(1) Net prior year reserve development due to changes in premiums includes, but it is not limited to, the impact to prior years reserves associated with (increases) decreases in the estimated or actual premium exposure reported by cedants.
Agriculture: Aggregate losses reported during the year for North America business were below the Company’s expectations, and primarily related to the 2010 underwriting year, while Global (Non-U.S.) business was in line with expectations. The Company lowered its loss ratio picks, but did not otherwise materially alter its reserving assumptions.
Multiline: Reported losses were lower than expected for most underwriting years. In addition to selecting lower loss ratios due to the reported loss development, the Company also reflected this experience through the updating of loss development factors for this line.
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, 43%, 42% and 48% of the Company’s reported net premiums written for 2011, 2010 and 2009, respectively, were based upon estimates.
the U.S. dollar ending exchange rate strengthened against most currencies, except the Japanese yen, at December 31, 2011 compared to December 31, 2010 and weakened against most currencies, except the euro and British pound, at December 31, 2010 compared to December 31, 2009.
Net (loss) income, preferred dividends, net (loss) income available to common shareholders and diluted net (loss) income per share for the years ended December 31, 2011, 2010 and 2009 were as follows (in millions of U.S. dollars, except per share data):
an increase in the book of business and exposure driven by the agriculture line, which also resulted in a change in the mix of business towards the agriculture line, which generally carries a higher loss ratio compared to most of the other lines of business in this sub-segment;
Acquisition costs decreased in 2010 compared to 2009 primarily as a result of lower net premiums earned. The acquisition ratio increased in 2010 compared to 2009 mainly due to higher profit commission adjustments reported by cedants in 2010, primarily in the agriculture line of business, partially offset by lower commission rates in most lines of business.
The following table provides the components of the technical result and the corresponding ratios for this sub-segment (in millions of U.S. dollars):
During the January 1, 2012 renewals, the Company generally observed a continuation of the soft market in most markets with terms and conditions stable to down compared to the prior year renewal. A hardening of terms and conditions and price increases was only generally observed in loss affected markets. Overall, the expected premium volume from the Company’s January 1, 2012 renewal, at constant foreign exchange rates, increased compared to the prior year renewal primarily as a result of opportunities to write new business in the motor line of business, which was partially offset by the Company’s decision to further reduce the level of its catastrophe exposed business. Management expects a continuation of the observed trends in pricing and terms and conditions during the remainder of 2012.
The net favorable loss development of $96 million was primarily due to favorable loss emergence, as losses reported by cedants in 2011 for prior accident years were lower than the Company expected. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratio, which had the effect of decreasing the level of prior year loss estimates.
the inclusion of losses and loss expenses related to business written by Paris Re; and
Acquisition costs decreased in 2011 compared to 2010 primarily due to lower profit commissions as a result of the large catastrophic losses and the decrease in net premiums earned. The lower profit commissions also decreased the acquisition ratio in 2011 compared to 2010.
Corporate and Other is comprised of the Company’s capital markets and investment related activities, including principal finance transactions, insurance-linked securities and strategic investments, and its corporate activities, including other operating expenses. The year over year comparisons of the investment related and corporate activities are affected by Paris Re’s results being included for a full year in 2011 and 2010, compared to the fourth quarter only of 2009.
Because of the interest-sensitive nature of some of the Company’s Life products, net investment income is considered in Management’s assessment of the profitability of the Life segment (see Life segment above). The following discussion includes net investment income from all investment activities, including the net investment income allocated to the Life segment.
As discussed in Overview above, U.S. and European risk-free interest rates decreased and credit spreads widened, while equity markets remained relatively flat during 2011. In addition to these general economic factors, the Company realized losses on treasury note futures and incurred losses related to certain insurance-linked securities impacted by the Japan Earthquake. The Company uses treasury note futures to manage the duration of its investment portfolio and the realized losses represent the Company reducing the duration of its investment portfolio to protect against the possibility of risk-free interest rates rising. These factors had an impact on the Company’s investment portfolio and the related level of realized and unrealized gains and losses on investments compared to 2010, during which U.S. and European risk-free interest rates decreased, equity markets rose and credit spreads declined modestly.
Net realized and the change in net unrealized investment losses on other invested assets were a combined loss of $222 million in 2011 and primarily related to realized and unrealized losses on treasury note futures, net realized and unrealized losses on certain non-publicly traded investments, and a realized loss on insurance-linked derivative securities impacted by the Japan Earthquake. Net realized investment losses and the change in net unrealized investment gains on other invested assets were a combined loss of $64 million in 2010 and primarily related to losses on treasury note futures, which were partially offset by unrealized gains on certain non-publicly traded investments and net realized and unrealized gains on total return swaps.
Income tax expense and the effective income tax rate during 2010 were $129 million and 13.1%, respectively, and were primarily driven by the geographic distribution of the Company’s pre-tax net income between its various taxable and non-taxable jurisdictions, as described above.
At December 31, 2011, the liability funds totaled $11.2 billion (including funds held - directly managed), or 62% of the Company’s total invested assets, compared to $10.6 billion at December 31, 2010. The liability funds were comprised of cash and cash equivalents and high quality fixed income securities. The increase in the liability funds at December 31, 2011 compared to December 31, 2010 reflects the increase in unpaid losses and loss expenses, which was driven by the 2011 catastrophic events.
net proceeds of $362 million, after underwriting discounts, commissions and other related expenses of $12 million, related to the issuance of the Series E preferred shares (see Note 12 to the Consolidated Financial Statements included in Item 8 of Part II of this report and Contractual Obligations and Commitments and Shareholders’ Equity and Capital Resources Management below); and
The average yield to maturity on fixed maturities, short-term investments and cash and cash equivalents was 2.4% at December 31, 2011, compared to 2.9% at December 31, 2010. The decrease in the average yield to maturity at December 31, 2011 compared to December 31, 2010 reflects declining U.S. and European risk-free rates, which were partially offset by widening credit spreads.
At December 31, 2011, the Company’s corporate bond portfolio included $393 million of European government guaranteed corporate debt, comprised of $261 million, $79 million, $47 million and $6 million corporate bonds guaranteed by the Dutch, German, Austrian and Danish governments, respectively. At December 31, 2011, the Company did not hold any government guaranteed corporate debt issued in peripheral EU countries (Portugal, Italy, Ireland, Greece and Spain).
At December 31, 2011, the Company’s corporate bond portfolio (excluding government guaranteed corporate debt) includes $1.3 billion of corporate bonds issued by companies in the finance sector. Included within this were $127 million of corporate bonds issued by companies in the EU finance sector, comprised of $56 million, $14 million, $13 million, $12 million and $8 million of British, French, Danish, Dutch and German finance sector corporate bonds, respectively. Of the remaining EU finance sector corporate bonds, no single country accounts for more than 1% of the Company’s total finance sector corporate bond exposure. At December 31, 2011, the Company held less than $23 million in total of finance sector corporate bonds issued by companies in peripheral EU countries (Portugal, Italy, Ireland, Greece and Spain).
In September 2011, the FASB issued new accounting guidance, which updates the existing guidance, related to goodwill impairment testing. The amendments revise the application of certain existing requirements to allow the option of performing a qualitative goodwill impairment assessment before calculating the fair value of reporting units, which could, depending on the results of the assessment, eliminate the need for further testing of goodwill for impairment. The guidance is effective for interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company does not expect the adoption of this guidance to have an impact on its consolidated shareholders’ equity or net income.
Short term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.
The aggregate purchase price paid by the Company to acquire 100% of the outstanding Paris Re common shares and warrants was $1,979.7 million for total identifiable net assets acquired, at fair value, of $1,953.7 million. The Company recorded goodwill of $26.0 million related to the acquisition (see Note 8).
The 2008 Senior Notes are ranked as senior unsecured obligations of PartnerRe Finance A. The Company has fully and unconditionally guaranteed all obligations of PartnerRe Finance A under the 2008 Senior Notes. The Company’s obligations under this guarantee are senior and unsecured and rank equally with all other senior unsecured indebtedness of the Company.
The Company has issued Series C, Series D and Series E cumulative redeemable preferred shares (Series C, D and E preferred shares) as follows (in millions of U.S. dollars or shares, except percentage amounts):
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, 2011, there were no significant restrictions on the payment of dividends by the Company’s reinsurance subsidiaries that would limit the Company’s ability to pay common and preferred shareholders’ dividends and its corporate expenses.
The Company incurred expenses for these defined contribution arrangements of $16.0 million, $14.8 million, and $13.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.
The Company has entered into strategic investments with unfunded capital commitments totaling $157.5 million through 2016. The Company expects to fund capital commitments of $61.2 million, $36.3 million, $25.9 million, $22.4 million and $11.7 million during 2012, 2013, 2014, 2015 and 2016, respectively.
(6) Combined ratio is defined as the sum of the technical ratio and the other operating expense ratio.