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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 34-0-26512
RENAISSANCERE HOLDINGS LTD.
(Exact name of Registrant as specified in its charter)
Bermuda 98-013-8020
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Renaissance House, 8-12 East Broadway, Pembroke HM 19 Bermuda
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: Common Shares, par
value $1.00 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of Common Shares held by nonaffiliates of the
Registrant as of March 29, 1999 was $401,252,390 based on the closing sale price
of the Common Shares on the New York Stock Exchange on that date.
The number of Common Shares outstanding as of March 29, 1999 was
20,927,331.
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DOCUMENTS INCORPORATED BY REFERENCE
Sections of the Registrant's Annual Report to Shareholders mailed to
shareholders on or about March 30, 1999 (the "Annual Report") are incorporated
by reference into Part II of this Form 10-K. With the exception of the sections
of the Annual Report specifically incorporated by reference herein, the Annual
Report is not deemed to be filed as part of this Form 10-K.
Sections of the Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission (the "Commission") pursuant to Regulation
14A under the Securities Exchange Act of 1934 relating to the Registrant's
Annual General Meeting of Shareholders to be held on May 13, 1999 (the "Proxy
Statement") are incorporated by reference into Part III of this Form 10-K. With
the exception of the sections of the Proxy Statement specifically incorporated
by reference herein, the Proxy Statement is not deemed to be filed as part of
this Form 10-K.
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RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business..............................................................1
Item 2. Properties...........................................................24
Item 3. Legal Proceedings....................................................24
Item 4. Submission of Matters to a Vote of Security Holders..................24
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................................24
Item 6. Selected Consolidated Financial Data.................................24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................24
Item 7A Quantitative and Qualitative Disclosures about Market Risk...........24
Item 8. Financial Statements and Supplementary Data..........................25
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................25
PART III
Item 10. Directors and Executive Officers of the Company......................25
Item 11. Executive Compensation...............................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management.......25
Item 13. Certain Relationships and Related Transactions.......................25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....25
SIGNATURES....................................................................29
(i)
PART I
Unless the context otherwise requires, references herein to the "Company"
include RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its subsidiaries,
which principally include Renaissance Reinsurance Ltd. ("Renaissance
Reinsurance"), DeSoto Insurance Company ("DeSoto"), Nobel Insurance Company
("Nobel"), Glencoe Insurance Ltd. ("Glencoe"), Renaissance Services Ltd.
("Services"), Renaissance Reinsurance of Europe ("Renaissance Europe"),
Renaissance U.S. Holdings, Inc. ("Renaissance U.S."), Pembroke Managing Agents,
Inc. ("Pembroke") and Paget Insurance Agency, Inc. ("Paget"). Certain terms used
below are defined in the "Glossary of Selected Insurance Terms" appearing on
pages 21-23 of this Report.
Note on Forward-Looking Statements
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which, with respect to
future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. In particular, statements using verbs such as "expect",
"anticipate", "intends", "believe" or words of similar impact generally involve
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. Numerous
factors could cause the Company's actual results to differ materially from those
in the forward-looking statements, including the following: (i) the occurrence
of catastrophic events with a frequency or severity exceeding the Company's
estimates; (ii) a decrease in the level of demand for the Company's reinsurance
or insurance business, or increased competition owing to increased capacity in
the industry; (iii) any lowering or loss of one of the financial or
claims-paying ratings of the Company or one or more of its subsidiaries; (iv)
risks with implementing business strategies of the Company; (v) uncertainties in
the Company's reserving process; (vi) failure of the Company's reinsurers to
honor their obligations; (vii) actions of competitors including industry
consolidation; (viii) loss of services of any one of the Company's key executive
officers; (ix) the passage of federal or state legislation subjecting
Renaissance Reinsurance to supervision or regulation, including additional tax
regulation, in the United States or other jurisdictions in which the Company
operates; (x) challenges by insurance regulators in the United States to
Renaissance Reinsurance's claim of exemption from insurance regulation under the
current laws; (xi) changes in economic conditions, including currency rate
conditions which could affect the Company's investment portfolio; (xii)
uncertainties with respect to the Company's planned distribution of certain
operating units of Nobel Insurance Company; (xiii) risks relating to the Year
2000 issue; or (xiv) a contention by the United States Internal Revenue Service
that the Company or Renaissance Reinsurance is engaged in the conduct of a trade
or business within the U.S. The foregoing review of important factors should not
be construed as exhaustive; the Company undertakes no obligation to release
publicly the results of any future revisions it may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Item 1. Business
General
RenaissanceRe is a Bermuda based holding company, incorporated in 1993,
with operating subsidiaries engaged in reinsurance and insurance. The Company's
principal operating subsidiary, Renaissance Reinsurance provides property
catastrophe reinsurance coverage to insurers and reinsurers, primarily on an
excess of loss basis. During 1998, Renaissance Reinsurance wrote $207.2 million
of premium and, based on gross premiums written, Renaissance Reinsurance is one
of the largest providers of this coverage in the world. Excess of loss
catastrophe coverage generally provides coverage for claims arising from large
natural catastrophes, such as earthquakes and hurricanes, in excess of a
specified loss. In connection with the coverage it provides, Renaissance
Reinsurance is also exposed to claims arising from other natural and man-made
catastrophes such as winter storms, freezes, floods, fires and tornadoes.
RenaissanceRe is continuing to expand its primary insurance business
through internal growth and acquisition. In 1996 RenaissanceRe incorporated
Glencoe, which provides primary catastrophe-exposed property coverage on an
excess and surplus lines basis, and is eligible to write business in 29 states.
During 1998, Glencoe wrote $5.6 million of primary insurance premium.
In January 1998, RenaissanceRe began to provide personal lines coverages
through DeSoto, a wholly owned subsidiary of Glencoe. DeSoto is a special
purpose Florida homeowners insurance company that is licensed to assume and
renew homeowner policies from the Florida Joint Underwriting Authority (the
"JUA"), a state sponsored insurance company. During 1998, DeSoto wrote $26.7
million of primary homeowners insurance coverage.
On June 25, 1998, RenaissanceRe, through its U.S. holding company,
Renaissance U.S., completed its acquisition of the U.S. operating subsidiaries
of Nobel Insurance Limited, a Bermuda company ("Nobel Limited"), for $56.1
million. During the fourth quarter of 1998, RenaissanceRe recorded after tax
charges of $40.1 million related to Nobel Insurance Company ("Nobel"). As a
result of these charges, RenaissanceRe adopted a plan to exit each of Nobel's
current businesses. Nobel will continue to operate these business units on a
transitional basis. See "Primary Insurance Operations - Nobel" on page 8 of this
form 10-K.
Nobel is a Texas domiciled company admitted in 50 states and the District
of Columbia to write all insurance lines except life insurance, with statutory
surplus of $15 million at December 31, 1998. In connection with the acquisition
of Nobel, the Company also acquired four related operating companies: (i) Nobel
Managing Agents, Inc. ("NMA"), a Texas corporation that provides insurance
brokerage and risk management services; (ii) Nobel Insurance Agency, Inc.
("NIA"), a Texas corporation that serves as Nobel's commercial and personal
lines recording agency; (iii) Nobel Service Corporation ("NSC"), a Delaware
corporation which provides certain administrative and management services for
Nobel; and (iv) IAS Claim Services, Inc. ("IAS"), a Delaware corporation which
conducts claims adjusting services on behalf of the Company's U.S. primary
operations, as well as for third parties.
In October 1998, Renaissance Europe was incorporated under the laws of
Ireland as a wholly owned subsidiary of Renaissance Reinsurance to provide
certain property catastrophe reinsurance coverage in Europe.
On December 31, 1998, RenaissanceRe entered into an agreement to purchase a
10% percent interest in Inter-Ocean Holdings Ltd. Also, effective January 11,
1999, RenaissanceRe entered into a joint venture, Top Layer Reinsurance Ltd.,
with State Farm Mutual Automobile Insurance Company ("State Farm") to provide
high layer coverage for non-U.S. risks.
The Company's results depend to a large extent on the frequency and
severity of catastrophic events, and the coverage offered to clients impacted
thereby. In addition, from time to time, the Company may consider opportunistic
diversification into new ventures, either through organic growth or the
acquisition of other companies or books of business. In evaluating such new
ventures, the Company seeks an attractive return on equity, the ability to
develop or capitalize on a competitive advantage and opportunities that will not
detract from its core reinsurance operations. Accordingly, the Company regularly
reviews strategic opportunities and periodically engages in discussions
regarding possible transactions.
The property catastrophe reinsurance market and the primary insurance
market continued to be highly competitive in 1998. Because the primary
catastrophe reinsurance business has been one of the most profitable segments of
the market, it is the focus of much competition, which has resulted in lower
premiums measured on a risk-adjusted basis.
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Ratings
Renaissance Reinsurance has been assigned an "A" claims-paying ability
rating from each of Standard & Poor's Insurance Ratings Services ("S&P") and
A.M. Best Company, Inc. ("AM Best"), and Glencoe has been assigned an "A-"
claims-paying ability rating from A.M. Best, representing independent opinions
of the financial strength and ability of Renaissance Reinsurance and Glencoe to
meet their respective obligations to their policyholders. As a result of Nobel's
recent operating performance (See "Primary Insurance Operations - Nobel"), A.M.
Best has reduced the credit rating of Nobel from "A-" to "B+". Such ratings may
not reflect the considerations applicable to an investment in the Company.
The "A" range ("A+," "A" and "A-") is the third highest of four ratings
ranges within what S&P considers the "secure" category. Insurance companies
assigned a claims-paying ability rating in the "A" range are believed by S&P to
provide good financial security, but their capacity to meet policyholder
obligations is somewhat susceptible to adverse economic and underwriting
conditions.
"A (Excellent)" and "A- (Excellent)" are the third and fourth highest of
A.M. Best's sixteen ratings designations. Insurance companies assigned an "A" or
"A-" rating by A.M. Best are companies which, in A.M. Best's opinion, have
demonstrated excellent overall performance when compared to the standards
established by A.M.
The "B++ and B+ (Very Good)" ratings are the fifth and sixth highest of
A.M. Best's sixteen ratings designations and are included within what A.M. Best
considers the "secure" category. A.M. Best assigns a B+ rating to insurance
companies which in A.M. Best's view have, on balance, excellent financial
strength, operating performance and market profile and a good ability to meet
their ongoing obligations to policyholders.
Strategy
The principal components of the Company's business strategy are to:
o Focus on the property catastrophe reinsurance business. The Company's
primary focus is property catastrophe reinsurance, which represented
approximately 77% of the Company's gross premiums written in 1998, 91% in
1997 and 95% in 1996, respectively.
o Build a superior portfolio of property catastrophe reinsurance by utilizing
proprietary modeling capabilities. The Company assesses underwriting
decisions on the basis of the expected incremental return on equity of each
new reinsurance contract in relation to the Company's overall portfolio of
reinsurance contracts. To facilitate this, the Company has developed
REMS(C), a proprietary, computer-based pricing and exposure management
system. The Company utilizes REMS(C) to assess property catastrophe risks,
price treaties and limit aggregate exposure. The Company combines the
analyses generated by REMS(C) with its own knowledge of the client
submitting the proposed program to assess the premium offered against the
risk of loss that such program presents. See "Underwriting."
o Utilize the Company's capital base efficiently while maintaining prudent
risk levels in the Company's reinsurance portfolio. The Company manages its
risks through a variety of means, including the use of contract terms,
portfolio selection methodology, diversification criteria and probability
analyses. By using such measures and by employing its proprietary modeling
capabilities, the Company attempts to construct a portfolio of reinsurance
contracts which maximizes the use of its capital while optimizing the
risk-reward characteristics of its portfolio. The Company relies less on
traditional ratios, such as net premiums written to surplus, because the
Company believes that such statistics do not adequately reflect the risk in
the property catastrophe reinsurance business. Management believes the
level of net premiums written relative to surplus does not reflect the
composition of a reinsurer's attachment points, aggregate limits,
geographic diversification, and other material elements of the risk
exposures embodied in a reinsurer's book of business.
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o Capitalize on the experience and skill of management. The Company's senior
management team has extensive experience in the reinsurance and/or
insurance industries, with an average of approximately 18 years of
experience for each of the four senior executives of the Company.
Additionally, senior management is supported by an officer group with an
average of approximately eleven years of experience in the reinsurance
and/or insurance industries.
o Build and maintain long-term relationships with brokers and clients. The
Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company believes that its existing portfolio of
reinsurance business is a valuable asset given the renewal practices of the
reinsurance industry. The Company believes that it has established a
reputation with its brokers and clients for prompt response on underwriting
submissions, for fast claims payments and for the development of customized
reinsurance programs. See "Marketing."
o Maintain a low cost structure. Management believes that as a result of its
ability to maintain a small staff and by basing operations in the favorable
regulatory and tax environment of Bermuda, the Company is able to maintain
low operating costs relative to its capital base and net premiums earned.
As of March 29, 1999, the Company, including Nobel, had approximately 280
employees. Following the Nobel Acquisition, the Company employed
approximately 250 additional employees, and is subject to an increased
level of U.S. regulation through the businesses purchased from Nobel. See
"Regulation."
o Leverage the Company's modeling expertise by expanding into primary
insurance markets with significant natural catastrophe exposures. The
Company is pursuing opportunities in the United States to write an
increased level of catastrophe-exposed primary insurance. The Company is
exploring opportunities to write both personal and commercial coverages, on
a primary basis, where natural catastrophe exposures represent a
significant component of the overall exposure. In addition to Glencoe,
these opportunities are being pursued through the development of new
operations, such as DeSoto, or through acquisitions, such as the purchase
of the operating subsidiaries of Nobel.
Industry Trends
It is anticipated that the competitive pressures in the property
catastrophe reinsurance market that have existed since 1995 will continue
through 1999. During the past four years, these pressures have suppressed the
premiums for property catastrophe coverages. However, partially as a result of
the approximately $10.1 billion of U.S. catastrophe losses reported in 1998, as
estimated by Property Claims Services, the Company believes that the rate
reductions which have been evident in the past four years may subside. Also, the
Company believes that opportunities in certain select markets will continue to
exist which, because of the Company's competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, should enable the Company to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
The Company has entered the primary insurance business, focusing
particularly on catastrophe exposed business, with a view to leveraging the risk
assessment skills of the core reinsurance business. In addition, the Company
will continue to evaluate other new business opportunities, which may be related
or unrelated to its current insurance or reinsurance businesses.
The Company's financial strength has enabled it to pursue these
opportunities outside of the property catastrophe reinsurance market and into
the catastrophe exposed primary insurance market. The Company believes that its
financial strength will enable it to continue to pursue other opportunities in
the future; however, there can be no assurance that the Company's pursuit of
such opportunities will materially impact the Company's financial condition and
results of operations.
The year ended December 31, 1998 was the third worst year for insured U.S.
catastrophe losses as measured in nominal dollars and as reported by Property
Claims Services. In comparison, the year ended December 31, 1997 was a
relatively light year for natural catastrophe losses. Gross claims in 1998
included claims on a number of aggregate stop loss and excess of loss contracts,
as well as claims related to Hurricane Georges, the January Canadian Freeze,
Hurricane Bonnie and additional claims from various U.S. wind, hail, tornado and
flood claims. However,
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largely due to Renaissance Reinsurance's reinsurance protection, the net loss
ratio of Renaissance Reinsurance was not significantly impacted by the 1998
catastrophe loss events. Net reinsurance claims for Renaissance Reinsurance in
1998 were $42.4 million, or 25.0 percent of net premiums earned as compared with
$49.0 million in 1997 or 23.6 percent of net premiums earned. Due to the high
severity and low frequency of claims related to the property catastrophe
reinsurance business, there can be no assurance that Renaissance Reinsurance
will continue to experience this level of net claims in future years.
During recent fiscal years, there has been considerable consolidation among
the leading reinsurance brokerage firms; whereby 64.2 percent of the Company's
1998 assumed premiums were sourced from five reinsurance brokers. Although there
can be no assurance as to how this consolidation may affect the property
catastrophe reinsurance business and the business of the Company, the Company
believes that its relationships with the brokers will minimize any adverse
effect on the Company's business.
Also, during recent fiscal years, there has been considerable consolidation
among the Company's customers, which has been a partial contributor to the
reduction of the Company's reinsurance premiums. Although this consolidation may
continue to occur, the Company believes that its financial strength, its
position as one of the market leaders in the property catastrophe reinsurance
industry and its ability to provide innovative products to the industry will
enable the Company to maintain its current gross premium volume in the
reinsurance business.
Premium rates or other terms or conditions of trade may vary in the future,
the present level of demand may not continue and the present level of supply may
increase as a result of capital provided by recent or future market entrants or
by existing property catastrophe reinsurers. Some of the property catastrophe
reinsurers who have entered the worldwide reinsurance markets (or may enter them
in the future) have or could have more capital than the Company. The full effect
of this additional capital on the property catastrophe reinsurance market may
not be known for some time.
