Discounted Non-Life Reserves. September 20, 2006

Transcription

1 September 20, 2006

2 Cautionary Language The information in this financial supplement is for informational purposes only and is current only as of its stated date, which is June 30, We are under no obligation to and do not expect to update or revise this data, whether as a result of new information, future events or otherwise, even when such new data has been reflected in our filings with the Securities and Exchange Commission. Loss reserves are estimates involving actuarial and statistical projections at a given point in time to reflect the Company s expectations of the costs of the ultimate settlement and administration of claims. In determining these estimates the Company uses assumptions which are themselves estimates based on historical information (see the Company s Annual Report on Form 10 K/A for additional information on the key reserving assumptions). The determination of loss reserves is therefore subject to a number of underlying uncertainties. The estimation of discounted reserves is subject to additional estimation uncertainties, in particular, both the timing of future loss payments and the distribution of future payments by currency, may differ significantly from those assumed in the calculation of the value of the discount. Readers must keep these and the other qualifications more fully described in this report in mind when reviewing this information. This supplement should be read in conjunctions with other documents filed by the Company with the Securities and Exchange Commission, including the Company s most recent Annual Report on Form 10 K/A. Cautionary Statements Regarding Forward-Looking Statements: Any forward-looking statements contained in this supplement are based upon the Company s current assumptions and expectations concerning future events and financial performance and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. PartnerRe s forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments such as: payout patterns of future claims differing materially from our internal historical experience; actual losses and loss expenses exceeding our loss reserves; or changes in the expected currency of future claims payments, and other factors identified in the Company s filings with the Securities and Exchange Commission, including the Company s Annual report on Form 10 K/A for the year ended December 31, 2005, which are available on the Company s website. The foregoing review of important factors should not be construed as exhaustive. The words believe, anticipate, estimate, project, plan, expect, intend, hope, will likely result or will continue or words of similar impact generally involve forward-looking statements. We caution readers not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. PartnerRe

3 Purpose & Scope Over the past two years, PartnerRe has engaged in a discussion on how we assume and manage risk to create economic value. We believe our stakeholders can benefit from enhanced data disclosure. As part of this ongoing effort, we are publishing PartnerRe s estimate of discounted net loss reserves. We believe that the information presented in this document will improve the user s understanding of PartnerRe s underlying economic value and economic value creation over time. At PartnerRe our U.S. GAAP Non-Life loss reserves are recorded on an undiscounted, or full settlement value, basis. Our U.S. GAAP loss reserves represent the full value of all future payments that we expect to make in respect of losses that have already occurred. We expect that these payments will be made over several years in the future. Discounted reserves are the present value of all estimated future payments. They are lower than the loss reserves reported in our financial statements as they take into account the time value of money. The accompanying exhibit presents PartnerRe s estimate of discounted reserves and the difference between discounted and undiscounted reserves. We refer to this difference as the value of discount in our reserves. The value of discount is an approximate measure of the value of the investment income that we believe funds set aside to support our loss reserves will generate in the future. This measure assumes that funds set aside to support reserves are invested in assets earning a return equal to the interest rate used in the discounted reserve calculation. Under usual U.S. GAAP accounting, where loss reserves are not discounted, this investment income will be recognized as revenue in future reporting periods when earned. Changes in the value of discount over reporting periods are therefore a current approximation of changes in the future investment income potential from funds set aside to support our loss reserves. We calculate the value of discount in our loss reserves by discounting future claim payments at the risk-free rate. We choose the risk-free rate to discount reserves as this is an objective measure of the time value of money. The risk-free rate is independent of the actual assets supporting our reserves so any risks assumed in our investment portfolio do not influence our valuation of the discount in reserves. The value of discount in our reserves is one of the elements in the calculation of the economic value of PartnerRe. Several value and risk components are needed to perform a full economic value calculation of PartnerRe. A key element in an economic value calculation is the fair value of our loss reserves. The value of discount is a key element, but not the only one, in the fair value of the loss reserves. A full discussion of economic value and its relationship to fair value is outside the scope of the information presented here, but in the following paragraphs we briefly discuss the relationship between the value of discount and the fair value of reserves. PartnerRe 1

4 The fair value of the loss reserves is usually defined as the amount that PartnerRe would have to pay today in order to transfer its obligations from past claims to a third party in an arm s length transaction. Typically the party that assumes the liabilities would take into account not only the value of discount in the reserves but also the capital investment needed to support the reserves and their own required return on the capital. The capital investment is usually a function of the third party s assessment of the risks associated with the reserve estimates, their risk appetite, as well as statutory requirements regarding reserves. The value of the discount in the reserves is therefore the starting point in calculating the fair value of reserves but other adjustments, often subjective, are made. We present here the value of discount in our reserves as it is a major component of the fair value of our reserves. Although the value of discount is also an estimate (see methodology and risk factors sections), it is not dependent on factors such as risk profile, risk appetite and required return on capital. By presenting the value of discount only, we are not expressing any opinion on how a third party may assess the effect of these factors on the fair value of PartnerRe s loss reserves and hence our economic value. We believe however, that to the extent that allowance for such factors is consistent over time, for a mature portfolio changes in the value of discount over reporting periods will be highly correlated with changes in the fair value of our reserves. PartnerRe 2

5 Methodology and risk factors We calculated discounted reserves in the following fashion: i. For each of our internal reserving classes we estimated future payments, using expected loss payment patterns. These payment patterns were derived both from our internal historical experience as well as external benchmarks. They indicate how the loss reserves for each underwriting year in each reserving class are expected to be paid out. They are a function of both the maturity of the underwriting year and the underlying type of business. ii. We also estimated, for each reserving class, the original currency of future payments for seven key currencies (U.S. dollar, euro, sterling, Australian dollar, yen, Canadian dollar, Swiss franc). Our estimate of future currency exposure was based on the current distribution of reserves by currency and underwriting year. iii. For each reserving class payments in each future year were discounted to the valuation date using the risk-free interest rates at the valuation date appropriate for the underlying original currency exposures. We used the government bond zero coupon yield curves to define risk-free interest rates at each duration for each of the above currencies. iv. We summarized discounted net reserves for each reserving class by SEC segment to calculate the value of discount by segment and in aggregate. v. We calculated Macauley durations and sensitivities to parallel shifts in the interest rates yield curves. These sensitivities provide an indication of how the value of the discount would change if there was an immediate change in interest rates. PartnerRe 3

6 Discounting Reserve Summary by SEC Reporting Segment As at June 30, Booked Net Loss & Loss Expense Reserves U.S. P&C 2,118 2,063 1,731 Global P&C 2,139 2,130 1,993 World-Wide Specialty 2,373 2,389 1,878 TOTAL 6,630 6,582 5, Discounted Reserves at Risk-Free Rates U.S. P&C 1,694 1,670 1,460 Global P&C 1,687 1,757 1,700 World-Wide Specialty 2,111 2,126 1,710 TOTAL 5,492 5,553 4, Difference between Undiscounted and Discounted Reserves = [1] - [2] U.S. P&C Global P&C World-Wide Specialty TOTAL 1,138 1, Macauley Duration of Booked Net Loss & Loss Expense Reserves U.S. P&C Global P&C World-Wide Specialty TOTAL Discount Sensitivity to Changes in Interest Rates U.S. P&C (65) (32) (16) (6) Global P&C (84) (41) (20) (8) World-Wide Specialty (52) (25) (13) (5) TOTAL (201) (98) (49) (19)