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PartnerRe Ltd. (NYSE:PRE)

Q4 2009 Earnings Call

February 11, 2010 09:00 pm ET

Executives

Robin Sidders - IR

Patrick Thiele - President and CEO

Albert Benchimol - EVP and CFO

Analysts

Jay Gelb - Barclays Capital

Matthew Heimermann - JPMorgan

Jay Cohen - Bank of America, Merrill Lynch

Ian Gutterman - Adage Capital

Paul Tucker - Egerton Capital

Josh Shanker - Deutsche Bank

Operator

Before we begin the call I would like to remind all participants that they are in a listen-only mode. (Operator Instructions).

If you haven't received a copy of the press release, it is posted on our company's website, www.partnerre.com or you can call 212-687-8080 and one will be faxed to you right away. As a reminder this call is being recorded.

I'll now hand over to Robin Sidders, Director of Investor Relations at PartnerRe, who will begin the call today. Please go ahead.

Robin Sidders

Good morning. And welcome to PartnerRe's fourth quarter and full year 2009 earnings conference call and webcast. As a remainder our fourth quarter financial supplement can be found on our website at www.partnerre.com, in the Investor Relations section by clicking on supplementary financial data on the financial reports page.

On today's call are Patrick Thiele, President and CEO of PartnerRe; and Albert Benchimol, Executive Vice President and CFO of PartnerRe.

Patrick will start with an overview of the quarter and full year and then handover to Albert who'll provide more details on the results. Patrick will conclude with some additional commentary on the market and then we'll open the call up for a Question-and-Answer Session.

I'll begin with the Safe Harbor Statements. 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 and 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 in developments such as exposure to catastrophe or other large property and casualty losses, equity and reserves, risks associated with implementing business strategy levels in 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 these measures to GAAP measures in the company's financial supplement.

With that, I'll hand over call over to Patrick.

Patrick Thiele

Thank you Robin and welcome everyone to the 2009 results conference call for PartnerRe. 2009 was an exceptional year for PartnerRe on several levels. We had record results on a number of metrics including operating earnings per share on $14.59 which led to an operating return on beginning equity or 22% and GAAP book value per share of $84.51 representing 32% growth in the one year period.

We did this despite starting the year of in the worst economic and financial environment the company has ever faced and finally to position and prepare ourselves for the future we purchased PARIS RE substantially increasing our capital base our asset portfolio premium volume and diversification while reducing our overall risk profile.

Our performance in 2009 underscores the focus on risk and return management that is central to the strategy that we are consistently applied and executed over the last several years. Over virtually any time period during the last 10 years we have met or exceeded our financial goals of 13% operating ROE and 10% plus growth rate in book output value per share.

We have increased our common dividend every year since our inception, creating approximately 300 basis points of additional share holder return. We expect that with the new larger size stronger balance sheet and more diversified risk portfolio we are well positioned to continue this track record under whatever external market pressures economic financial or industry specific we are faced with.

Specifically our significant and larger premium base allows us to deploy the capital to lines and markets with the most attractive risk and return characteristics and take advantage as opportunities as they arrive. As we have in the past we expect to return capital which we cannot efficiently deploy to shareholders through dividends and share repurchase assuming the stock continues to sell at less than economic value.

As regards to PARIS RE we are moving ahead with the integration and expect that as of July 1, we will be operating as one company. We maintain our existing executive committee and our business unit structure while making some senior management changes which are outlines in the press release that is being issued today.

Next up is dealing with the combined operations expense structure. Obviously given the unique nature of French regulation this process will take time and money to accomplish but we expect to have it substantially complete by year end and consistent with the regional economics of the deal.

I would like to highlight the contributions of the PARIS RE management board led by CEO, Hans-Peter Gerhardt their cooperation professionalism and support through the integration process has been helpful in making this a smooth transition for all. I wish those who are not continuing with us good fortune in our future endeavors.

I will now hand the call over to Albert to walk you through the results in more detail and I will come back at the end of the call to talk more about the specifics of the integration and give more information on market conditions in the January renewal. Albert?

Albert Benchimol

Thank you Patrick and good day everyone. This was indeed a spectacular quarter to end an exceptional year. At this time last year we were in the midst of the worst financial crisis of our lifetimes. Today we are reporting to you the best results in our history. Thus it was from a position of strength and stability that we consolidated PARIS RE into our organization and this too added to our results.

You may recall we closed on the block purchase and acquired majority over ownership of PARIS RE on October 2, and we ultimately closed the merger on December 7. Our fourth quarter results include the operations of PARIS RE from the second of October.

This was a busy quarter and with the acquisition of PARIS RE there was a lot of movement in our financial statement. I proposed to keep my remarks at a high level and only focus on significant development in our operating results or material changes to our financial statements. Of course we would be happy to address any specific issue during the question and answer period.

Fourth quarter Non-Life premiums written are up 20%, excluding PARIS RE and FX net premiums written would have been down close as 10%, as a result of higher retention by some of our clients, our discipline on the of price declines in certain lines changes in the timing of certain renewals as well as reinstatement premiums.