Management is aware of a number of new, proposed or potential legislative
or industry changes that may impact the worldwide demand for property
catastrophe reinsurance and other products offered by the Company. In the United
States, the states of Hawaii and Florida have implemented arrangements whereby
property insurance in catastrophe prone areas is provided through
state-sponsored entities. The California Earthquake Authority, the first
privately financed, publicly operated residential earthquake insurance pool,
provides earthquake insurance to California homeowners. Additionally, in recent
years the U.S. Congress has considered a number of proposals to establish a
federal program to provide reinsurance for state disaster insurance programs and
ensure the availability and affordability of insurance against catastrophic
natural disasters, respectively, and could impact upon the demand for, and
availability of, traditional reinsurance. In the United Kingdom, the government
has enacted a bill to allow insurers to build claim equalization reserves which
might reduce the amount of property reinsurance necessary in the marketplace.
Management is also aware of many potential initiatives by capital market
participants to produce alternative products that may compete with the existing
catastrophe reinsurance markets. Management is unable to predict the extent to
which the foregoing new, proposed or potential initiatives may affect the demand
for the Company's products or the risks which may be available for the Company
to consider underwriting.
Segment Information
Certain information regarding the Company's segments of operations are
provided on the following pages. Further information regarding the Company's
segments of operations are contained in Note 15 to the Consolidated Financial
Statements of the Company contained on page 42 of the Company's Annual Report to
Shareholders for the year ended December 31, 1998, and is incorporated herein by
reference thereto.
Reinsurance Products
The Company's property catastrophe reinsurance contracts are generally "all
risk" in nature. The Company's most significant exposure is to losses from
earthquakes and hurricanes, although the Company is also
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exposed to claims arising from other natural and man-made catastrophes, such as
winter storms, freezes, floods, fires and tornadoes, in connection with the
coverages it provides. The Company's predominant exposure under such coverage is
to property damage. However, other risks, including business interruption and
other non-property losses, may also be covered under the property reinsurance
contract when arising from a covered peril. In accordance with market practice,
the Company's property reinsurance contracts generally exclude certain risks
such as war, nuclear contamination or radiation.
Catastrophic events of significant magnitude have historically been
relatively infrequent, although the property catastrophe reinsurance market
experienced a high level of worldwide catastrophe losses in terms of both
frequency and severity during the period from 1987 to 1996 as compared to prior
years. However, because of the wide range of the possible catastrophic events to
which the Company is exposed, and because of the potential for multiple events
to occur in the same time period, the Company's business is volatile, and its
results of operations may reflect such volatility. Further, the Company's
financial condition may be impacted by this volatility over time or at any point
in time. The effects of claims from one or a number of severe catastrophic
events could have a material adverse effect on the Company. The Company expects
that increases in the values and concentrations of insured property and the
effects of inflation will increase the severity of such occurrences per year in
the future.
The Company seeks to moderate the volatility described in the preceding
paragraph through the use of contract terms, portfolio selection methodology,
diversification criteria and probability analyses. Also, consistent with its
risk management practices, the Company purchases property catastrophe coverage
for its own account to seek to further reduce the potential volatility of its
results.
Type of Reinsurance
The following table sets forth the Company's gross premiums written and
number of programs written by type of reinsurance.
Year Ended December 31,
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1998 1997 1996
---- ---- ----
Type of Reinsurance Gross Number Gross Number Gross Number
- - ------------------- Premiums of Premiums of Premiums of
Written Programs Written Programs Written Programs
------- -------- ------- -------- ------- --------
(in millions)
Catastrophe excess of loss ............... $137.0 249 $150.8 311 $156.0 293
Excess of loss retrocession .............. 39.8 64 37.6 74 70.4 105
Proportional retrocession
of catastrophe excess
of loss ............................... 20.3 13 21.9 11 33.3 11
Marine, aviation and other ............... 10.1 15 10.9 25 8.6 25
------ --- ------ --- ------ ---
Total Reinsurance ................. $207.2 341 $221.2 421 $268.3 434
====== === ====== === ====== ===
Catastrophe Excess of Loss Reinsurance. Catastrophe excess of loss
reinsurance provides coverage to primary insurers when aggregate claims and
claim expenses from a single occurrence of a covered peril exceed the attachment
point specified in a particular contract. A portion of the Company's property
catastrophe excess of loss contracts limit coverage to one occurrence in a
contract year, but most such contracts provide for coverage of a second
occurrence after the payment of a reinstatement premium. The coverage provided
under excess of loss retrocessional contracts may be on a worldwide basis or
limited in scope to selected geographic areas. Coverage can also vary from "all
property" perils to limited coverage on selected perils, such as "earthquake
only" coverage.
Excess of Loss Retrocessional Reinsurance. The Company also enters into
retrocessional contracts pursuant to which it provides property catastrophe
coverage to other reinsurers or retrocedents. In providing
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retrocessional reinsurance, the Company focuses on property catastrophe
retrocessional reinsurance which covers the retrocedent on an excess of loss
basis when aggregate claims and claim expenses from a single occurrence of a
covered peril and from a multiple number of reinsureds exceed a specified
attachment point. The coverage provided under excess of loss retrocessional
contracts may be on a worldwide basis or limited in scope to selected geographic
areas. Coverage can also vary from "all property" perils to limited coverage on
selected perils, such as "earthquake only" coverage. In general, excess of loss
retrocessional contracts are for a term of one year. Retrocessional coverage is
characterized by high volatility, principally because retrocessional contracts
expose a reinsurer to an aggregation of losses from a single catastrophic event.
In addition, the information available to retrocessional underwriters concerning
the original primary risk can be less precise than the information received from
primary companies directly. Moreover, exposures from retrocessional business can
change within a contract term as the underwriters of a retrocedent alter their
book of business after retrocessional coverage has been bound.
Proportional Retrocessional Reinsurance. The Company writes proportional
retrocessions of catastrophe excess of loss reinsurance treaties when it
believes that premium rates and volume are attractive. In such proportional
retrocessional reinsurance, the Company assumes a specified proportion of the
risk on a specified coverage and receives an equal proportion of the premium.
The ceding insurer receives a commission, based upon the premiums ceded to the
reinsurer, and may also be entitled to receive a profit commission based on the
ratio of losses, loss adjustment expense and the reinsurer's expenses to
premiums ceded. A proportional retrocessional catastrophe reinsurer is dependent
upon the ceding insurer's underwriting, pricing and claims administration to
yield an underwriting profit, although the Company generally obtains detailed
underwriting information concerning the exposures underlying the proportional
retrocessions of catastrophe excess of loss reinsurance treaties written by the
Company. In addition, all of the Company's proportional retrocessions of
catastrophe excess of loss reinsurance contracts have aggregate per event risk
exposure limits.
Marine, Aviation and Other Reinsurance. The Company has also written
short-tail marine and aviation reinsurance and retrocessional reinsurance for
selected domestic and foreign insurers and reinsurers. Marine and aviation risks
involve primarily property damage, although certain marine and aviation risks
may involve casualty coverage arising from the same event causing the property
claim. Coverage is generally written in excess of a substantial attachment
point, so events likely to cause a claim will occur infrequently, such as the
destruction of a drilling platform, the loss of a satellite or the loss of a
sizable vessel and its contents. Although the Company focuses on writing
catastrophe excess of loss reinsurance, the Company also writes risk excess of
loss reinsurance and retrocessions. The risk excess of loss treaties in which
the Company participates generally contain limited reinstatement provisions. In
selected cases, the Company also writes customized financial reinsurance
contracts when the expected returns are particularly attractive.
Primary Insurance Operations; Glencoe, DeSoto, and Nobel
The Company is pursuing opportunities in the United States to write an
increased amount of catastrophe-exposed primary insurance. The Company expects
to write both personal and commercial coverages, on a primary basis, where
natural catastrophe exposures represent a significant component of the overall
exposure.
Glencoe - In January 1996, the Company incorporated Glencoe in Bermuda as
an excess and surplus lines insurance company. Glencoe is pursuing opportunities
in the catastrophe-exposed primary insurance business in the United States, and
is writing policies that primarily are exposed to earthquake and wind perils.
Glencoe is eligible to do business in the United States on an excess and surplus
lines basis in 29 states. For the year ended December 31, 1998, Glencoe
generated gross premiums written of $5.6 million, and net income of $4.0
million. For the year ended December 31, 1997, Glencoe generated gross premiums
written of $7.0 million and net income of $2.4 million. For the year ended
December 31, 1996, Glencoe generated gross premiums written of $1.6 million and
net income of $0.9 million.
DeSoto - In September 1997, Glencoe organized DeSoto in Florida to pursue
the assumption of policies from the Florida Residential Property and Casualty
Joint Underwriting Association (the "JUA"). In January 1998, the Company began
to provide personal lines coverages through DeSoto with an initial assumption of
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approximately 12,000 policies with an in-force premium of approximately $10
million. For the year ended December 31, 1998 DeSoto generated $26.7 million of
gross written premium and net income of $3.3 million.
Nobel - On June 25, 1998, the Company completed its acquisition of the U.S.
operating subsidiaries of Nobel Limited for $56.1 million. Between September and
December 1998, the Company contributed an additional $9 million of capital to
Nobel. As part of the transaction, the Company provided Nobel Limited with a
limited recourse loan of $8.9 million to support the liquidation of Nobel
Limited. The Company currently estimates that Nobel, after satisfying its
liabilities, will have the ability to repay $7.9 million of this loan. The gross
assets and gross liabilities purchased in the transaction were $188.1 million
and $155.9 million, respectively, thereby resulting in the recognition of $23.9
million of goodwill, which is being amortized on a straight line basis over a 20
year period (subsequently written down to $14.0 million due to the fourth
quarter charge described below). The Company accounted for this acquisition
using the purchase method of accounting and issued no shares as part of the
purchase.
During the fourth quarter of 1998, the Company recorded an after tax charge
of $40.1 million, consisting of $29.6 million of adverse development on Nobel's
casualty and surety books of business, a goodwill write-down of $6.6 million,
and other related costs of $3.9 million. As a result of Nobel's operating
performance, A.M. Best reduced the credit rating of Nobel from "A-" to "B+" and
Nobel is seeking to sell or reinsure its principal businesses and reserves,
specifically the casualty, surety, low-value dwelling and bail bond businesses.
While the Company intends to pursue an exit from these businesses, there can be
no assurance that the Company will complete any specific transactions and, if
sales transactions do occur, there can be no assurance that the Company will
receive its estimated fair value of the Nobel businesses. Accordingly, the
future results of the Company's operations could be adversely affected by a
potential write-down of goodwill, a partial write-off of the deferred tax asset
or by other costs or loss in value which could occur during the transaction
process. Nobel will continue to operate these business units on a transitional
basis. Subsequent to the sale of the businesses, Renaissance U.S. expects to
retain ownership of Nobel along with its licenses in the 50 states of America
although there can be no assurance that such licenses can be successfully
maintained following such sales.
Nobel has been engaged in the following lines of business however, as
discussed above, the Company is seeking to exit the Commercial Casualty,
Personal Lines and Bail Bonds businesses of Nobel.
Commercial Casualty Programs. The commercial casualty insurance program
offered by Nobel consists of: combined single limit automobile liability;
automobile physical damage; combined single limit comprehensive general
liability; combined single limit excess liability; and motor truck cargo
coverage. Additionally, Nobel assists insureds in placing workers' compensation
coverages with various state assigned risk pools and property coverages with
unaffiliated insurers.
Personal Lines Program. Nobel writes a Personal Lines Program comprised of
homeowners and fire policies covering homes valued up to $140,000, but which is
predominated by lower value dwellings (the "LVD Program"). Nobel is a leading
provider of low-value dwelling insurance in South Carolina, and also provides
this coverage in other states.
Bail Bond. Nobel presently writes bail bond insurance through four General
Agents. Nobel is indemnified through collateral provided to the producing and
General Agent and as such retains all business written.
Claim Adjusting Service Business. Renaissance U.S. owns IAS Claims
Services, Inc., a Delaware company based in Texas. This company provides claim
adjusting services and is divided into two divisions, IAS and Cat Crew. IAS
offers a broad range of routine and custom claims services tailored to the
insurance carrier's specifications. CAT Crew appraises and adjusts catastrophic
events on a nationwide basis. The claim adjusting service businesses provide
services both to the Company's primary insurance operations and to third
parties.
As a result of the Company's plan to sell or reinsure the remaining
businesses of Nobel, it is anticipated that the gross written premiums in 1999
related to Nobel will be substantially lower than the $31 million of gross
written premiums Nobel received in 1998.
-8-
Potential Diversification
From time to time, the Company may consider opportunistic diversification
into new ventures, either through organic growth or the acquisition of other
companies or books of business. In evaluating such new ventures, the Company
seeks an attractive return on equity, the ability to develop or capitalize on a
competitive advantage and opportunities that will not detract from its core
reinsurance operations. Accordingly, the Company regularly reviews strategic
opportunities and periodically engages in discussions regarding possible
transactions. However, there can be no assurance that the Company will enter
into any such agreement in the future, or that any consummated transaction would
contribute materially to the Company's results.
Geographic Diversification
The Company seeks to diversify its exposure across geographic zones. The
Company writes the majority of its business within the United States because the
returns obtained relative to the risks involved are currently most attractive in
the United States and because it is able to obtain the most detailed
underwriting information on U.S. risks. Within the United States, the Company's
zones of highest exposure are Southern California, Northern California,
metropolitan New York, New Madrid (midwestern United States) and Southern
Florida. The following table sets forth the percentage of the Company's gross
insurance and reinsurance premiums written allocated to the territory of
coverage exposure.
Year Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Percentage Percentage Percentage
Gross of Gross Gross of Gross Gross of Gross
Geographic Area Premiums Premiums Premiums Premiums Premiums Premiums
- - --------------- Written Written Written Written Written Written
------- ------- ------- ------- ------- -------
(in millions)
United States - reinsurance ........... $128.4 47.5% $116.7 54.2% $125.1 46.4%
United States - primary ............... 63.3 23.4 7.0 3.1 1.5 0.5
Worldwide ............................. 20.6 7.6 27.9 12.2 44.5 16.5
Worldwide (excluding U.S.)(1) ......... 26.4 9.8 32.0 14.0 38.7 14.3
Europe (including U.K.) ............... 18.5 6.8 21.0 9.2 31.5 11.7
Other ................................. 9.4 3.5 16.8 7.4 19.0 7.0
Australia and New Zealand ............. 3.9 1.4 6.9 3.0 9.6 3.6
------ ------ ------ ------ ------ ------
Total ................................. $270.5 100.0% $228.3 100.0% $269.9 100.0%
====== ====== ====== ====== ====== ======
- - ---------------
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic zone (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe.
See Note 13 to Consolidated Financial Statements.
-9-
Program Limits
The following table sets forth the number of the Company's reinsurance
programs in force at December 31, 1998 by aggregate program limits.
Aggregate
Program Number of
Limit Programs
----------- --------
$50-60 million................................................ 4
$40-50 million................................................ 3
$30-40 million................................................ 8
$20-30 million................................................ 11
$10-20 million................................................ 53
Less than $10 million......................................... 262
---
Total...................................................... 341
===
Underwriting
The Company's primary underwriting goal is to construct a portfolio of
reinsurance and insurance contracts that maximizes the return on shareholders'
equity subject to prudent risk constraints.
Management assesses underwriting decisions on the basis of the expected
incremental return on equity of each new reinsurance contract in relation to the
Company's overall portfolio of reinsurance contracts. To facilitate this,
Management has developed REMS(C), a proprietary, computer-based pricing and
exposure management system. Management utilizes REMS(C) to assess property
catastrophe risks, price treaties and limit aggregate exposure. REMS was
developed with consulting assistance from Tillinghast, an actuarial consulting
unit of Towers, Perrin, Forster & Crosby, Inc., and AIR, the developer of the
CATMAP(TM) system. REMS(C) has analytic and modeling capabilities that assist
the Company's underwriters in assessing the catastrophe exposure risk and return
of each incremental reinsurance contract in relation to the Company's overall
portfolio of reinsurance contracts. The Company has licensed and integrated into
REMS(C) six commercially available catastrophe computer models in addition to
the Company's base model. The Company uses these models to validate and stress
test its base REMS(C) results. In addition, the Company stress tests its
exposures and potential future results by increasing the frequency and severity
of catastrophic events above the levels embedded in the models purchased from
the outside consultants. Management combines the analyses generated by REMS(C)
with its own knowledge of the client submitting the proposed program to assess
the premium offered against the risk of loss which such program presents.
REMS(C) provides more precise exposure information than is generally
analyzed currently throughout the property catastrophe reinsurance industry.
REMS(C) combines computer-generated statistical simulations that estimate
catastrophic event probabilities with exposure and coverage information on each
client's reinsurance contract to produce expected claims for reinsurance
programs submitted to the Company. REMS(C) then uses simulation techniques to
generate 40,000 years of catastrophic event activity, including events causing
in excess of $250 billion in insured industry losses. From this 40,000 year
simulation, the Company is able to obtain expected claims, expected profits and
a probability distribution of potential outcomes for each program in its
portfolio and for its total portfolio.
Management believes that REMS(C) provides the Company's underwriters with
several competitive advantages which are not generally available. These include
(i) the ability to simulate 40,000 years of catastrophic event activity compared
to a much smaller sample in generally available models, allowing the Company to
analyze its exposure to a greater number and combination of potential events,
(ii) the ability to analyze the incremental impact of an individual reinsurance
contract on the Company's overall portfolio, and (iii) the ability to collect
detailed data from a wide variety of sources which allows the Company to measure
geographic exposure at a detailed level.
-10-
For its property catastrophe reinsurance business, the Company has
developed underwriting guidelines that limit the amount of exposure it will
underwrite directly for any one cedent, the exposure to claims from any single
catastrophic event and the exposure to losses from a series of catastrophic
events. The Company also attempts to distribute its exposure across a range of
attachment points.
