Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PartnerRe Ltd (NYSE:PRE)

Q4 2012 Earnings Conference Call

February 7, 2013 10:00 am ET

Executives

Robin Sidders – Director-Investor Relations

Costas Miranthis – President and Chief Executive Officer

William Babcock – Executive Vice President and Chief Financial Officer

Analysts

Amit Kumar – Macquarie Capital

Jay Gelb – Barclays Capital

Michael Zaremski – Credit Suisse

Vinay Misquith – Evercore Partners

Jay A. Cohen – Bank of America Merrill Lynch

Meyer Shields – Stifel, Nicolaus & Co., Inc.

Ian Gutterman – Adage Capital

Operator

Before we start today’s call, I will remind all participants that they are in a listen-only mode. (Operator Instructions) If you have not received the copy of the press release, it is posted on the Company’s website at www.partnerre.com or you can call 212-687-8080, and one will be faxed to you right away.

I’ll now hand the conference over to Ms. Robin Sidders, Director of Investor Relations at PartnerRe who will begin the call.

Robin Sidders

Good morning, and welcome to PartnerRe’s Fourth Quarter and Full Year 2012 Results Conference Call and Webcast. As a reminder, our fourth quarter financial supplement can be found on our website in the Investor Relations section by clicking on Supplementary Financial Data on the Financial Reports Page.

On today’s call are Costas Miranthis, President and CEO of PartnerRe and Bill Babcock, Executive Vice President and CFO of PartnerRe. Costas will start with an overview of the quarter and the year and then hand over to Bill who will provide more details on the results. Costas will come back at the end and provide additional commentary on the market on the January 1 renewal, then we’ll open the call up for a question-and-answer session.

I’ll begin with the Safe Harbor statement. Forward-looking statements contained in this call are based on the Company’s assumptions and expectations concerning future events and financial performance of the company and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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 the forward-looking statements. PartnerRe’s forward-looking statements could be affected by numerous foreseeable and unforeseeable events and development such as exposure to catastrophe or other large property and casualty losses, adequacy of reserves, risks associated with implementing business strategies, levels and pricing of new and renewal business achieved, credit, interest, currency, and other risks associated with the Company's investment portfolio, changes in accounting policies and other factors identified in the Company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking information contained herein, listeners are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the dates on which they are made. The Company disclaims any obligation to publicly update or revise any forward-looking information or statements. In addition, during the call, management will refer to some non-GAAP measures when talking about the Company's performance. You can find the reconciliation of those measures to GAAP measures in the Company's financial supplement.

With that, I'll hand the call over to Costas.

Costas Miranthis

Thank you, Robin, and good morning, everybody. The strong fourth results capped a very successful year for PartnerRe on a number of fronts. Financially we achieved a very satisfying full year operating ROE of 7.3% driven primarily by a strong underwriting results despite continuing to be challenged by the low interest rate environment. We achieved a normalized combined ratio of 87.8% despite a major loss activity in U.S. agriculture and Superstorm Sandy; both of these losses were high end digit and the fact that we were able to absorb during the fourth quarter, a loss like Sandy, and still produce a very good results reflects the increased balance in our portfolio.

Our book value growth was even more interesting, as market value through the year by positioning well our portfolio led to significant gains.

I’m also pleased with the work that we did last year, which enabled us profitably grow our top line in both life and non-life during 2012. A trend we continue at January 1? Which I will discuss after Bill take you through the numbers in more detail. We were active in capital management during the year, allocating capital to alliance where we saw opportunities, continuing to optimize our capital funding by alliance, and investing new capabilities such as our recently announced acquisition of Presidio, and repurchasing a substantial portion of our capital at very attractive and accretive prices.

All of these factors contributed to an excellent 2012, which culminated in us closing out the year with the highest book value per share in our 20 year history. But what gives me even greater pleasure, is that I feel we have better position to face the challenges that lie ahead of us.

I’ll hand over the call to Bill, and I’ll come back at the end of the call to talk more about the January 1 renewals in tenant market conditions.

William Babcock

Thanks, Costas and good morning everyone. We capped a strong 2012, with the solid fourth quarter result. Operating income for the quarter was $96 million or $1.55 per diluted share, which translates to an annualized operating ROE of 7.3%. We finished 2012 with the full year operating ROE of 12.3%. We grew diluted book value per share during the year by 19% or 22% after adjusting for dividends paid closing the year at $100.84 which as Costas mentioned the record high for us.