Our U.S. operations report had a modest growth in premiums written but this was more than offset by reduction in other units. I wouldn’t get hung up on the quarterly comparison as there are many moving parts. I would direct you to the full year comparisons which were pretty stable.

Net Non-Life premiums earned are up 39% but would have been essentially flat year-over-year excluding PARIS RE and FX. We reported a fourth quarter technical ratio of 73.2% and a combined ratio of 80.3. Our underwriting results reflect a profitable and well balanced book of reinsurance risks and this was further enhanced by the absence of large losses as well as the continuing favorable developments of our reserves.

These results represent a significant improvement over the fourth quarter of 2008, which included $114 in Ike losses and higher loss ratios for lines exposed to the credit crisis. All of out Non-Life sub segments performed well especially our catch units which had essentially no losses.

PARIS RE contributed its fare share to our Non-Life results with premiums earned of $312 million and a technical ratio of 81.4%. While that ratio was about 10 points higher than that reported by the other Non-Life segments the legacy private PartnerRe units benefitted from $136 million in favorable reserve development $16 million of which related to prior quarters of 2009.

By definition there can be no prior year impact in the PARIS RE book as this is the first quarter we reported as part of PartnerRe. For the full year our Non-Life business which include, PARIS RE only for the fourth quarter reported a 1% reduction in net premiums written. It would have been essentially flat excluding the reinstatement premiums related to Ike and Gustav.

Interestingly the inclusion of PARIS RE fourth quarter net premiums written offset the full year negative impact of FX on this metric. The U.S. sub segment was flat but the global P&C, global specialty and Cat sub segments reported full year decline. The overall decrease in net premiums written is attributable to most lines of business including U.S. casualty on the global P&C side some property casualty and motor and on the specialty side, specialty casualty and credit and surety.

We reported a full year Non-Life technical ratio of 74.6% and a combined ratio of 81.8% as compared to a full year combined ratio of 94.1% in 2008. As noted earlier we have no large losses in 2009 and benefitted from $486 million or 13.8 points of favorable development in 2009.

We also had favorable development in 2008 and this reduced the combined ratio by 12.5 points. But we experienced $284 million or 9 points of Cat losses related to Gustav and Ike. Excluding prior year reserves in the volatility of large Cat losses accidents to your technical ratios are holding up well year-over-year.

This is due to contained loss trends generally our reported claims are coming in at or below expectations for most lines. Occasion point in specialty casualty as you may recall we have expressed concern in the past that the recent sub prime and financial crisis would cause a spike in liability claims.

In addition to our normal attritional IBNR we lifted up in excess of $150 million in specific IBNR for the financial crisis. To date however claims have come in below our cautious expectations. With that said we think it is too early to make any changes to the reserves we have put up for this eventuality.

On the other hand the recession has caused a significant increase in claims for credit and for credit reinsurance. We are comfortable that we have booked this line as efficiently higher loss ratios for the effected years. Here too though we have observed from stabilization and claimed trends have started to come down from the elevated levels. It is worth noting that our credit book is nearly entirely comprised of European trade credit and does not include any meaningful exposure to structured credit or political risks.

Looking forward our expectations at the favorable trends we have observed in most lines will not persist and we therefore price business and book reserves on that basis. As we report a couple of weeks ago we have a satisfactory renewal and we believe price tactical ratios for the January 2010 renewals are consistent with those achieved in 2009.

Our life operations continue to grow at a good pace for the quarter net written premiums were up 17% excluding the impact of FX driven by production in the longevity portfolio and new traditional mortality business. Production and likely insurance can be lumpy so I point you to the full year statistics where life net premiums written grew 12% as in the impact of currency fluctuations.

The life allocated underwriting results which include allocated investment income and operating expenses was $10 million for the quarter and $51 million for the full year. The GMDB line affected results in both years.

In 2008 given the significant drop in equity markets the GMDB recorded adverse development of $33 million. In 2009 given the recovery in equity markets the GMDB line booked favorable development of $16 million otherwise the rest of the life book is progressing in line with expectations.

We continue to believe that our life business is an excellent source of profitably premium growth and serves to diversify our portfolio of risks. Our investment and capital market activities contributed to $204 million to our fourth quarter pre-tax results inclusive of the PARIS RE contribution but excluding life investment income.

Of this amount $165 million wasn’t included in pre-tax operating income with an additional $39 million in portfolio gains and earnings from equity investee companies. Overall our portfolio was well positioned to protect investment income and market values in a challenging investment environment.

Our full consolidated fourth quarter investment income was $182 million of which $16 million was allocated to life operations. PARIS RE contributed $34 million the pre-tax invested income. Otherwise quarterly invested income would have been relatively flat year-over-year absent FX and a small number of non recurring items.

For the full year consolidated investment income was $596 million, a 4% increase over the prior year. Investment income would have been essentially flat excluding FX and PARIS RE.

