Executives
Robin Sidders - Director, IR
Patrick Thiele - President and CEO
Albert Benchimol - EVP and CFO
Analysts
Joshua Shanker - Citi
Jay Gelb - Lehman Brothers
Doug Mewhirter - Ferris, Baker Watts
Matthew Heimermann - J.P.Morgan
Brian Meredith - UBS
Larry Greenberg - Langen McAlenney
Vinay Misquith - Credit Suisse
PartnerRe Ltd. (PRE) Q4 FY07 Earnings Call February 5, 2008 ET
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 the company's website at www.partnerre.com or you can call area code 212-687-8080 and one will be faxed to you right away. I will now hand over to Robin Sidders, Director of Investor Relations at PartnerRe, who will begin the call.
Robin Sidders - Director, Investor Relations
Good morning, and welcome to PartnerRe's fourth quarter and full-year 2007 earnings conference call and webcast. 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 hand over to Albert, who'll provide more details on the results. Patrick will come back at the end and conclude with comments on the market and the January renewals, and then we will 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, 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 developments 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 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 our forward-looking statements, which speak only as of the date 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 could find a reconciliation of these measures to GAAP measures in the company's earnings release.
With that, I'll hand the call over to Patrick.
Patrick Thiele - President and Chief Executive Officer
Thanks, Robin, and welcome to the fourth quarter and full-year 2007 earnings conference call for PartnerRe. As you've seen from our press release last night, we had another very strong quarter to close our 2007 with exceptional results, and this, despite more challenging reinsurance market conditions than significant turmoil in the capital markets. We continue to strengthen PartnerRe on all levels, and our balance sheet is at its strongest level ever. I'll highlight a few of the important points.
First, we continue to see a moderate level of incurred losses in 2007 and that combined with the strong investment income growth led to the 25% annualized operating return on equity for the year. Total investments and cash are $11.6 billion, representing approximately a $1 billion increase year-over-year. Book value per share is at $67.96, representing 21% growth for the year and our economic value per share grew by 18% in 2007. These are significant achievements.
More important though is our record of performance over a longer period. Over the cumulative five-year periods since 2002, we have delivered in excess of a 15% compound annual growth rate and book value per share well above our long-term goal of 10% in addition to a 2.3% average annual dividend yield. We have grown economic value in excess of 17% compounded during the same five-year period. These results underscore the singular focus we have in executing our strategies and the strength and stability of the franchise we've built it for PartnerRe. This level of achievement comes only with having the right people with the right capabilities, being transparent about what we're trying to achieve at PartnerRe, communicating with our people, our investors, and our clients on a consistent basis about our progress and our strategies.
Before I hand the call over to Albert, I will end by initial remarks by saying that PartnerRe is in its strongest position ever and we remain focused on continuing this record of success for all of our stakeholders, our clients, shareholders, and our employees. I'll come back at the end of the call to talk more about January 1st renewals and the broader market.
And so now I'll turn the call over to Albert to walk you through the details.
Albert Benchimol - Executive Vice President and Chief Financial Officer
Thank you Patrick, and good morning everyone. PartnerRe's results for the fourth quarter and full-year 2007 reflect the environment we faced during the year. Favorable results in reinsurance operations were partially offset by difficult capital market conditions. Overall, however, our strong consolidated results demonstrated the benefits of balance and diversification.
Before getting into the details, I'd like to comment on the new segmentation of our operations. As we announced in our last investor day, the recent organizational developments have caused us to redefine some of our segments. We now report our Non-Life in four subsegments, U.S., Global P&C, Global Specialty and our new Catastrophe subsegment. Certain Specialty business written in the U.S. as well as U.S. sourced structured risk transfer business is now included in the U.S. result. The remaining results of ART, by that I mean principal finance, insurance-linked securities and strategic investments are now included in the category Corporate & Other as are our other investment activities.
Prior results have been recast to this new presentation and were posted on our website in December [ph]. During the fourth quarter, our Non-Life segment had slightly lower net premiums written and earned but a stronger technical result versus the prior-year quarter. Premiums both written and earned decreased in both the U.S. and Global Specialty subsegments and increased for Global P&C and Catastrophe. The weakening U.S. dollar had significant impact on reported premium volumes. Without the positive contribution of FX, net premiums written and earned would have declined 6% and 7%, respectively.
The increased technical results include net positive reserve development from prior year’s of $96 million, as well as an additional $35 million from prior 2007 quarters. This compares to aggregate prior-year and prior-quarter releases of $89 million in the '06 quarter and that was comprised of $49 million of prior year and $40 million of prior quarter releases. The U.S. subsegment had modest reductions in quarterly premiums written and earned, the result of downward premium adjustments received in the quarter but the technical result improved on the strength of larger prior-period reserve releases. For the full year, the U.S. subsegments' premium written was essentially flat, with increases in multi-line treaties and surety making up for reductions in other lines.
To give you a sense of scale and contribution, of the $1 billion or so in net premiums written in the U.S. segment, 80% related to the traditional property casualty, multi-line, and motor lines historically included in this subsegment, and 20% is related to the U.S. specialty lines, as structured risk transfer previously included in our worldwide Specialty and ART segments. The strong improvement in year-over-year technical results is due to both larger prior-year reserve reductions and better current year results.
The Global non-U.S. P&C segment reported 10% growth in quarterly net premiums written but that is due to the benefit of the weaker dollar. On a constant exchange rate basis, net premiums written would have been down 1%. The improved technical result is due to higher prior-period reserve releases offsetting lower current year profitability given lower pricing in '07.