Turning to our operations, fourth quarter non-life net premiums written totaled $723 million, up 6% compared to the prior year quarter, while net premiums earned were up 1%. These changes are on a constant FX basis as our all references to percentage premium changes for the remainder of my prepared remarks. The increase in net premiums written was driven by our North America subsegment, partially offset by lower premiums in our Global P&C and Specialty subsegments. The Non-life technical ratio for the quarter was 87.9%, producing $116 million of technical income. The net pre-tax charge recorded during the quarter related to Superstorm Sandy was $225 million, consistent with the preliminary indication we provided in December.

Favorably Non-life development contributed $161 million or $179 million after adjusting for changes in premiums to fourth quarter technical income, favorable development on prior quarter reserves in our short tail lines also aided our Non-life underwriting results this quarter.

Before addressing the Non-life subsegment results in more detail, I’d like to provide some additional information about the favorable prior year development we experienced this quarter. The distribution of favorable development this quarter was 58% from short tail lines, 13% from medium tail lines, and 29% from long tail lines. The biggest single contributor to favorable development this quarter was our Global P&C property lines was contributed about 23% of the total.

I will speak these significant drivers of this favorable development as we cover the results of each our subsegments. Favorable prior year reserve development for the full year 2012 was more evenly distributed with 40% from short tail lines, 22% from medium tail lines and 38% from long tail lines. The single biggest contributor in the full year development was casualty in North America, which contributed 23% of the total.

Turning to our Non-life segment results and starting with our North America subsegment. Net premiums written and earned were up 26% and 10% respectively. This growth was driven by new business and upward premium adjustments in our casualty lines, and a $19 million upward premium adjustments related to the 2011 crop year in our agriculture book. The bottom line impact of the agriculture adjustments was immaterial. As losses and commissions were booked against it. The technical ratio for the quarter was 102.4%, and reflects the impact of losses associated with Superstorm Sandy. This event resulted in $66 million of losses this quarter or 21 points on the technical ratio.

Last quarter I mentioned that based on estimates at that time we expected to record our fourth crop results at breakeven. We revised our estimates slightly and recorded a net pretax charge of about $2 million on this portfolio during the fourth quarter. Reported prior year favorable development was $52 million or $68 million after adjusting for the agriculture exposure adjustments, I mentioned when discussing premiums in the subsegment.

Favorable casualty development was the largest contributor and was driven by the continued trend of favorable reported verus expected losses. Favorable property development was also a contributor to this quarter as we reassess prior year event reserves as part of our normal process.

Last quarter I mentioned that losses in this subsegment were coming in closer to expectations than we had observed in recent periods. This quarter losses were below expectations mainly driven by lower than expected casualty losses.

Capping the year by North America subsegment we were able to grow net premiums written by 11%. The technical results of 94.1% was impacted by losses in our agriculture book as a result of a very difficult growing season across most of the U.S. and Superstorm Sandy, while continued favorable reserve development serve to offset these loss drivers.

In our Global P&C subsegment net premiums written and earned were down 10% and 1% respectively, compared to the prior year quarters. The largest drivers of the decrease were cancellations, downward premium adjustments, and the restructuring of two treaties from a proportional to excessive law spaces in property. The technical ratio for the quarter was 74.1% resulting in $48 million contribution to technical income. This excellent results was driven by favorable prior quarter, and prior year loss development in our property lines, comprising favorable development on some of our prior year catastrophe events mainly Thailand and Chile. Our low level of large and catastrophe loss activity in the current quarter, and estimates for large losses occurring earlier in 2012, proving less than initially expected. For the full year, we increased net premiums written in new subsegment by 4%, and produce technical income of $96 million reflecting an 85.9% technical ratio for the year.

Turning to our global specialty subsegment net premiums written and earned were down 4% and 2% respectively, downward premium adjustments in our engineering, and marine lines and non-renewals and increased retentions in aviation and energy more than offset new business in our specialty property lines.

The technical ratio for the quarter was 97.8% and includes 25 points or $86 million of losses related to Superstorm Sandy, which impacted both our treaty and facultative books. Favorable prior-year reserve development was $46 million this quarter and was distributed broadly across lines. For the full year in Global Specialty, we increased net premiums written by 8%, recorded a technical ratio of 83.2% and produced technical income of $231 million.

The fourth quarter isn’t a large renewal period for our catastrophe subsegment. Net premiums written and earned were up 24% and 9% respectively on a small renewable base. The technical ratio for the quarter was 45.4% and includes 67 points or $71 million related to Superstorm Sandy.

