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 Business-Reserves in Item 1 of Part I of this report 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 reserves for unpaid losses and loss expenses at December 31, 2015 included $181 million that represents estimates of its net ultimate liability for asbestos and environmental claims. The gross liability for such claims at December 31, 2015 was $191 million, which primarily relates to Paris Re’s gross liability for asbestos and environmental claims for accident years 2005 and prior of $121 million, with any favorable or adverse development being subject to the Reserve Agreement. Of the remaining $70 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.
reinsurance of longevity, subdivided into standard and non-standard annuities primarily written in the U.K.;
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 Bornhuetter-Ferguson method to calculate IBNR.
Gross reserves for future policy benefits for life contracts includes a provision for adverse deviation of $168 million at December 31, 2015.
Under proportional treaties, which represented 81% of the Company’s total gross premiums written for the year ended December 31, 2015, 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.
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 estimate assumes that the changes in net premiums written become known at the mid-point of the risk period and is made by applying the reported technical ratio for the year ended December 31, 2015.
The estimate assumes that the changes in net premiums written become known at the mid-point of the risk period, there is no change in losses and loss expenses and is made by applying the reported acquisition ratio for the year ended December 31, 2015.
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.
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, 2015 was as follows (in millions of U.S. dollars):
In addition to other invested assets included in the table above for Level 3 of $211 million and the combined fair value of Level 1 and Level 2 derivative liabilities of $20 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 $208 million at December 31, 2015. 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, 2015 would result in a $21 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. Certain of the Company’s derivatives, such as interest rate swaps, to-be-announced mortgage-backed securities (TBAs), foreign exchange forward contracts and foreign currency options, are fair valued using significant other observable inputs (fair value of $26 million net liability position at December 31, 2015) and are referred to as Level 2 assets. The Company’s derivatives that are fair valued using quoted prices in active markets, referred to as Level 1 assets, had fair value of $6 million at December 31, 2015, 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 insurance-linked securities and total return swaps that are classified as Level 3 had a combined fair value of $5 million at December 31, 2015, based on a combined notional exposure of $183 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, 2015, 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 $2 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, 2015, the notional value of the total return swap portfolio and the fair value of the assets underlying the total return swap portfolio categorized as Level 3 was $42 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, 2015.
At December 31, 2015, the Company’s insurance-linked securities that are classified as Level 3 include longevity swaps and weather derivatives, with combined fair value of $5 million. At December 31, 2015, the notional exposure of the longevity swaps and weather derivatives classified as Level 3 was $133 million and $7 million, respectively. At December 31, 2015, the Company estimated that a 10% improvement in the mortality assumption used in the Company’s internal valuation models for its longevity swaps would result in a $20 million decrease in the fair value of its longevity swap portfolio. The weather derivatives categorized as Level 3 are exposed to changes in a heating degree day index, and a degree change to a full limit loss would decrease the fair value of weather derivatives by $2 million at December 31, 2015.
The following discussion of Results of Operations contains forward-looking statements based upon assumptions and expectations concerning the potential effect of future events that are subject to uncertainties. See Item 1A of this report for a complete list of the Company’s risk factors. Any of these risk factors could cause actual results to differ materially from those reflected in such forward-looking statements.
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 in each of the relevant sections. See Note 2(m) to Consolidated Financial Statements in Item 8 of Part II of this report for a discussion of translation of foreign currencies.
the U.S. dollar ending exchange rate strengthened against most currencies at December 31, 2015 compared to December 31, 2014.
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 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 includes the Company’s strategic investments. Other components of net income or loss include technical result and other income or loss, other expenses, interest expense, amortization of intangible assets, net foreign exchange gains or losses and income tax expense or benefit.
The components of net income for the years ended December 31, 2015, 2014 and 2013 were as follows (in millions of U.S. dollars, except per share data):
Underwriting result is a measurement that the Company uses to manage and evaluate its Non-life and Life and Health segments, 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 investors 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.
