Interview of Emmanuel Clarke, CEO PartnerRe Global : « Our results reflect the volatility seen on the markets »

A major player on the Cat reinsurance and industrial risk markets, the Bermudian reinsurer, recording a loss of USD 682.8 million in the first half of this year, is going through a delicate period notably due to soaring increases in loss experience. Unless a major event occurs in the second half, Emmanuel Clarke does not foresee a significant upturn in the market in 2012.

Following mixed results in 2010, PartnerRe posted a loss of USD 807 million in the first quarter of 2011. How were the second quarter results?

There were fewer events in the second quarter than in the first, which was extremely challenging for the entire industry; reinsurers lost between 7 and 15% of their capital on average. PartnerRe is on the upper end of this range as we have a particularly strong presence in Japan and Australia. Having said that, in terms of its impact on capital, the first quarter of 2011 is only the third highest in the history of PartnerRe, following that of the World Trade Center attack in 2001 and the Katrina and Rita hurricanes in the U.S. in 2005. It is not unusual for a reinsurer of our size to post negative results when faced with events of this magnitude; you can only assess the performance of a reinsurer over a relatively long period. Indeed, our mission is to generate enough profit over the longer term to be able to absorb these shocks and remain profitable. It is true that 2010 was already a challenging year for the market. Last year PartnerRe posted results that reflected what happened during a year marked by an acceleration of losses from natural catastrophes and major risks, with reinsurance margins that continued to erode, investment income remaining mediocre for some time, and an economic environment that was not conducive to growth, particularly in the developed countries of Western Europe and in North America. In this environment our results reflected market volatility and the volatility we assume on behalf of our clients. As PartnerRe is heavily involved in reinsuring natural catastrophes and major industrial risks, and as it is highly diversified geographically, our results naturally reflect this volatility. With a combined ratio of 95% and a return on equity of 11.5%, our results for 2010 are quite satisfactory in that environment.

In June, PartnerRe increased its capital; was that to refill the coffers?

We had the opportunity to access the capital markets at good conditions, which allowed us to lower our overall capital cost: our aim is to deliver a 13% return on capital over the cycle; it is therefore positive to borrow capital at a rate slightly above 7%. This also allows us to diversify our sources of capital and, as a result, increase our financial flexibility. So this has nothing to do with refilling the coffers since following first-quarter events we have USD 7.4 billion in capital, which is more than enough to cover all the risks we assume.

WE HAD THE OPPORTUNITY TO ACCESS THE CAPITAL MARKETS AT GOOD CONDITIONS, IT ALLOWS US TO DIVERSIFY OUR SOURCES OF CAPITAL AND TO INCREASE OUR FINANCIAL FLEXIBILITY.

 

Did these results lead you to change your underwriting policy for the 2011 renewals?

On January 1, 2011, the market continued to show signs of gradual margin erosion in most segments (apart from those with high claims rates such as offshore energy). At PartnerRe, we are continuing to do what we have always done: manage the cycle. That means growth is not our priority at this time. Accordingly, there was a decline in the volume of PartnerRe's business as reported on January 1, 2011. Yet this is also the result of the merging of the PartnerRe and PARIS RE portfolios, as we combined both underwriting portfolios. The January 1, 2011 renewal was indeed the main renewal date for the two portfolios to be merged, and we managed our combined risk appetite in a way which was commensurate with market conditions. There are indeed a number of segments where we reduced our risk appetite.

How much duplication was there between the PartnerRe and PARIS RE portfolios?

The overlap between PartnerRe and PARIS RE business was around 20%.

As a result of the overlap in PartnerRe and PARIS RE portfolios and of your decisions not to renew some treaties, by how much did premium volume actually contract?

We renew slightly over half of our treaty business in January. At January 1, 2011, our underwriting decisions led to a 16% reduction of premium for the book renewing at Jan 1st. Our goal was to maintain underwriting profitability despite a noticeable deterioration in market conditions, and we were able to achieve this by focusing on best priced business and segments. There is only a marginal share of PARIS RE business that we were not able to renew even though we would have liked to.

How were the April renewals in Asia?

In April, we renew the Japanese and Korean business; renewals this year began before the Japanese earthquake, continued through it and were completed afterwards! The result was therefore rather mixed, and not sufficiently representative of the market, especially for the Japanese renewals: some clients preferred to renegotiate their contract before April 1 to secure the available capacity, even if they didn't have all the loss information yet, and others preferred instead to request a 2-month or 3-month extension to their contract. In the end, a number of Japanese contracts were renewed after April 1.

And how were the July 1 renewals in the U.S.?

That is an important date as we renew a lot of business in the U.S. at this time, especially property Cat business. We pushed for rate increases and achieved between 5 and 10% on our contracts. For other lines, apart from loss affected business, our approach was to stop premium rate erosion. Accordingly, our best offer to our best clients was at expiring terms - and we did actually see stabilization of market conditions, again, other than Cat business which went up. Going forward, we'll approach the forthcoming renewals with the same approach in mind, barring any major event between now and the end of the year of course. Many things may still happen until then. So far, the events that have affected the industry were not capital events (events jeopardizing capital position of market players, editor's note); they reduced the excess of capital on the market but overall supply remains greater than demand.

However, any additional event, such as a major hurricane landfall could change that. In the absence of a significant event, we anticipate a reasonable rate increase for property Cat business and a stabilization in other segments.

So you don't envisage any major developments for your 2012 underwriting policy?

No. Our view of the market is that pricing is generally below adequate levels. This is not a time for deploying all of our capacity in certain segments. However, our appetite remains strong in some of our Specialty lines. For instance, we are one of the major players in Credit reinsurance and following the difficult times in 2008-2009, we have grown our support to our clients in this specific class of business. We are also present in a meaningful way in offshore energy where we see continuously rising rates following large losses in 2010 and 2011.

How did the PARIS RE integration go in 2010?

The integration went very well because it had been well prepared. In addition, there was a natural consistency in risk culture among the teams. PARIS RE was big enough to be important to our development and market position, while at the same time it was small enough for us to incorporate relatively easily. While we already had a strong presence in Paris, the integration marked the consolidation of a major employee base in an environment with which we are perfectly familiar. This stage is behind us now, but at the time our other priority was of course to communicate with our clients. On July 1, 2010, we already had deployed our combined PartnerRe/PARIS RE organization and a consolidated underwriting policy with clear messages to give to the market prior to Monte Carlo about our continuity of offer. The non-renewal of some business was more the exception than the rule, dictated by the need to balance the portfolio and manage risk accumulation.

Are all the PARIS RE employees now working on PartnerRe's premises?

Yes, the teams have merged and are working together. By end of 2012, we will even have all employees in the same office building. We benefitted from this acquisition in several important ways: a stronger balance sheet hence an enhanced resistance to stock losses, addition to our product range especially in facultative business where the integration of PARIS RE helped us to accelerate establishing a new unit on a major scale with a strong market presence. The merger has also added to our presence geographically - in the emerging markets for example - as well as in some classes such as agriculture and credit.

How many employees does PartnerRe/PARIS RE have now; what was the outcome of the voluntary redundancy plan?

Of about 1,400 employees worldwide, we now have close to 400 people in Paris, following about 140 voluntary departures. We are pleased that we were able to limit this plan to voluntary redundancies. The departures are spread between 2010 and 2012. The plan was rolled out in a good social climate because it offered generous conditions.

CURRICULUM VITAE

Emmanuel Clarke, CEO of PartnerRe Global, is responsible for the executive management of all PartnerRe's Global Non-Life operations. He is also a member of PartnerRe's Group Executive Committee.

1997 He joined PartnerRe, with the acquisition of SAFR.

2001 Appointed Head of Credit and Surety, Global.

2002 Additionally Deputy Head of Specialty Lines, Global.

2006 Head of Property and Casualty, Global.

2008 Head of Specialty Lines, Global.

September 2010 Appointed to his current position of CEO, PartnerRe Global.

He has a Master Studies in Business Administration from the Universite Paris, IX -Dauphine, specializing in Finance and Controlling and an MBA in International Business from the City University of New York.

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Interview of Emmanuel Clarke, CEO PartnerRe Global : « Our results reflect the volatility seen on the markets »

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