Prior year favorable development was $23 million and was the result of a number of small reserve releases, none of which were individually material. The technical result was also favorably impacted by development on prior quarter events, including Hurricane Isaac and the Italian earthquake.

We continue to hold the $50 million of gross bulk IBNR reserve for the 2011 catastrophe, we established at the end of 2011. we continue to review development on these events and although in the aggregate, there has been no material increase, we believe that sufficient uncertainty remains for warrant approved reserving commission.

For the full year, on a catastrophe subsegment, net premiums written decreased 19% as a result of the portfolio repositioning we undertook and discussed with you in 2011, and early 2012. We recorded technical income of $312 million reflecting the technical ratio of 31.7%.

Turning to our Life segment, net premiums written and earned were up 7% and 4% respectively, this quarter over the comparable prior year quarter. The increases were the result of growth in our mortality business and the impact of the new longevity treaty we wrote midway through the fourth quarter of last year. The life allocated underwriting results, which includes allocated investment income and operating expenses was $5 million this quarter compared to $6 million we reported in the prior year quarter. A decrease in allocated investment income reflecting lower reinvestment rates was the driver. For the full year, net premiums written and earned were up 6% and 5% respectively and produced an allocated underwriting result of $48 million.

On the investment front, markets were fairly stable this quarter. Overall investment activities contributed $126 million to fourth quarter pretax income, excluding investment income allocated to our Life segment, nearly all of this amount was included in the operating income in this quarter.

During the quarter, we achieved a total return of 0.8% on a local currency basis. Net investment income for the quarter was $136 million, essentially flat compared to the third quarter of 2012. the impact of lower reinvestment rates was largely offset by FX this quarter. We expect continued pressure on investment income in coming quarters assuming current conditions persist. The market yield on our portfolio increase slightly this quarter to 2.01%, however continues to trail our current portfolio investment income rates by 126 basis points.

Based on our view of risks of rising rates, we increased our short of neutral duration this quarter bringing the expected average duration of the investment portfolio to 2.75 years from 3 years. Operating expenses this quarter were $112 million compared to $95 million we reported in the third quarter of 2012. The increase is due primarily to various quarter-to-quarter accrual items and other non-recurring items impacting the quarter.

Looking at the full year, operating expenses were $411 million in 2012 compared to $435 million in 2011 despite higher bonus accruals in the current year period. The effective tax rate this quarter were 16% on operating income and 79% on non-operating income. From the full year, our operating effective rates was 13% and our non-operating rates was 19%. These rates reflect the geographies were profits and losses emerged.

Net income of $112 million for the quarter, drilling for comprehensive income results of $105 million. For the full year 2012 comprehensive income was $1.2 billion and was driven by full year net income of $1.1 billion. Operating cash flow was positive $224 million this quarter, up from the negative $10 million we reported in the comparable prior year quarter. The increase is primarily related to higher underwriting cash flows resulting from lower catastrophe loss payments.

The time value of money in our Non-life reserves was $466 million at quarter-end, essentially unchanged from the end of the third quarter of 2012. We calculate this using the risk free rates for each major reserving currency.

Total capital at quarter-end was $7.7 billion, down slightly from the end of the third quarter, as share repurchases and dividends exceed comprehensive income this quarter. On the matter with share repurchases I’d like to recap our activity for the year.

During the full-year 2012, we repurchased $7.1 million shares or 10.8% of shares outstanding as at the beginning of the year. We executed this repurchase activity at an average discount to diluted book value per share of nearly 20%, adding over $2 in value per share, and helping us close the year at our highest ever diluted book value per share at over $100.

Compared to operating income for the year of $664 million, share repurchases in common dividends totaled $689 million, so our share repurchase activity for the year meaningful in both quality and positive financial impact. We have continued to repurchase shares since year-end, and expect to continue to do so in the near-term, but as always we take into consideration valuation as well as opportunities to profitably deploy capital in our business.

Before I hand the call back to Costas, I’d like to address a few financial considerations regarding our recently announced acquisition of Presidio. The transaction close on the last day of 2012, so it’s reflective in our year-end balance sheet, it’s not in our P&L. We recorded intangible assets net of tax of approximately $73 million as a result of the acquisition. The intangibles were amortized over a period of 13 years, with about 60% of the amount amortized over the first six years. Amortization for 2013 is expected to be about $7 million. The results of Presidio will be included in our Life segment beginning in the first quarter of 2013.

In our announcement we indicated that the underwritten premium is about $250 million, given Presidio had been operating principally as an MGA we will maintain certain funding relationships for a period of time, to ensure an orderly transition of business. But we expect to see a little less than half of this amount in our top line in 2013, and weight it for the latter half of the year. Fees related to the MGA relationships will be accrued as income as well. We expect most of the funding relationships to transition by the end of the year.

Also for the next two or three years, we expect that income and intangible amortization will be largely offsetting. That said we are very excited about the prospects this transaction brings our organization.

I’ll now hand the call back to Costas.

Costas Miranthis

Thank you, Bill. As you saw from our press release last week, we had a successful January 1 renewals posting a 12% increase on renewable premium. About 60% of our Non-life treaty renews on January 1, with U.S. agriculture renewing later in the first quarter, and facultative business renewing early than require for the year. Most of our business units find attractive opportunities to grow, to grow the portfolio by expanding existing client relationship either through increasing shares on existing contracts or participating new insurance contracts bought by existing clients. We also entering a limited number of new relationships. Although these opportunities may not continue to present themselves throughout the rest of 2013, this is a strong foundation on which we’ll start the year.

As for market conditions, apprised technical ratios in the various lines are generally similar to last year although they range from very modest declines to areas where profitability have been particularly high to the significant increases in areas that excluding the losses over the recent past.

The broadest feature is one of modest, but steady improvement in underlying primary market pricing, and stable reinsurance market. As a significant portion is on proportional basis, primary improvement directly impact our price profitability. I believe that the market improvements are not driven by an imbalance between demand and supply, but rather by the realization that in the different macroeconomic environment in which we operate, rates need to adjust to maintain an adequate return.

More specifically in the U.S., we have seen primary rate increases in almost all lines with the possible exception of medical liability. On average, this increases R&D 4% to 6% range, as we’ve commented last quarter although 12 months ago the increases were concentrated on short tail lines. They are not broader and casualty rate increases are beginning to catch up and outpace loss trends.

For international standard P&C business were generally stable or even modestly increasing particularly in Europe. In some cases, for example in the UK where loss trends in the recent type have been really high such as more to excess. The market is experiencing dislocations and rates are increasing our own process.

As expected, we saw profitable growth opportunities in several of our specialty lines. the pricing environment range from stable to sharp increases in lines that had experienced losses over the last few years. Marine rates were sharply up, and energy rate continued to be firm. The marine market has seen several large losses over the last two years including absorbing a significant portion over loss from Sandy.

Other specialty property rates also appear to be on a firming trend. PartnerRe, has many year of expertise in many specialty lines and our diversified platform allows us to provide low to risk solutions across many lines of business. This is increasingly attracted to cedants while choosing to use life reinsureds at a meaningful proportion of the growth in our specialty lines can be attributed to relationships that have a more than one line of business.

The Property cat loss business, it is a bifurcated story. Business that were impacted by losses or where the perception of risk increase, so substantial increases were 20% or more in income cases, this include the coverage impacted by Sandy as well as business more exposed to combative storms in the U.S.

For a broader construction of our portfolio however, that have an adequate year, we said our risk rates were flat or marginally down in the 2% to 3% range on average. The U.S. in general was somewhat more attractive than international. so overall, the pricing environment for the aggregate portfolio was broadly stable.

Demand was marginally down, as in some cases, some cedants chose to retain more while others to reflex (inaudible). In this environment, we approach the market with a similar risk appetite as in 2012, although as always our approach for particular zones or programs dependent on prices.

We expect to significantly increase our agriculture portfolio this year, both in the U.S. and internationally. In the U.S. we’ve added meaningful new relationships with proportional MPCI business. The final premium volume is still dependent on commodity prices, which will still not be determining until later this quarter.

Our Life business is not so driven by the January 1 renewals, as our Non-life business due to the continuous nature of many of the conflicts. However, we continue to make steady progress in an environment with new business terms for Life remains competitive. In his remarks, Bill mentioned our acquisition of California-based Presidio Reinsurance Group, a leading U.S. specialty accident health underwriter. This is a new line of business for us and that’s a new risk life to broaden our overall diversification. When the transition from the MGA status is complete it will provide us with an additional 250 million of more in premium and good growth prospects.

It has limited correlations for our existing group of business and allows us to further diversify our earnings claims from a capital, and from a capital perspective it is about efficient. The Presidio team is very experienced and indeed a thought leader in the niche and the focus on technical expertise and their technical prowess fits well with our culture. It positions us well for future growth by providing access to specialty re’s we have not previously accessed.

Although I'm sure this market will also experience normal cyclical competitive pressures, we believe we will be able to navigate this and establish our presence in the market where demand is likely to grow over time.

Finally, a quick remark about our investments, as you heard from Bill, our portfolio did very well during the year. In part, this was a reflection of the asset class positioning and superior portfolio performance by our own investment team. But it also reflects the substantial contraction in fixed income yield over the last year. In details we face in near future their low yields are likely to be the single most important challenge we think. While we will selectively take risks on our asset portfolio overall we will continue to maintain a high quality portfolio, and strategically at somewhat short on duration.

As our reference at the beginning of the call 2013 marks a 20 anniversary since we have formed in 1993, during this time we have evolved form the catastrophe specialist into a truly global diversified organization, and shown resilience in the phase of often turbulent market conditions both in the reinsurance market, and on the investment side of our business. While market conditions will always be changing, and will continue to present new and perhaps significant challenges to our industry, I’m confident of PartnerRe will continue to adopt, and maintain its track record of success well into the future.

We are now happy to take any questions you may have. Operator we are ready for your first question.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Amit Kumar of Macquarie Capital.

Amit Kumar – Macquarie Capital

Thanks and good morning, the first question relates to the discussion on capital management, and you’ve talked about 2012, I’m curious how do you think about capital management for 2013, just based on the 1/1 renewal data, are you still thinking of setoff dividends plus, buyback equal to net income or maybe you’re thinking that we need to hold more capital based on growth enhance buybacks will diminish going forward maybe just how to flash out that thought process.

William Babcock

Sure. You should think about 2013 along the same lines of 2012, which should be earnings potentially flat depending on valuations. The increases that we saw 1/1 were really not in very capital intensive lines, so they didn’t change our view of capital management for 2013.

Amit Kumar – Macquarie Capital

Okay, that’s helpful. Other question goes back to the 1/1 renewal data, obviously this is helpful, what would be even more helpful is, could you sort of breakout, how much was new business out of this growth?

Costas Miranthis

It’s actually very difficult to break new business from increases on existing lines, because very often contract get to reflect, system track these, new business even though is an existing contract like that different lines. We’ll give you the number for the combined increasing share plus new business in the press release.

Amit Kumar – Macquarie Capital

Yeah. I have that in front of me, the reason I’m asking is if you compare the commentary with some of the other Bermudians, clearly, you seem to be in a better place than some of the other guys, and that’s what we’re trying to understand a bit better, just based on the 12% growth number for 1/1?

Costas Miranthis

Well, as I mentioned in my comments, I think we’re in a very good position with a number of our clients to access more of their business, even in an environment where the total buying is decreasing, and as I’ll give you an example with some of the major buys that we track, major the total spending decrease and decreased in maybe more than 30%, the portion of the business we get actually went up. We do have preferential treatment particularly with relating to clients that we’ve been over a long time.

Amit Kumar – Macquarie Capital

Got it, final question, and then I'll requeue. You’ve talked about the impact of Presidio over 2013, so you have Presidio, you have crop, you’ve had a good 1/1 renewal. What lines are going to pull backup on this life and annuity book, it is the focus change on that book for 2013, what is the offset here just based on the growth in all the other lines?

Costas Miranthis

I didn't say we have sorted anything. It is nothing that we have to offset, we will make the decisions, want to make decisions depending on meet some trust, lead some profitability compared to what we believe is an adequate rate of returning to current environment.

Amit Kumar – Macquarie Capital

And what do you quantify as an adequate rate of return?

Costas Miranthis

Rates being below 2% which we rates, I don't think we can make double-digit returns in all of our business, so high single-digits or above is perfectly acceptable at this point.

Amit Kumar – Macquarie Capital

Got it. Okay that's all I have for now. Thanks so much for the answers.

William Babcock

You're welcome.

Operator

And we will take our next question from Jay Gelb of Barclays.

Jay Gelb – Barclays Capital

Thank you. I wanted to follow-up on the crop reinsurance book, are you able to discuss at this point, where how much rates do you think were advanced, when those contract renew?

Costas Miranthis

First of all rates, I assume that you're speaking largely about the MPCI, the U.S. MPCI portfolio rates the government sets and that have already – something is already known about this from the RME, and the way the formula works, it’s a little bit retrospective looking without taking into account, the losses of last year that will impact rates next year. The impact this year is a slight reduction in margins, but there’s a variation between state and 12, the impact of our overall portfolio is fairly minimal about 1%. When I mentioned earlier about there’s some uncertainty of our premium volume. The reason for that is premium volume is set, depending on overall prices are at the certain date during the first quarter and that date is a few weeks ahead, where commodity prices are. There’s some activity on the premium volume.

Jay Gelb – Barclays Capital

Right. So in the January outlook release, implied a big uptick in volume of premium for across the PartnerRe, it’s going to, I’m just trying to square those two factors.

Costas Miranthis

Yes. There’s a very big uptick in volume, because we signed up in new agreements, which will produce significant additional premium.

Jay Gelb – Barclays Capital

I see, okay. And then my separate question probably for Bill, is net investment income stabilized compared to the third quarter, I’m just trying to understand. And so why that was given we’ve seen some pretty sharp declines on a quarter-over-quarter basis and clearly year-over-year. And is this $136 million pretax level, is that a good baseline going forward?

William Babcock

Yeah. I guess two parts to that question. The first is, we do see some, the reason we have steadied this quarter was basically the favorable impact of FX, otherwise on the FX neutral basis, we would have seen a slight decline, and as you’ve seen in the past couple of quarters, it’s not exactly linear, it’s a little bit of bouncing around quarter-to-quarter, it’s the current quarter of level, you should assume the run rate going forward absolutely not, we quite of just said in by prepared remarks on what that spread us between reinvestment rates in the current yield, and we expect to continue to come through each quarter. Yeah, so that’s how you should think about it.

Jay Gelb – Barclays Capital

All right. so we would see that predominantly in the fixed maturities line, which is essentially net of everything by more than 90% of the recurring investment income.

William Babcock

Yeah.

Jay Gelb – Barclays Capital

Okay. Now I just want to make sure there’s no – it seems to sometimes there’s – I don’t know whether it’s partnership distributions or maybe some aspect of realized gains that are in that. is that a pretty clean number for 4Q?

William Babcock

No, what we really see is – we have dividend receipts, they’re really mightier. We don’t have alternative investments that we run through investment income.

Jay Gelb – Barclays Capital

Okay.

William Babcock

So, the receipts we have a little bit of bouncing around, but nothing, major that you should think about realized gains really to that line item.

Jay Gelb – Barclays Capital

I appreciate it, thank you.

William Babcock

You’re welcome.

Operator

And our next question comes from Michael Zaremski of Credit Suisse.

Michael Zaremski – Credit Suisse

Thanks. In Global Specialty, 86% acts in near excluding cap’s combined ratio, obviously very good. any elements impacting that ratio we should be aware of?

William Babcock

No, good under writing performance.

Michael Zaremski – Credit Suisse

Okay. And a follow-up to Jay’s last question, Bill are you just able to provide us with the FX benefit in that investment income this quarter?

William Babcock

I’ll get back the number for you, just give me a minute.

Michael Zaremski – Credit Suisse

Okay. No problem, and then I guess lastly, could you talk about the margins and ROE profile that I think it’s accident and health business that will be coming on board with Presidio? Thanks.

William Babcock

I’ll talk about the long-term combined ratio margins that this business have experienced. On a very long basis, this business appears to be running to low 90s somewhere from the high 80s to the low 90s averaging about to 90 to 92, which could be bringing the mid-80s and that was getting 95, 96. This is on a combined ratio including their own expenses. On an ROE basis, as I mentioned in my prepared remarks, the ROE for us is like, it will be very attractive as this business is very efficient from a capital perspective, as it is highly uncorrelated with outer portions of our business and comes other declines.

Michael Zaremski – Credit Suisse

Got it. Is that the U.S. for global business or both?

William Babcock

It's both, although a vast majority is US with some good prospects for expansion both in the U.S. and internationally, but over 90% of this business is U.S.

Michael Zaremski – Credit Suisse

Got it, that’s helpful. thanks.

William Babcock

And Mike that investment number you are looking for the FX on investment income was about $3 million help this quarter.

Michael Zaremski – Credit Suisse

Great.

Operator

And we’ll take our next question from Vinay Misquith of Evercore Partners.

Vinay Misquith – Evercore Partners

Hi. First, just a follow-up question to be capital management, if I heard you correctly, you said no change to your view despite this strong top line growth this year, correct.

William Babcock

Yeah.

Vinay Misquith – Evercore Partners

Okay. So we should expect about 100% of earnings being sort of distributed to shareholders this year, roughly you would say.

William Babcock

Yeah, always depending on like sort of I think in other opportunities that maybe available for us. I mean there is not benefit, but I would think vehicle, we expect that we don’t need additional capital and we can deploy to return it.