The current accident year technical result, adjusted for large losses - a deterioration in the technical result (and corresponding increase in the technical ratio) generally reflecting increasingly competitive pricing and conditions. Specifically, the deterioration was driven by higher downward prior year premium adjustments and modestly higher loss picks in the Global Specialty and Global (Non-U.S.) P&C sub-segments, higher acquisition costs in the Global Specialty and North America sub-segments and lower net premiums earned in the Catastrophe sub-segment mainly due to the increased level of retrocessional purchases and cancellations and non-renewals. These decreases were partially offset by a modest profit recorded in the agriculture line of business related to the 2015 crop year compared to losses recorded in 2014 in the North America sub-segment.
These factors driving the decrease in the Non-life underwriting result in 2015 compared to 2014 were partially offset by:
Net favorable prior year loss development - an increase of $171 million from $660 million (15.1 points on the technical ratio) in 2014 to $831 million (20.5 points on the technical ratio) in 2015. The increase in net favorable prior year loss development was primarily due to an increase in the Global Specialty sub-segment and, to a lesser extent, North America sub-segment. 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.
Other expenses - a decrease of $33 million (a decrease of 0.4 points in the combined ratio) from $252 million (5.8 points on the combined ratio) in 2014 to $219 million (5.4 points on the combined ratio) in 2015, primarily as a result of lower facilities and information technology costs, the impact of foreign exchange and lower personnel costs.
Net foreign exchange losses increased by $27 million, from gains of $18 million in 2014 to losses of $9 million in 2015. The net foreign exchange losses of $9 million 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. The Company hedges a significant portion of its currency risk exposure as discussed in Quantitative and Qualitative Disclosures about Market Risk in
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, effective April 1, 2015, 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 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.
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.
As such, following the closing, EXOR will pay a cash payment of approximately $42.7 million in aggregate to the holders of record of the Company’s preferred shares as at the effective time of the Merger and the Company will use commercially reasonable efforts to launch an exchange offer after the closing of the Merger, referred to as the Alternate Exchange Offer in the Merger Agreement, whereby participating preferred shareholders would receive newly issued preferred shares reflecting, subject to certain exceptions contained in the existing preferred shares, an extended call date of the fifth anniversary of the date of issuance and a restriction on payment of dividends on common shares to an amount not exceeding 67% of net income until December 31, 2020.
The terms of the newly issued preferred shares would be otherwise identical in all material respects to the Company’s applicable existing preferred shares.
In connection with the execution of the Merger Agreement with EXOR, the Company and AXIS terminated the Amalgamation Agreement. On August 3, 2015, the Company paid AXIS a termination fee and reimbursement of expenses of $315 million (AXIS Termination Fee).
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 as life policy benefits 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.
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.
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 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.
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.
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 and losses on certain hedged items in net foreign exchange gains or losses in the Consolidated Statements of Operations (see Note 2(n)).
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 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.
Diluted net income or loss per common share is defined as net income or loss attributable to PartnerRe Ltd. common shareholders divided by the weighted average number of common shares and common share equivalents outstanding, calculated using the treasury stock method for all potentially dilutive securities. Net income or loss attributable to PartnerRe Ltd. common shareholders is defined as net income or loss attributable to PartnerRe Ltd. less preferred share dividends. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted net income or loss per share. Basic net income or loss per share is defined as net income or loss attributable to PartnerRe Ltd. common shareholders divided by the weighted average number of common shares outstanding for the period, giving no effect to dilutive securities.
performance. Forfeiture benefits on all awards are estimated at the time of grant and incorporated in the determination of share-based compensation costs. Awards granted to employees who are eligible for retirement and do not have to provide additional services are expensed at the date of grant.
The Company also has three indirect 100% owned subsidiaries, PartnerRe Finance A LLC, PartnerRe Finance B LLC and PartnerRe Finance II Inc., that are considered to be VIEs, which were utilized to issue the Company’s debt related to senior notes (Senior Notes) and Capital Efficient Notes (CENts). The Company determined that it was not the primary beneficiary of any of these VIEs at December 31, 2015. As a result, the Company has not consolidated PartnerRe Finance A LLC, PartnerRe Finance B LLC and PartnerRe Finance II Inc., and has reflected the debt issued by the Company related to the Senior Notes and CENts as liabilities in the Consolidated Balance Sheets (see Note 10). The interest on the debt related to the Senior Notes and CENts is reported as interest expense in the Consolidated Statements of Operations.