For the full year, Global P&C net premiums written and earned would have been down 10% and 8% respectively without the benefit of the lower dollar. The largest driver of lower premiums remains increase retentions from our cedents and cancellations due to deteriorating prices or terms and conditions. The lower technical result for the full year was due to a higher accident year loss ratio, reflecting higher frequency of midsize losses including Windstorm Kyrill in the first quarter and lower-priced profitability partially offset by a higher prior-year reserve releases.
The Global and Specialty subsegments have reductions of approximately 7% in both net premiums written and earned in the quarter. The reduction would have been closer to double that amount in the absence of FX. The quarterly technical results declined versus the prior year, reflecting lower earned premium, lower-priced profitability and lower prior-period reserve releases. As for the full year, premiums written and earned would have been down between 1% and 2% on a constant currency basis and the full-year technical result was flat. Loss experienced and profitability for the full-year held up pretty well notwithstanding reductions in pricing. For our new Catastrophe subsegment, premiums written are not significant in the fourth quarter but we do earn about a quarter of our annual catastrophe premiums in the fourth quarter.
This quarter's technical results were exceptional as the absence of losses was further enhanced with prior-year and prior-quarter reserve releases. You will recall we incurred the losses earlier this year on Australian, British, and Swiss floods but our current view on these claims is lower than we initially estimated. For the full year, cat net premiums written would have been down 5% on a fixed currency basis but the technical result was even better than last year's exceptional results as prior-period developments more than offset the higher cat losses experienced in '07.
Putting it altogether, it was an outstanding year for our Non-Life operations. Premiums were close to flat but we achieved record underwriting results with the combined ratio of 80.4%, the lowest in our history as a diversified multi-line reinsurer. Of course, there are increasingly competitive market conditions making receipts most challenging in the near future.
For the Life segment, underlying trends were consistent for both the fourth quarter and full year. Growth was driven by mortality lines, as our longevity business volume declined. The quarterly premium capacity would have been negative on a constant exchange basis. However, full year premiums would have been up about 8% without the benefit of foreign exchange. Our Life segments allocated underwriting results which includes allocated investment income and operating expenses was $11 million for the quarter and $21 million for the full year. In both cases the reduction from the prior-year is due to smaller prior period reserve releases as compared to last year. With the premium based that now approaches $600 million and less cyclical pressures than our Non-Life business, our Life segment provides growth and diversification opportunities, even as our Non-Life segment faces increasing competitive pressures. As part of our new segment classification, our investments in capital market activities are included in our Corporate and Other segment as are our corporate activities.
We had mixed results in our Investment and Capital Markets activities. For both the quarter and the full year while we had big growth of investment income, the dysfunctional capital markets conditions let you realize losses, write-downs and mark-to-market valuation adjustments of certain portfolio positions, including the reduction to zero of the carrying value of our interest in ChannelRe. All-in however, we did quite well in what can be fairly characterized as a catastrophe year in capital markets.
First we had healthy growth in investment income. It was up 9.3% for the quarter compared to last year, and up 16.4% for the year to $523 million. The growth in investment income gives you the cumulative cash added to the portfolio over the past year, higher reinvestment rates, and a stronger euro vis-a-vis the US dollar. Other income was a loss of $15 million for the quarter and $24 million for the year. This negative result is primarily due to impairment charges and mark-to-market valuation adjustments, on transactions managed by our principal finance units. These are not related CDOs nor to sub-prime exposures. The impairment relates to a small handful of diversified transactions that are not performing as anticipated at the time we under wrote them. The mark-to-market valuation adjustments are reflective of the widening spreads in the credit markets, and we would hope that these would reverse as the underlying risks approach maturity.
We recorded an approximately $17 million worth of pre-tax net realized capital losses in the fourth quarter and $72 million for the year. Actually we generated realized gains on sales of securities in both periods. However, the widening credit spreads and significant reductions in equity markets causes to take OTTI charges on certain securities where we either could not affirm our intention to hold these until their value recovered to our original cost. There is going to be a change going forward because we will be adopting FAS 159 for the bulk of our invested assets effective January 1, 2008. The adoption FAS 159 will eliminate the practice of recording OTTI charges, but will cause us to recognize all changes in the market value of our portfolios, up and down, through the net realized gain loss line of our income statement. This will contribute to additional volatility to our net income but will not affect operating income nor book value.
Finally, we recorded a charge of $67 million for the quarter and $83 million for the full year to reflect our interest and losses of equity investments. This is driven by our previously announced write-down of our investment in ChannelRe. For ChannelRe, 2007 represented the perfect storm. Over the past few years, an increasing percentage of ChannelRe's business was the credit enhancement of CDOs through derivative structures, rather than the traditional insurance form. The drop in valuation of underlying securities led to unprecedented mark-to-market charges at financial guarantors. This highlights the difference between GAAP insurance accounting and accounting for derivatives. In insurance accounting, a company would take a charge when it determines it will incur a loss, no matter what the market price for the underlying security. In accounting for derivatives, the guarantor must reflect the market value of the underlying securities via entries to its income statement and balance sheet, regardless of the amount of losses it expects to incur. Thus, accounting for derivatives is much more volatile than accounting for insurance.
In January, MBIA, ChannelRe's sole client, announced the most recent valuation of its CDO exposures based on updated market prices and revised methodology resulted in a $3.5 billion mark-to-market charge, of which approximately $200 million represented estimated credit impairments. ChannelRe's share of the mark-to-market charge is expected to result a negative shareholders' equity on a reported GAAP basis. Since we use equity accounting for ChannelRe, we are required to reduce the carrying value of our investment to zero.
Our fourth quarter results include a $76 million charge to reduce the carrying value of our investment in ChannelRe, modestly offset by a $2 million benefit under comprehensive income. It is important to note that ChannelRe's negative GAAP equity does not mean that it is insolvent. It continues to operate as a viable reinsurer, nor does the carrying value of zero indicate our view of its value. We are simply following accounting rules.
Over the next few years, the actual performance of the underlying securities will eliminate much of the current uncertainty. Our current expectation is that ultimate impairments and losses will be less than the mark-to-market charges and some of our write-down may be reversed. However, it would be premature given current market uncertainties to venture an estimate of probable ultimate recovery, if any. Using our reinsurance analogy, we booked a full limit loss on a treaty, but are hopeful that we may be able to have favorable development on that treaty in future years. As we have stated in the past, we have no other direct investment exposure to CDOs and subprime other than through our investment in ChannelRe. Now that it has been written down, we are immunized from additional disruptions in this investment.
There are many pieces to our investment in capital markets activity and what might lose sight of the forest for all the trees. Out of the net investment income, technical results, other income or loss, net realized gains and losses, and interest in gains and losses of equity investment, we get a pre-tax contribution of $29 million for the quarter and $293 million for the year. Excluding realized gains and losses and interest in equity investments, this translates into a pre-tax contribution to operating income of $113 million for the quarter and $448 million for the year.
We also look at all of our activities and measure the total return to our consolidated investment in capital markets portfolio and this was approximately 7.1% in 2007, slightly lower than it was in '06. This single metric captures everything: portfolio investment income; fees and premiums received for assuming private market risks, as well as realized and unrealized changes in market values of both public and private market exposures, divided by the average balance of our notional exposures during the year.
Moving on to other items on our income statement, we had an unusually low effective tax rate this quarter. The total tax expense was $4 million in the quarter, comprised of a charge of $2 million to operating income and $2 million against net realized investment losses. This low tax charge was due to benefits coming from the expiry of certain risk periods for certain FIN 48 reserves, as well as favorable FX movement. This brought the full-year operating effective tax rate to approximately 10% as compared to 12% in '06. In both cases, these are within the range of 10% to 15% we previously communicated to you.
While our tax items were favorable in '07, we do expect to incur nonrecurring tax charges in the first quarter of '08 due to the internal transactions we consummated on January 1 relating to our European reorganization. Going forward though, our European reorganization will also lead to a more efficient… more tax efficient corporate structure and should lead to lower effective tax rates going forward. Thus, absent large catastrophes, we believe that our effective tax rate for '08 will be closer to the top of our historical range of 10% to 15%, although that will be more front loaded with the higher charge in the first quarter.
Putting it altogether, for the full year we had record operating income of $822 million or $14.29 per diluted share, 25.2% operating ROE on beginning book value. These record operating results were reduced by realized losses and interest and losses of equity investments, aggregating $139 million that are excluded from operating income leading to net income of $718 million or $11.87 per diluted share equating to a net income ROE of 20.9%. As to comprehensive income, which captures the impact on book value of all business activities, it was $889 million for the year, its 13% increase over the level of '06.
Moving on to the balance sheet. We understand that our results of operations will be volatile reflecting the nature of our business. We've experienced both extraordinary profitable years in '06 and '07 and unprofitable years such as '01 and '05. It is because of that volatility that we must strive to ensure the strength and stability of our balance sheet and capital and in that regard 2007 proves another year of great progress.
As of December 31, our total assets were $16 billion, up from $14.9 billion dollars at December 31 of '06. And apart from some reallocation of certain assets in our investment portfolio during the quarter all changes are consistent with normal operations. Total investments and cash stand at $11.6 billion compared to $10.7 billion last year. For the full year, cash and investments increased due to operating cash flows and changes in FX offset by share repurchases and dividends, increases in the market value of the fixed-income portfolio were offset by decreases in the market value of the equity portfolio and other invested assets including the write-down of ChannelRe.
Our asset obligation at December 31 of '07 was similar to that at the end of the third quarter. Fixed income is up a bit and equities are lower. The credit quality of our fixed income portfolio did not change, remains AA with 68% of our fixed-income portfolio rated AAA. Since spread widens, we started adding cautiously to our corporate credit and agency and BS exposures in an incremental approach. We have every confidence that we have the required skills and experience in house to analyze and assume credit in prepayment risk.
The average yield to maturity at market fell to 4.7% at December 31 of '07. This is 17 basis points lower than it was at December 31 of '06 and if it continues it will have a negative impact on future reinvestment rates. This will further accentuate the importance of strong operating cash flow. We report negative GAAP operating cash flow of $75 million for the quarter and positive cash flow of $1.225 billion or so for the full-year of 07.
However, these figures are greatly affected by changes in allocations to training portfolios. Without the training portfolio activities adjusted operating cash flow for the quarter would have been $225 million, a modest increase over the fourth quarter of ‘06 and $1.1 billion for the full year of ‘07 compared to $882 million in ‘06. The strong year-over-year increase and adjusted operating cash flow is primarily attributable to lower loss payments in ‘07 on the large catastrophes we incurred in ‘04 and ‘05. We'll be looking for positive cash flow to more than offset lower rates and continue to drive growth of our portfolio and investment income.
Gross Non-Life reserves are $7.2 billion at December 31 and net Non-Life reserves were $7.1 billion at December 31 compared to $6.7 billion at December 31 of ‘06. The changes reflect normal ongoing underwriting activities and claim payment. During the fourth quarter we incurred total Non-Life losses of $409 million and paid claims of $389 million. The impacts of currency movement increased net results by $104 million during the quarter. While, for the full year we incurred and paid approximately $1.6 billion of claims for Non-Life. The impact with currency movements increased net reserves by about $351 million during the year. This in fact is very close to the number of the FX benefit in our investment portfolio and this provides evident of asset liability matching on our balance sheet.
In the falling interest environment of the fourth quarter, the time value of money in our Non-Life reserves, which is discounted at the December 31 risk-free rates for each major reserving currency declined by $49 million in the quarter and $21 million for the full year and now stands at a total of $1.122 billion. And as usual we will post that calculation on our website shortly.
The interplay between the impact of interest rates on our fixed income portfolio and our Non-Life reserves provides additional stability to the economic book value of our company. Gross reserves for life policy benefits and annuity contracts were down $81 million for the quarter but were up $111 million for the year and totaled $1.5 billion at December 31. The decline for the quarter is due to the commutation of a mortality financing contracts, which resulted in the reduction of reserves by approximately $140 million. The increase for the year reflects the continued growth of our Life segment, as well as the impact of foreign exchange movements on those reserves.
While we continue to experience net favorable development in the quarter and year this is a result of new information. We have made no significant changes to our processes nor to the prudence that we exercise in the setting of our reserves. Our total capital of $5.2 billion was up 1.9% for the quarter and 11.5% for the year and this is after the impact of share repurchase of $123 million for the quarter and $275 million for the full year.
Our total common shareholders equity increased 16.4% from its level at the end of ‘06. However, with a lower number of shares outstanding, our book value at year-end of $57.96 per share reflected growth of 4.4% in the quarter and 21.2% year-over-year.
And with that I will return the call to Patrick.
Patrick Thiele - President and Chief Executive Officer
Thanks Albert and now to the forward-looking part of the call. As you all have seen in the press release, we issued recently on the January 1 renewals we are pleased with those renewals. We renewed approximately 60% of our annual book at January 1 at a level of price to profitability on a risk capital that is in the mid-teens range above our long-term operating return on equity target of 13% plus over the cycle. This is a good result. We wrote a significant amount of new business, a good piece of which was the result of the acquisition last May of the renewal rights of international business of the French Monceau Group.
In addition, we still have an estimated $195 million of new and renewal business in process much of which is U.S. Ag business which we expect to buy within the next few weeks. So all in all our production is likely to be up slightly approximately 3% on a constant foreign exchange basis from January 1, 2007. And this was accomplished in an increasingly competitive environment in which pricing is on the decline pretty much market wide and where scenes are continuing to retain the risk meaning that the reinsurance marketplace continues to shrink. Our success in the January renewals this year has proved that all those things I said about PartnerRe at the start for our call are being considered by our cedents and incorporated into their reinsurance buying decisions.
Now I'll move onto the most talked about issue impacting the markets today, the sub-prime mortgage prices. We have had a number of calls asking about our potential exposure. We are aware there is uncertainty in the market about who has exposure and how much. We’ve always have been as transparent as possible about potential exposures to any large industry invents as with any potential loss of events to us we have been systematic and focused in our evaluation and our analysis of our potential sub-prime exposure. This process allows us to provide our stakeholders with reasonably accurate estimates of potential losses to PartnerRe reasonably quickly.
Overall, we are comfortable to sub-prime prices that’s manageable and contained within our 2007 financial statement. In our investment portfolio we have performed a detailed analysis of our exposure to asset-backed securities and financial companies and feel comfortable with our understanding of these exposures, as well as to the accounting, the reporting, and disclosure around these exposures. We do not have exposure to the sub-prime residential mortgage sector in our $2.3 billion MBS, ABS portfolio nor do we own any CDOs.
On the private market side, Albert mentioned the total write-down of our investment in Channel Re amounting to $74 million, which was the carrying value of our investment at September 30, 2007. This write-down was recorded in our fourth quarter results and it's the maximum exposure that we have to ChannelRe. I would add three additional points.
First, this write-down, which caps our exposure reaffirms our original decision to participate in the financial guarantee business by way of a minority equity investment in ChannelRe. That was the right structure for us to participate in the financial guarantee business in order to safeguard our balance sheet from the potential 1 in 25 or 1 in 50-year events in this business and ultimately protect our shareholders. Second, given all the information we currently have, we believe strongly that ChannelRe is solvent and that it can pay all of its obligations to its cedents with the resources at hand. And third, while PartnerRe has no obligations to commit any additional capital funds to Channel, we would evaluate additional commitment if Channel were presented with the opportunity to write significant amounts of attractively priced and structured new business.
The other area where we have exposure to sub-prime is on our D&O and E&O portfolios but here again, as I'll explain, we are a relatively small player in this business both in the U.S. and worldwide. We have approximately $105 million of in-force premium of U.S. D&O reinsurance, down from approximately $145 million three years ago and approximately $25 million in net written premium in Europe. The total of these two represents approximately 3.5% of our total worldwide premium in 2007. We believe that the $105 million of U.S. D&O premium represents about 1.2% of the total U.S. market, which we estimate at around $8.5 billion in written premium in '07. We also believe that of the total industry D&O premium in the United States, approximately 15% enters the reinsurance market. We do not write any London casualty clash, we do not write facultative casualty, we do not write retrocession accountants at E&O and we have only incidental exposure to the London market D&O place business. So we have no opinion on the potential losses for those lines of business.
We have been tracking this situation since early last year. In the relevant affected industries, we have approximately 80 insureds in the U.S. and 55 internationally with some level of exposure to potential securities class action lawsuits, although only a fraction of these have been sued today. We are monitoring all of these names against our various treaty limits. Our average limit per insured is less than $2.5 million. From both our bottom-up and our top-down analysis we currently see our losses as consistent with our market share of the total D&O reinsurance market both on the premiums and exposed limit basis of between 1.0% and 1.2%.
However, these are very preliminary numbers and the number of claims and actual losses will of course, be determined over the next 3 to 5 years. I would also note that we disclosed our U.S. specialty casualty reserves on our website and at December 31, 2006 we carried $982 million of reserves for all underwriting years in this segment. As of December 31, 2007, we carried $1.168 billion of reserves for all underwriting years, of which $687 million was for the 2005, 2006, and 2007 underwriting years with obviously the majority of that $687 million being in IBNR. We will add to this number in 2008 as we earn our 2007 written premium.
Consequently, we are very comfortable that this level of potential losses is contained within our December 2007 loss and unearned premium reserves. Going forward, our rigorous risk management policies and procedures and our underwriting approach will serve us well, as we continue to underwrite this class of business, that's credible information emerges regarding potential loss exposure, we will incorporate it as appropriate into our loss reserving process and methodology.
Again, we believe PartnerRe has the right strategies, the right philosophies, the right policies to continue our track record of success in 2008 and deliver on our stated goals. PartnerRe is well positioned to take advantage of whatever opportunities are available that meet our risk and return criteria. We will maintain the [inaudible] diversification and balance that we've built over the years, and while it would be unusual for the very favorable loss activity in the last two years to continue throughout 2008, we do expect that even within a return to more normal loss patterns we would continue to grow our GAAP book value per share in excess of our long-term target of 10% plus per year.
With that I'll open up the call to questions. Operator, we are ready for the first question.
Question and Answer
Operator
Thank you. [Operator Instructions] We will take our first question with Joshua Shanker with City. Please go ahead.
Joshua Shanker - Citi
Good morning everyone.
Patrick Thiele - President and Chief Executive Officer
Hi Josh.
Joshua Shanker - Citi
Hi there. I'm trying to understand your renewals, in addition to how your premiums changed, how your exposures might have changed? And another way of putting that is given the very low catastrophe losses this year; it is difficult to understand your technical pricing, perhaps, if you…under ordinary circumstances you can talk about technical pricing of this business compared to the business you wrote a year ago?
Patrick Thiele - President and Chief Executive Officer
I think if you look at the first issue about risk capital, I think if you look at the bottom of the press release, we give you a breakdown of the percentages by line, using our underwriting risk capital, our internal methodology and so you can see the variants that occurred which is relatively minor between 2006 and 2007 and 2008. In total, by our methodology, our exposure stayed about the same as measured by our capital at risk.
Joshua Shanker - Citi
And in terms of the technical pricing, was it similar to what it was one year ago?
Patrick Thiele - President and Chief Executive Officer
Technical pricing would have deteriorated several points.
Joshua Shanker - Citi
Several points. And maybe a little bit of ignorance, I am just trying to understand, reconcile those two things, if exposures stayed the same and your premium volume stayed the same, how did pricing deteriorate by several points?
Albert Benchimol - Executive Vice President and Chief Financial Officer
I think what you are looking at is... the underlying exposures are probably modestly up. But what you are then doing is you are dealing with pricing on the technical ratio, you're pricing in, what I would call, positive loss cost trends. So you are assuming anywhere from 3% to 8% or so of inflation in loss cost trends. So if you are getting flat to minus 5% in pricing, but your loss cost trends are going up you're going to capture... in general anywhere from 2 to 6 or 7 points of increase in your technical ratio.
Patrick Thiele - President and Chief Executive Officer
And we did increase our cat and specialty lines percentage of the total. So you are moving toward higher and more capital intensive lines, which historically have had a little bit more margin and are more profitability in them as well.
Albert Benchimol - Executive Vice President and Chief Financial Officer
The other thing that I think is relevant as we look at these things to give you a sense of it is that the technical pricing at inception, you need to compare technical pricing at the beginning of '07 and the technical pricing at the beginning of '08, not the actual result of '07. So, whether or not we had a great loss experience in '07, we tend to go back to an expected average loss flows, and so what we do is we take a look at the exposures, we take a look at the prior-year loss trends, and every once in a while for example in casualty where it turns out the lost trend ended up being not as high as we originally priced them the starting point for the loss ratio is brought down to reflect our current understanding of the loss trends and then from that lower starting point, we've then applied inflation factor for going forward. And those are the three factors that we look at when we are doing our pricing and measuring our profitability.
Patrick Thiele - President and Chief Executive Officer
And then the final issue is interest rates because they obviously get into the return on risk capital calculation and not contained within the technical ratio and as Albert mentioned to you that January 1 our investment rates were lower than they were at the beginning of 2007.
Joshua Shanker - Citi
Well, thank you. I appreciate that color.
Operator
And we will take our next question with Jay Gelb with Lehman Brothers. Please go ahead.
Jay Gelb - Lehman Brothers
Thanks, and good morning. I was hoping you could update us on your view of capital management including share buybacks?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Well, obviously we've generated substantially more capital last year than we needed to use in the second... in the renewal this year. So, obviously we think that we are in great shape from a capital perspective. As always what we are focusing on is creating value for our shareholders. There are opportunities for share buybacks that makes sense for our shareholders and there will be some that won’t and we've discussed with you... our general appetite for share repurchases. We believe that there are two important ways of returning capital to our shareholders, one that I think very important strategically is a consistent and growing dividend yield.
We believe that you want to be paid regularly for the capital that you've allowed us to use and so we have just increased again for the 15th consecutive year our dividend rate and we will hopefully continue to do that in the future. With regards to stock repurchases, we currently have $4.5 million... sorry 4.5 million shares in our authorization, and we will continue to look at that in as we look at our total capital. You should also know that at the end of this year, our range forward will mature, it's approximately 6.7 million shares, and at that point we are going to have to decide what to do with that, do we actually deliver the shares? Do we extend this for another two or three years? Do we simply pay out the profits in the range forward and cancel it? Those are all things that we will also consider as we look at our capital in 2008.
Jay Gelb - Lehman Brothers
Okay. And then separately on the tax rate I know you said for 2008 it’s…at the… for the full-year the effective tax rate on operating income is closer to the 15% level, can you help us and gives us a sense what the tax rate is going to be in the first quarter so we can lend that for the full year?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Yeah, it will be a larger number. We expect to give you more precise number in our 10-K, so rather than give you an estimate here if you would be so kind us to wait for the K you will have specific disclosure there as to what you can expect in terms of the one-time charge due to the inter-company transactions we did on January 1. And all this is literally is that by selling assets from one subsidiary to another in different country or transferring assets and liabilities from one country to another, we had accelerated the proxies… the taxes which of course will create a benefit on the other side but the taxes get paid upfront.
Jay Gelb - Lehman Brothers
Is it fair to say that for the later nine months 2008 that the tax rate will be closer to 12%?
Albert Benchimol - Executive Vice President and Chief Financial Officer
It is fair to say that using historical average contributions of our profits from France, Ireland, U.S., Britain [ph] and elsewhere that the tax rate in the first quarter will be substantially higher than it will be the rest of the year. And so by definition if we are going to be closer to the top of the range in the first quarter then you should expect it to be closer to bottom of the range for the subsequent quarters, assuming historical distributions of profits.
Jay Gelb - Lehman Brothers
Right. And the historical range is 10 to 15?
Albert Benchimol - Executive Vice President and Chief Financial Officer
That is right.
Jay Gelb - Lehman Brothers
Okay. Thanks very much.
Operator
We'll take our next question with the Doug Mewhirter with Ferris, Baker Watts. Please go ahead.
Doug Mewhirter - Ferris, Baker Watts
Hi. Good morning. Two questions. My first question looks like you seem to weight Europe a little more heavily in your premium distribution for the quarter, is there... as more opportunities, does that reflect the recent acquisition? Can you explain that?
Patrick Thiele - President and Chief Executive Officer
No, the recent acquisition won’t have occurred in the fourth quarter, that was a January 1st renewal issue. The bulk of that is frankly FX.
Doug Mewhirter - Ferris, Baker Watts
Okay. That explains it. The second question I had is regarding FAS159. Looking at the documentation for that it gives you... gives you some leave way to mark-to-market both assets and liabilities, have you've considered actually discounting your Non-Life loss reserves as part of that adoption?
Patrick Thiele - President and Chief Executive Officer
I am not a fan of discounting liabilities. I think that the whole subject of fair valuing, insurance, and reinsurance liabilities is fraught with danger and misunderstanding, so, no we are not.
Doug Mewhirter - Ferris, Baker Watts
Okay. Thanks that's all my questions.
Operator
And we will take our next question with Matthew Heimermann with J.P.Morgan. Please go ahead.
Matthew Heimermann - J.P. Morgan
Hi, good morning everyone. Couple of questions, first following on the first question regarding your one-one renewals, is it fair to say that while the profitability of the book might be similar to a year ago that the volatility of the book has increased.
Patrick Thiele - President and Chief Executive Officer
The profitability I think when we talked about the January 1, 2007 renewals in January of last year we said it was mid-to-high teens price profitability. And this time, we said it was mid-teens, which would imply a several point decline in underlying profitability. Last year, I did say that we had probably a slightly increased volatility because in fact, we wrote more, the more volatile lines are mixed changed somewhat, I don't think it was a big factor this year. It's actually, I think compared... certainly to virtually any other reinsurer on the island, we have probably the most stable book that you're going to find.
Matthew Heimermann - J.P. Morgan
Okay, fair enough. And then with respect to the loss constraints I guess could you just give… that's something you'd highlighted earlier in the year explicitly in the press release as a positive force. The lack of highlighting the last couple of quarters does that reflect any subset of change or just a continuation of status quo?
Patrick Thiele - President and Chief Executive Officer
I think again as we said in the January 1 renewal information, we did not in fact in our renewals see any kind of increase in loss trend specifically in the U.S. Casualty. We have not seen anything in terms of the attritional… we watch, I guess two extra points. One, we do watch with some interest the...the disclosures that's going around the motor line in the United States where apparently frequency is beginning to increase and there is some indication severity. Frankly, we don't see that because that doesn't come into our book. There is... we write very little motor.
I guess the other issue is... we're making some distinction between the D&O issue around sub-prime as being an event, as opposed to being incorporated in the attritional loss ratios that we've been seeing. We've not seen, if you take the D&O, E&O potential exposure, which hasn't shown up obviously in the reported loss trends yet if you take them out of the equation, we have not seen anything in terms of the attritional loss ratio in the United States Casualty book that has given us concern to date. Having said all that it is the thing that we watch most closely on a going forward basis. It's the thing that we are most concerned about; Casualty loss trends will accelerate at some point in the future. We expect to identify that acceleration as quickly as possible to make sure that our pricing on a going forward basis will reflect a change but at the moment we don't see anything which is why we were able to stay in the January 1, 2008 renewals for the U.S. and European Casualty book.
Matthew Heimermann - J.P. Morgan
Okay. And then that the last question I have was just whether or not you will be willing to share your industrial loss assumption on the sub-prime market exposure?
Patrick Thiele - President and Chief Executive Officer
We are wondering if I’d get that question. The difficult in estimating this one is a couple fold. One is we don't have any similar event in the recent future. The most similar event I think to the sub-prime mortgage issue would be the same as in loan crisis in the early 1980s which were probably as broad and as deep as thing is likely to end up. Two, we are in a period of time where the legal environment is probably as good as it has ever been in terms of class action lawsuits where there has been a series of decisions which have sharply limited or somewhat limited the potential exposure to D&O treaties by the U.S. Supreme Court over the last year or so.
Offsetting probably that to some degree is the fact that this is likely once the trial start, there are likely to be emails and practices disclosed which are probably not very savory. And two, three years, I guess the other negative influence would be the fact that this is dealing with people's houses. This isn't about digital data wag stock going down by 30% or 40%. This is people potentially losing their homes. I think if we put all those factors together, we would estimate that and this is early days and it certainly doesn't constitute a definitive view but we could see the D&O experience in the United States getting up to $6 billion to $10 billion industry event. We do not have an estimate for D&O, we don't have an estimate for surety and we don't have an estimate for non-US D&O probably because the statistics are less available there. And two, because we don't think we're exposed to a level that would require us to do the same level of disclosure as we are to the U.S. D&O marketplace. Did that help?
Matthew Heimermann - J.P. Morgan
That is very helpful. Thank you so much.
Operator
And we will take our next question with Brian Meredith with UBS. Please go ahead, sir.
Brian Meredith - UBS
Yes, thanks. Good morning. Patrick, I wonder if you can talk briefly about ChannelRe and you mentioned that it is presented with the right opportunity in the rate tax returns you think about actually putting some more money in there. What type of return do you think you need in order to commit capital, and more capital to ChannelRe?
Patrick Thiele - President and Chief Executive Officer
Something significant. Really, north of the current 12% to13%.
Brian Meredith - UBS
Okay. And that is given to some of the inherent risk I guess that we are seeing in that business. And then quickly, Albert, could you talk a little bit about what is your CMBS exposure is?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Just the one thing on ChannelRe that, I think, is probably worth mentioning is that, it's not just the return, it's the structure. I think that the structure that we determine to utilize for taking our financial guarantee exposure proved to be wise and I think whatever we do, we want to make sure that it also has structures and limits. With regards to our ABS exposures, we have a de minimis amount of CMBS exposure. We do have approximately $35 million or $40 million in a REIT’s portfolio, and so that will have that almost everything else that we have, the biggest piece of course is the agency, RMBS, but those are all Fannie, Freddie, Ginnie.
We do have approximately $700 million of asset-backed, the largest single chunk are European RMBS, these are AAA with significant levels of subordination. We have a small amount of credit card ABS. We really do not have a significant exposure to the residential mortgage area. If I add it all up, I would probably say it's less than $50 million.
Brian Meredith - UBS
Great. Thank you.
Albert Benchimol - Executive Vice President and Chief Financial Officer
Commercial area, I'm sorry, I don't mean residential.
Operator
And we'll take our next question with Larry Greenberg with Langen McAlenney. Please go ahead.
Larry Greenberg - Langen McAlenney
Thanks very much. Just following up on a couple of numbers, Albert on the tax rate, if you were to look forward to 2009, does it just revert back to kind of normal, 10% to 15%?
Albert Benchimol - Executive Vice President and Chief Financial Officer
I'm hopeful that from 2009 going forward, we will be able to lower that range by a couple of points on both the bottom and the top.
Larry Greenberg - Langen McAlenney
Great. Thank you. And on the other income line, excluding OTTI, can you give us kind of a normal base for that... the decline?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Well, the problem with that line is that it's... most of what we do on the other income line has to be derivative exposures and derivative exposures are by definition very volatile in terms of gains and losses. Historically, if you'll check it out, it's been... it's been in the single-digits million dollars in that line historically on a quarterly basis. Now what's going to happen is that going forward, we'll see most of our volatility in the realized gain/loss line that we are going to using in with FAS 159. The other income line will be substantially driven by our principal finance activities and more often than not we would expect just to be earning some fees there with less volatility than we’ve had in the past.
Larry Greenberg - Langen McAlenney
Okay. Great. And can you give us what your IBNR percentages is overall and for the Casualty line?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Let me get back to you on that.
Patrick Thiele - President and Chief Executive Officer
I think on the numbers that I quoted for the U.S. Specialty Casualty...
Albert Benchimol - Executive Vice President and Chief Financial Officer
Before we finish this call we’ll get it to you.
Larry Greenberg - Langen McAlenney
Okay. Great. And I might have missed this did you give what the Q1 to Q3 reserve leases were for the fourth quarter?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Yes. Let me get back to my notes. I believe that we had 45 or whatever the prior quarter... the prior quarter releases in the third... in the fourth quarter were I believe it was $35 million.
Larry Greenberg - Langen McAlenney
35?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Whereas last year let year, let me go back and give you all the other numbers. In the fourth quarter of '07, we had $96 million worth of prior year’s reserve releases and $35 million of prior quarter reserve releases. The same numbers for the fourth quarter of '06 is you had approximately $49 million worth of prior year’s and $40 million of prior quarter.
Larry Greenberg - Langen McAlenney
Great. Thanks very much.
Patrick Thiele - President and Chief Executive Officer
And parenthetically, as we usually at this point say we remain as confident and the strength of our loss reserves at the end of 2007 as we did at the end of 2006 despite the reserve releases that occurred during the year.
Larry Greenberg - Langen McAlenney
Okay. Thank you.
Operator
[Operator Instructions] we'll take our next question from Vinay Misquith with Credit Suisse. Please go ahead.
Vinay Misquith - Credit Suisse
Hi good morning. Albert, question for you on the financial guarantee business. You mentioned, you might be considering putting more money into ChannelRe, would it be better to put it into sort of a similar vehicle but not ChannelRe specifically considering that that vehicle might have a lot of losses from NBI?
Albert Benchimol - Executive Vice President and Chief Financial Officer
Well, I think that we would look at any opportunities. The fact that we would look at them doesn't mean that we'll do them all. So, I think that at the end of the day, there may be some benefits to doing it within Channel, there maybe some benefits from doing it outside Channel but I think at this point in time you are going to have to give us the latitude of exploring opportunities and ultimately determining which ones are the best, but at this point in time we don't have anything that we can discuss.
Vinay Misquith - Credit Suisse
Okay, and Pat I'm trying to get a sense for the volatility and your earnings going forward. You've increased slightly your allocation to Property catastrophe and reduced your allocation to Casualty lines. And with cedents keeping more net, I'm just curious as to whether your cat exposures would be now higher. So, you need higher industry loss event to really hit you now versus the past. So, therefore you'd have sort of strong earnings in most quarters except if there was a large event?
Patrick Thiele - President and Chief Executive Officer
I think you can say that at this part during the cycle, we are giving a whole host of factors both in terms of what the client wants to buy and what... where the sweet spots in terms of the risk and return curve are for cat, we are moving up in the programs.
Vinay Misquith - Credit Suisse
Okay, that's great. Thank you.
Albert Benchimol - Executive Vice President and Chief Financial Officer
Before the next question, I wanted to identify the IBNR of our total portfolio. As of December 31, 54% of our reserves were IBNR and that compares to 53% of our reserves at the prior year-end.
Operator
And we'll take a follow-up question with Jay Gelb with Lehman Brothers. Please go ahead.
Jay Gelb - Lehman Brothers
Thanks. Patrick, I want to follow up on your comment on potential losses on sub-prime D&O. Can you give us a sense of how you came up with that range?
Patrick Thiele - President and Chief Executive Officer
That's looking from basically a ground-up identification of every insured that we are aware of that has been in the press, in the affected relevant industries, including obviously mortgage, banks, investment banks, rating agencies, real estate, other financial, insurance, and reinsurance. Everybody whose has had a significant market decline, public companies who have had a significant market decline in the right area, and then we take that down to our book, the people that we know reasonably well, we make estimates, we have information as to the limits, not only our own limits per insured, but what the total insured limits are per insured we put factors on, we categorize them into A, B, C or 1, 2, 3 or 4 risk levels, we put a loss factor against the ultimate limits and then we determine our loss and then we extrapolate back to the total market loss.
So it's knowing who the relevant insured list is and then trying to work back through some kind of view, obviously in that is the... most important thing is the number of security class action lawsuits, which by our count is approximately 40 at this moment, and we have a reasonably good sample of those 40 security class action lawsuits. So I think our book, it's only 1% potentially of the total U.S. market, probably has a pretty good... a reasonably good spread in terms of its use as a sample.
Jay Gelb - Lehman Brothers
Do you think it would be fair to say that approaching it that way could inflate the market loss given you're talking only about the potentially 1% share of losses from your perspective?
Patrick Thiele - President and Chief Executive Officer
Because we have a much higher level of the company's insureds who have apparent [ph] security class action lawsuit against, I don't think so.
Jay Gelb - Lehman Brothers
Okay...
Patrick Thiele - President and Chief Executive Officer
I think it's a... I mean I don't know any other way to do it except to look at the towers, the amount of coverage that's bought by those companies who we think have some reasonable expectation of having a security class action lawsuit, either currently filed against or going to be filed against them, and then putting some kind of loss factor, which is our view of how much of those limits are likely to be blown based upon the meritorious defenses that they have.
Albert Benchimol - Executive Vice President and Chief Financial Officer
It is early in the process.
Patrick Thiele - President and Chief Executive Officer
It is very early in the process, where we are trying to be as open and transparent as we possibly can. I don't think it... I think the number I gave you is kind of contained within the published numbers that I have seen either from brokers, from investment banks or other observers of the industry. When we do it from a top bottom-up... tops-down, we come to the kind of the exact same kind of level. That isn't saying anything about any individual insureds particular case. This is just trying to add up various classes of insureds likelihood of having a loss.
Jay Gelb - Lehman Brothers
Thanks for the answer.
Operator
And we'll also take a follow-up with Joshua Shanker with Citi. Please go ahead.
Joshua Shanker - Citi
Just curious, following up on Vinay's question, would PartnerRe ever be interested in being a writer of credit insurance from the bond guarantor perspective... reinsurance I should suggest?
Albert Benchimol - Executive Vice President and Chief Financial Officer
The whole point of doing ChannelRe is that we like the risk, but we didn't like the nominal exposures and so that to us is the real issue. As you know, there are very large limit exposed for a very small amount of premium and we are uncomfortable with any risk where we have very large limit exposures. Absolute dollar limits are a fundamental basis of our risk management system. So I do not believe that we would be interested in exposing our total balance sheet and our shareholders equity, even to a one in a million type of event. So we would much prefer exposing our capital to the risk that I have high nominal leverage, we would prefer to do so through a capped investment structure.
Joshua Shanker - Citi
And that’s it, thank you.
Operator
And that concludes our question-and-answer session. I would like to turn the conference back over to Patrick Thiele with any or additional for closing remarks.
Patrick Thiele - President and Chief Executive Officer
Thank you very much. Thanks for your attention to the call, thanks for the support of the company. We did have a very good year in 2007 and we believe that based upon our strength, our franchise, our position in the marketplace, and the generally decent level of pricing that exists within the marketplace, we can look forward to hopefully another good year in 2008. And with that thank you very much, we are adjourned.
Operator
Once again ladies and gentlemen this will conclude today's conference. We thank you for your participation you may now disconnect.
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