Vinay Misquith – Evercore Partners

Okay, fair enough, that’s okay. Second question is your tax and didn’t your margin improvement maybe ‘13 versus ‘12. You mentioned that rates in the U.S. that 4% to 6%, what proportion of your business remind me, a sourced within the U.S., because I know that about 45% of your growth premiums come from the U.S., but I think it’s more than that, correct?

William Babcock

So you’re asking what proportion of our business comes from the U.S.?

Vinay Misquith – Evercore Partners

Yes, correct.

William Babcock

Yeah. The business you should take into account that a large portion of what we have in our specialty line curve is with we’re operating in the U.S. So everything that you see on the North America is U.S., and a large proportion on perhaps, more than 50% of what you see in the global specialty line is risks, which originate in the U.S., even if the client is not the U.S., the underlying risk and hence the pricing environment that applies to that really is in the U.S.

Vinay Misquith – Evercore Partners

Sure. And would you expect margins to expand in ‘13 versus ‘12 based on the pricing at least in the U.S.?

William Babcock

Like I said in my earlier remarks, the rates are improving on the primary side, but I want to make one point straight, when I say rates are improving on the primary side, that improving for less, because a very less portion of our portfolio is proportional. So we get it lacking with that primary gets other than any commission adjustments, which as I indicated, we have been reluctantly stable. So ways are improving in the U.S., ways are improving internationally with somewhat higher improvement in the U.S. and we see in other parts of the world.

Vinay Misquith – Evercore Partners

Okay, that’s helpful. And then one last follow-up on the net investment income that $3 million number that was given for the FX. Thanks. So is that a one-time benefit that we should be sort of zeroing out next quarter or will that remain with?

William Babcock

No. You can’t predict what the FX component is going to be one quarter to the next Vinay, but what you can predict is on a like basis, how much decrease in investment will come through, because of that spread in portfolio versus market yield that I quoted to you.

Vinay Misquith – Evercore Partners

Okay, that’s helpful. Thank you.

William Babcock

You’re welcome.

Operator

And we’ll take our next question from Jay Cohen of Bank of America.

Jay A. Cohen – Bank of America Merrill Lynch

Thank you. A couple of questions, first is on Presidio, where will those revenues and earnings be reported in your reporting structure?

William Babcock

You’ll see it will be in our Life segment. And you’ll see the kind of the normal premium revenue come through the premium line and you’ll see the fees come through the other income line in 2013, and that’s where it will look just like everything else it does in our business and be reported in our Life segment.

Costas Miranthis

In fact, we would probably (inaudible).

Jay A. Cohen – Bank of America Merrill Lynch

Okay. So the fees as well going at Life segment?

Costas Miranthis

Yes. The fees are temporary thing larger transition of portfolio, we don’t intend to be in the MGA business, that’s our transition phase, which basically because the number of our payments are well in place, and you will see some increase in 2013 from 2014 on what you shouldn’t expect that to be ending for meaningful.

Jay A. Cohen – Bank of America Merrill Lynch

Got it. That’s helpful. I did notice in the I guess the corporate side, the amortization our intangibles this quarter went down versus the third quarter, I don’t see any change in the balance of that number, I’m wondering why that happened?

William Babcock

The balance did changed, but you did see the number of the amortization number for the quarter, come down that’s really related to the amortization of intangibles on Paris Re, and because it’s not a straight line amortization that’s why you saw the decrease this quarter. Again you will see it go up next quarter, because it will include a continued amortization of what’s left in Paris Re intangibles plus Presidio, starting in the first quarter.

Jay A. Cohen – Bank of America Merrill Lynch

So we should start with that roughly $5 million pace net, net Presidio.

William Babcock

Yes, 7 to annual for Presidio.

Jay A. Cohen – Bank of America Merrill Lynch

Great, and then. What’s that?

William Babcock

I give you a number of 7, I assuming you put that in the quarters and coming up with your 2, that’s correct.

Jay A. Cohen – Bank of America Merrill Lynch

Correct, next question may be for Costas, on the pro rata business which is the dominant part of your business outside of cat, what’s happening with the ceding commission and terms and condition on these contracts any trends there?

William Babcock

There was my comment about reinsurance spend were largely stable. No, no a couple of trend for increased commissions, there is some plusses, some minuses, while look overall portfolio it’s stable.

Jay A. Cohen – Bank of America Merrill Lynch

Very good.

William Babcock

And even the plusses and minuses are fairly minor.

Jay A. Cohen – Bank of America Merrill Lynch

Got it, thank you.

Operator

We’ll take our next question from Meyer Shields with Stifel, Nicolaus.

Meyer Shields – Stifel, Nicolaus & Co., Inc.

