PartnerRe Reaps Benefits Of Maturity

While start-ups work frenetically to capitalize on opportunities in the property-catastrophe reinsurance market, PartnerRe can build on its position as a mature company and focus on less dramatic activities aimed at enhancing its returns.

Or, as President and Chief Executive Officer Patrick Thiele likes to say, it can focus on refinements aimed at "building an optimal risk-return portfolio."

Mr. Thiele repeats those words often--and PartnerRe's results indicate the phrase has been internalized by a culture of followers. Like other reinsurers, PartnerRe lost money in 2005, with $900 million in hurricane losses cutting into its bottom line and lowering book value 12.5 percent. But over the last four years, including two marked by hurricanes, the reinsurer's book value per share grew 11.3 percent, he noted.

With its history dating back to 1993, when the first wave of property-catastrophe reinsurers sprang up in the wake of Hurricane Andrew, PartnerRe is among the biggest companies headquartered in Bermuda, with capital and 2005 premium dollars ranking it behind ACE and XL, who have each been around since 1986. But with its transition from property-cat specialist to diversified reinsurer long out of the way, the events of 2004 and 2005 did nothing to shift PartnerRe's thinking about risks it will take or opportunities it will pursue.

Indeed, Mr. Thiele had a "business-as-usual" message to deliver during a 2005 earnings conference call in early February.

The results for 2005 were "within our risk-return proposition," he said. "Because we don't think of [the year] as overly unique, we have not changed our risk appetite. We have not cut back on catastrophe aggregate limits. We have not decreased our appetite for long-term casualty business. We have not changed management, organizational structure, reserving policies, compensation fees, risk management systems....

"Our core skills of underwriting, pricing, tactical capital allocation [and] our broadly diversified portfolio of risk are still in place," he said.

Summing it up differently in an interview with NU, he said: "We're boring. We take great pride in being boring. Boring to us is--just do your job."

Speaking to NU on a day when a competitor released a less boring announcement about an upcoming management change, he contrasted the challenges for older and newer companies.

Newer companies are very dependent on one or a few individuals, he said. At PartnerRe, in contrast, "we have tried to institutionalize a risk management culture, so that [we can] get consistency of results over time, regardless of the executive in charge of the company at any given point."

It's very difficult for a start-up "to go from just a pool of capital, managed by one or two people, to a real company that has all the attributes of a sustainable, long-term participant in the reinsurance market," said Mr. Thiele, who took over PartnerRe in 2000, when founder Herbert Haag retired.

But having reached a stage of maturity doesn't give PartnerRe team members the luxury of sitting on their hands. In 2006, potential changes for the company will involve refining "our tools and our ability to manage risk and return in a holistic fashion," he said, referring to changes on the nonlife side--which accounted for $3.2 billion, or 85 percent of total gross premiums in 2005.

In addition, a four-year effort aimed at building life and alternative risk-transfer businesses will continue. "They're diversifying lines and don't have the same shock-loss potential that our nonlife lines do," he noted.

Finally, he said, the company will continue to become more sophisticated in its investment strategy. Noting that the company internalized all its investment functions in the last four years, he described a mentality of controlled risk taking on the investment side not unlike that of the reinsurance operation--seeking to optimize returns within its risk parameters.

"You'll see a greater proportion of our value creation coming out of investment operations," he predicted, adding that at $10 billion, invested assets "can throw off a lot of income."

Going over the first initiative--the development of holistic reinsurance risk management tools--he explained that the company, and the industry, "does a pretty good job of individual treaty underwriting--of being able to forecast expected loss trends and to price" for them.

At the same time, however, good tools are lacking--both for Partner and the industry--to understand the portfolio effects of adding pieces of business, he said, contrasting the superior knowledge of correlations that investment equity and bond portfolio managers possess.

"We tend to build up our exposures from the bottom up, treaty by treaty," he noted. "We have to do a better job of trying to understand the characteristics of the portfolio of risks now that we have a better understanding of the characteristics of an individual risk."

With 27 percent of gross premiums in casualty and motor business, 19 percent in property, and the rest in worldwide specialty businesses including catastrophe (11 percent), the nonlife book already has a degree of diversification not present when its early years as a property-cat specialist.

The diversification came about as the result of two acquisitions--of Paris-based SAFR in 1997, and of Zurich-based Winterthur in 1998.

"We've been in business now 12 years, and you can basically break it up into three four-year periods," Mr. Thiele observed. In 1994-1997, PartnerRe was in the "typical immature" stage of a start-up, cat-only operation. During the next four years--a transition phase--it digested acquisitions and transitioned the management team.

And the last four years have been the "maturation phase" with a consistent strategy and management team, he said.

With portfolio management now high on the agenda of the mature company, the ART and life books continue to grow.

Describing the ART component--which was only 1 percent of gross premium and $18 million in income in 2005--he said: "It's the business that sits between the reinsurance business and capital markets business that exists in our investment department. It has characteristics of both."

The income numbers for ART, he said, "are not indicative of the amount of capital actually employed in that business," which he put at "several hundred million dollars."

Included in the segment are structured risk transfer, or finite deals, and structured finance products like weather insurance.

Explaining the finance products further, he said, they involve risk classes that are not the "fully tradeable, liquid asset classes," which exist within the investment department. Instead, these tend to be like private placements, and sometimes are accounted for with reinsurance accounting, and other times, investment-type accounting.

As for life business, PartnerRe acquired that in the Winterthur acquisition, but sold the U.S. portion, leaving it with a book of roughly $120 million in premium. That book--in Europe, Latin America and Asia--has tripled in size in the last four years.

"My expectation is that premium growth rate will be much slower [over] the next four years, but that profit emergence will accelerate," Mr. Thiele said, noting that life profits grow slowly and are just now starting to show up on the maturing book.

Turning to investments, when asked whether the goal of optimizing the mix will mean taking on riskier assets, he said, "We're probably already there." Invested assets--growing from $3.5 billion five years ago to $10 billion today--probably include some "risky" ones, but "if we do our diversification right and put limits on the concentration in any asset class, we can move into 'riskier' classes, but not increase the risk to the organization overall."

Describing changes already made by the in-house investment team, he said that five years ago investments were entirely in fixed income, medium-term bonds. Now, "nonbonds" of over $2 billion include bank loans, real estate investment trusts, noninvestment grade bonds, and international common stocks, for example.

In the nonlife insurance business, Partner had 59 percent of its premiums outside North America in 2005, but that may change some in 2006 and 2007. "We're seeing more opportunities in the United States," he said. (See sidebar on "How Were Renewals?")

PartnerRe distributes its U.S. business through brokers, but has a mixed distribution strategy elsewhere. The global specialty segment--which includes excess-of-loss and London business--tends to be brokered, while global property-casualty tends to be more direct.

The system "allows us to see all the business," Mr. Thiele said. "Some business only shows up direct; some business only shows up broker. So if you don't have a dual distribution system, you're only looking at a portion of the market. Therefore, you must be suboptimal in your ability to maximize your risk-return profile."

Although significant milestones in PartnerRe's history have been its acquisitions, Mr. Thiele doesn't foresee any near-term deals. "We consider ourselves to be opportunistic acquirers rather than having it be part of our strategy," he said, noting that current return goals can be comfortably met without them.

"But you never say never. If we could find a reinsurance company--and it has to be reinsurance--selling for significantly below its economic value that [we] could integrate smoothly and efficiently, we would look at it," he said.

He added that PartnerRe isn't seen as an attractive buyer. "We wouldn't likely do a merger," he said, contrasting what could be a painful acquisition process for the acquired company in which systems, people and relationships are dismantled.

Mr. Thiele is adamant about not getting into the insurance business. "I don't like competing with my clients....There's always a hesitancy and confusion and complication if you're in there trying to be their reinsurer, while another part of the organization is competing with them for business."

He also said that individual risk underwriting entails more overhead expense. Reinsurers involved in large treaty transactions "don't have anywhere close to an insurance company's process, regulatory or marketing capabilities," he said.

Finally, he reasoned, "when you're in the insurance and reinsurance businesses at the same time, it's difficult to control your aggregates--to know how much risk you're taking on--because you have a complicated organizational structure. You talk in different languages [and] the risk of surprises to events goes up exponentially."

"We like the reinsurance-only model. We know how to run that one," he said.

While language barriers between insurance and reinsurance professionals may be problematic, a blend of spoken languages and cultures is a feature of PartnerRe that Mr. Thiele points to with pride.

"We're headquartered in Bermuda, but we don't view ourselves as part of the Bermuda market," he said, preferring to be thought of as a "global reinsurer."

"It's hard to find a reinsurer with as much diversification," not only in terms of its business, but cultures, he said. "We're French, Swiss, American, Bermudian--and we view that as a real strength."