Investment income would have been higher had we not opportunistically reduced debts earlier in 2009. But the $88 million pre-tax gain on the CENts unit and the significant savings with interest expense were well worth that investment. On the positive side we had investment of positive cash flow and the benefit of some higher yielding assets repurchased late last year and earlier in 2009. On the negative side we are reinvesting our portfolio at rates substantially below those of maturing bonds and this is dragging investment income growth.

By way of illustration our average portfolio book yield is 4.2% while the overall portfolios average yield to maturity at the market is 3.5% the book yield I just mentioned includes the impact of purchase accounting. As you may know under purchase GAAP accounting all acquired investments including those within the directly managed funds held account are recorded at market value.

Thus we increased the cost basis of PARIS RE invested assets by approximately $140 million to reflect its market value on October 2. This premium must be amortized over the expected remaining maturity of the portfolio while the interest that we received on these securities does not change our fourth quarter investment income includes approximately $12 million of additional bond premium amortization this has the effect of decreasing the book yield on these assets from 3.7% as was previously reported by PARIS RE to 2.3% the market yield for those assets on the date of the acquisition.

We continued to believe that longer term interest rates will rise but in the near term this will create some head win. Never the less cash flow remains the strength of this company. We generated $324 million worth of operating cash flow in the quarter and $1.1 billion for the full year. Going forward we continue to expect strong cash flow to contribute positively to investment income.

In addition to investment income realized and unrealized gains and earnings from the equity and investee companies generated $607 million worth of value during 2009 for a total full year pre-tax contribution from capital markets activities of $1.2 billion which more than makes up for the break even result we achieved in a very difficult 2008.

The total accounted return for our portfolio excluding the impact of FX was 1.3% for the quarter and 9.1% for the full year. The fixed income portfolio achieved a full year local currency return of 7% despite higher risk free rates as spread tightened during the quarter. Our capital assets portfolio which includes public equities principal finance strategic investments in IOS generated a total return of 29.9% we are very proud of our investment results over these difficult and volatile times.

We avoided most of the troubled asset classes in the downturn and managed to deliver a modest positive result in 2008 and in 2009 we prudently re-risked the portfolio in a deliberate and thoughtful fashion adding to credit, principal finance, public equities and IOS with outstanding results.

With that said we are not overweight risk ours remains a high quality and liquid portfolio as can bee seen in the pages of our financial supplement. We felt in 2009 that market values were likely ahead of the economy and the limited growth in risk and thus we limited the growth in the risk assets until we had more visibility on the economy and market conditions that remains our current position.

There are a number of income statement items that noted some comments. Our other operating expenses were $147 million for the quarter. This amount includes $30 million of operating expenses from PARIS RE an additional $18 million in acquisition related expense excluding amortization of intangibles and bond premium.

On the same basis our year-to-date operating expenses includes $37 million in acquisition related expenses. Separately we are incurring amortization expense for the intangibles associated with the PARIS RE acquisition.

The opening balance sheet for the consolidation of PARIS RE includes total intangible assets of $288 million representing fare value adjustments to reserves and under premiums as well as the fare value of renewal rights and U.S. licenses.

All but the amounts for the U.S. licenses will be amortized over the expected life of the intangible assets. Our fourth quarter results include $40 million of pre-tax amortization expense. We expect that we will have an additional $70 million of pre-tax amortization expense in 2010 declining annually thereafter.

You can find additional details regarding PARIS RE acquisition related expenses including future amortization amounts in our financial supplements. Our effective tax rates are within our previously communicated guidance the effective operating tax rate was 11.8% for the quarter and 12.4% for the full year.

All in the effective tax rate on all consolidated income was 14.6% for the year. As usual the effective tax rate is ruled by the geography of operating income and the distribution of non operating gains and losses.

There may be some modest changes to our effective tax rate as we define the organizational structure with the integration of PARIS RE. But at this point we do not have enough information to provide any firm guidance, other than to note that we do not currently believe that these changes would be material in 2010.

Let’s move on to the balance sheet which has expanded materially with the PARIS RE acquisition. Our total assets, aggregates $23.7 billion up from $17.8 billion at the end of the third quarter.

I bring to your attention a $26 million additional goodwill item related to the acquisition of PARIS RE as well as $247 of intangible assets. That $247 million is equal to the initial intangible amount of $288 million I referred to earlier less the $40 million we amortized in the fourth quarter.

Well it's not explicitly shown in our balance sheet there is also deferred tax approval related to the intangible assets, so the true net after tax intangible asset is $184 million.

The PARIS RE acquisition brings us an additional $5 billion of invested assets. Comprised of an investment portfolio of $3 billion and a directly managed funds withheld accounts of $2 billion. While the funds withheld account is held at AXA to secure the reinsurance obligations the PARIS RE has to AXA its former parent we have the rights to directly manage the investment activities of this portfolio and retain all economic interest in gains or losses from that account.

While we have to report this funds withheld account separately for accounting purposes we are responsible for its results just as we are for our other invested assets. So our discussion of investment results and investment portfolio will include the contributions from this fund withheld accounts.

And we added to our financial supplements a detailed analysis of this account just as we do for the rest of our portfolio. So all-in total investments cash and the directly managed funds withheld accounts totaled $18.2 billion up from $13.1 billion at the end of the third quarter.

Allocations to various asset classes reflect the composition of a legacy PartnerRe and PARIS RE portfolio. On a consolidated basis our portfolios at December 31, have a greater allocation to corporate debts and a lower allocation to foreign government's MBS, ABS and equities.

I would note however that over $800 million of those corporate are actually government guarantee securities such as the government guaranteed bonds recently issued by banks and financial companies. We find that these securities have the same credit quality as those of who are sponsoring government but offer additional yield.

Overall the average rating of the portfolio remains AA while the duration is marginally higher at 3.1 years. Gross Non-Life reserves are $10.8 billion at December 31 net Non-Life reserves were $10.5 billion.

The increase in the fourth quarter is primarily attributable to PARIS RE’s $3.1 billion total reserve portfolio. I would remind listeners that $1.5 billion of PARIS RE’s reserves relate to 2005 and prior reserves which are guaranteed by PARIS RE’s former parent. Thus, we will not be exposed to adverse development nor benefit from favorable development on this portion of the reserves.

We do however, benefit from the investor income and returns associated with the assets supporting those reserves. We are applying PartnerRe’s reserving philosophy to PARIS RE's earned premium since the date of the consolidation.

As the prior period of reserves, we have reviewed them and are satisfied as to the adequacy. We found no reason to make any material adjustments to the PARIS RE reserves in the quarter.

The legacy PartnerRe reserves developed favorably in the quarter with a $120 million reduction to prior year reserves and additional reduction of $60 million in estimated losses incurred in prior quarters of 2009. This favorable development is the result of the updated information including claimed expense.

As I noted earlier, claimed reports are generally coming in below the level anticipated in our reserves especially for U.S. casualty and global specialty lines. The time value of money and our Non-Life reserves which is calculated with the risk free rate as of December 31 was $1.190 billion. The increase of $337 million from third quarter reflect the addition of the PARIS RE reserves and higher risk free rate.

Gross reserves for policy benefits for life and annuity contracts were up modestly for the quarter and total $1.6 billion. Life reserves benefited from $4 million reduction in prior period GMDB reserves in the quarter and $16 million for the year reflecting improved equity market conditions.

We noted that one of the benefits of the PARIS RE acquisition was that we would achieve a larger, stronger balance sheet to allow us the capacity to offer substantial limits to our clients and absorb the shocks and volatility that are inherent to our industry.

Our year end balance sheet reflects that increased financial strength with $8 billion of capital that’s an increase of 38% in the quarter and 62% for the year with substantial growth in equity modestly offset by reductions in long term debt.

Our common share-holders equity increased 45% in the quarter and 94% in the full year. The increase during the quarter is due to net income of $354 million, other comprehensive income of $14 million and $1.9 billion of new equity issued in the acquisition if PARIS RE.

Modestly offset by the payment of $46 million in common and preferred dividend. For the full year net income of $1.5 billion, other comprehensive income of $62 million and $2 billion of new equity issue in the acquisition of PARIS RE were modestly offset by the payment of common and preferred dividend totaling $152 million.

All in, we issued 25.7 million shares in the PARIS RE acquisition and currently have 82.6 million shares outstanding. As discussed in our third quarter call the PARIS RE acquisition lead to a modest dilution in book value per share of approximately 2.1%.

For the year book value per share including the impact of the PARIS RE acquisition has increased from $53.95 to $84.51 a 32% increase. Just to talk about that growth rate, I think when we look at the fourth quarter growth rate in book value per share although on a reporting basis it grew 1.7% I believe the right way to look at that is to first adjust the beginning book value for the dilution and then look at the growth in the book value per share.

On that basis the growth in the quarter was 3.9% but in any case what matters is the 32% increase during the full year inclusive of the dilution.

What's also important I think is really to look at the growth in book value over a 2 year period. And that grew 24% over those 2 years and I think this more effectively reflect our ability to manage through cycle and crisis.

Of our $8 billion in total capital, $7.1 billion or 89% is comprised of common stock and fully 96% is common and perpetual preferred stock. We recognized that post the financial crisis financially prudent reinsurers should operate with lower operating and financial leverage.

And as you know our preference is to use our capital to assume attractively price risk in the reinsurance and capital market. However we also believe that we have an attractive opportunity to optimize our capital structure without impacting our financial strength nor our ability to capitalize our market opportunities.

Given the current valuations in the financial market we do view share repurchases as well as debt issuance as viable and effective capital management strategies for PartnerRe. As you know we have an authorization from our board to repurchase up to 5 million shares and in this market it’s difficult for us to find a better investment opportunity than to repurchase some of our own shares.

Before passing the call to Patrick, I also want to share with you how we are proposed to report our results in the forth coming quarters while we are in the process of integrating PARIS RE operations and staff into our business units' structure we will report PARIS RE as a separate Non-Life sub-segment.