Thanks good morning everyone. Costas you’ve talked a little about maybe an uptick in competition in these accidents and health grounds, and I was wondering if you could expand on that a little bit, particularly in light of whether we should expect a factor loss cost inflation as the Affordable Care Act is actually implemented in 2014 and beyond.

Costas Miranthis

Thanks for the question, and accident and health is a business that will go through a number of changes over the next two years, I’m talking about the U.S. health environment and yes there is a possibility that you’ll see higher cost products. Those are already factoring in the pricing, and one point that I omitted to mention, this is a very short tail business, we know exactly where you stand in a very short space of time, so one of the characteristics of this business is adjustment in rates vary fast to response, unlike casualty or liability business, where you may see that two or three years before you can figure out, what’s the impact of your current pricing is compared what the trends in this business manifest themselves very quickly.

So I’m sure over the next few years, we will see a number of changes so that’s what I believe, it’s very important is to have an experience team that have done this before, and react to the changes very rapidly to gain maximum advantage.

Meyer Shields – Stifel, Nicolaus & Co., Inc.

Okay and I guess simple question, is there any way, I came on a little late, I mean is there any way of quantifying the impact of premium adjustments outside of agriculture on the quarters underwriting profit.

William Babcock

No that I mean segments are all over pluses and minuses, we don’t track it that way.

I don’t expect, in the future I can…

Meyer Shields – Stifel, Nicolaus & Co., Inc.

Okay, fantastic.

William Babcock

They are more impact full on obviously in ag, they are almost entirely offset in other lines depending on how the tail of the line they can be completely offset or if they older related to older years which is unusual they can have some bottom line impact, but that we don’t have those numbers

Meyer Shields – Stifel, Nicolaus & Co., Inc.

Okay that’s great thank you.

William Babcock

You’re welcome.

Operator

(Operator Instructions) And we go next to Ian Gutterman of Adage Capital

Ian Gutterman – Adage Capital

Hi good morning. Costas could you talk a little more about the crop growth, I think it was about $200 million increase in January renewal, just on flavor of what type business it was quarter share, XOL, it was a national carriage or regional, just kind of flavor of where the growth came from.

William Babcock

It’s almost all proportion, I think partly and full we will have a very small XOL would be, and it’s spread very broadly national, concentrated in any one particular state.

Ian Gutterman – Adage Capital

Great and just are there caps in there anything, I guess what I’m going to do towards is the soil conditions right now are pretty awful, and I think there is only the chance we have a great spring rains, but if we don’t it seems like we’re starting behind the April a bit, just curious how you feel I know it is a long-term relationships, but how you feel about putting all that business into what it looks like a tough year.

William Babcock

Well it’s too early I think only one thing I know it’s too early to tell whether it’s going to be a tough year or not. I mean last year business looking to be good a very good year, a bumper year up until June, then it changed very rapidly, so it is a bigger boost, but you should think it that we look at our exposure on these, and we manage the aggregate reach to that we expose the total portfolio to, and we’ll going forward will be prepared to look at other instruments on managing the rates including potentially buying some professional sales

Ian Gutterman – Adage Capital

Got it great, and then Bill, maybe I did my math on here, but I think I’m right, and in the cat business, the cat segment your last ratio ex-cat, ex-development we’ll take its a negative remember.

William Babcock

No.

Ian Gutterman – Adage Capital

Is that right and so why would that be?

William Babcock

Really, prior quarter and prior year development was favorable in that line.

Ian Gutterman – Adage Capital

Okay. Do you have that? How much that would be?

William Babcock

We published the prior year number.

Ian Gutterman – Adage Capital

Right.

William Babcock

And the prior quarter number was in the 20 range.

Ian Gutterman – Adage Capital

Okay. $20 million you mean, not 20 points.

William Babcock

Yeah, yeah. $20 million, yeah.

Ian Gutterman – Adage Capital

Okay. And then just lastly, do you have what impact reinstatements had on the quarters?

William Babcock

$12.4 million in total of which $11 million was in cash and that is also the only reinstatement for the full year.

Ian Gutterman – Adage Capital

Great, thank you so much.

William Babcock

You’re welcome.

Operator

And we have no further questions. At this time, I’d like to turn the conference back over Mr. Miranthis for additional or closing remarks.

Costas Miranthis

Well, thank you very much and this concludes our fourth quarter call. Thank you for joining today and for your interest in PartnerRe. We look forward to speaking with you again during our next quarter. Thank you.

Operator

And this does conclude today’s presentation. Thank you for joining and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PartnerRe's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts