The acquisition of Paris Re, combined with a strong net income during 2009, resulted in the Company’s total capital increasing to approximately $8 billion at December 31, 2009. This provides the Company with enhanced strategic and financial flexibility in a less predictable and more limited growth environment. With the addition of Paris Re’s diversified book of business, the Company’s clients will benefit from a broader product spread and increased size and balance. Specifically, the Company’s larger premium base allows it to deploy capital to the lines of business and markets with the most attractive risk and return characteristics, and take advantage of opportunities as they arise. It is also expected that the increased capital base will enable the Company to better position itself in order to continue to achieve its long-term financial goals and generate long-term shareholder value.
PartnerRe Ltd. (the Company) provides reinsurance on a worldwide basis through its principal wholly-owned subsidiaries, including Partner Reinsurance Company Ltd. (Partner Reinsurance), Partner Reinsurance Europe Limited (PartnerRe Europe), Partner Reinsurance Company of the U.S. (PartnerRe U.S.), PARIS RE SA (Paris Re France) and PARIS RE Switzerland AG (Paris Re Switzerland). 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, life/annuity 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.
A variable interest entity (VIE) is required to be consolidated by the Company if the Company is determined to be the primary beneficiary of the VIE, such that it is subject to a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the VIE’s residual returns or both. A VIE is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The Company has determined that PartnerRe Finance A, which issued the Senior Notes, and PartnerRe Finance II, which issued the capital efficient notes (CENts), do not meet consolidation requirements under U.S. GAAP. As a result, the Company has not consolidated PartnerRe Finance A 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 16). The interest on the debt related to the Senior Notes and CENts is reported as interest expense in the Consolidated Statements of Operations.
In July 2009, the Company purchased approximately 6% of the outstanding Paris Re common shares by issuing approximately 1.5 million of its common shares (approximately 1.3 million of which were treasury shares) for consideration of $95.5 million. Prior to the Acquisition Date, the Paris Re common shares were recorded as equity investments in the Company’s Consolidated Balance Sheet with the change in fair value from the date of purchase to the Acquisition Date of $18.3 million recorded in net realized and unrealized gains in the Consolidated Statement of Operations. The fair value of the Paris Re shares held immediately before the Acquisition Date was determined based on the closing market price of the Company’s common shares as of the Acquisition Date.
In each step of these purchases, the Company exchanged 0.300 Company common shares for each Paris Re common share and 0.167 Company common shares for each Paris Re warrant.
For the period from October 2, 2009 to December 7, 2009, Paris Re had noncontrolling interests. Net income attributable to Paris Re’s noncontrolling interests during this period was $4.3 million, and has been recorded within other income (loss) in the Consolidated Statement of Operations.
The components of net investment income for the years ended December 31, 2009, 2008 and 2007 were as follows (in thousands of U.S. dollars):
Following Paris Re’s acquisition of substantially all of the reinsurance operations of Colisée Re in 2006, 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 Statement of Operations does 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.
The net favorable development in 2009 and the net adverse development in 2008 was primarily related to certain guaranteed minimum death benefit treaties, where the payout is linked to the performance of underlying capital market assets and where changes in credit spreads have impacted certain indexed-linked products that are interest-rate sensitive. Such development was $16 million favorable and $33 million unfavorable for the years ended December 31, 2009 and 2008, respectively.
Included in the Consolidated Balance Sheets at December 31, 2009 and 2008 were the following balances related to Atradius N.V. (in thousands of U.S. dollars):
For employee retirement benefits, the Company maintains certain defined contributions plans and other active and frozen defined benefit plans. The most significant active defined benefit plan is for the Company’s Zurich office employees (the Zurich Plan).
Total unrecognized share-based compensation expense related to unvested RSUs was approximately $12.3 million at December 31, 2009, which is expected to be recognized over a weighted-average period of 1.4 years.
The reconciliation of basic and diluted net income per share for the years ended December 31, 2009, 2008 and 2007 is as follows (in thousands of U.S. dollars or shares, except per share amounts):
(2) At December 31, 2009, 2008 and 2007, share options to purchase 387.0 thousand, 870.1 thousand and 4.7 thousand common shares, respectively, were excluded from the calculation of diluted weighted average number of common and common share equivalents outstanding because their exercise prices were greater than the average market price of the common shares.
For the fourth quarter of 2007, the diluted net income per share included the dilutive effect of 115,350 shares related to this agreement, as the Company’s average share price exceeded the maximum price per share during the fourth quarter of 2007. The 2009 and 2008 diluted net income per share did not include any dilutive effect related to this agreement.
The Company assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at December 31, 2009. The counterparties on the Company’s assumed credit default swaps are all highly rated financial institutions.
The fair values and related notional values of derivatives included in the Company’s Consolidated Balance Sheets at December 31, 2009 and 2008 were as follows (in thousands of U.S. dollars):
In the normal course of its operations, the Company enters into agreements with financial institutions to obtain unsecured and secured credit facilities. As of December 31, 2009, the total amount of such credit facilities available to the Company was $1,118.4 million. These facilities are used primarily for the issuance of letters of credit, although a portion of these facilities may also be used for liquidity purposes. Under the terms of certain reinsurance agreements, irrevocable letters of credit were issued on an unsecured and secured basis in the amount of $502.6 million and $250.0 million, respectively, at December 31, 2009, in respect of reported loss and unearned premium reserves.
The following table provides the distribution of net premiums written by line of business for the years ended December 31, 2009, 2008 and 2007: