Despite recording significant losses following this year's intense hurricane season, PartnerRe remains confident in its business plan, says Nigel Allen

It is perhaps difficult to comprehend how the chief executive of a company which has just reported losses for the quarter of almost $300m could still stand firm on the principles of its business model. However, in a quarter that saw the reinsurance industry experience its largest ever single loss in the form of Katrina, with almost two thirds of the expected $50bn loss expected to be carried by reinsurers, PartnerRe president and chief executive Patrick Thiele is adamant that the Bermudan company will not move from the "risk management philosophy and policies and diversification strategies which we initiated seven years ago."

Stormy conditions

The third quarter saw PartnerRe report a net loss of $288.7m or $5.48 per share, reflecting estimated overall catastrophe losses for the three-month period of $610m. "We calculate that (PartnerRe's) aggregate losses in the third quarter represent about a 1 in 35 to 1 in 40 year occurrence for us," explained Patrick Thiele during the company's Q3 conference call. Cat losses were broken down into approximately $510m relating to Katrina, $35m to Rita, and a further $65m resulting from losses incurred from the Central European floods. The company stated that initial estimates for Wilma put the company's losses at approximately 3% of the estimated $2bn to $2.5bn total insured loss in Mexico (around $60m to $75m), with Florida losses expected to be some 1% of the total loss figure, which currently ranges from approximately $5bn to $12bn (around $50m to $120m).

However, despite incurring such hefty losses for the three-month period in what was described as "the worst quarter in the history of the industry", in terms of overall losses Albert Benchimol, EVP & chief financial officer, was keen to point out that, "we believe that PartnerRe's aggregate losses under these events were less than our overall market share," even though the company will report its largest ever quarterly loss. The 2% share of the overall Katrina losses carried by the company was considered consistent with its global share of the reinsurance market's capital. Thiele did add however that the 1% of total losses in Florida predicted for Wilma was slightly higher than their exposure the previous year, when the state was battered by four major hurricanes. He put this down to the fact that, "we had increased our cat exposure in response to raised prices in Florida." So how can we expect PartnerRe to respond to the market conditions which form in the wake of this unprecedented hurricane season?

PartnerRe's long-term strategy has always been based on achieving a broad diversification of risks, both on a geographic and product basis. The company's portfolio is broken down into three broad segments: non-life (which is subdivided into US property & casualty, global or non-US property & casualty), life and ART. The breakdown of premium distribution by line of business and according to geographic region for the first half of 2005 is in table 1.

Add to this the fact that 55% of business across all segments is written on a proportional basis, while 40% is on a non-proportional basis and the remaining 5% on a facultative basis; and further, that the company generates 62% of business through brokers and 38% through direct relationships, and one would struggle to find a more diverse reinsurer.

Maintaining balance

"We expect to maintain balance in our portfolio, which has become a competitive advantage for us over the last seven years," confirmed Thiele, who remains firmly of the opinion that despite these significant storm losses in the third quarter, the company will still be in a position to achieve a return on equity in the mid to high teens in 2006, (subject to a normal catastrophe year).

In terms of changing the balance of their portfolio, there is very little likelihood that PartnerRe will seek to materially increase its exposure to US windstorm, with Patrick Thiele adding that they will pay close attention to increasing frequency and severity in such exposures. However, should prices continue to improve outside of US windstorm, he said, "we would expect to write more business and try to further balance our catastrophe book." With expectations that the supply of catastrophe excess of loss cover in the south east of the US and the Gulf Coast will be "barely" adequate, strong price increases are a given in the renewal season, Thiele believes. In terms of US casualty opportunities, he is of the opinion that they are "pretty close to our risk appetite" with any growth potential more on an exposure basis. It would appear that expansion opportunities for PartnerRe lie mainly in its diversified lines of business.

Pushed on the potential for growth on the European front, Thiele responded positively, believing that, "in the traditional property casualty book in Europe there is certainly a better tone than there was last year." With property rates set to improve across most European regions, it is not Katrina and Rita that is expected to be the driving force, but rather storm Erwin and the Central European floods.

On specific lines of business impacted directly by the storm losses, PartnerRe is clearly quite bullish in terms of predicted price hikes, with rates on catastrophe, property specialty, energy, marine and sections of the property per risk book expected to record marked price increases. Putting a percentage on such price hikes, suggestions are that US windstorm will rise by between 20%-40%, catastrophe prices look set to record double digit increases, while offshore energy should push into the triple digit bracket.

