S&P Affirms PartnerRe Ratings; Revises Outlook to Negative

May 25, 2006

Standard & Poor’s Ratings Services has affirmed its “A” counterparty credit rating on Bermuda-based reinsurer PartnerRe Ltd. (PRE), its “AA-” counterparty credit and financial strength ratings on PRE’s operating reinsurance subsidiaries Partner Reinsurance Co. Ltd., PartnerRe S.A., and Partner Reinsurance Co. of U.S., and its “AA-” financial strength rating on Partner Re Ireland Insurance Ltd., (collectively PartnerRe). However S&P said its outlook on the ratings “has been revised to negative from stable.”

S&P also assigned its preliminary “A” senior debt, “A-” subordinated debt, and “BBB+” preferred stock ratings to PRE’s recently filed universal shelf. The new shelf has an unlimited notional amount and is in accordance with the new SEC rules effective Dec. 1, 2005.

“The revised outlook reflects PartnerRe’s operating capital adequacy, which remains below Standard & Poor’s expectations for a ‘AA-‘ rating, at an estimated 121 percent as of March 31, 2006, as measured by Standard & Poor’s capital adequacy model,” said the announcement.

“Although the group’s capital adequacy is likely to improve throughout the year through retained earnings, PartnerRe’s current capital adequacy places it in a weaker than expected position relative to the upcoming hurricane season,” observed S&P credit analyst Laline Carvalho.

S&P noted: “The ratings on PartnerRe are based on the group’s very strong historical operating performance, reasonable (albeit large) 2005 catastrophe losses, very strong competitive position, strong modeling capabilities, and conservative reserving practices. In addition, the group’s prudent underwriting approach is reflected in its strategy to cap its zonal exposures for all lines of business at a maximum of 25 percent of its capital base.

“Offsetting these positives are the group’s potential underwriting volatility due to low retrocessional usage, lower than expected capital adequacy, and risks associated with the group’s strategy to increase diversification through the further expansion into relatively new lines of business such as life reinsurance and annuities.”

The rating agency added that it “does not expect any issuances under the shelf to lead to any material changes in the group’s financial leverage over the near term. At March 31, 2006, PartnerRe’s total debt plus preferreds to total capital remained consistent with the rating at 34 percent.”

Returning to a discussion on PartnerRe’s ratings outlook S&P indicated that it could be revised back to stable over the next six to 18 months, “dependent on the group’s ability to improve its capital adequacy to levels more commensurate with the ratings, as well as its ability to continue to demonstrate better than industry operating results.

“Conversely, if PartnerRe’s capital adequacy ratios remain substantially below the rating level, or the group’s operating performance does not meet Standard & Poor’s expectations, the ratings on the group could be lowered by one notch.”

S&P tacitly confirmed, without specifically saying so, that the main problem it has rating reinsurers these days is uncertainty. The rating agency indicated that “assuming normal catastrophe losses,” it expects PartnerRe’s 2006 operating performance to improve significantly, with the group expected to report a combined ratio in the low to mid-90 percent range and returns on revenue of more than 12 percent.” The problem with that scenario is that no one really knows with any certainty what “normal catastrophe losses” are going to be in 2006.

Assuming PartnerRe turns in that “strong performance,” S&P said it “is expected to stem from substantially improved pricing and terms and conditions in property and other short-tail lines of business, as well as the group’s efforts to prudently manage its aggregate exposures given the potential frequency of large natural catastrophe events in coming years. Capital adequacy is also expected to improve to about 140 percent by year-end 2006, reflecting expected strong earnings and relatively flat premium growth for the year. Financial leverage as measured by total debt plus preferreds to total capital is expected to remain supportive of the rating level at 32 percent-35 percent.”

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