The Company monitors the performance of its operations in three segments, Non-life, Life and Health and Corporate and Other. The Non-life segment is further divided into four sub-segments: North America, Global (Non-U.S.) Property and Casualty (Global (Non-U.S.) P&C), Global Specialty and Catastrophe.
At December 31, 2015 and 2014, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $208.3 million and $187.3 million, respectively, which related to the Company’s investments that are accounted for using the cost method of accounting or equity method of accounting.
At December 31, 2015 and 2014, 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.
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, 2015 and 2014, the fair values of financial instrument assets recorded in the Consolidated Balance Sheets not described above, approximate their carrying values.
Settlements and sales of mutual funds and exchange traded funds and private equities include sales of $4.4 million and $0.2 million, respectively.
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) and certain derivatives.
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 (losses) gains.
At December 31, 2015 and 2014, the fair values of financial instrument liabilities recorded in the Consolidated Balance Sheets approximate their carrying values, with the exception of the Senior Notes and CENts.
the fair value of the Senior Notes was calculated based on discounted cash flow models using observable market yields and contractual cash flows based on the aggregate principal amount outstanding of $250 million from PartnerRe Finance A LLC and $500 million from PartnerRe Finance B LLC at December 31, 2015 and 2014; and
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, 2015 and 2014.
Disclosures about the fair value of financial instrument liabilities exclude insurance contracts and certain other financial instruments.
The cost, gross unrealized gains, gross unrealized losses and fair value of investments classified as trading securities at December 31, 2015 and 2014 were as follows (in thousands of U.S. dollars):
The distribution of fixed maturities and short-term investments at December 31, 2015, 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, 2015, 2014 and 2013 were as follows (in thousands of U.S. dollars):
The assets underlying the funds held - directly managed account are maintained by Colisée Re in a segregated investment portfolio and managed by the Company. The segregated investment portfolio underlying the funds held - directly managed account is carried at fair value. Realized and unrealized investment gains and losses and net investment income related to the underlying investment portfolio in the funds held - directly managed account inure to the benefit of the Company.
The cost, gross unrealized gains, gross unrealized losses and fair value of investments underlying the funds held - directly managed account at December 31, 2015 and 2014 were as follows (in thousands of U.S. dollars):
The components of the net realized and unrealized investment (losses) gains on the funds held - directly managed account for the years ended December 31, 2015, 2014 and 2013 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, 2015, 2014 and 2013 were as follows (in thousands of U.S. dollars):
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.
The Company’s goodwill related to the acquisitions of PartnerRe SA, Winterthur Re, Paris Re and PartnerRe Health and intangible assets related to the acquisitions of Paris Re and PartnerRe Health at December 31, 2015 and 2014 were as follows (in thousands of U.S. dollars):
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, 2015 and 2014 is 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, 2015, 2014 and 2013 was as follows (in thousands of U.S. dollars):
The reconciliation of losses and loss expenses including life policy benefits for the years ended December 31, 2015, 2014 and 2013 was as follows (in thousands of U.S. dollars):
For the Global (Non-U.S.) P&C sub-segment, the Company reported net favorable loss development for prior accident years in 2015, 2014 and 2013. The net favorable loss development for prior accident years in 2015, 2014 and 2013 was driven by all lines of business, primarily the property line. 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 2015, 2014 and 2013. The net favorable loss development for prior accident years in 2015 was driven by all lines of business, primarily the marine, aviation/space, specialty casualty, energy and credit/surety lines. 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 adverse loss development. 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 in each year was primarily due to favorable loss emergence.
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.
