The Company’s capital markets unit, which includes both public and private market investments, experienced a difficult second half of 2007 with the collapse of the credit markets, and the market turmoil
Management is focused on ensuring that the structure and culture of the organization promote intelligent, prudent, transparent and ethical decision-making. Management believes that a sound enterprise culture starts with the tone at the top. The Executive Management holds regular company-wide information sessions to present and review Management’s latest decisions, whether operational, financial or structural, as well as the financial results of the Company. Employees are encouraged to address questions related to the Company’s results, strategy or Management decisions, either anonymously or otherwise to Management so that they can be answered during these information sessions. Management believes that these sessions provide a consistent message to all employees about the Company’s value of transparency. Management also strives to promote a work environment that (i) aligns the skill set of individuals with challenges encountered by the Company, (ii) includes segregation of duties to ensure objectivity in decision making, and (iii) provides a compensation structure that encourages and rewards intelligent and ethical behavior. To that effect, the Company has a written Code of Business Conduct and Ethics and provides employees with a direct communication channel to the Audit Committee in the event they become aware of questionable behavior of Management or anyone else. Finally, Management believes that building a sound internal control environment, including a strong internal audit function, helps ensure that behaviors are consistent with the Company’s cultural values.
At a strategic level, the Company manages these risks through diversification and absolute limits. At an operational level, risk mitigation strategies for assumed risks include strong processes, technical risk assessment and collaboration among different groups of professionals who each contribute a particular area of expertise.
On January 1, 2008, the Company completed a reorganization, at which time PartnerRe SA ceased its underwriting operations. As part of the reorganization, PartnerRe SA, its Canadian non-life branch and the Swiss branch of Partner Reinsurance transferred substantially all of their business, assets and liabilities to PartnerRe Europe. Following the reorganization, PartnerRe Europe is the principal reinsurance carrier for all of the Company’s business underwritten in France, Ireland and Switzerland and for the non-life business underwritten in Canada. Contemporaneously, the business, assets and liabilities of the Canadian life branch of PartnerRe SA were transferred to a new Canadian life branch of Partner Reinsurance.
The reporting currency of the Company is the U.S. dollar. The national currencies of the Company’s subsidiaries and branches are generally their functional currencies, except for the Bermuda subsidiaries and the Company’s Swiss branch, whose functional currencies are the U.S. dollar. In translating the financial statements of those subsidiaries or branches whose functional currency is other than the U.S. dollar, assets and liabilities are converted into U.S. dollars using the rates of exchange in effect at the balance sheet dates, and revenues and expenses are converted using the weighted average foreign exchange rates for the period. The effect of translation adjustments are reported in the Consolidated Balance Sheets as currency translation adjustment, a separate component of accumulated other comprehensive income.
The Company has entered into weather related transactions that are structured as insurance, reinsurance or derivatives. When those transactions are determined to be derivatives, they are recorded at fair value with the changes in fair value reported in other income or loss in the Consolidated Statements of Operations. The Company uses internal valuation models to estimate the fair value of these derivatives.
The Company has entered into total return and interest rate swaps. Income related to these swaps and any fair value adjustments on the swaps are included in other income or loss in the Consolidated Statements of Operations. The Company records these swaps at fair value, based on quoted market prices. Where such valuations are not available, the Company uses internal valuation models to estimate fair value.
The cost, fair value, gross unrealized gains and gross unrealized losses on investments classified as available for sale at December 31, 2007 and 2006 were as follows (in thousands of U.S. dollars):
The following table is a reconciliation of the net realized investment (losses) gains on available for sale securities to the net realized investment (losses) gains in the Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 (in thousands of U.S. dollars):
For the years ended December 31, 2007, 2006 and 2005, the Company recorded a net gain of $0.5 million, a net gain of $0.6 million and a net loss of $2.8 million, respectively, in net realized investment gains and losses in the Consolidated Statements of Operations, representing the ineffectiveness of its designated fair value hedging activities.
to the large 2005 catastrophic losses, including $20 million of additional IBNR reserves established by the Company as a result of uncertainty regarding litigation developments and evolving out of court settlement trends that may affect some of the Company’s cedants in the future. Other than for losses related to the 2005 hurricanes, loss information provided by cedants during 2006 for prior accident years included no significant losses or reductions but a series of attritional losses or reductions.
Income tax expense for the years ended December 31, 2007, 2006 and 2005 was as follows (in thousands of U.S. dollars):
Included in the Consolidated Balance Sheets at December 31, 2007 and 2006 were the following balances related to Atradius N.V. (in thousands of U.S. dollars):
If the fair value provisions of SFAS 123 had been applied retroactively to all outstanding share-based compensation issued, the pro forma net loss available to common shareholders for the year ended December 31, 2005 would be $88.7 million. To reconcile to the reported net loss available to common shareholders of $85.6 million in 2005, total share-related compensation expense determined under the fair value method for all grants of $12.4 million would need to be deducted and share-related compensation expense of $9.3 million included in the reported net loss would need to be added.
In November 2001, PartnerRe Capital Trust I (the Trust), a Delaware statutory business trust, issued $200 million of 7.90% Preferred Securities (trust preferred securities). The Trust was wholly owned by PartnerRe
As part of the agreement to sell its U.S. life operations in 2000 (acquired in 1998 as part of the Winterthur Re acquisition), the Company entered into certain representations and warranties, extending through 2008, related to the enterprise being sold. At the time of the sale, the Company established a reserve of $15.0 million for potential future claims against such representations and warranties.
The following methods and assumptions were used by the Company in estimating fair market value of each class of financial instrument recorded in the Consolidated Balance Sheets.
For certain financial instruments where quoted market prices are not available, Management’s best estimate of fair value may be based on quoted market prices of similar instruments or on other valuation techniques. SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” (SFAS 107) excludes insurance contracts (other than financial guarantees), investment contracts, investments accounted for under the equity method and certain other financial instruments.
The following tables provide summarized financial information for ChannelRe Holdings. As the Company calculates its share of ChannelRe Holdings’ results on a one-quarter lag, the results presented below include summarized financial information for the twelve month periods from October 1 to September 30.