We will announce shortly our new going forward organizational structure and we expect to report our result according to the new organizational structure by the end of the year once the integration process is complete. In our financial supplement you will find certain pro-forma, historical data for PARIS RE which we hope you'll find helpful in comparing historical result on a like for like basis.

We will also change our self imposed large loss reporting threshold to reflect the new scale of earnings power of our company, henceforth we will report on all large losses expected to be in excess of $35 million as soon as we have a good estimate to share with you and with I will return the call to Patrick

Patrick Thiele

Thanks Albert. Now to the forward looking part of the call, as to the overall market I don’t really have a lot to say beyond what we said in our 1,1 renewals press release. The global Non-Life reinsurance market's price profitability is gently declining on under the weight of low risk free rates and an overall pricing trends that’s showing a modestly negative bias.

In addition, premium growth will be difficult in this environment of restrained exposure growth and continuing to move away from quarter share to excess of a loss. But all in all its a decent environment for PartnerRe and our P&C business, it’s a market where our marketing skills, financial strength and most importantly our tactical capital allocation skills can shine.

We think that we can hold our overall Non-Life books priced underwriting year return on equities stable in 2010 despite the head wins principally by reallocating capital to better priced risk classes.

You saw an example of that with our increased writings of Cat business at January 1. The acquisition of PARIS RE with its additional premium only enhances our ability to maintain profitability at attractive levels.

Additionally our Life book shows some real promise in 2010 as two trends begin to emerge. First, longevity risk reinsurance is finally taking off in the UK and we expect to participate in that development given our skills and our capital strength.

Second, Solvency II as it’s presently outlined will put significant capital pressure on small to medium size European life insurers will have to turn to reinsurers for capital relief on mortality risk.

And finally while we don’t have this specific forecast for the various asset classes we participate in within our capital markets unit, we do believe that the extraordinary “return to risk” of 2009 will not be repeated in 2010 and that we face an extended period of lower returns in most classes.

Despite this we expect to continue to perform well given our skills and tactical asset allocation. You are unlikely to see further significant risking of the portfolio until expected risk adjusted returns improve materially although as Albert said we will reallocate the PARIS RE assets somewhat to reflect the modest risk allocation of their existing portfolio.

Overall in 2010 we are positioned to perform well in al three of our areas, Non-Life, Life and capital markets while moving ahead with the integration of PARIS RE. On that front I couldn’t be more pleased with the skills of our new employees, their willing support of the acquisition and the integration process.

We are well on our way to integrating our new colleagues in to the PartnerRe structure and culture. Because of the intercrosses of the French system the process will continue through the year and while there will be some integration continuing in to 2011 by the end of this year we are hopeful to have almost everything in place.

And we expect that the overall productivity and efficiency will be enhanced. As we said before not everyone will come through in to the new organization but those who do will have an excellent career potential with a well managed company.

All of this ultimately is for the benefit of the shareholders. We continue to target a 13% operating return on beginning shareholders equity and 10% compound annual growth in economic and GAAP book value per share.

And that’s despite the reduced risk profile that we feel we have in the new larger stronger PartnerRe. Our assumption is that the stock market will eventually recognize the attractive risk adjusted return character of the reinsurance industry and afford a valuation to the industry and to PartnerRe that more accurately reflects the risk adjusted returns that we generate. With that I'll open the call up to questions. Operator we are ready for the first question.

Question-and-Answer Session

Operator

(Operators Instructions). We'll go first to Jay Gelb of Barclays Capital.

Jay Gelb - Barclays Capital

Thanks good morning, couple of questions with regard to the integration of PARIS RE what should our expectations be of cedar premiums historically partner is seated very little forwards reinsurance will that be the case for the combined company and will that take until mid-year to put into place?

Patrick Thiele

No. we renewed basically the quarter share they had in place so that there will still be some significant sessions during 2010. During 2010 we will reexamine the session's policy was too soon we didn’t have time really to take care of it in 2010 but during 2010 we will examine the retro-session policy and most likely reduce it.

Jay Gelb - Barclays Capital

What would be the PARIS RE segment net the gross spend look like percentage wise?

Patrick Thiele

I think there is about a 20% session, 23% session at the moment it will decline somewhat in 2010 but major decline will occur in 2011.

Jay Gelb - Barclays Capital

Okay and then for Albert, what's the right run rate quarterly for investment income given that the integration took place mid fourth quarter, just so we get our models calibrated right?

Albert Benchimol

Actually, we credited investment income from October 2. So the current run rate that you got in the quarter is about right. I would caution you that the current run rate includes full year distribution on some assets that PARIS RE have in its portfolio so I would actually say that the run rate is somewhere between the 175 and 180. Now that’s the basis going forward, you are going to adjust that for FX obviously incremental cash flow and the repurchases of new securities that potentially lower rates been expiring.

Jay Gelb - Barclays Capital

Okay, and then last one. Page 37 of the supplement shows the acquisition related expenses should we focus on that last comp which is total amortization of intangible assets, is that going to be what's running through the income statement the $68.5 million in 2010 is that the number you are referencing?