But the question is whether, having hemorrhaged some $610m in a single quarter, PartnerRe is in a position to avail of these improving market conditions, or if it will be forced to infuse all available capital back into the balance sheet?

Capital matters

At the time of the investment analyst call, PartnerRe was evasive when asked about the potential for raising capital. Thiele was confident that the company had sufficient capital to exploit any attractive price moves "quickly and decisively", while Albert Benchimol was of the opinion that PartnerRe was "not in a bad place" in terms of available capital, with the capital model continuing to show strong capital adequacy, although he added, "We are currently doing the analysis and we have not and are not prepared to say anything right now about whether or not we are going to raise capital." But he did concede that were the company to seek to raise capital; PartnerRe was in a strong position to be able to tap any cash inflow. "I've got more bankers calling on us every day than I know how to count offering us money," he confirmed. "So we can afford to be opportunistic." Within hours, PartnerRe announced it had responded to those calls, stating that it had raised $550m in additional capital.

Divided into two tranches, the first part of the capital was in the form of a $400m three-and-a-half year loan agreement with Citibank, while the second part involved an agreement by PartnerRe to sell $150m of its common shares to Citigroup Global Markets. PartnerRe stated that the capital would be used for general corporate purposes, including moves to exploit opportunities for growth in the international reinsurance marketplace.

It was no surprise that following this announcement, Standard & Poor's, AM Best, Fitch and Moody's all chose to affirm their ratings on the Bermudan reinsurer, each citing the capital raising exercise as a key factor in the affirmation. Referring to the catastrophe losses in the third quarter, Standard & Poor's added that it "believes the magnitude of these losses as currently estimated is reasonable within the context of (PartnerRe's) capital base and business mix." It is also interesting to note that both Fitch and Standard & Poor's cite the company's lack of retrocession as a contributing factor, with the latter stating that as a result of PartnerRe's nominal use of retrocessional cover the group will avoid any material reinsurance recoverable balances related to the third-quarter events and will not be hit by any potential contraction in the retrocessional market. Thiele concurs, believing that there will be less retrocession capital available, with what capacity remains being at a much higher price, with cover for whole accounts unlikely, concluding that whatever way the market develops, "it will not affect us because we do not buy nor do we sell retrocession protection on our catastrophe book."

Stand firm

"We are very proud of the balance which we have achieved over the last 12 years in our catastrophe book and we think that the results speak for themselves," said Thiele, a unit that he adds has exceeded its return targets over this period. So while others may be reassessing their business model, it appears PartnerRe are affirming theirs.

- Nigel Allen is editor of Global Reinsurance.

PARTNERRE - PATRICK THIELE, PRESIDENT AND CEO

In December 2000, Patrick Thiele was appointed president and chief executive officer of PartnerRe and is a director of the company.

Thiele has a 25-year background in the financial services industry, with extensive experience in finance, insurance and management. Prior to joining PartnerRe, Thiele was group director of development of CGNU, formerly CGU until its merger with Norwich Union.

Before joining CGNU, Thiele spent 12 years at the St Paul Companies, where he most recently served as chief executive officer and president of the company's worldwide insurance operations, from 1996 to 1998. Under his leadership, the St Paul Companies became the fourth largest commercial lines carrier and the eighth largest property and casualty insurer in the US with 65% in revenue growth and 60% in asset base growth. Thiele was vice president, finance in 1987 and became senior vice president, chief financial officer and chief investment officer in 1989. In 1991, he was promoted to executive vice president. He joined the St Paul Companies in 1978 and has held the positions of investment officer, senior corporate development officer, senior investment officer and equity portfolio manager and assistant to the chairman.

PARTNERRE UNDER INVESTIGATION

PartnerRe is currently cooperating with the Securities Exchange Commission and the New York Attorney General's office in relation to subpoenas which the company received in April of this year concerning its investment in Channel Re. Channel Re, a Bermuda-based financial guarantee reinsurer, was formed in February 2004 to assume a $27bn portfolio of in-force business from MBIA. PartnerRe has a 20% share in the company, with RenaissanceRe holding 32.7%, Koch Financial, which through its affiliate Koch Financial Re owns 29.9% and the remaining 17.4% in the hands of MBIA. Subpoenas have also been received by MBIA and RenaissanceRe.

PartnerRe also received a subpoena from the United States Attorney for the Southern District of New York in June requesting information relating to its finite reinsurance products.