PartnerRe, the reinsurance firm acquired by the Italian conglomerate EXOR, reported a fourth-quarter net loss as it suffered significant investment losses on fixed income securities following on from the increase in U.S. risk-free rates.
The increase in risk-free rates was expected to negatively impact some reinsurers in late 2016, although to date the impact appears marginal for most. PartnerRe, due to the composition of its investment portfolio has suffered more than most, bringing it to a quarterly loss.
A -1.9% return on the PartnerRe investment portfolio in the quarter reflects a $312 million net investment loss “largely driven by the realized and unrealized investment losses of $388 million, partially offset by net investment income of $105 million.”
The reinsurer explained; “The negative total net investment return in the fourth quarter of 2016 was primarily generated by fixed income securities, driven by the significant increase in U.S. risk-free rates (85 basis points on the 10-year US Treasury in the quarter), partially offset by narrowing credit spreads.”
The impact of the investment loss is a net loss of $191 million for the fourth-quarter of 2016, with negative return on equity of -12.4%.
The fourth-quarter saw impacts from hurricane Matthew and other attritional catastrophe and weather events, which meant that operating earnings were $151 million, down from $206 million in the prior year quarter.
PartnerRe President and Chief Executive Officer Emmanuel Clarke, commented; “We delivered good operating results in the fourth quarter with an annualized adjusted Operating ROE of 9.8%. The Non-life combined ratio of 89.6%, notwithstanding losses related to Hurricane Matthew, highlights our underwriting discipline while favorable prior year development continues to remain strong. In the current market conditions, we are undertaking the right underwriting actions to better serve our core clients while preserving our long-term capital strength.”
But look beyond the investment loss and PartnerRe’s performance across the full-year 2016 shows a significant improvement over the prior year, with net income of $447 million up significantly from just $107 million in 2015.
The reinsurer is perhaps the first to show such a major impact from the increase in U.S. rates, but given the construction of its investment portfolio that will have been unavoidable and some companies were always going to be hit as rates rose.