Albert Benchimol

That’s right. And the reason we did it this way is to allow you to have a more comparable analysis of the acquisition cost so that the acquisition cost and technical ratio would look more consistent with a running grade operation as opposed to having it all on an NPV basis and then have a very low acquisition cost in our reported data. So this is really, the total is absolutely the right way, which shows to break it down between amortization of intangible and DAC to give you better ability to compare results year-over-year.

Jay Gelb - Barclays Capital

Now is that $68 million in 2010, is that incremental increase or with part of that already have been reflected in PARIS RE acquisition cost?

Albert Benchimol

Well, its all reflected in, now we would say to you that the $68 million is the equivalent of the $40 million we booked in the fourth quarter.

Jay Gelb - Barclays Capital

To the incremental?

Albert Benchimol

Well, that’s an incremental $30 million then, its not 68 above the 40, its 68 all in for the full year.

Jay Gelb - Barclays Capital

I understand, thank you.

Operator

Matthew Heimermann of JPMorgan has our next question. Please go ahead.

Matthew Heimermann - JPMorgan

Hi, good morning. Actually just on up on that question, am I reading this right to on page 37 and in terms of allocating it? You base of three areas the corporate expense line and new intangible amortization for intangible amortization line and then the acquisition expenses?

Albert Benchimol

I think the way to look at it is, you’ll notice there is a total of $239.9 million of the bottom right hand side of that page and that really reflects if you add the $40 million pretty close to the entire intangible that we discussed earlier. So the 288 intangible is almost fully amortized that there is very little value in the U.S. licenses. That’s one line and with regards to the income statement. The second item with regard to the income statement.

The second item with regard to the income statement is just fees and expenses to bankers, the lawyers and ultimately whatever expenses we may have to incur to effective strategy and potentially office closures and so on and so forth. And that’s what is included in other operating expenses. Thirdly and it's not in this page is the $12 million of bond amortization I referred to earlier when I just got the investment income and that’s how we incorporated in that baseline number that I gave Jay of 175 to 180.

Matthew Heimermann - JPMorgan

I guess and just another merger question just on the accounting you gave us how the premiums of PARIS RE will convert to PartnerRe on an accounting basis should we assume from an acquisition expense standpoint incurred loss standpoint that our proportional shift in those items as well?

Albert Benchimol

I'm not sure I understand your question Matt.

Matthew Heimermann - JPMorgan

In other words if you reallocate the premiums on the written and earned basis I would assume it affects the losses in acquisition expenses and the PARIS RE previously reported so I guess I'm just asking whether or not I should reallocate those proportionally with the premium.

Albert Benchimol

Certainly every dollar of premium has an acquisition ratio and a loss ratio that is specific to that dollar of premium depending on what line it is.

Matthew Heimermann - JPMorgan

So that’s a yes?

Albert Benchimol

Yes.

Matthew Heimermann - JPMorgan

I guess then maybe stepping back. Pat could you just touch on solvency too a little bit I was in Europe early this year and everybody over there is talking about it and sweating it a little bit and I'm just curious whether or not you think it will have much of an impact on the P&C industry and Europe and 2011 and 2012 as people try to adopt for 11, 12.

Patrick Thiele

I think it’s been pushed back even another year now I they are talking about 2013 for full implementation there is still is a series of steps that have to be done over the next 12 to 18 months as they get comments back and begin the negotiation process the current state of solvency too is fairly problematic certainly for the life industry where both annuity and for traditional life insurance products the capital charges are going to be significant which is what I referenced in my comment.

There is some impact upon the Non-Life business, the P&C business through Solvency II it actually occurs little bit more on some of the personal line sides than it does on the more risky lines but it is unlikely to be of the same impact as it is on the life side but incrementally it will add to the capital charge.

I don’t think there is any doubt that’s Solvency II as its fully implemented well in fact have a more conservative solvency regime then what people are currently operating underneath there and there is some concerned on the part of Non-Life insurance companies that this will push them toward the reinsurance industry with potential positive profitability effects on us.

Matthew Heimermann - JPMorgan

Can you give us the duration of the funds withheld portfolio that acts retained?

Patrick Thiele

I believe it's in the financial supplement. Let me look for it.

Matthew Heimermann - JPMorgan

If you give me the page, that’s fine too.

Patrick Thiele

For three years exactly on page 24.

Operator

From Bank of America, Merrill Lynch we will head from Jay Cohen.

Jay Cohen - Bank of America, Merrill Lynch

Two questions, first is did you repurchase any stock in 2010 yet?

Patrick Thiele

No.

Jay Cohen - Bank of America, Merrill Lynch

Any particular reason why not?

Patrick Thiele

We are in a blackout period.

Jay Cohen - Bank of America, Merrill Lynch

Okay. When does that black out period end?

Patrick Thiele

Tomorrow.