A significant amount of judgment was used to estimate the range of potential losses related to the earthquakes that occurred in New Zealand in 2010 and 2011 (New Zealand Earthquakes), and there remains a considerable degree of uncertainty related to the range of possible ultimate losses associated with these events. Loss estimates arising from earthquakes are inherently more uncertain than those from other catastrophic events and the Company believes the ultimate losses arising from the New Zealand Earthquakes may be materially in excess of, or less than, the amounts provided for in the Consolidated Balance Sheet at December 31, 2015.
The Life and Health segment reported net favorable loss development for prior accident years of $47 million, $19 million and $39 million for the years ended December 31, 2015, 2014 and 2013, respectively.
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.
For each of the years ended December 31, 2015, 2014 and 2013, the Company incurred interest expense and paid interest of $27.5 million in relation to the 2010 Senior Notes issued by PartnerRe Finance B.
In May 2008, PartnerRe Finance A LLC (PartnerRe Finance A), an indirect 100% owned subsidiary of the parent company, issued $250 million aggregate principal amount of 6.875% Senior Notes (2008 Senior Notes). The 2008 Senior Notes will mature
For each of the years ended December 31, 2015, 2014 and 2013, the Company incurred interest expense and paid interest of $4.6 million in relation to the CENts.
During 2015, the Company repurchased, under its authorized share repurchase program, 0.5 million of its common shares at a total cost of $59.3 million, representing an average cost of $112.89 per share. At December 31, 2015, the Company had approximately 2.9 million common shares remaining under its current share repurchase authorization and approximately 39.3 million common shares were held in treasury and are available for reissuance. During 2015, the Company reissued approximately 0.6 million of its common shares under its employee share-based awards program at a total cost of $51.6 million, representing an average cost of $82.88 per share. Following the announcement of the Amalgamation Agreement on January 25, 2015, the Company suspended its repurchase activities and the share repurchase program remains suspended under the terms of the Merger Agreement with EXOR.
During 2013, the Company repurchased, under its authorized share repurchase program, 7.7 million of its common shares at a total cost of $695.3 million, representing an average cost of $90.73 per share.
During the years ended December 31, 2015, 2014 and 2013, the Company had Series C, Series D and Series E cumulative redeemable preferred shares and Series F non-cumulative redeemable preferred shares outstanding as follows (in millions of U.S. dollars or shares, except percentage amounts):
The reconciliation of basic and diluted net income per share and dividends declared per common share for the years ended December 31, 2015, 2014 and 2013 is as follows (in thousands of U.S. dollars, except share and per share data):
In April 2015, following the expiration of the multi-year period, a portion of the preferred shares was redeemed. Commutation of the portfolio in the 2013 segregated accounts back to the Company and redemption of the remainder of the preferred shares is expected to occur on or before June 1, 2016.
During the three months ended June 30, 2015, Lorenz Re issued non-voting redeemable preferred share capital on behalf of newly formed segregated accounts (2015 segregated accounts) related to new reinsurance agreements for a diversified catastrophe portfolio and an agriculture portfolio with the Company on a fully collateralized basis. The Company has determined that it is not the primary beneficiary of the 2015 segregated accounts as it does not have a controlling financial interest and, accordingly, the 2015 segregated accounts are not consolidated by the Company.
At December 31, 2015 and 2014, the assets of Lorenz Re, that are included in the Company's Consolidated Balance Sheets, were $42.2 million and $100.8 million, respectively, primarily consisting of investments and cash. At December 31, 2015, the liabilities of Lorenz Re, that are included in the Company's Consolidated Balance Sheet, were $7.8 million, primarily consisting of other reinsurance balances payable and unpaid losses and loss expenses. At December 31, 2014, such liabilities were $13.1 million, primarily consisting of unearned premiums, unpaid losses and loss expenses and other reinsurance balances payable. These balances relate to the 2013 segregated accounts that the Company continues to consolidate. The assets of each segregated account within Lorenz Re can only be used to settle the liabilities of the respective segregated account and there is no recourse to the Company for the liabilities of the Lorenz Re segregated accounts.
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, 2015, the maximum dividend that PartnerRe Bermuda could pay without prior regulatory approval was approximately $991 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). At December 31, 2015, 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, 2015, the maximum dividend that PartnerRe Europe could pay without prior regulatory approval was approximately $257 million. On January 1, 2016 Solvency II European Directive (Solvency II regulations) came into force. 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. In addition to the Solvency II regulations, some of the previous rules, known as Solvency I regulations, and some specific requirements set by the Central Bank of Ireland are retained for 2016.
Of the Company’s total net assets of $6.9 billion at December 31, 2015, the total amount of restricted net assets for the Company’s consolidated subsidiaries was $5.3 billion and primarily related to the statutory dividend restrictions described above.
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 expense for the years ended December 31, 2015, 2014 and 2013 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, 2015 and 2014 were as follows (in thousands of U.S. dollars):
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, 2015 related to a foreign tax credit carryforward of $89.4 million in Ireland and to tax loss carryforwards of $3.5 million, $1.0 million and $0.3 million in Canada, the United States and Switzerland, respectively. The valuation allowance recorded at December 31, 2014 related to a foreign tax credit carryforward of $47.0 million in Ireland and to tax loss carryforwards of $20.0 million and $1.1 million in Singapore and Canada, respectively. A portion of the valuation allowance recorded at December 31, 2014 related to a foreign tax credit carryforward was reversed during the year ended December 31, 2015, resulting from a reassessment of the likelihood of recovery of the related deferred tax asset.
At December 31, 2015, the deferred tax assets (after valuation allowance) included tax loss carryforwards of $19.1 million in Singapore, which can be carried forward for an unlimited period of time, $2.9 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 $5.2 million in Ireland, which can be carried forward for an unlimited period of time. At December 31, 2014, the deferred tax assets (after valuation allowance) included foreign tax credit carryforwards of $10.1 million in Ireland, which can be carried forward for an unlimited period of time, tax loss carryforwards of $10.3 million in Switzerland, which can be carried forward for 7 years, and $3.1 million in Ireland, which can be carried forward for an unlimited period of time.
The Company's Employee Equity Plan (EEP) expired in May 2015 and the Company has ceased granting any new awards to employees under the plan. The EEP, which was approved by the Company’s shareholders, permitted the grant of share options, RS, RSUs, SSARs or other share-based awards to employees of the Company. The EEP has been administered by the Compensation and Management Development Committee of the Board (the Committee). From 2013, the Company also granted PSUs to employees of the Company.
Under the EEP, the exercise price of the award would not be less than the fair value of the award at the time of grant. The fair value was 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, 2015, no shares remain available for issuance under this plan given it expired in May 2015.
Prior to 2013, options and RSUs were awarded under the Directors Share Plan. Since 2013, only RSUs have been awarded. Options generally vest and are expensed ratably over three years and have a ten year contractual term. 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.
At December 31, 2015, 0.3 million shares remained available for issuance under this plan.
Under each of the Company’s equity plans, the Company re-issues treasury shares or issues new shares upon the exercise of share options and SSARs or the conversion of RSUs into shares.
The weighted average remaining contractual term and the aggregate intrinsic value of share options outstanding, exercisable, vested and expected to vest at December 31, 2015, was 4.2 years and $18.1 million, respectively.
During the years ended December 31, 2015, 2014 and 2013, the Company issued 264,018 RSUs and PSUs, 333,358 RSUs and PSUs and 329,174 RSUs and PSUs with a weighted average grant date fair value of $119.06, $98.86 and $89.44, respectively. The Company values RSUs and PSUs issued under all plans at the fair value of its common shares at the date of grant date.
During the years ended December 31, 2015, 2014 and 2013, the Company issued 72,918 SSARs, 153,797 SSARs and 125,561 SSARs with a weighted average grant date fair value of $17.03, $14.62 and $11.25, respectively.
The total unrecognized share-based compensation expense related to unvested SSARs was approximately $1.1 million at December 31, 2015, which is expected to be recognized over a weighted-average period of 1.7 years.
Expected volatility is 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 is 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 is based on the average dividend yield of the Company’s shares over the expected life of the Company’s SSARs.
In 2009, the Company issued 27,655 replacement warrants as part of the acquisition of Paris Re. At December 31, 2015, 557 warrants are outstanding and fully vested with a weighted average remaining contractual life of 1.0 years and a weighted average exercise price of $30.86. During the year ended December 31, 2015, 8,110 warrants were exercised with a weighted average exercise price of $31.25.
The Company incurred expenses for these defined contribution arrangements of $13.4 million, $15.9 million and $14.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015 and 2014, 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, 2015 and 2014 were $29.2 million (net of $7.9 million of taxes) and $25.4 million (net of $6.8 million of taxes), respectively.
The assumptions used to determine the Zurich Plan’s pension obligation and net periodic benefit cost for the years ended December 31, 2015, 2014 and 2013 were as follows:
The Company does not believe that any of the Zurich Plan’s assets will be returned to the Company during 2016.
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, 2015 and 2014, 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 monitors significant concentrations of credit risk in any one bank. At December 31, 2015, the Company held cash and cash equivalent of $1.2 billion with a high credit quality international bank which was primarily invested in United States government and government sponsored enterprises' money market funds. This concentration at December 31, 2015 was partially due to the timing of investment sale and purchase activity and certain specific cash requirements related to the closing of the Merger.
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.
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 unpaid losses and loss expenses. The Company regularly reviews its reinsurance recoverable balances to estimate an allowance for uncollectible amounts based on quantitative and qualitative factors. At December 31, 2015 and 2014, the Company recorded a provision for uncollectible premiums receivable of $8 million. See also Note 9 for discussion of credit risk related to reinsurance recoverable on paid and unpaid losses.
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 non-cancelable leases and future sub-lease rental income on non-cancellable leases at December 31, 2015 (in thousands of U.S. dollars):
Rent expense for the years ended December 31, 2015, 2014 and 2013 was $23.2 million, $33.6 million and $33.0 million, respectively, excluding any restructuring charges related to real estate.
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, share-based compensation, the reimbursement of certain expenses, retention incentive payments, as well as certain severance and change in control provisions.
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 $14 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 $93 million with $47 million, $35 million, $10 million, $1 million and $nil to be paid during 2016, 2017, 2018, 2019 and 2020, respectively.
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, 2015 and 2014, the Company's participation in the facility was $81 million and $61 million, respectively. At December 31, 2015, 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.
At December 31, 2015, 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.
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, 2015, the total amount of such credit facilities available to the Company was approximately $817 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 $113 million and $375 million, respectively, at December 31, 2015, in respect of reported loss and unearned premium reserves.
Since the Company does not manage its assets by segment, net investment income is not allocated to the Non-life segment. 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 Non-life and Life and Health segments: net realized and unrealized investment gains and losses, interest expense, amortization of intangible assets, net foreign exchange gains and losses, income tax expense or benefit and interest in earnings and losses of equity method investments. Segment results are shown before consideration of intercompany transactions.
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.
The Company has two brokers that individually accounted for 10% or more of its gross premiums written during the years ended December 31, 2015, 2014 and 2013. The brokers accounted for 19%, 20% and 22% and 22%, 20% and 21% of gross premiums written for the years ended December 31, 2015, 2014 and 2013, respectively.
On August 3, 2015, in connection with the execution of the Merger Agreement with EXOR, the Company and AXIS terminated the Amalgamation Agreement. The Company paid AXIS a termination fee and reimbursement of expenses of $315 million which is included within Other expenses in the Consolidated Statements of Operations for the year ended December 31, 2015.
During the year ended December 31, 2015, the Company recorded $63 million of other transaction costs related to professional fees and severance costs associated with the Amalgamation Agreement with AXIS and Merger Agreement with EXOR within Other expenses in the Consolidated Statements of Operations.
During the years 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 were expensed as the employee remained with the Company and provided service.