Jay Cohen - Bank of America, Merrill Lynch

Okay. Secondly there is obviously a lot of moving pieces now but we appreciate the commentary. At this point given all those moving pieces, given what you know about PARIS RE and the deal, do you feel as if this deal will be accretive or dilutive to your 2010 earnings per share?

Albert Benchimol

I’m not sure how to approach that one, I think fundamentally what I would say is that the ROI on this investment is going to meet our long term target of 13% I think if you take a look at the contribution of PARIS RE for the cost that we have given it its approaching in the fourth quarter already that target and overtime there is going to be some volatility with regard to any quarter. But long term the investment that we have made in PARIS RE is helped to the same standard that we have for the rest of the capital that we have got in PartnerRe and to the extent that we target both at 13% and certainly aim do higher then I don’t think that it’s going to be dilutive long term.

Jay Cohen - Bank of America, Merrill Lynch

Okay, you obviously can’t comment specifically on 2010 then?

Albert Benchimol

No.

Operator

From Adage Capital we’ll hear from Ian Gutterman.

Ian Gutterman - Adage Capital

Hi, I also have some clarification questions on the accounting from Paris. I guess want to hasn’t been asked yet I guess third page 36, you showed changes in gross premium and premiums and are in for adjustment to partner methodology. What exactly is that?

Albert Benchimol

I think fundamentally there are two major issues. We recognize and report written premium essentially ratably over the four quarters and the only time that we front load the written premium for quarter share business is if there is a minimum deposit. Other than that we estimate the quarterly and we recognize that on each quarter as written premium.

Where as at PARIS RE they recognized the entire written premium for proportional upfront. So they would front load proportional versus our spreading it over the year.

The second issue on the earned premium is that as you know we earn our cat premium according to the exposure period and that means that we earned substantial majority of our cat premiums in the third and fourth quarter. PARIS RE used to earn their cat premium ratably over the year and those are the two biggest changes in those pattern.

Ian Gutterman - Adage Capital

So did the Paris's cat premium get earned the way yours did starting in October 2, this past quarter?

Albert Benchimol

Yes it did although obviously its not very material but yes it did.

Ian Gutterman - Adage Capital

Okay and back to the amortization I'm still a little confused there I guess so if I'm understanding right basically half of it is running through the expense ratio and about half of its going to run through at least for 2010 about half of its going to run through amortization line below the combine ratio?

Albert Benchimol

Yeah that’s right think of it this way. Basically with GAAP accounting you cant have DAC and so as you know the way that it works whatever premiums and fees we paid on a policy is booked as DAC and that is amortized as the premiums are earned.

You no longer have DAC in purchase accounting and if that were to happen you would end up with a significantly lower expense ratio for the PARIS RE premiums moving forward and it would be difficult for you to then compare the overall technical profitability of each line of business putting back in our numbers the allocation of the amortization to what it would have been had we normalized DAC we now have a more consistent representation. DAC as you know, to get amortized over the earning premium of your UPR. So over approximately a year you use lot of your DAC which is why the DAC is written pretty much within a year or so whereas the other intangibles take a little longer to earn it or to amortize.

Ian Gutterman - Adage Capital

Okay, that makes a lot of sense. The other one is in Q4, the non acquisition cost amortization look like it was a benefit of $6 million as opposed to an expense. Why was it a benefit and why has it flip over?

Albert Benchimol

That’s right. Basically, it was really to get the $40 million number and the way the DAC worked it would have been a slightly higher numbers. So its an anomaly in the fourth quarter and the minus fix was really to get the appropriate amortization number of 40. You will not see that in the future.

Ian Gutterman - Adage Capital

I assume all of this intangible amortize is non deductable?

Albert Benchimol

No. it is tax deductable. As I mentioned earlier there was an offsetting tax effect which is why although you have $247 million worth of intangibles on the balance sheet. I said the net after tax intangible is actually 184.

Ian Gutterman - Adage Capital

Okay. So there is not going to be a material change should going for a tax rate then?

Albert Benchimol

I don’t think so.

Ian Gutterman - Adage Capital

Okay. And then last one can you run me through one more time real time the investments the funds withheld why exactly those were different than your regular investment. I understand conception what funds withheld is but is there anything I need to think about separately or is it just a characterization issue?

Albert Benchimol

Well, I think the most important issue is that the assets are actually in the name of AXA and then they owe us that money. And so we have to represent it as a separate item and they do have a financial obligation to us so it’s clearly our asset but since we can manage it and we get all of the benefit or losses we choose to think about it as part of our overall capital market exposures.

Ian Gutterman - Adage Capital

And then last up for Patrick, is follow-up on Solvency II are there any certain lines of business or any certain kind of this tails or anything like that is disproportionally benefit or hurt by Solvency II?

Patrick Thiele

Again Life obviously has the biggest impact on the Non-Life side, it isn’t so much line by line, its kind of the ability in the size of the company to be able to handle it, there are certain diversification and constraints and so if you are a small undiversified insurance company you are going to struggle a little bit with the Solvency II unless its amended.

Ian Gutterman - Adage Capital

Okay, but its nothing that safe day or cat or workers comp or something like that or rather lines for take out thank you.

Operator

(Operator Instructions). From Egerton Capital we’ll go to Paul Tucker.

Paul Tucker - Egerton Capital

Good morning. I just wanted to ask you about something topical regarding your investment portfolio and just thinking about your potential exposures to problematic severance. So, I'm thinking about Greece, obviously the contagion has spread to Portugal potentially even the U.K. but can you just give us a sense of your comfort level within the portfolio that you split up as other foreign governments and then is the follow-up maybe some sort of sense how you feel your underwriting risk exposures to some of those countries that potentially troubled?

Patrick Thiele

I think the short answer is, we do not own any bonds, any material amount, there maybe a few left over bonds in the funds with health account. But as of now in our own portfolio as well as the actual owned portfolio PARIS RE, we own no bonds of Greece, we own no bonds of Italy, we have a small amount of bonds to Ireland nothing to Spain nothing to Portugal.

We did have some at the beginning of the year so a year end number we did have some exposures as we sold all those assets we incurred a loss of approximately $3 to $4 million on the entire position but that is the only material impact.

We have instructed the managers on the funds withheld accounts to sell off what is commonly known as the pigs and as I understand that has happened I cannot affirm t hat we have none today but whatever exposure is will be de minimus.

The second part of your question was on the political risk insurance and reinsurance and structured credit exposure we avoided the structured credit exposure that’s typically written in London and being talked about now as $1 billion loss we did not participate in that marketplace and we've had a very-very small political risk portfolio which is in contained also within our credit but no material exposure to names you are talking about.

Paul Tucker - Egerton Capital

Okay great and I mean you can't really put anymore clearly than that so just to be clear if your overall credit exposure the answer that you gave is in the context of the entire portfolio.

Albert Benchimol

Absolutely as I said we have nothing directly held there was a small amount in the funds withheld they were instructed to sell there maybe a little bit left today but from the last actual number that I had it was de minimus exposure.

Patrick Thiele

And on the underwriting side the exposure we have to credit is the traditional credit insurance written in Europe with the big three credit insurers not the more exotic instruments.

Operator

Next we'll go to Josh Shanker, Deutsche Bank.

Josh Shanker - Deutsche Bank

My question involves thinking about thinking about the cycle and thinking about the FAC capability or you picking up that Paris when does FAC become a useful tool for you to be engaged in due to that redeveloping that right now in the company and aggregate?

Patrick Thiele

As part of the announcement that should be coming out almost immediately you'll see that we are setting up a separate faculty of unit that combines PartnerRe and PARIS RE teams and techno guys prestige, I think we are up to perhaps $350 to $400 million and the energy, the offshore, the engineering and the property, it’s a significant, we are setting it up as a separate business unit.

With full profit and loss responsibility it will not show up as a sub-segment in the reporting results because it’s just not that material yet so we will continue to stay within the specialty sub-segment we are reporting.

Obviously this is not a start-up operation. Obviously we have had a fair amount of expertise and fair amount of premium here but it will take about 9 months to a year for it to get fully engaged in market place. I think that distinction here is that as we make it a business unit, one is we will have a more defined risk appetite and two is we will have a larger risk appetite. We will increase our limits exposed, we understand I think the issue is around riding faculty that business it is individual risk underwriting it certainly has an expense level which is distinct from our traditional treaty business but it is I think a good diversifying line for us and we'll balance out some of our treaty exposures. It’s a big issue there, is making sure that we manage our aggregates correctly

Josh Shanker - Deutsche Bank

Historically has demand gone up as the market softened or I actually don’t know nothing about it to look it over historical perspective.

Patrick Thiele

It tends to be a how fairly cyclical business because you are operating at the margin there and if you just think about it I guess in two buckets besides the line by line bucket there is the standard global risk category where the large risk get into the large brokers and our distributors on a global basis to facultative writers around the world.

That tends to be a fairly competitive and thinly priced potentially bucket then there is a each one of the, in each significant insurance market in the world there is a big domestic FAC. We think the domestic FAC is less competitive and probably more attracted to us and probably little more stable.

Josh Shanker - Deutsche Bank

Operator

And it appears we have no further questions at this time, I’d like to turn the conference back over to our speakers for closing remarks.

Patrick Thiele

Well, we don’t have much else to say, obviously a very interesting quarter for us, a very interesting year until starting in the significant model problems and ending I think with a really, exceptional year. And I would make the point that there are two aspects of 2009 in the fourth quarter of 2009 first is the results we were able to achieve in a difficult environment but then two is probably more importantly that this performance as well obviously the PARIS RE acquisition with the pretty good stat to handle whatever it comes in 2010 and we have a good deal of confidence ion our ability to turn a decent rate of return, risk adjusted rate of return 2010 absent something going haywire in the market with profit. So with that thank you for your attention and, it’s done.

Operator

And that concludes today’s conference. We thank you all for joining us.

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Source: PartnerRe Ltd. Q4 2009 Earnings Call Transcript
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