As part of its pricing and underwriting process, the Company also assesses
a variety of factors, including the reputation of the proposed cedent and the
likelihood of establishing a long-term relationship with the cedent; the
geographic area in which the cedent does business and its market share;
historical loss data for the cedent and, where available, for the industry as a
whole in the relevant regions, in order to compare the cedent's historical
catastrophe loss experience to industry averages; the cedent's pricing
strategies; and the perceived financial strength of the cedent.
During 1998, consistent with its risk management practices and the
availability of coverage responsive to the company's risk profile, the Company
increased the level of property catastrophe reinsurance coverage purchased for
its own account. Ceded premiums written in the Company's reinsurance operations
during 1998 were $47.7 million compared to $31.6 million in 1997. Additionally,
the Company's primary operations had ceded premiums of $27.7 million (compared
to $9 million in 1997). To the extent that appropriately priced coverage is
available, the Company anticipates continued use of its reinsurance to reduce
potential volatility of its results. Glencoe markets its products through a
diverse group of surplus lines brokers operating primarily in cat exposed
states.
Marketing
The Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company focuses its marketing efforts on targeted
brokers and insurance and reinsurance companies, placing primary emphasis on
existing clients. Management believes that its existing portfolio of business is
a valuable asset given the renewal nature of the reinsurance industry and,
therefore, attempts to continually strengthen relationships with its existing
brokers and clients. The Company also targets prospects that are deemed likely
to enhance the risk/return composition of its portfolio, that are capable of
supplying detailed and accurate underwriting data and that potentially add
further diversification to the Company's book of business. Glencoe markets its
products through a diverse group of surplus lines brokers operating primarily in
cat exposed states.
Management believes that primary insurers' and brokers' willingness to use
a particular reinsurer is based not just on pricing terms, but on the financial
security of the reinsurer, its claim paying ability ratings, perceptions of the
quality of a reinsurer's service, the reinsurer's willingness to design
customized programs, its long-term stability and its commitment to provide
reinsurance capacity. Management believes that the Company has established a
reputation with its brokers and clients for prompt response on underwriting
submissions and for fast claims payments. Since the Company selectively writes
large lines on a limited number of property catastrophe reinsurance contracts,
it can establish reinsurance terms and conditions on these contracts that are
attractive in its judgment, make large commitments to the most attractive
programs and provide superior client responsiveness. In addition, the Company
acts as sole reinsurer on certain property catastrophe reinsurance contracts,
which allows the Company to take advantage of its ability to develop customized
reinsurance programs. Management believes that such customized programs help the
Company to develop long-term relationships with brokers and clients.
The reinsurance brokers perform data collection, contract preparation and
other administrative tasks, enabling the Company to market its reinsurance
products cost effectively by maintaining a smaller staff. The Company believes
that by maintaining close relationships with brokers, it is able to obtain
access to a broad range of potential reinsureds. Subsidiaries and affiliates of
E.W. Blanch & Co., J&H Marsh & McLennan, Inc., AON Re Group, Herbert Clough
Inc., and Bates Turner, L.L.C. (a GE Capital Services Company, an affiliate of
GE Investments) accounted for approximately 23.2%, 18.8%, 12.6%, 5.4% and 4.2%,
respectively, of the Company's net premiums written in 1998. During such period,
Renaissance Reinsurance issued authorization for coverage on programs submitted
by 35 brokers worldwide. The Company received approximately 1,164 program
submissions during 1998. The Company is highly selective and, from such
submissions, the Company issued authorizations for coverage in 1998 for only 341
programs, or 29.3% of the program submissions received.
-11-
Reserves
The Company incurred claims of $112.8 million, $50 million, and $86.9
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
reserve for claims and claim expenses includes estimates for unpaid claims and
claim expenses on reported losses as well as an estimate of losses incurred but
not reported. The reserve is based on individual claims, case reserves and other
reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in the consolidated statement
of income in the period in which they become known and are accounted for as
changes in estimates.
For the Company's reinsurance operations, estimates of claims and claim
expenses are based in part upon the estimation of claims resulting from
catastrophic events. Estimation by the Company of claims resulting from
catastrophic events based upon its own historical claim experience is inherently
difficult because of the Company's short operating history and the potential
severity of property catastrophe claims. Therefore, the Company utilizes both
proprietary and commercially available models, as well as historical reinsurance
industry property catastrophe claims experience, for purposes of evaluating
future trends and providing an estimate of ultimate claims costs.
On both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to reasonably estimate ultimate expected
claims and claim expenses. The period of time from the reporting of a loss to
the Company to the settlement of the Company's liability may be significant.
During this period, additional facts and trends will be revealed. As these
factors become apparent, case reserves will be adjusted, sometimes requiring an
increase in the overall reserves of the Company, and at other times requiring a
reallocation of IBNR reserves to specific case reserves. These estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates.
Claim reserves represent estimates, including actuarial and statistical
projections at a given point in time, of an insurer's or reinsurer's
expectations of the ultimate settlement and administration costs of claims
incurred, and it is possible that the ultimate liability may exceed or be less
than such estimates. Such estimates are not precise in that, among other things,
they are based on predictions of future developments and estimates of future
trends in claim severity and frequency and other variable factors such as
inflation. During the claim settlement period, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward. Even after such adjustments, ultimate liability may exceed or be less
than the revised estimates. Moreover, reserve estimates by relatively new
property catastrophe reinsurers, such as the Company, may be inherently more
volatile than the reserve estimates of a reinsurer with a more established
claims history.
Investments
As of December 31, 1998, the Company held investments and cash totaling
$942.3 million with net unrealized depreciation of $5.1 million. The Company's
strategy is to maximize its underwriting profitability and fully deploy its
capital through its underwriting activities; consequently, the Company has
established an investment policy which it considers to be conservative. The
Company's investment guidelines, which are established by Management and
approved by the Company's Board of Directors, stress preservation of capital,
market liquidity, and diversification of risk. Notwithstanding the foregoing,
the Company's investments are subject to market-wide risks and fluctuations, as
well as to risks inherent in particular securities. The primary objective of the
portfolio, as set forth in such guidelines, is to maximize investment returns
consistent with these policies. To achieve this objective, the Company's current
fixed income investment guidelines call for an average credit quality of "AA" as
measured by Standard & Poor's Ratings Group.
-12-
Primarily because of the potential for large claims payments, the Company's
investment portfolio is structured to provide a high level of liquidity. The
table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
At December 31,
--------------------------
1998 1997 1996
------ ------ ------
(in millions)
Investments available for sale at fair value ..... $825.0 $710.2 $603.5
Equity securities, at fair value ................. 1.6 26.4 --
Cash and cash equivalents ........................ 115.7 122.9 199.0
------ ------ ------
Total invested assets ............................ $942.3 $859.5 $802.5
====== ====== ======
The growth in the Company's portfolio of invested assets for the year ended
December 31, 1998 resulted primarily from net cash provided by operating
activities of $102.5 million and the assets purchased in the Nobel acquisition,
partially offset by $42.7 million utilized in purchasing Common Shares and $26.7
million utilized to pay aggregate quarterly dividends. The Company's investment
income also increased during this period, largely as a result of the increased
size of the fixed income portfolio.
At December 31, 1998, the Company's invested asset portfolio had a dollar
weighted average rating of AA, an average duration of 2.76 years and an average
yield to maturity of 5.45 percent before investment expenses.
The Company's investment portfolio is subject to the risks of further
declines in realizable value. The Company attempts to mitigate these risks
through the active management of its portfolio.
Under the terms of certain reinsurance contracts, the Company may be
required to provide letters of credit to reinsureds in respect of reported
claims and/or unearned premiums. The Company has obtained a facility providing
for the issuance of letters of credit. This facility is secured by a lien on a
portion of the Company's investment portfolio. At December 31, 1998 the Company
had outstanding letters of credit aggregating $42.0 million. Also, in connection
with the Company's January 11, 1999 investment in Top Layer Reinsurance Ltd.,
the Company has committed $50 million of collateral in the form of a letter of
credit. This letter of credit is also secured by a portion of the Company's
investments.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked
securities and derivative instruments under which losses could be triggered by
an industry loss index or natural parameters. For the year ended December 31,
1998, the Company's activities with respect to these securities has approximated
$3 million of fees and risk premiums. To date the Company has not experienced
any losses from such securities or derivatives. In the fourth quarter of 1998,
the Company recorded a recovery of $7.5 million on a non-indemnity catastrophe
index transaction. The Company has included this amount as other income in its
financial statements. The Company may in the future utilize other derivative
instruments.
Market Sensitive Instruments
The Company's investment portfolio includes investments which are subject
to changes in market values with changes in interest rates. The aggregate
hypothetical loss generated from an immediate adverse parallel shift in the
treasury yield curve of 100 basis points would be a decrease in total return of
3.2 percent, which equates to a decrease in market value of approximately $28
million on a portfolio valued at approximately $877 million at December 31,
1998. An immediate time horizon was used as this presents the worst-case
scenario.
-13-
Investment Agreements
The Company has entered into an Investment Advisory Agreement with GE
Investment Management Incorporated ("GE Investment Management"). GE Investment
Management manages 68.1% of the Company's investment portfolio, subject to the
Company's investment guidelines. The terms of the related Investment Advisory
Agreement were determined in arms' length negotiations. The performance of, and
the fees paid to, GE Investment Management under the Investment Advisory
Agreement are reviewed periodically by the Investment Committee of the Board.
Such fees paid to GE Investment Management aggregated $0.4 million for the year
ended December 31, 1998.
The following table summarizes the fair value of the investments and cash
and cash equivalents of the Company as of the dates indicated.
December 31,
------------------------
Type of Investment 1998 1997 1996
------------------ ------ ------ ------
(in millions)
Fixed Maturities Available for Sale:
U.S. Government and agency debt securities ..... $564.6 $248.3 $ --
U.S. Corporates ................................ 137.8 -- --
Non-U.S. government debt securities ............ 30.6 256.9 239.4
Non-U.S. corporate debt securities ............. 67.0 188.6 329.6
Non-U.S. mortgage backed securities ............ -- 6.9 34.5
------ ------ ------
Subtotal ................................... 800.0 700.7 603.5
Equity Securities .............................. 1.6 26.4 --
Short-term investments .............................. 25.0 9.5 --
Cash and cash equivalents ........................... 115.7 122.9 199.0
------ ------ ------
Total fixed maturity investments, equity
securities, short-term investments and
cash and cash equivalents .................. $942.3 $859.5 $802.5
====== ====== ======
The following table summarizes the fair value by contractual maturities
of the Company's fixed maturity investment portfolio as of the dates indicated.
December 31,
---------------------------------
(in millions) 1998 1997 1996
------- ------- -------
Due in less than one year ............... $ 193.7 $ 74.6 $ 56.1
Due after one through five years ........ 393.7 473.0 457.1
Due after five through ten years ........ 121.4 90.9 90.3
Due after ten years ..................... 91.2 62.2 --
------- ------- -------
Total ................................... $ 800.0 $ 700.7 $ 603.5
------- ======= =======
Maturity and Duration of Fixed Maturity Portfolio
Currently, the Company maintains a target duration of approximately three
years on a weighted average basis, reflecting Management's belief that it is
important to maintain a liquid, shorter-duration portfolio to better assure the
Company's ability to pay claims on a timely basis. The actual portfolio duration
may not exceed the target duration by more than two years. From time to time,
the Company expects to reevaluate the target duration in light of
-14-
estimates of the duration of its liabilities and market conditions, including
the level of interest rates, from time to time.
Quality of Debt Securities in Portfolio
The Company's guidelines for its various investment classes have strict
restrictions on credit quality, duration and benchmark relative exposures. The
overall investment portfolio guidelines stipulate that the overall rating of the
portfolio, including cash and cash equivalents, be at least AA and no more than
20% of the composite portfolio may be below investment grade securities.
The following table summarizes the composition of the fair value of the
fixed maturity portfolio as of the dates indicated by rating as assigned by S&P
or, with respect to non-rated issues, as estimated by the Company's investment
managers.
December 31,
-----------------------------------------
Rating 1998 1997 1996
------ ----- ----- -----
AAA 70.9% 56.9% 28.1%
AA 4.3 12.2 50.1
A 9.2 14.9 20.2
BBB 3.7 5.0 1.6
BB 5.2 4.9 --
B 2.2 6.1 --
NR 4.5 -- --
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Foreign Currency Exposures
The Company's functional currency is the United States ("U.S.") dollar. The
Company writes a substantial portion of its business in currencies other than
U.S. dollars and may, from time to time, experience significant exchange gains
and losses and incur underwriting losses in currencies other than U.S. dollars,
which will in turn affect the Company's financial statements.
The Company's foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including loss reserves and reinsurance balances payable.
All changes in the exchange rates are recognized currently in the Company's
statement of income. As a result of the Company's exposure to foreign currency
fluctuations, it is anticipated that during periods in which the U.S. dollar
appreciates, the Company will likely recognize foreign exchange losses.
Diversification
The Company at year end had allocations to the following asset classes:
U.S. Governments and agencies, U.S. Corporates, Emerging Market Debt and U.S.
High Yield, Municipals, cat-linked securities and cash and cash equivalents.
During 1999, the Company expects to allocate $100 million to Mortgage-Backed
securities, will reduce the allocations to U.S. Government and agency and
Municipals and may consider further modification to its investment allocations.
-15-
Competition
The property catastrophe reinsurance industry is highly competitive and is
undergoing a variety of challenging developments, including a marked trend
toward greater consolidation. The Company competes, and will continue to
compete, with major U.S. and non-U.S. property catastrophe insurers, reinsurers,
and certain underwriting syndicates. Many of these competitors have greater
financial, marketing and management resources than the Company. In addition, new
companies may enter the property catastrophe reinsurance market or existing
reinsurers may deploy additional capital in the property catastrophe reinsurance
market. The Company cannot predict what effect any of these developments may
have on the Company and its business.
Competition in the types of reinsurance business that the Company
underwrites is based on many factors, including premium charges and other terms
and conditions offered, services provided, speed of claims payment, ratings
assigned by independent rating agencies, the perceived financial strength and
the experience of the reinsurer in the line of reinsurance to be written. The
number of jurisdictions in which a reinsurer is licensed or authorized to do
business is also a factor. Some of the reinsurers who have entered the Bermuda
and London-based reinsurance markets have or could have greater financial,
marketing or managerial resources than the Company. Ultimately, increasing
competition could affect the Company's ability to attract business on terms
having the potential to yield an attractive return on equity.
The primary insurance business is also highly competitive. Primary insurers
compete on the basis of factors including selling effort, product, price,
service and financial strength. The Company generally seeks to adjust its
overall primary insurance pricing and pricing to individual customers to achieve
underwriting profits and, as a result, may lose primary insurance business to
competition offering competitive insurance products at lower prices. The
Company's competitors in the primary insurance market include independent
insurance companies, subsidiaries or affiliates of major worldwide insurance
companies, underwriting syndicates and others. While the Company has determined
to seek to sell the principal business lines of Nobel, the Company will continue
to offer primary insurance through Glencoe and other potential subsidiaries.
Management is also aware of many potential initiatives by capital market
participants to produce alternative products that may compete with the existing
catastrophe reinsurance markets. Among other things, over the last several years
capital markets participants, including exchanges and financial intermediaries,
have developed financial products intended to compete with traditional
reinsurance, the usage of which has grown in volume. In addition, the tax
policies of the countries where the Company's clients operate can affect demand
for reinsurance. Management is unable to predict the extent to which the
foregoing new, proposed or potential initiatives may affect the demand for the
Company's products or the risks which may be available for the Company to
consider underwriting.
Employees
As of March 29, 1999, the Company and its subsidiaries employed
approximately 280 people. The Company believes that its employee relations are
satisfactory. None of the Company's employees are subject to collective
bargaining agreements, and the Company knows of no current efforts to implement
such agreements at the Company.
Many Bermuda based employees of RenaissanceRe and Renaissance Reinsurance,
including all of the Company's senior management, are employed pursuant to work
permits granted by the Bermuda authorities. These permits expire at various
times over the next few years. The Company has no reason to believe that these
permits would not be extended at expiration upon request, although no assurance
can be given in this regard.
-16-
Regulation
Bermuda
The Insurance Act 1978, as amended, and Related Regulations. The Insurance
Act, which regulates the business of Renaissance Reinsurance and Glencoe,
provides that no person shall carry on an insurance business in or from within
Bermuda unless registered as an insurer under the Insurance Act by the Minister.
Renaissance Reinsurance and Glencoe are registered as a Class 4 and a Class 3
insurer under the Insurance Act, respectively. The Minister, in deciding whether
to grant registration, has broad discretion to act as he thinks fit in the
public interest. The Minister is required by the Insurance Act to determine
whether the applicant is a fit and proper body to be engaged in the insurance
business and, in particular, whether it has, or has available to it, adequate
knowledge and expertise. In connection with the applicant's registration, the
Minister may impose conditions relating to the writing of certain types of
insurance.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions, and sub-committees
thereof supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set forth below.
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with a requirement made of it under
the Insurance Act or, if in the opinion of the Minister, after consultation with
the Insurance Advisory Committee, the insurer has not been carrying on business
in accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, the
latter of which is required to be filed annually with the Registrar of Companies
(the "Registrar"), who is the chief administrative officer under the Insurance
Act. The auditor must be approved by the Minister as the independent auditor of
the insurer. The approved auditor may be the same person or firm which audits
the insurer's financial statements and reports for presentation to its
shareholders.
Loss Reserve Specialist. Every Registered Class 3 and Class 4 insurer is
required to submit an annual loss reserve opinion when filing the Annual
Statutory Financial Return. This opinion must be issued by a Loss Reserve
Specialist. The Loss Reserve Specialist, who will normally be a qualified
casualty actuary, must be approved by the Minister.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and surplus,
and detailed notes thereto). The insurer is required to give detailed
information and analyses regarding premiums, claims, reinsurance and
investments. The Statutory Financial Statements are not prepared in accordance
with GAAP and are distinct from the financial statements prepared for
presentation to the insurer's shareholders under the Companies Act 1981 of
Bermuda, which financial statements may be prepared in accordance with GAAP. The
insurer is required to submit the Annual Statutory Financial Statements as part
of the Annual Statutory Financial Return.
Minimum Solvency Margin. The Insurance Act provides that the statutory
assets of an insurer must exceed its statutory liabilities by an amount greater
than the prescribed minimum solvency margin which varies with the type of
business of the insurer and the insurer's net premiums written and loss reserve
level. The minimum solvency margin for a Class 4 insurer is the greatest of
$100.0 million, 50% of net premiums written (with a credit for reinsurance ceded
not exceeding 25% of gross premiums) and 15% of loss and loss expense provisions
and other insurance reserves. The minimum solvency margin for a Class 3 insurer
is the greatest of $1.0 million, 20% of the
-17-
first $6.0 million of net premiums written plus 15% of net premiums written in
excess of $6.0 million, and 15% of loss and loss expense provisions and other
insurance reserves.
Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity
ratio for general business. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances
to affiliates, real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities (by interpretation, those not
specifically defined).
Annual Statutory Financial Return. An insurer is required to file with the
Registrar a Statutory Financial Return no later than four months after the
insurer's financial year end (unless specifically extended). The Statutory
Financial Return includes, among other items, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the Statutory
Financial Statements themselves; the opinion of the approved Loss Reserve
Specialist and certain details concerning ceded reinsurance. The solvency
certificate and the declaration of the statutory ratios must be signed by the
principal representative and at least two directors of the insurer, who are
required to state whether the Minimum Solvency Margin and, in the case of the
solvency certificate, the Minimum Liquidity Ratio, have been met, and the
independent approved auditor is required to state whether in its opinion it was
reasonable for them to so state and whether the declaration of the statutory
ratios complies with the requirements of the Insurance Act. The Statutory
Financial Return must include the opinion of a Loss Reserve Specialist in
respect of the loss and loss expense provisions of the insurer. Where an
insurer's accounts have been audited for any purpose other than compliance with
the Insurance Act, a statement to that effect must be filed with the Statutory
Financial Return.
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new insurance
business; not to vary any insurance contract if the effect would be to increase
the insurer's liabilities; not to make certain investments; to realize certain
investments; to maintain in Bermuda, or transfer to the custody of a Bermuda
bank, certain assets; not to declare or pay any dividends or other distributions
or to restrict the making of such payments and/or to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of the Company and its Subsidiaries is
at the Company's offices at Renaissance House, 8-12 East Broadway, Pembroke HM
19 Bermuda and Mr. John D. Nichols, the Company's Vice President, and Glencoe's
Company's Vice President, and Treasurer, is the principal representative of
Renaissance Reinsurance and Glencoe, respectively. Without a reason acceptable
to the Minister, an insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease to act as such,
unless thirty days' notice in writing to the Minister is given of the intention
to do so. It is the duty of the principal representative, within thirty days of
his reaching the view that there is a likelihood of the insurer for which he
acts becoming insolvent or its coming to his knowledge, or his having reason to
believe, that an event has occurred, to make a report in writing to the Minister
setting out all the particulars of the case that are available to him. Examples
of such an event include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the Minister relating to a solvency margin
or a liquidity or other ratio.
-18-
United States and Other
Renaissance Reinsurance is not admitted to do business in any jurisdiction
except Bermuda. The insurance laws of each state of the United States and of
many other countries regulate the sale of insurance and reinsurance within their
jurisdictions by alien insurers, such as Renaissance Reinsurance, which are not
admitted to do business within such jurisdiction. With some exceptions, such
sale of insurance or reinsurance within a jurisdiction where the insurer is not
admitted to do business is prohibited. Renaissance Reinsurance does not intend
to maintain an office or to solicit, advertise, settle claims or conduct other
insurance activities in any jurisdiction other than Bermuda where the conduct of
such activities would require that Renaissance Reinsurance be so admitted.
Glencoe is eligible to write insurance in 29 states and is subject to the
regulation and reporting requirements of these states. In accordance with
certain requirements of the National Association of Insurance Commissioners (the
"NAIC"), Glencoe has established, and is required to maintain, a trust funded
with a minimum of $15.0 million as a condition of its status as a licensed,
non-admitted insurer in the U.S.
DeSoto is a licensed insurer in Florida and the businesses acquired from
Nobel are subject to regulation in all 50 U.S. states and the District of
Columbia. The Company's U.S. operations are subject to extensive regulation
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance commissioners. Such regulation generally is designed to
protect policyholders rather than investors, and relates to such matters as the
standard of solvency which must be met and maintained; the licensing of insurers
and their agents; the nature of and extermination of the affairs of insurance
companies, which includes periodic market conduct examinations by the regulatory
authorities; annual and other reports, prepared on a statutory accounting basis,
required to be filed on the financial condition of insurers or for other
purposes; establishment and maintenance of reserves for unearned premiums and
losses; and requirements regarding numerous other matters. In general, regulated
insurers must file all rates for directly underwritten insurance with the
insurance department of each state in which they operate on an admitted basis;
however, reinsurance generally is not subject to rate regulation. Further, state
insurance statutes typically place limitations on the amount of dividends or
other distributions payable by insurance companies in order to protect their
solvency. Florida, the jurisdiction of incorporation of DeSoto, requires that
dividends be paid only out of earned surplus and limits the annual amount
payable without the prior approval of the Florida Insurance Department to the
greater of 10% of policyholders' surplus adjusted for unrealized gains or 100%
of prior year statutory net income. Texas, the jurisdiction of incorporation of
Nobel, currently requires that dividends be paid only out of earned statutory
surplus and limits the annual amount of dividends payable without the prior
approval of the Texas Insurance Department to the greater of 10% of statutory
capital and surplus at the end of the previous calendar year or 100% of
statutory net income from operations for the previous calendar year. These laws
also impose prior approval requirements for certain transactions with
affiliates.
Further, as a result of the Company's ownership of DeSoto and Nobel, under
the terms of applicable state statutes, any person or entity desiring to
purchase more than 10 percent of the Company's outstanding voting securities is
required to obtain prior regulatory approval for the purchase.
The NAIC has established eleven financial ratios to assist state insurance
departments in their oversight of the financial condition of insurance companies
operating in their respective states. The NAIC calculates these ratios based on
information submitted by insurers on an annual basis and shares the information
with the applicable state insurance departments. The failure of the Company's
U.S. insurance subsidiaries to comply with the acceptable range of such ratios
could have an adverse effect on the Company.
In their ongoing effort to improve solvency regulations, the NAIC and
individual states have enacted certain laws and statutory financial statement
reporting requirements. For example, NAIC rules require audited statutory
financial statements as well as actuarial certification of loss and loss
adjustment expense reserves therein. Other activities are focused on greater
disclosure of an insurer's reliance on reinsurance and changes in its
reinsurance programs and stricter rules on accounting for certain overdue
reinsurance. In addition, the NAIC has implemented risk-based capital
requirements for property and casualty insurance companies (see below). These
-19-
regulatory initiatives, and the overall focus on solvency, may intensify the
restructuring and consolidation of the insurance industry. It is also possible
that the U.S. Congress may enact legislation regulating the insurance industry.
While the impact of these regulatory efforts on the Company's operations cannot
be quantified until enacted, the Company believes it will be adequately
positioned to compete in an environment of more stringent regulation.
The NAIC has implemented a risk-based capital measurement formula to be
applied to all property/casualty insurance companies, which formula calculates a
minimum required statutory net worth based on the underwriting, investment,
credit loss reserve and other business risks applicable to the insurance
company's operations. An insurance company that does not meet threshold
risk-based capital measurement standards could be required to reduce the scope
of its operations and ultimately could become subject to statutory receivership
proceedings.
The Company's U.S. insurance subsidiaries are subject to guaranty fund laws
which can result in assessments, up to prescribed limits, for losses incurred by
policyholders as a result of the impairment or insolvency of unaffiliated
insurance companies. Typically, an insurance company is subject to the guaranty
fund laws of the states in which it conducts insurance business; however,
companies which conduct business on a surplus lines basis in a particular state
are generally exempt from that state's guaranty fund laws. The Company does not
expect the amount of any such guaranty fund assessments to be paid by the
Company in 1999 to be material.
The expansion of the Company's operations through Glencoe, DeSoto and
Nobel, with the potential further expansion of the Company into additional
insurance markets, could expose the Company or subsidiaries of the Company to
increasing regulatory oversight. However, the Company intends to continue to
conduct its operations so as to minimize the likelihood that RenaissanceRe or
Renaissance Reinsurance will become subject to U.S. regulation.
Other Available Information
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. For further information regarding the Company,
reference is made to such reports, proxy statements and other information which
are available as described under "Available Information" and "Incorporation of
Certain Documents by Reference."
-20-
GLOSSARY OF SELECTED INSURANCE TERMS
Attachment point The amount of loss (per occurrence or in
the aggregate, as the case may be) above
which excess of loss reinsurance becomes
operative.
Broker One who negotiates contracts of
insurance or reinsurance, receiving a
commission for placement and other
services rendered, between (1) a policy
holder and a primary insurer, on behalf
of the insured party, (2) a primary
insurer and reinsurer, on behalf of the
primary insurer, or (3) a reinsurer and
a retrocessionaire, on behalf of the
reinsurer.
Catastrophe excess of loss reinsurance A form of excess of loss reinsurance
that, subject to a specified limit,
indemnifies the ceding company for the
amount of loss in excess of a specified
retention with respect to an
accumulation of losses resulting from a
"catastrophe cover."
Cede; Cedent; Ceding company When a party reinsures its liability
with another, it "cedes" business and is
referred to as the "cedent" or "ceding
company."
Claim expenses The expenses of settling claims,
including legal and other fees and the
portion of general expenses allocated to
claim settlement costs.
Claim reserves Liabilities established by insurers and
reinsurers to reflect the estimated cost
of claims payments and the related
expenses that the insurer or reinsurer
will ultimately be required to pay in
respect of insurance or reinsurance it
has written. Reserves are established
for losses and for claim adjustment
expenses.
Excess of loss reinsurance A generic term describing reinsurance
that indemnifies the reinsured against
all or a specified portion of losses on
underlying insurance policies in excess
of a specified amount, which is called a
"level" or "retention." Also known as
non-proportional reinsurance. Excess of
loss reinsurance is written in layers. A
reinsurer or group of reinsurers accepts
a band of coverage up to a specified
amount. The total coverage purchased by
the cedent is referred to as a "program"
and will typically be placed with
predetermined reinsurers in
pre-negotiated layers. Any liability
exceeding the outer limit of the program
reverts to the ceding company, which
also bears the credit risk of a
reinsurer's insolvency.
Funded cover A form of insurance where the insured
pays premiums to a reinsurer to serve
essentially as a deposit in order to
offset future losses. On a funded cover,
there is generally limited or no
transfer of risk for catastrophe losses
from the insured to the reinsurer.
Generally accepted accounting
principles Accounting principles as set forth in
opinions of the Accounting Principles
Board of the American Institute of
-21-
Certified Public Accountants and/or
statements of the Financial Accounting
Standards Board and/or their respective
successors and which are applicable in
the circumstances as of the date in
question.
Incurred but not reported Reserves for estimated losses that have
been incurred by insureds and reinsureds
but not yet reported to the insurer or
reinsurer including unknown future
developments on losses which are known
to the insurer or reinsurer.
Layer The interval between the retention or
attachment point and the maximum limit
of indemnity for which a reinsurer is
responsible.
Net premiums written Gross premiums written for a given
period less premiums ceded to reinsurers
and retrocessionaires during such
period.
Proportional reinsurance A generic term describing all forms of
reinsurance in which the reinsurer
shares a proportional part of the
original premiums and losses of the
reinsured. (Also known as pro rata
reinsurance, quota share reinsurance or
participating reinsurance.) In
proportional reinsurance the reinsurer
generally pays the ceding company a
ceding commission. The ceding commission
generally is based on the ceding
company's cost of acquiring the business
being reinsured (including commissions,
premium taxes, assessments and
miscellaneous administrative expense)
and also may include a profit factor.
Reinstatement premium The premium charged for the restoration
of the reinsurance limit of a
catastrophe contract to its full amount
after payment by the reinsurer of losses
as a result of an occurrence.
Reinsurance An arrangement in which an insurance
company, the reinsurer, agrees to
indemnify another insurance or
reinsurance company, the ceding company,
against all or a portion of the
insurance or reinsurance risks
underwritten by the ceding company under
one or more policies. Reinsurance can
provide a ceding company with several
benefits, including a reduction in net
liability on individual risks and
catastrophe protection from large or
multiple losses. Reinsurance also
provides a ceding company with
additional underwriting capacity by
permitting it to accept larger risks and
write more business than would be
possible without a concomitant increase
in capital and surplus, and facilitates
the maintenance of acceptable financial
ratios by the ceding company.
Reinsurance does not legally discharge
the primary insurer from its liability
with respect to its obligations to the
insured.
Retention The amount or portion of risk that an
insurer retains for its own account.
Losses in excess of the retention level
are paid by the reinsurer. In
proportional treaties, the retention may
be a percentage of the original policy's
limit. In excess of loss
-22-
business, the retention is a dollar
amount of loss, a loss ratio or a
percentage.
Retrocessional Reinsurance;
Retrocessionaire A transaction whereby a reinsurer cedes
to another reinsurer, the
retrocessionaire, all or part of the
reinsurance that the first reinsurer has
assumed. Retrocessional reinsurance does
not legally discharge the ceding
reinsurer from its liability with
respect to its obligations to the
reinsured. Reinsurance companies cede
risks to retrocessionaires for reasons
similar to those that cause primary
insurers to purchase reinsurance: to
reduce net liability on individual
risks, to protect against catastrophic
losses, to stabilize financial ratios
and to obtain additional underwriting
capacity.
Risk excess of loss reinsurance A form of excess of loss reinsurance
that covers a loss of the reinsured on a
single "risk" in excess of its retention
level of the type reinsured, rather than
to aggregate losses for all covered
risks, as does catastrophe excess of
loss reinsurance. A "risk" in this
context might mean the insurance
coverage on one building or a group of
buildings or the insurance coverage
under a single policy, which the
reinsured treats as a single risk.
Statutory accounting principles ("SAP") Recording transactions and preparing
financial statements in accordance with
the rules and procedures prescribed or
permitted by United States state
insurance regulatory authorities
including the NAIC, which in general
reflect a liquidating, rather than going
concern, concept of accounting.
Underwriting The insurer's or reinsurer's process of
reviewing applications submitted for
insurance coverage, deciding whether to
accept all or part of the coverage
requested and determining the applicable
premiums.
Underwriting capacity The maximum amount that an insurance
company can underwrite. The limit is
generally determined by the company's
retained earnings and investment
capital. Reinsurance serves to increase
a company's underwriting capacity by
reducing its exposure from particular
risks.
Underwriting expenses The aggregate of policy acquisition
costs, including commissions, and the
portion of administrative, general and
other expenses attributable to
underwriting operations.
-23-
Item 2. Properties
The Company leases office space in Bermuda, where its executive offices are
located.
Nobel owns a 39,000 square foot building at 8001 LBJ Freeway, Dallas,
Texas, which is occupied by the corporate and commercial lines insurance
operations. Approximately 10,000 square feet of this building is leased to
unrelated tenants. Additionally, Nobel owns a 24,000 square foot building at
6923 North Trenholm Road, Columbia South Carolina, of which approximately 22,300
square feet is occupied by the personal lines insurance operation. Approximately
1,700 square feet of the building is leased to unrelated tenants.
IAS, the Company's claim adjusting operation, leases and occupies
approximately 9,423 square feet of office space for its home office and
Dallas-based service operation at 1485 Richardson Drive, Richardson, Texas. IAS
leases office space for its branch offices located in various cities in the
United States.
Item 3. Legal Proceedings
The Company is, from time to time, a party to litigation and arbitration
that arises in the normal course of its business operations. While any
proceeding contains an element of uncertainty, the Company believes that it is
not presently a party to any such litigation or arbitration that would have a
material adverse effect on its business or operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information with respect to the market for the Common Shares and
related shareholder matters is contained under the caption "Financial and
Investor Information" on page 50 of the Company's Annual Report to Shareholders
for the year ended December 31, 1998 (the "Annual Report") and is incorporated
herein by reference thereto in response to this item.
Item 6. Selected Consolidated Financial Data
Selected Consolidated Financial Data is listed on page 14 of the Annual
Report and is incorporated herein by reference thereto in response to this item.
The selected financial data of the Company should be read in conjunction with
the Consolidated Financial Statements of the Company and related Notes thereto
contained in the Annual Report and incorporated herein by reference thereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information with respect to Management's discussion and analysis of
financial condition and results of operations is contained under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" on pages 15 through 26 of the Annual Report and is incorporated
herein by reference thereto in response to this item.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information with regard to Quantitative and Qualitative Disclosures
About Market Risk is contained on page 13 of this Form 10-K under the caption
"Market sensitive instruments."
-24-
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company are contained on pages
28 through 48 of the Annual Report and are incorporated herein by reference
thereto in response to this item. Reference is made to Item 14(a) of this Report
for the Schedules to the Consolidated Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
This information with respect to directors and officers of the Company is
contained under the captions "Directors and Executive Officers of the Company"
on pages 4 through 6 of the Company's Definitive Proxy Statement in respect of
the Annual General Meeting of Shareholders to be held on May 13, 1999 (the
"Proxy Statement") and "Proposal 1" on page 23 of the Proxy Statement, and is
incorporated herein by reference thereto in response to this item.
Item 11. Executive Compensation
The information with respect to executive compensation is contained under
the subcaption "Executive Officer and Director Compensation" on pages 14 through
22 of the Proxy Statement, and is incorporated herein by reference thereto in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information with respect to security ownership of certain beneficial
owners and Management is contained under the caption "Security Ownership of
Certain Beneficial Owners, Management and Directors" on pages 7 through 9 of the
Proxy Statement, and is incorporated herein by reference thereto in response to
this item.
Item 13. Certain Relationships and Related Transactions
The information with respect to certain relationships and related
transactions is contained under the caption "Certain Relationships and Related
Transactions" on pages 10 and 11 of the Proxy Statement, and is incorporated
herein by reference thereto in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) Financial Statements and Exhibits.
1 The Consolidated Financial Statements of the Company and related Notes
thereto are contained on pages 28 through 48 of the Company's 1998 Annual
Report to Shareholders are incorporated herein by reference thereto.
2. The Schedules to the Consolidated Financial Statements of the Company are
listed in the accompanying Index to Schedules to Consolidated Financial
Statements and are filed as part of this Report.
3. The following exhibits are included in this Report:
3.1 Memorandum of Association.*
-25-
3.2 Amended and Restated Bye-Laws.##
3.3 Memorandum of Increase in Share Capital of Company.###
4.1 Specimen Common Share certificate.*
10.1 Investment Management Agreement, dated as of November 1, 1993, between GE
Investment Management Incorporated and Renaissance Reinsurance Ltd.*
10.2 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.3 Agreement and Plan of Recapitalization, dated as of March 26, 1995, by
and among RenaissanceRe Holdings, Ltd., Renaissance Reinsurance Ltd. and
Investors named therein.*
10.4 Third Amended and Restated Employment Agreement, dated as of July 1,
1997, between Renaissance Reinsurance Ltd. and James N. Stanard, amended
and restated as of June 3, 1998.##
10.5 Form of Employment Agreement, dated as of June 23, 1997, between
Renaissance Reinsurance Ltd. and certain executive officers.#
10.6 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.####
10.7 Third Amended and Restated Credit Agreement, dated as of December 12,
1996, among RenaissanceRe Holdings Ltd., various financial institutions
which are, or may become, parties thereto (the "Lenders"), Fleet National
Bank of Connecticut and Mellon Bank, N.A. as Co-Agents, and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.+++
10.8 First Amendment to Amended and Restated Credit Agreement, dated as of
September 8, 1997, among RenaissanceRe Holdings Ltd., the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent.+
10.9 Second Amendment Agreement, dated as of June 15, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.##
10.10 Third Amendment Agreement, dated as of December 31, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.
10.11 Equity Purchase Agreement, dated as of December 13, 1996, by and among
RenaissanceRe Holdings Ltd., Warburg, Pincus Investors, L.P., Trustees of
General Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.^
10.12 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.####
10.13 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.####
10.14 Stock Purchase Agreement, dated December 19, 1997, by and among
RenaissanceRe Holdings Ltd. and Renaissance U.S. Holdings, Inc. and Nobel
Insurance Limited and Nobel Holdings, Inc.++
-26-
10.15 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.16 Amended and Restated Shareholders Agreement, dated as of March 23, 1996,
by and among Warburg, Pincus Investors, L.P., Trustees of General
Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.####
10.17 Amended and Restated Registration Rights Agreement, dated as of March 23,
1996, by and among Warburg, Pincus Investors, L.P., PT Investments Inc.,
GE Private Placement Partners I-Insurance, Limited Partnership and United
States Fidelity and Guaranty Company.####
10.18 Amended and Restated Declaration of Trust of RenaissanceRe Capital Trust,
dated as of March 7, 1997, among the Company, as Sponsor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as Delaware
Trustee, and the Administrative Trustees named therein.^^
10.19 Indenture, dated as of March 7, 1997, among the Company, as Sponsor, and
The Bank of New York, as Debenture Trustee.^^
10.20 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between the Company and The Bank of New York, as Trustee.^^
10.21 Registration Rights Agreement, dated March 7, 1997, among the Company,
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Brothers Inc.^^
10.22 Credit Agreement between Renaissance U.S. Holdings Inc. the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent, dated as of June 24, 1998.##
10.23 First Amendment to Credit Agreement between Renaissance U.S. Holdings
Inc. the Lenders named therein, and Bank of America National Trust and
Savings Association as Administrative Agent, dated as of December 31,
1998.
10.24 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings, Ltd.,
as Guarantor, and Bank of America National Trust & Savings Association.##
13.1 Annual Report to Shareholders of RenaissanceRe Holdings Ltd. for the year
ended December 31, 1998 (with the exception of the information
incorporated by reference into Items 5, 7, 8 and 14 of this Report, such
Annual Report to Shareholders is furnished for the information of the
Commission and is not deemed "filed" as part of this Report).
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
27.1 Financial Data Schedule for the Year Ended December 31, 1998.
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K with the Commission during
the fourth quarter of 1998.
-27-
- - ----------------
* Incorporated by reference to the Registration Statement on Form S-1 of the
Company (Registration No. 33-70008) which was declared effective by the
Commission on July 26, 1995.
^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 16, 1996, relating to an event which
occurred on December 31, 1996.
^^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1997, relating to certain events
which occurred on March 7, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the Commission on
October 22, 1997.
++ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on January 6, 1998, relating to certain events
which occurred on December 19, 1997.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the Commission on March 21,
1997.
# A substantially similar form of Employment Agreement has been entered into
with each of Messrs. Hynes, Lummis and Eklund.
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Commission on August 4,
1998.
### Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, filed with the Commission on May 14,
1998.
#### Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 31,
1998.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Hamilton, Bermuda
on March 29, 1999.
RENAISSANCERE HOLDINGS LTD.
/s/ James N. Stanard
----------------------------------------
James N. Stanard
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
-29-
Signature Title Date
- - --------- ----- ----
/s/ James N. Stanard President and Chief Executive Officer and March 29, 1999
- - ----------------------- Chairman of the Board of Directors
James N. Stanard
/s/ John M. Lummis Senior Vice President and Chief Financial March 29, 1999
- - ----------------------- Officer (Principal Accounting Officer)
John M. Lummis
/s/ Arthur S. Bahr Director March 29, 1999
- - -----------------------
Arthur S. Bahr
/s/ Thomas A. Cooper Director March 29, 1999
- - -----------------------
Thomas A. Cooper
/s/ Edmund B. Greene Director March 29, 1999
- - -----------------------
Edmund B. Greene
/s/ Gerald L. Igou Director March 29, 1999
- - -----------------------
Gerald L. Igou
/s/ Kewsong Lee Director March 29, 1999
- - -----------------------
Kewsong Lee
/s/ Paul J. Liska Director March 29, 1999
- - -----------------------
Paul J. Liska
/s/ Lisa J. Marshall Director March 29, 1999
- - -----------------------
Lisa J. Marshall
/s/ Howard H. Newman Director March 29, 1999
- - -----------------------
Howard H. Newman
/s/ Scott E. Pardee Director March 29, 1999
- - -----------------------
Scott E. Pardee
/s/ William I. Riker Director & Executive Vice President March 29, 1999
- - -----------------------
William I. Riker
-30-
RENAISSANCERE HOLDINGS LTD AND SUBSIDIARIES.
INDEX TO SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Auditors on Schedules............................... S-2
I Summary of Investments other than Investments in Related
Parties at December 31, 1998.................................... S-3
III Condensed Financial Information of the Registrant.................... S-4
V Supplementary Insurance Information for the years ended
December 31, 1998, 1997 and 1996................................ S-7
VI Reinsurance for the years ended December 31, 1998, 1997 and 1996..... S-8
X Supplementary Information Concerning Property-Casualty
Insurance Operations............................................. S-9
Schedules other than those listed above are omitted for the reason that
they are not applicable.
S-1
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
To the Board of Directors and Shareholders
of RenaissanceRe Holdings Ltd.
We have audited the consolidated financial statements of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated January 26, 1999; such financial statements and our report
thereon are incorporated by reference elsewhere in this Annual Report on Form
10-K. Our audits also included the financial statement schedules listed in item
14(a)(2) of this Annual Report on Form 10-K for the year ended December 31,
1998. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Hamilton, Bermuda
January 26, 1999
S-2
SCHEDULE I
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(millions of United States dollars)
Year Ended
December 31, 1998
------------------ Amount at
Amortized Market which shown in the
Type of Investment: Cost Value Balance Sheet
--------- ------ -------------
Fixed Maturities Available for Sale:
U.S. Government bonds .................... $560.0 $564.6 $564.6
U.S. corporates .......................... 137.0 137.8 137.8
Non U.S. sovereign government bonds ...... 34.7 30.6 30.6
Non U.S. corporate debt securities ....... 73.2 67.0 67.0
------ ------ ------
Subtotal .............................. 804.9 800.0 800.0
Equity Securities ............................. 1.8 1.6 1.6
Short-term investments ........................ 25.0 25.0 25.0
Cash and cash equivalents ..................... 115.7 115.7 115.7
------ ------ ------
Total investments, short-term
investments, cash and cash
equivalents ...................... $947.4 $942.3 $942.3
====== ====== ======
S-3
SCHEDULE III
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD.
BALANCE SHEETS
(Parent Company)
(thousands of United States dollars, except per share amounts)
December 31
----------------------
1998 1997
--------- ---------
ASSETS
Cash ................................................................... $ 7,702 $ 41,593
Investments available for sale ......................................... 80,487 50,753
Investment in subsidiaries ............................................. 650,515 657,227
Dividend receivable .................................................... 24,294 7,261
Other assets ........................................................... 4,262 1,749
--------- ---------
Total assets .................................................. $ 767,260 $ 758,583
========= =========
LIABILITIES
Loan payable ........................................................... $ 50,000 $ 50,000
Minority interest - Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated
debentures of the Company ......................................... 100,000 100,000
Other liabilities ...................................................... 5,028 9,880
--------- ---------
Total liabilities ............................................. 155,028 159,880
--------- ---------
Commitments and contingencies ..........................................
SHAREHOLDERS' EQUITY
Common Shares: $1 par value-authorized 225,000,000 shares. Issued and
outstanding at December 31, 1998 - 21,645,913 (1997 - 22,440,901) ... 21,646 22,441
Additional paid-in capital ............................................. 17,389 52,481
Unearned Stock Grant Compensation ...................................... (8,183) (4,731)
Accumulated other comprehensive income ................................. (5,144) (10,155)
Retained earnings ...................................................... 586,524 538,667
--------- ---------
Total shareholders' equity .................................... 612,232 598,703
--------- ---------
Total liabilities and shareholders' equity ............... $ 767,260 $ 758,583
========= =========
S-4
SCHEDULE III (Cont'd.)
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF INCOME
(Parent Company)
(thousands of United States dollars)
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Income:
Investment income ...................................... $ 1,364 $ 5,723 $ 2,534
--------- --------- ---------
Total income ........................................... 1,364 5,723 2,534
--------- --------- ---------
Expenses:
Amortization of organizational expenses ................ -- -- 168
Interest expense ....................................... 3,059 4,271 6,553
Corporate expenses ..................................... 3,317 3,218 2,298
--------- --------- ---------
Total expenses ......................................... 6,376 7,489 9,019
--------- --------- ---------
Loss before equity in net income of subsidiaries & taxes (5,012) (1,766) (6,485)
Equity in net income of Renaissance Reinsurance ........ 126,768 146,209 161,855
Equity in net income of Renaissance U.S. ............... (44,274) -- --
Equity in net income of Glencoe ........................ 6,340 2,421 900
--------- --------- ---------
Income before minority interests & taxes ............... 83,822 146,864 156,270
Minority interest - Company obligated, mandatorily
redeemable capital securities of a subsidiary trust
holding solely junior subordinated debentures of
the Company ....................................... (8,540) (6,998) --
Minority interest - Glencoe ............................ (705) (617) (110)
--------- --------- ---------
Net income before taxes ................................ 74,577 139,249 156,160
Income tax expense ..................................... -- -- --
--------- --------- ---------
Net income ............................................. $ 74,577 $ 139,249 $ 156,160
========= ========= =========
S-5
SCHEDULE III (Cont'd.)
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(Continued)
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF CASH FLOWS
(Parent Company)
(thousands of United States dollars)
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Cash flows from operating activities:
Net income ........................................... $ 74,577 $ 139,249 $ 156,160
Less equity in net income of subsidiaries ............ 88,129 148,013 162,755
--------- --------- ---------
(13,552) (8,764) (6,595)
Adjustments to reconcile net income to net cash
provided by operating activities
Other ................................................ 2,085 (4,013) 3,630
--------- --------- ---------
Net cash applied to operating activities ............. (11,467) (12,777) (2,965)
--------- --------- ---------
Cash flows applied to investing activities:
Contributions to subsidiary .................. (22,516) (12,000) (50,000)
Proceeds from sales of investments ................... 76,770 73,793 40,624
Purchases of investments ............................. (109,295) (105,223) (63,440)
Dividends from subsidiary ............................ 102,061 124,770 135,629
Purchase of minority interest in subsidiary .......... -- (5,185) --
Proceeds from sale of minority interest in subsidiary -- -- 15,126
--------- --------- ---------
Net cash provided by (applied to) investing activities 47,020 76,155 77,939
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Capital Securities ......... -- 100,000 --
Repurchase of Common Shares .......................... (42,724) (53,458) (73,460)
Dividend to Common Shareholders ...................... (26,720) (22,643) (20,489)
Net proceeds from (repayment of) bank loan ........... -- (100,000) 50,000
Repayments from (loans to) officers .................. -- 4,104 (868)
--------- --------- ---------
Net cash provided by financing activities ............ (69,444) (71,997) (44,817)
--------- --------- ---------
Net increase in cash and cash equivalents ............ (33,891) (8,619) 30,157
Balance at beginning of year ......................... 41,593 50,212 20,055
--------- --------- ---------
Balance at end of year ............................... $ 7,702 $ 41,593 $ 50,212
========= ========= =========
S-6
SCHEDULE V
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(thousands of United States dollars)
December 31, 1998 Year Ended December 31, 1998
------------------------------------ -------------------------------------------------------------------------
Future
Policy
Benefits, Benefits, Amortization
Deferred Losses, Claims, of Deferred
Policy Claims and Net Losses and Policy Other Net
Acquisition Claims Unearned Premium Investment Settlement Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
----------- -------- -------- -------- -------- -------- ----------- -------- --------
Property ...... $ 10,997 $298,829 $ 94,466 $204,947 $ 52,834 $112,752 $ 26,506 $ 34,525 $195,019
======== ======== ======== ======== ======== ======== ======== ======== ========
December 31, 1997 Year Ended December 31, 1997
------------------------------------ -------------------------------------------------------------------------
Future
Policy
Benefits, Benefits, Amortization
Deferred Losses, Claims, of Deferred
Policy Claims and Net Losses and Policy Other Net
Acquisition Claims Unearned Premium Investment Settlement Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
----------- -------- -------- -------- -------- -------- ----------- -------- --------
Property ...... $ 5,739 $110,037 $ 57,008 $211,490 $ 49,573 $ 50,015 $ 25,227 $ 25,131 $195,752
======== ======== ======== ======== ======== ======== ======== ======== ========
December 31, 1996 Year Ended December 31, 1996
------------------------------------ -------------------------------------------------------------------------
Future
Policy
Benefits, Benefits, Amortization
Deferred Losses, Claims, of Deferred
Policy Claims and Net Losses and Policy Other Net
Acquisition Claims Unearned Premium Investment Settlement Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
----------- -------- -------- -------- -------- -------- ----------- -------- --------
Property ...... $ 6,819 $105,421 $ 65,617 $252,828 $ 44,280 $ 86,945 $ 26,162 $ 16,731 $251,564
======== ======== ======== ======== ======== ======== ======== ======== ========
S-7
SCHEDULE VI
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
REINSURANCE
(thousands of United States dollars)
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
Year ended December 31, 1998
Property Premiums Written $ 63,271 $ 75,441 $207,189 $195,019 106%
======== ======== ======== ========
Year ended December 31, 1997
Property Premiums Written $ 7,041 $ 32,535 $221,246 $195,752 113%
======== ======== ======== ========
Year ended December 31, 1996
Property Premiums Written $ 1,552 $ 18,349 $268,361 $251,564 107%
======== ======== ======== ========
S-8
SCHEDULE X
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(Expressed in United States Dollars)
(dollars in thousands)
Deferred Reserve for
Policy Unpaid Claims Discount Net
Acquisition and Claims if any, Unearned Earned Investment
Affiliation with Registrant Costs Expenses Deducted Premiums Premiums Income
--------------------------- --------- -------- -------- -------- -------- ------
Consolidated Subsidiaries
Year ended December 31, 1998 ..... $ 10,997 $298,829 $ -- $ 94,466 $204,947 $ 52,834
======== ======== ====== ======== ======== ========
Year ended December 31, 1997 ..... $ 5,739 $110,037 $ -- $ 57,008 $211,490 $ 49,573
======== ======== ====== ======== ======== ========
Year ended December 31, 1996 ..... $ 6,819 $105,421 $ -- $ 65,617 $252,828 $ 44,280
======== ======== ====== ======== ======== --------
Claims and Claims
Expense Incurred Amortization
Related to of Deferred Paid
--------------------- Policy Claims and Net
Current Prior Acquisition Claims Premiums
Affiliation with Registrant Year Years Costs Expenses Written
- - --------------------------- -------- -------- -------- -------- --------
Consolidated Subsidiaries
Year ended December 31, 1998 $ 96,431 $ 16,321 $ 26,506 $ 80,594 $195,019
======== ======== ======== ======== ========
Year ended December 31, 1997 $ 50,015 $ 0 $ 25,227 $ 45,399 $195,752
======== ======== ======== ======== ========
Year ended December 31, 1996 $ 75,118 $ 11,827 $ 26,162 $ 81,969 $251,564
======== ======== ======== ======== ========
S-9
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
EXHIBITS
to
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
RenaissanceRe Holdings Ltd.
a) Financial Statements and Exhibits.
1 The Consolidated Financial Statements of the Company and related Notes
thereto are contained on pages 28 through 48 of the Company's 1998 Annual
Report to Shareholders are incorporated herein by reference thereto.
2. The Schedules to the Consolidated Financial Statements of the Company are
listed in the accompanying Index to Schedules to Consolidated Financial
Statements and are filed as part of this Report.
3. The following exhibits are included in this Report:
3.1 Memorandum of Association.*
3.2 Amended and Restated Bye-Laws.##
3.3 Memorandum of Increase in Share Capital of Company.###
4.1 Specimen Common Share certificate.*
10.1 Investment Management Agreement, dated as of November 1, 1993, between GE
Investment Management Incorporated and Renaissance Reinsurance Ltd.*
10.2 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.3 Agreement and Plan of Recapitalization, dated as of March 26, 1995, by
and among RenaissanceRe Holdings, Ltd., Renaissance Reinsurance Ltd. and
Investors named therein.*
10.4 Third Amended and Restated Employment Agreement, dated as of July 1,
1997, between Renaissance Reinsurance Ltd. and James N. Stanard, amended
and restated as of June 3, 1998.##
10.5 Form of Employment Agreement, dated as of June 23, 1997, between
Renaissance Reinsurance Ltd. and certain executive officers.#
10.6 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.####
10.7 Third Amended and Restated Credit Agreement, dated as of December 12,
1996, among RenaissanceRe Holdings Ltd., various financial institutions
which are, or may become, parties thereto (the "Lenders"), Fleet National
Bank of Connecticut and Mellon Bank, N.A. as Co-Agents, and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.+++
10.8 First Amendment to Amended and Restated Credit Agreement, dated as of
September 8, 1997, among RenaissanceRe Holdings Ltd., the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent.+
10.9 Second Amendment Agreement, dated as of June 15, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.##
10.10 Third Amendment Agreement, dated as of December 31, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.
10.11 Equity Purchase Agreement, dated as of December 13, 1996, by and among
RenaissanceRe Holdings Ltd., Warburg, Pincus Investors, L.P., Trustees of
General Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.^^
10.12 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.####
10.13 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.####
10.14 Stock Purchase Agreement, dated December 19, 1997, by and among
RenaissanceRe Holdings Ltd. and Renaissance U.S. Holdings, Inc. and Nobel
Insurance Limited and Nobel Holdings, Inc.++
10.15 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.16 Amended and Restated Shareholders Agreement, dated as of March 23, 1996,
by and among Warburg, Pincus Investors, L.P., Trustees of General
Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.####
10.17 Amended and Restated Registration Rights Agreement, dated as of March 23,
1996, by and among Warburg, Pincus Investors, L.P., PT Investments Inc.,
GE Private Placement Partners I-Insurance, Limited Partnership and United
States Fidelity and Guaranty Company.####
10.18 Amended and Restated Declaration of Trust of RenaissanceRe Capital Trust,
dated as of March 7, 1997, among the Company, as Sponsor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as Delaware
Trustee, and the Administrative Trustees named therein.^^
10.19 Indenture, dated as of March 7, 1997, among the Company, as Sponsor, and
The Bank of New York, as Debenture Trustee.^^
10.20 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between the Company and The Bank of New York, as Trustee.^^
10.21 Registration Rights Agreement, dated March 7, 1997, among the Company,
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Brothers Inc.^^
10.22 Credit Agreement between Renaissance U.S. Holdings Inc. the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent, dated as of June 24, 1998.##
10.23 First Amendment to Credit Agreement between Renaissance U.S. Holdings
Inc. the Lenders named therein, and Bank of America National Trust and
Savings Association as Administrative Agent, dated as of December 31,
1998.
10.24 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings, Ltd.,
as Guarantor, and Bank of America National Trust & Savings Association.##
13.1 Annual Report to Shareholders of RenaissanceRe Holdings Ltd. for the year
ended December 31, 1998 (with the exception of the information
incorporated by reference into Items 5, 7, 8 and 14 of this Report, such
Annual Report to Shareholders is furnished for the information of the
Commission and is not deemed "filed" as part of this Report).
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
27.1 Financial Data Schedule for the Year Ended December 31, 1998.
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K with the Commission
during the fourth quarter of 1998.
- - ----------------
* Incorporated by reference to the Registration Statement on Form S-1 of the
Company (Registration No. 33-70008) which was declared effective by the
Commission on July 26, 1995.
^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 16, 1996, relating to an event which
occurred on December 31, 1996.
^^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1997, relating to certain events
which occurred on March 7, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the Commission on
October 22, 1997.
++ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on January 6, 1998, relating to certain events
which occurred on December 19, 1997.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the Commission on March 21,
1997.
# A substantially similar form of Employment Agreement has been entered into
with each of Messrs. Hynes, Lummis and Eklund.
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Commission on August 4,
1998.
### Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, filed with the Commission on May 14,
1998.
#### Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 31,
1998.
THIRD AMENDMENT AGREEMENT
THIS THIRD AMENDMENT AGREEMENT (this "Amendment"), dated as of December 31,
1998, is among RENAISSANCERE HOLDINGS LTD. (the "Borrower"), the Lenders listed
on the signature pages hereto, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION as Administrative Agent for the Lenders;
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Third Amended and
Restated Credit Agreement dated as of December 12, 1996, as amended to date (the
"Credit Agreement");
WHEREAS, the parties hereto wish to amend the Credit Agreement as
hereinafter set forth;
NOW, THEREFORE, the parties hereto, in consideration of the premises and
the mutual agreements herein contained, hereby agree as follows:
Section 1. Credit Agreement Definitions Capitalized terms used herein that
are defined in the Credit Agreement shall have the same meaning when used herein
unless otherwise defined herein.
Section 2. Amendments To Credit Agreement. Effective on (and subject to the
occurrence of) the Third Amendment Effective Date (as defined below), the Credit
Agreement shall be amended as follows:
2.1 Amendment to Section 5.8. Section 5.8 of the Credit Agreement is
amended in its entirety to read as follows:
Maintain, and cause each of its Subsidiaries to maintain, all permits,
licenses and consents as may be required for the conduct of its business by
any federal or local government agency or instrumentality except (x) for
such permits, licenses and consents related to assets which are sold in
accordance with Section 6.3 or (y) where failure to maintain the same could
not reasonably be expected to have a Material Adverse Effect.
2.2 Amendment to Section 5.10. Section 5.10 of the Credit Agreement is
amended by inserting the following as the end thereof:
; provided further, Renaissance U.S. Holdings Inc. and its Subsidiaries may
sell assets as permitted under Section 6.3.
2.3 Amendment to Section 6.3. Section 6.3(b) of the Credit Agreement is
amended by inserting the following at the end thereof:
and (iii) sales of assets by Renaissance U.S. Holdings Inc. and its
Subsidiaries, including capital stock of such Subsidiaries, provided no
Default or Event of Default has occurred and is continuing.
2.4 Waiver of Section 7.1. The Lenders are aware of the approximately
$40,000,000 after tax charge relating to Nobel Insurance Company to be taken in
the fourth Fiscal Quarter of 1998, which charge may result in a negative net
worth at Nobel and Renaissance U.S. Holdings, Inc. The Lenders waive the
Default, if any, under Section 7.1(e)(i) of the Credit Agreement relating to
such after tax charge.
Section 3. Representation And Warranties. In order to induce the Lenders
and the Administrative Agent to execute and deliver this Amendment, the Borrower
hereby represents and warrants to the Lenders and to the Administrative Agent
that:
(a) No Event of Default or Default has occurred and is continuing or
will result from the execution and delivery or effectiveness of this
Amendment; and
(b) the warranties of the Borrower contained in Article IV of the
Credit Agreement are true and correct as of the date hereof, with the same
effect as though made on such date; provided that (i) with respect to
clause (a) of Section 4.2, the reference to "1995 Fiscal Year" therein
shall instead be a reference to "1997 Fiscal Year" and (ii) with respect to
clause (a) of Section 4.3, the reference to "December 31, 1996" shall
instead be a reference to "December 31, 1997" and the reference to the nine
months ended September 30, 1996 shall instead be a reference to "the nine
months ended September 30, 1998".
Section 4. Conditions to Effectiveness. The Amendment set forth in Section
2 hereof shall become effective on the date (the "Third Amendment Effective
Date") when the Administrative Agent shall have received all of the following,
each in form and substance satisfactory to the Administrative Agent:
(a) eight counterparts of this Amendment executed by the Borrower and
the Required Lenders;
(b) a certificate of an authorized officer of the Borrower as to the
satisfaction of the conditions set forth in Section 3 of this Amendment;
and
(c) such other documents as the Administrative Agent or any Lender may
reasonably request.
Section 5. Reaffirmation of Loan Documents. From and after the date hereof,
each reference that appears in any other Loan Document to the Credit Agreement
shall be deemed to be a reference to the Credit Agreement as amended hereby. As
amended hereby, the Credit Agreement, is hereby reaffirmed, approved and
confirmed in every respect and shall remain in full force and effect.
-2-
Section 6. Counterparts; Effectiveness. This Amendment may be executed by
the parties hereto in any number of counterparts and by the different parties on
separate counterparts and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same agreement.
Section 7. Governing Law; Entire Agreement. This Amendment shall be deemed
a contract made under and governed by the laws of the State of Illinois, without
giving effect to conflicts of laws principles. This agreement constitutes the
entire understanding among the parties hereto with respect to the subject matter
hereof and supersedes any prior agreements with respect thereto.
Section 8. Loan Document. This Amendment is a Loan Document.
-3-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
RENAISSANCERE HOLDINGS LTD.
By: /s/ John M. Lummis
Title: Senior Vice President and Chief Financial
Officer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, individually and as
Administrative Agent
By: /s/ Debra Basler
Title: Assistant Vice President
FLEET NATIONAL BANK
By: /s/ [illegible]
Title: Senior Vice President
MELLON BANK N.A.
By: /s/ [illegible]
Title: Vice President
THE BANK OF N.T. BUTTERFIELD & SON
LIMITED
By: /s/ [illegible]
Title: Manager, Corporate Banking
BANK OF MONTREAL
By: Brian L. Banke
Title: Director
-4-
DEUTSCHE BANK AG, New York and/or
Cayman Islands Branch
By: /s/ John S. McGill
Title: Vice President
By: /s/ Clinton M. Johnson
Title: Director
BANK OF BERMUDA
By: /s/ Michael E. Collin
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By:
Title:
-5-
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of December 31, 1998
(this "Amendment"), amends the Credit Agreement, dated as of June 24, 1998 (the
"Credit Agreement"), among RENAISSANCE U.S. HOLDINGS, INC., a Delaware
corporation (the "Borrower"), the various financial institutions parties thereto
(collectively, the "Lenders") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent (the "Administrative Agent") for the
Lenders. Terms defined in the Credit Agreement are, unless otherwise defined
herein or the context otherwise requires, used herein as defined therein.
WHEREAS, the parties hereto have entered into the Credit Agreement, which
provides for the Lenders to extend certain credit facilities to the Borrower
from time to time; and
WHEREAS, the parties hereto desire to amend the Credit Agreement in certain
respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1 AMENDMENTS. Effective as of December 31, 1998, the Credit
Agreement shall be amended as follows:
SECTION 1.1 Amendment to Section 1.1. Section 1.1 of the Credit Agreement
is amended by amending the definition of "Debt Service Coverage Ratio" in its
entirety to read as follows:
Debt Service Coverage Ratio means the ratio of (a) the sum of (i)
Available Dividends plus (ii) Consolidated EBITDA plus (iii) cash and cash
equivalents consisting of money market instruments or marketable securities
which are rated AA- or A-1 or better by Standard & Poor's Rating Group or
Aa3 or P-1 or better by Moody's Investors Services, Inc. which securities
mature in less than one year on hand at the Guarantor and/or Renaissance
Reinsurance Ltd. (provided the cash and cash equivalents at Renaissance
Reinsurance Ltd. can be withdrawn without regulatory restrictions) as of
the last day of the Computation Period to (b) Future Debt Service.
SECTION 1.2 Amendment to Section 5.8. Section 5.8 of the Credit Agreement
is amended in its entirety to read as follows:
Maintain, and cause each of its Subsidiaries to maintain, all permits,
licenses and consents as may be required for the conduct of its business by
any federal or local government agency or instrumentality except (x) for
such permits, licenses and consents related to assets which are sold in
accordance with Section 6.3 or (y) where failure to maintain the same could
not reasonably be expected to have a Material Adverse Effect.
SECTION 1.3 Amendment to Section 5.9. Section 5.9 of the Credit Agreement
is amended by inserting the following at the end thereof:
provided further, the Borrower and its Subsidiaries may sell assets as
permitted under Section 6.3.
SECTION 1.4 Amendment to Section 6.1. Section 6.1 of the Credit Agreement
is amended by deleting the numbers "1.25:1.00" and inserting "4.00:1.00"
therefor.
SECTION 1.5 Amendment to Section 6.2. Section 6.2 of the Credit Agreement
is restated in its entirety to read as follows:
Section 6.2 [Intentionally Omitted].
SECTION 1.6 Amendment to Section 6.3. Section 6.3(b) of the Credit
Agreement is amended by inserting the following at the end thereof:
, and (iv) sales of assets, including sales of capital stock of
Subsidiaries, provided no Default or Event of Default has occurred and is
continuing.
SECTION 1.7 Waiver of Section 7.1. The Lenders are aware of the
approximately $40,000,000 after tax charge relating to Nobel to be taken in the
fourth Fiscal Quarter of 1998, which charge may result in a negative net worth
at Nobel and the Borrower. The Lenders waive the Default, if any, under Section
7.1(e)(i) of the Credit Agreement relating to such after tax charge.
SECTION 2 CONDITIONS PRECEDENT. This Amendment shall become effective when
each of the conditions precedent set forth in this Section 2 shall have been
satisfied, and notice thereof shall have been given by the Administrative Agent
to the Borrower and the Lenders.
SECTION 2.1 Receipt of Documents. The Administrative Agent shall have
received all of the following documents duly executed, dated the date hereof or
such other date as shall be acceptable to the Administrative Agent, and in form
and substance satisfactory to the Administrative Agent:
(a) Amendment. This Amendment, duly executed by the Borrower, the
Administrative Agent and the Required Lenders.
(b) Consent. The Consent (the "Guarantor Consent") of the Guarantor in
the form attached hereto.
(c) Certificates. A Certificate of an authorized officer of the
Guarantor as to the matters set forth in Section 2.3.
SECTION 2.2 Borrower's Compliance with Warranties, No Default, etc. After
giving effect to the effectiveness of this Amendment, the following statements
by the Borrower shall be
-2-
true and correct (and the Borrower, by its execution of this Amendment, hereby
represents and warrants to the Administrative Agent and each Lender that such
statements are true and correct as at such time):
(a) the representations and warranties set forth in Article IV of the
Credit Agreement shall be true and correct as of the date hereof, with the
same effect as though made on such date; provided that (i) with respect to
clause (a) of Section 4.2, the reference to "March 31, 1998 Quarterly
Statement" shall instead be a reference to "September 30, 1998 Quarterly
Statement" and (ii) with respect to clause (a) of Section 4.3, the
reference to "March 31, 1998" shall be a reference to "September 30, 1998";
and
(b) no Default or Event of Default shall have then occurred and be
continuing.
SECTION 2.3 Guarantor's Compliance With Warranties, No Default, etc. After
giving effect to the effectiveness of this Amendment, the following statements
by the Guarantor shall be true and correct:
(a) The representations and warranties set forth in Article III of the
Guaranty shall be true and correct as of the date hereof, with the same
effect as though made on such date; and
(b) No Default or Event of Default shall have then occurred and be
continuing under the Guaranty.
SECTION 3 REPRESENTATIONS AND WARRANTIES. To induce the Lenders and the
Administrative Agent to enter into this Amendment, the Borrower represents and
warrants to the Administrative Agent and each Lender as follows:
SECTION 3.1 Due Authorization, Non-Contravention, etc. The execution,
delivery and performance by the Borrower of this Amendment, and by the Guarantor
of the Guarantor Consent are within the Borrower's and the Guarantor's corporate
powers, have been duly authorized by all necessary corporate action, and do not
(a) contravene the Borrower's or the Guarantor's Organization
Documents;
(b) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting the Borrower or
the Guarantor; or
(c) result in, or require the creation or imposition of, any Lien on
any of the properties of the Borrower or the Guarantor.
SECTION 3.2 Government Approval, Regulation, etc. No authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body or other Person is required for the due execution,
delivery or performance by the Borrower of this Amendment or by the Guarantor of
the Guarantor Consent.
-3-
SECTION 3.3 Validity, etc. This Amendment constitutes the legal, valid and
binding obligation of the Borrower enforceable in accordance with its terms.
SECTION 4 MISCELLANEOUS.
SECTION 4.1 Continuing Effectiveness, etc. This Amendment shall be deemed
to be an amendment to the Credit Agreement, and the Credit Agreement, as amended
hereby, shall remain in full force and effect and is hereby ratified, approved
and confirmed in each and every respect. After the effectiveness of this
Amendment in accordance with its terms, all references to the Credit Agreement
in the Loan Documents or in any other document, instrument, agreement or writing
shall be deemed to refer to the Credit Agreement as amended hereby.
SECTION 4.2 Payment of Costs and Expenses. The Borrower agrees to pay on
demand all expenses of the Administrative Agent (including the fees and
out-of-pocket expenses of counsel to the Administrative Agent who may be
employees of the Administrative Agent) in connection with the negotiation,
preparation, execution and delivery of this Amendment.
SECTION 4.3 Severability. Any provision of this Amendment which is
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Amendment
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 4.4 Headings. The various headings of this Amendment are inserted
for convenience only and shall not affect the meaning or interpretation of this
Amendment or any provisions hereof.
SECTION 4.5 Execution in Counterparts. This Amendment may be executed by
the parties hereto in several counterparts, each of which shall be deemed to be
an original and all of which shall constitute together but one and the same
agreement.
SECTION 4.6 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT
MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS.
SECTION 4.7 Successors and Assigns. This Amendment shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
-4-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
RENAISSANCE U.S. HOLDINGS INC.
By: /s/ John M. Lummis
Title: Senior Vice President and Chief Financial
Officer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, individually and as
Administrative Agent
By: /s/ Debra Basler
Title: Assistant Vice President
FLEET NATIONAL BANK
By: /s/ [illegible]
Title: Senior Vice President
MELLON BANK N.A.
By: /s/ [illegible]
Title: Vice President
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCH
By: /s/ John S. McGill
Title: Vice President
By: /s/ Clinton M. Johnson
Title: Director
-5-
FORM OF
AGREEMENT AND CONSENT
The undersigned hereby agrees and consents to the terms and provisions of
the foregoing First Amendment to Credit Agreement, and agrees that the Guaranty
executed by the undersigned shall remain in full force and effect
notwithstanding the provisions of the foregoing First Amendment to Credit
Agreement.
Dated as of: December 31, 1998
RENAISSANCERE HOLDINGS, LTD.
By: /s/ John M. Lummis
Title: Senior Vice President and Chief
Financial Officer
- - --------------------------------------------------------------------------------
===========================
SELECTED FINANCIAL DATA
===========================
The following summary financial information should be read in conjunction with
the Consolidated Financial Statements and the notes thereto presented on pages
28 to 48 in this Annual Report.
(in thousands, except per share data) 1998 1997 1996 1995 1994
------------------------------------------------------------------------------
Income Statement Data
Gross premiums written $ 270,460 $228,287 $269,913 $292,607 $273,481
Net premiums written 195,019 195,752 251,564 289,928 269,954
Net premiums earned 204,947 211,490 252,828 288,886 242,762
Net investment income 52,834 49,573 44,280 32,320 14,942
Total revenues 260,527 254,726 294,959 326,566 261,392
Claims and claim expenses 112,752 50,015 86,945 110,555 114,095
Acquisition and operating expenses 61,031 50,358 42,893 39,734 35,378
Net income 74,577 139,249 156,160 162,786 96,419
Earnings per Common Share - basic $3.39 $6.19 $6.15 $6.84 $4.24
Earnings per Common Share - diluted 3.33 6.06 6.01 6.75 4.24
Dividends per share 1.20 1.00 0.80 0.16 --
------------------------------------------------------------------------------
Balance Sheet Data
Total investments $ 826,608 $736,538 $603,484 $528,836 $284,493
Cash and cash equivalents 115,701 122,929 198,982 139,163 153,049
Total assets 1,356,164 960,749 904,764 757,060 509,410
Reserve for claims and claim expenses 298,829 110,037 105,421 100,445 63,268
Capital Securities(1) 100,000 100,000 -- -- --
Shareholders' equity 612,232 598,703 546,203 486,336 265,247
Book value per Common Share $ 28.28 $ 26.68 $ 23.21 $ 18.99 $ 11.79
------------------------------------------------------------------------------
Operating Ratios
Claims and claim expense ratio 55.0% 23.7% 34.3% 38.3% 47.0%
Underwriting expense ratio 29.8% 23.8% 17.0% 13.7% 14.6%
Combined ratio 84.8% 47.5% 51.3% 52.0% 61.6%
(1)Represents minority interest - company obligated, mandatorily redeemable
capital securities of a subsidiary trust holding solely junior subordinated
debentures of the Company.
- - --------------------------------------------------------------------------------
14 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 15
- - --------------------------------------------------------------------------------
================================================
MANAGEMENT'S
DISCUSSION AND ANALYSIS
================================================
of Results of Operations and Financial Condition
GENERAL
RenaissanceRe Holdings Ltd. ("RenaissanceRe") is a Bermuda based holding company
with operating subsidiaries engaged in reinsurance and insurance.
RenaissanceRe's principal operating subsidiary, Renaissance Reinsurance Ltd.
("Renaissance Reinsurance") provides property catastrophe reinsurance coverage
to insurers and reinsurers, primarily on an excess of loss basis. During 1998,
Renaissance Reinsurance wrote $207.2 million of premium and based on gross
premiums written, Renaissance Reinsurance is one of the largest providers of
this coverage in the world. Excess of loss catastrophe coverage generally
provides coverage for claims arising from large natural catastrophes, such as
earthquakes and hurricanes, in excess of a specified loss. In connection with
the coverage it provides, Renaissance Reinsurance is also exposed to claims
arising from other natural and man-made catastrophes such as winter storms,
freezes, floods, fires and tornadoes.
RenaissanceRe is continuing to expand its primary insurance business
through internal growth and acquisition. In 1996 RenaissanceRe incorporated
Glencoe Insurance Ltd. ("Glencoe"). Glencoe provides primary catastrophe-exposed
property coverage on an excess and surplus lines basis, and is eligible to write
business in 29 states. During 1998, Glencoe wrote $5.6 million of primary
insurance premium.
In January 1998, RenaissanceRe began to provide personal lines coverages
through DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of
Glencoe. DeSoto is a special purpose Florida homeowners insurance company that
is licensed to assume and renew homeowner policies from the Florida JUA, a state
sponsored insurance company. During 1998, DeSoto wrote $26.7 million of primary
homeowners insurance coverage.
On June 25, 1998, RenaissanceRe, through it's U.S. holding company,
Renaissance U.S. Holdings, Inc. ("Renaissance U.S.") completed its acquisition
of the U.S. operating subsidiaries of Nobel Insurance Limited, a Bermuda company
("Nobel Limited"), for $56.1 million. During the fourth quarter of 1998,
RenaissanceRe recorded after tax charges of $40.1 million related to Nobel
Insurance Company ("Nobel"). As a result of these charges, RenaissanceRe adopted
a plan to exit each of Nobel's current businesses. Nobel will continue to
operate these business units during the sales process. See Financial Condition -
Nobel.
In October 1998, Renaissance Reinsurance of Europe ("Renaissance Europe")
was incorporated under the laws of Ireland as a wholly owned subsidiary of
Renaissance Reinsurance to provide certain property catastrophe reinsurance
coverage in Europe.
On December 31, 1998, RenaissanceRe entered into an agreement to purchase a
10 percent interest in Inter-Ocean Holdings Ltd. Also, effective January 11,
1999, RenaissanceRe entered into a joint venture, Top Layer Re, with State Farm
Mutual Automobile Insurance Company ("State Farm") to provide high layer
coverage for non-U.S. risks.
RenaissanceRe and its subsidiaries' (the "Company") results depend to a
large extent on the frequency and severity of catastrophic events, and the
coverage offered to clients impacted thereby. In addition, from time to time,
the Company may consider opportunistic diversification into new ventures, either
through organic growth or the acquisition of other companies or books of
business. In evaluating such new ventures, the Company seeks an attractive
return on equity, the ability to develop or capitalize on a competitive
advantage and opportunities that will not detract from its core reinsurance
operations. Accordingly, the Company regularly reviews strategic opportunities
and periodically engages in discussions regarding possible transactions.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SAFE HARBOR DISCLOSURE
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements in the
following discussion and elsewhere in this Annual Report. Forward-looking
statements are necessarily based on estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which, with respect to future business
decisions, are subject to change. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. In particular, statements using verbs such as "expect", "anticipate",
"intends", "believe" or words of similar impact generally involve
forward-looking statements.
In light of the risks and uncertainties inherent in all future projections,
the inclusion of forward-looking statements in this report should not be
considered as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Numerous factors could
cause the Company's actual results to differ materially from those in the
forward-looking statements, including the following: (i) the occurrence of
catastrophic events with a frequency or severity exceeding the Company's
estimates; (ii) a decrease in the level of demand for the Company's reinsurance
or insurance business, or increased competition in the industry; (iii) the
lowering or loss of one of the financial or claims-paying ratings of the Company
or one or more of its subsidiaries; (iv) risks associated with implementing
business strategies of the Company; (v) uncertainties in the Company's reserving
process; (vi) failure of the Company's reinsurers to honor their obligations;
(vii) actions of competitors including industry consolidation; (viii) loss of
services of any one of the Company's key executive officers; (ix) the passage of
federal or state legislation subjecting Renaissance Reinsurance to supervision
or regulation, including additional tax regulation, in the United States or
other jurisdictions in which the Company operates; (x) challenges by insurance
regulators in the United States to Renaissance Reinsurance's claim of exemption
from insurance regulation under the current laws; (xi) changes in economic
conditions, including currency rate conditions which could affect the Company's
investment portfolio; (xii) uncertainties with respect to the Company's planned
reinsurance or distribution of certain operating units of Nobel Insurance
Company; (xiii) risks relating to the Year 2000 issue; or (xiv) a contention by
the United States Internal Revenue Service that the Company or Renaissance
Reinsurance is engaged in the conduct of a trade or business within the U.S. The
foregoing review of important factors should not be construed as exhaustive; the
Company undertakes no obligation to release publicly the results of any future
revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Year Ended December 31, 1998
Compared to Year Ended December 31, 1997
Net operating income, excluding the Nobel fourth quarter $40.1 million after tax
charge and excluding realized investment gains and losses, for the year ended
December 31, 1998 was $121.5 million compared to $142.1 million for the year
ended December 31, 1997. The decrease was primarily related to a decrease in net
premiums earned, an increase in net claims and claim expenses and an increase in
operating expenses, partially offset by an increase in investment income and an
increase in other income. The above factors resulted in a decrease in operating
earnings per Common Share to $5.42 for the year ended December 31, 1998 from
$6.19 for the year ended December 31, 1997. Earnings, excluding the Nobel
charge, but including realized gains and losses on investments, decreased to
$114.7 million in 1998 from $139.2 million in 1997.
Including the Nobel charge, net operating income for the year ended
December 31, 1998 was $81.5 million compared to $142.1 million for the year
ended December 31, 1997. The decrease was primarily due to the fourth quarter
Nobel charge. The Nobel charge included after tax amounts of $29.6 million for
adverse development on Nobel's casualty and surety books of business, a goodwill
write-down of $6.6 million, and other related costs of $3.9 million. Earnings
per Common Share decreased to $3.33 per share in 1998, compared with $6.06 in
1997 primarily as a result of the Nobel charge. See Financial Condition - Nobel.
Gross premiums written for the year ended December 31, 1998 increased 18.5
percent to $270.5 million from $228.3 million for the year ended December 31,
1997. The increase
- - --------------------------------------------------------------------------------
16 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 17
- - --------------------------------------------------------------------------------
resulted from the inclusion of $30.9 million of premiums from Nobel, which was
acquired in June 1998, and of $26.7 million of premiums from DeSoto, which began
providing coverage in January of 1998. Partially offsetting the growth in the
primary insurance premiums was a 6.3 percent decrease in the Company's
reinsurance operations from $221.2 million in 1997 to $207.2 million in 1998.
The property catastrophe reinsurance market and the primary insurance
market continued to be highly competitive in 1998. Because the property
catastrophe reinsurance business has been one of the most profitable segments of
the market, it is the focus of much competition, which has resulted in lower
premiums measured on a risk-adjusted basis.
The 6.3 percent premium decrease from the Company's reinsurance operations
was the result of a 16.4 percent decrease in premiums due to the Company or the
cedent not renewing coverage and a 14.0 percent decrease related to changes in
pricing, participation levels and coverage on renewed business, partially offset
by a 24.1 percent increase in premiums related to new business. The decrease in
premiums resulted in part from consolidation of the Company's customers.
During 1998, consistent with its risk management practices and the
availability of coverage responsive to the Company's risk profile, the Company
increased the level of property catastrophe reinsurance coverage purchased for
its own account. Ceded premiums written in the Company's reinsurance operations
during 1998 were $47.7 million compared to $31.6 million in 1997. Additionally,
the Company's primary operations had ceded written premiums of $27.7 million
(1997 - $.9 million). To the extent that appropriately priced coverage is
available, the Company anticipates continued use of reinsurance to reduce the
potential volatility of its results.
The Company's gross premiums written by geographic region were as follows:
- - --------------------------------------------------------------------------------
(in thousands)
Year ended December 31, 1998 1997
-------------------------
Geographic Region
United States - reinsurance $128,387 $116,676
United States - primary 63,271 7,041
Worldwide 20,584 27,930
Worldwide
(excluding U.S.) 26,380 32,005
Europe (including the
United Kingdom) 18,532 21,007
Other 9,374 16,738
Australia and New Zealand 3,932 6,890
-------------------------
Total Gross Premiums
Written $270,460 $228,287
-------------------------
- - --------------------------------------------------------------------------------
The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross premiums written to date is predominately from Europe and
Japan.
The table below sets forth the Company's combined ratio and components
thereof:
- - --------------------------------------------------------------------------------
Year ended December 31, 1998 1997
-------------------------
Claims and claim expenses 55.0% 23.7%
Underwriting expense ratio 29.8 23.8
-------------------------
Combined ratio 84.8% 47.5%
-------------------------
- - --------------------------------------------------------------------------------
The Company's combined ratio and components thereof, excluding the Nobel
charge, were as follows:
- - --------------------------------------------------------------------------------
Year ended December 31, 1998 1997
-------------------------
Claims and claim expenses 33.1% 23.7%
Underwriting expense ratio 29.3 23.8
-------------------------
Combined ratio 62.4% 47.5%
-------------------------
- - --------------------------------------------------------------------------------
This claims ratio does not reflect the benefits of a recovery on a
non-indemnity catastrophe index transaction which is included in other income.
In the fourth quarter of 1998, the Company recorded pre tax charges of
$45.0 million for claims and claim expenses on the casualty and surety books of
business of Nobel. See Financial Condition - Nobel.
Excluding the Nobel charge, the claims and claim expenses
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
incurred for the year ended December 31, 1998 were $67.8 million, or 33.1
percent of net premiums earned. In comparison, claims and claim expenses
incurred for the year ended December 31, 1997 were $50.0 million, or 23.7
percent of net premiums earned. The primary reasons for the increase in the loss
ratios are 1) a decrease in the net earned premiums, which is primarily related
to an increase in ceded premiums written and 2) the inclusion of the operations
of Nobel and DeSoto during 1998, whose loss ratios, based on the nature of those
businesses, are normally higher than those of Renaissance Reinsurance.
The year ended December 31, 1998 was the third worst year for insured U.S.
catastrophe losses. In comparison, the year ended December 31, 1997 was a
relatively light year for natural catastrophe losses. However, largely due to
Renaissance Reinsurance's reinsurance protection, the net loss ratio of
Renaissance Reinsurance was not significantly impacted by the 1998 catastrophe
loss events. Net reinsurance claims for Renaissance Reinsurance in 1998 were
$42.4 million, or 25.0 percent of net premiums earned as compared with $49.0
million in 1997 or 23.6 percent of net premiums earned. Gross claims in 1998
included claims on a number of aggregate stop loss and excess of loss contracts,
as well as claims related to Hurricane Georges, the January Canadian Freeze,
Hurricane Bonnie and additional claims from various U.S. wind, hail, tornado and
flood claims. Due to the high severity and low frequency of claims related to
the property catastrophe reinsurance business, there can be no assurance that
Renaissance Reinsurance will continue to experience this level of net claims in
future years.
Excluding the Nobel charge, the Company's primary operations produced a
loss ratio of 72.1 percent. Including the Nobel charge, the incurred loss ratio
of the primary operations was 200 percent. See Financial Condition - Nobel. In
connection with the Company's acquisition of Nobel, Nobel purchased a
retroactive reinsurance contract to cover $38 million of adverse loss
development on certain prior year casualty reserves. Accounting guidelines
require that adverse development of the reserves covered by this contract be
reflected in the Company's statement of income at the time of the adjustment.
However, the offsetting recovery under the contract is required to be deferred
and recognized into income as payments are received from the reinsurer. During
1998, Nobel recognized $27.6 million of adverse development on the business
covered by this contract with the offsetting recovery reflected on the balance
sheet as a deferred gain. In future years, as payments are received from the
reinsurer, the deferred gain will be reflected as a reduction in claims and
claim expenses in the Company's statement of income.
For the Company's reinsurance operations, estimates of claims and claim
expenses incurred are based in part upon the estimation of claims resulting from
catastrophic events. Estimation by the Company of claims resulting from
catastrophic events based upon its own historical claim experience is inherently
difficult because of the Company's short operating history and the possible
severity of property catastrophe claims. Therefore, the Company utilizes both
proprietary and commercially available models, as well as historical reinsurance
industry property catastrophe claims experience, for purposes of evaluating
future trends and providing an estimate of ultimate claims costs.
For both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to estimate ultimate expected claims and claim
expenses. The period of time from the reporting of a loss to the Company through
the settlement of the Company's liability may be several years. During this
period, additional facts and trends will be revealed. As these factors become
apparent, case reserves will be adjusted, sometimes requiring an increase in the
overall reserves of the Company, while at other times the Company may affect a
reallocation of IBNR reserves to specific case reserves. Reserve estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates. See Notes 2 and 5 to the Consolidated Financial
Statements.
Acquisition and operational expenses, consisting of brokerage commissions,
excise taxes and other costs directly related to the underwriting operations of
the Company, for the year ended December 31, 1998 were $61.0 million, or 29.8
percent of net premiums earned, compared to $50.4 million, or 23.8 percent for
the year ended December 31, 1997. The primary contributors to the increase in
underwriting expenses were the inclusion of Nobel and DeSoto, which operate with
a greater expense ratio than that of Renaissance Reinsurance. Further, the
increased purchase of reinsurance, which in turn reduces net premiums earned,
causes acquisition and operational costs to increase as a percentage of net
premiums earned.
- - --------------------------------------------------------------------------------
18 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 19
- - --------------------------------------------------------------------------------
Net investment income (excluding net realized investment gains and losses)
for the year ended December 31, 1998 was $52.8 million, compared to $49.6
million for the year ended December 31, 1997. The increase in investment income
resulted primarily from the increase in the amount of invested assets which was
primarily the result of cash flows provided by operations and the assets
purchased in the Nobel acquisition, partially offset by amounts used to pay
dividends, purchase common stock and fund the acquisition of Nobel during the
year.
During 1998, the Company reported other income of $9.8 million. The
majority of the other income relates to a recovery on a non-indemnity
catastrophe index transaction. See Financial Condition - Derivative Instruments.
During 1998, net realized losses were $6.9 million, compared with $2.9
million in 1997. The 1998 losses were primarily generated from the sale of a
portion of the Company's emerging market debt securities. See Financial
Condition - Investments.
Excluding the Nobel charge, corporate expenses were $4.0 million in 1998,
compared with $3.2 million in 1997. The primary increase related to the
amortization of goodwill associated with the purchase of Nobel during 1998.
Including the Nobel charge, corporate expenses, on a pre tax basis, were $18.9
million, which included a write-down of goodwill of $9.9 million and additional
costs and charges related to the expected sale of certain aspects of the Nobel
operations of $5.0 million. See Financial Condition - Nobel.
For the year ended December 31, 1998, the Company realized net foreign
exchange losses of $0.2 million compared to $3.4 million for the year ended
December 31, 1997. The foreign exchange losses recorded in 1997 resulted
primarily from the strengthening of the U.S. dollar against the British pound
and the German mark.
During the year ended December 31, 1998, the Company recorded expenses of
$8.5 million related to the Capital Securities that were issued in March 1997,
compared with $7.0 million in 1997. Interest expense for the year ended December
31, 1998 was $4.5 million as compared with $4.3 million for the year ended
December 31, 1997.
RESULTS OF OPERATIONS
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
For the year ended December 31, 1997, net operating income, excluding realized
investment gains and losses, available to common shareholders was $142.1 million
compared to $159.1 million for the year ended December 31, 1996. The decrease
was primarily due to a decrease in gross premiums written, an increase in ceded
reinsurance premiums, an increase in operating expenses and an increase in
foreign exchange losses, which were partially offset by a decrease in claims and
claim expenses incurred and an increase in net investment income. The above
factors, combined with a 12 percent decrease in the number of weighted average
shares outstanding, as a result of the purchase of Common Shares during late
December 1996 and during 1997, resulted in an increase in operating earnings per
Common Share on a diluted basis, to $6.19 for the year ended December 31, 1997
from $6.12 for the year ended December 31, 1996. Earnings including realized
gains and losses on investments, decreased during 1997 to $139.2 million for the
year ended December 31, 1997 from $156.2 million for the same period in 1996.
Gross premiums written for the year ended December 31, 1997 decreased 15.4
percent to $228.3 million from $269.9 million for the year ended December 31,
1996. In 1997, the property catastrophe reinsurance market was highly
competitive due to the increased capital in the reinsurance market and the
limited opportunities to profitably deploy such capital. The property
catastrophe business has been among the most profitable segments of the market,
and accordingly it was the focus of much competition which resulted in lower
premiums measured on a risk adjusted basis.
The 15.4 percent premium decrease was the result of a 17.4 percent decrease
in premiums due to the Company not renewing coverage and a 9.6 percent decrease
related to changes in pricing, participation levels and coverage on renewed
business, partially offset by an 11.6 percent increase in premiums related to
new business. A majority of the decline in premiums written related to
reductions in the Company's book of assumed retrocessional premiums which were
$59.5 million in 1997 compared to $103.7 million in 1996.
During 1997, consistent with its risk management practices and the
availability of coverage responsive to the Company's risk profile, the Company
increased the level of property catastrophe reinsurance coverage purchased for
its own account. Ceded premiums written in 1997 were $32.5 million compared to
$18.3 million in 1996.
Property catastrophe reinsurance premiums accounted for approximately 91
percent of the Company's gross premiums written in 1997. The remaining gross
premiums written in
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- - --------------------------------------------------------------------------------
1997 consisted primarily of excess and surplus lines primary premiums written by
Glencoe, and premiums on aviation and marine coverages. The Company's gross
premiums written by geographic region were as follows:
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(in thousands)
Year ended December 31, 1997 1996
-------------------------
Geographic Region
United States - reinsurance $116,676 $125,059
United States - primary 7,041 1,552
Worldwide 27,930 44,460
Worldwide
(excluding U.S.) 32,005 38,746
Europe (including the
United Kingdom) 21,007 31,534
Other 16,738 18,958
Australia and New Zealand 6,890 9,604
-------------------------
Total Gross Premiums
Written $228,287 $269,913
-------------------------
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The category "Worldwide (excluding U.S.) consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross premiums written to date is predominately from Europe and
Japan.
The table below sets forth the Company's combined ratio and components
thereof.
- - --------------------------------------------------------------------------------
Year ended December 31, 1997 1996
-------------------------
Claims and claim expenses 23.7% 34.3%
Underwriting expense ratio 23.8 17.0
-------------------------
Combined ratio 47.5% 51.3%
-------------------------
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Claims and claim expenses incurred for the year ended December 31, 1997
were $50.0 million compared to $86.9 million for the year ended December 31,
1996. Compared to historical averages, the year ended December 31, 1997 was a
relatively light year for natural catastrophes worldwide. Accordingly, the
reduced level of catastrophe losses resulted in a significantly lower loss ratio
in 1997 compared to 1996 and therefore positively affected the Company's results
from operations.
Included in the claims expenses for the year ended December 31, 1996 were
provisions of $15.0 million for claims incurred from Hurricane Fran, $9.3
million for claims incurred related to severe wind and hail storms, $8.3 million
for claims related to the Northeast U.S. winter storms, and a provision of $7.0
million for Northwestern U.S. floods. Also, during 1996, there was $12.1 million
of development on prior year claims, which primarily related to a $3.2 million
development on claims related to the 1994 Northridge Earthquake and a net
development of $3.5 million for Hurricanes Luis, Marilyn and Opal which occurred
in 1995.
Underwriting expenses, consisting of brokerage commissions, excise taxes
and other costs directly related to underwriting, for the year ended December
31, 1997 were $50.4 million or 23.8 percent of net premiums earned, compared to
$42.9 million or 17.0 percent for the year ended December 31, 1996. The primary
contributors to the increase in underwriting expenses were the increased
operating costs related to the hiring of additional professional staff and
continued investment in modeling technology. Also, since there was no reduction
in acquisition expenses related to the purchase of reinsurance, the purchase of
reinsurance caused acquisition costs to be a higher percentage of net premiums
earned. Additionally, premiums written by Glencoe, due to the nature of the
business, had a higher ratio of acquisition costs.
Net investment income (excluding net realized investment gains and losses)
for the year ended December 31, 1997 was $49.6 million, compared to $44.3
million for the year ended December 31, 1996. The increase in investment income
resulted primarily from the increase in the amount of invested assets which was
primarily the result of cash flows provided by operations, partially offset by
amounts used to purchase common stock during 1997. Invested assets at December
31, 1997 were $859.5 million compared to $802.5 million at December 31, 1996.
During each of 1997 and 1996, the Company recorded net realized losses on
investments of $2.9 million. Included in the 1997 net realized loss figure was a
provision of $3.8 million for what the Company believed to be an other than
temporary impairment of certain securities of Asian issuers held by the Company
as at December 31, 1997.
During 1997 the Company realized net foreign exchange losses of $3.4
million compared to net realized foreign exchange gains of $0.8 million for the
year ended December 31, 1996. The foreign exchange losses recorded in 1997
resulted primarily in the strengthening of the U.S. dollar against the British
pound and the German mark. The exchange gains in 1996 resulted primarily in the
weakening
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20 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 21
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of the U.S. dollar against the British pound.
During the year ended December 31, 1997 net income available to common
shareholders was reduced by $7.0 million for minority interests related to the
Capital Securities that were issued in March 1997. The proceeds from the Capital
Securities were utilized to partially reduce the amount outstanding under the
Company's Revolving Credit Facility and accordingly, interest expense for the
year ended December 31, 1997 decreased to $4.3 million from $6.6 million for the
year ended December 31, 1996.
FINANCIAL CONDITION
Liquidity and Capital Requirements
As a holding company, RenaissanceRe relies on investment income, cash dividends
and other permitted payments from its subsidiaries to make principal payments,
interest payments, cash distributions on outstanding obligations and to pay
quarterly dividends, if any, to its shareholders. The payment of dividends by
RenaissanceRe's subsidiaries is, under certain circumstances, limited under U.S.
statutory regulations and Bermuda insurance law. U.S. statutory regulations and
The Bermuda Insurance Act 1978, amendments thereto and related regulations of
Bermuda (the "Act"), require RenaissanceRe's Bermuda subsidiaries to maintain
certain measures of solvency and liquidity. As at December 31, 1998, the
statutory capital and surplus of RenaissanceRe's subsidiaries was $680.5
million, and the amount required to be maintained was $101.0 million. During
1998, Renaissance Reinsurance paid aggregate cash dividends of $102.1 million to
RenaissanceRe, compared to $117.5 million in 1997. See Note 17 to the
Consolidated Financial Statements.
RenaissanceRe's operating subsidiaries have historically produced
sufficient cash flows to meet expected claims payments and operational expenses
and to provide dividend payments to RenaissanceRe. RenaissanceRe's subsidiaries
also maintain a concentration of investments in high quality liquid securities,
which management believes will provide sufficient liquidity to meet
extraordinary claims payments should the need arise. Additionally, the Company
maintains a credit facility from which $150 million is currently unborrowed and
available to meet the liquidity needs of the Company.
Nobel
On June 25, 1998, the Company completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel Limited"),
for $56.1 million. Between September and December 1998, the Company contributed
an additional $9 million of capital to Nobel. As part of the transaction, the
Company provided Nobel Limited with a limited recourse loan of $8.9 million to
support the liquidation of Nobel Limited. The Company currently estimates that
Nobel Limited, after satisfying its liabilities, will have the ability to repay
$7.9 million of this loan. The gross assets and gross liabilities purchased in
the transaction were $188.1 million and $155.9 million, respectively, thereby
resulting in the recognition of $23.9 million of goodwill, which is being
amortized on a straight line basis over a 20 year period. The Company has
accounted for this acquisition using the purchase method of accounting. The
Company issued no shares as part of the purchase.
During the fourth quarter of 1998, the Company recorded an after tax charge
of $40.1 million, consisting of $29.6 million of adverse development on Nobel
Insurance Company's ("Nobel") casualty and surety books of business, a goodwill
write-down of $6.6 million, and other related costs of $3.9 million. As a result
of Nobel's operating performance, A.M. Best reduced the credit rating of Nobel
from "A-" to "B+" and Nobel is seeking to sell or reinsure the remaining Nobel
businesses and reserves, specifically the casualty, surety, low-value dwelling
and bail bond businesses. While the Company intends to vigorously pursue a sale,
there can be no assurance that the Company will complete these sale transactions
and, if sales transactions do occur, there can be no assurance that the Company
will receive its estimated fair value of the Nobel businesses. Nobel will
continue to operate these business units during the sales process. Subsequent to
the sale of the businesses, Renaissance U.S. will retain ownership of Nobel
along with its licenses in the 50 states of America.
In conjunction with the fourth quarter charges, Renaissance U.S. has
recorded a deferred tax asset of $22.0 million. The Company believes the future
operations of Nobel, combined with other operating subsidiaries of Renaissance
U.S., will enable it to utilize the net operating loss carry-forward.
In connection with the Nobel acquisition, Renaissance U.S. borrowed $35
million from a syndicate of banks. In addition, the banks have provided a $15
million revolving credit facility which had been fully utilized as of December
31, 1998. RenaissanceRe has guaranteed these arrangements. See Note
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
6 to the Consolidated Financial Statements.
Contemporaneously with the Nobel acquisition, Nobel entered into a
retroactive reinsurance contract. This contract provides Nobel with $38 million
of protection from adverse development on its pre October 1, 1997 casualty book
of business. During the third and fourth quarters of 1998, Nobel recognized
pre-tax loss development on this book of business of $27.6 million, which is
recoverable under this contract. In accordance with SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts",
Nobel must record recoveries on these retroactive reinsurance contracts over the
remaining settlement period. Accordingly, although the Company has reflected in
its 1998 statement of operations a $27.6 million loss from adverse development
on Nobel's pre October 1, 1997 casualty book of business, the Company has also
recorded a $27.6 million deferred gain which will be offset against claims and
claim expenses incurred in future years consolidated statements of income. The
deferred gain will be recognized into income by multiplying the amount of such
gain by a fraction, the numerator being the cash recoveries collected from the
reinsurers under the contract, and the denominator being the total losses ceded
to the contract.
Other Cash Flows
In January 1996, RenaissanceRe capitalized a new subsidiary, Glencoe, with a
$50.0 million capital contribution and in June 1996 RenaissanceRe sold a 29.9
percent interest in Glencoe. During 1997 and 1998 the Company repurchased the
minority interest and accordingly, Glencoe is currently a wholly owned
subsidiary of RenaissanceRe.
Cash flows from operating activities resulted principally from premium and
investment income, net of paid losses, acquisition costs and underwriting
expenses. Cash flows from operations in 1998 were $102.5 million, compared to
$153.3 million in 1997. The 1998 cash flows from operations plus the proceeds
from bank loans were used to purchase $42.7 million of the Company's Common
Shares, pay aggregate quarterly dividends of $26.7 million and purchase Nobel
for $56.1 million. The 1997 cash flows from operations were utilized to purchase
$53.5 million of the Company's Common Shares and pay aggregate quarterly
dividends of $22.6 million.
The operating results of the Company have generated cash flows from
operations in 1998 and 1997 significantly in excess of its commitments. To the
extent that capital is not utilized in the Company's reinsurance business, the
Company will consider using such capital to invest in new opportunities or will
consider returning such capital to its shareholders.
Because of the potential high severity and low frequency of losses on the
coverages written by the Company, (which constitutes the majority of its
coverages) and the seasonality of the Company's business, it is not possible to
accurately predict the Company's future cash flows from operating activities. As
a consequence, cash flows from operating activities may fluctuate, perhaps
significantly, between individual quarters and years.
Capital Resources
The total capital of the Company as at December 31, 1998 and 1997 was as
follows:
- - --------------------------------------------------------------------------------
(in thousands) 1998 1997
-------------------------
Revolving Credit Facility -
Borrowed $ 50,000 $ 50,000
Term Loan & Credit Facility 50,000 --
Revolving Credit Facility -
Unborrowed 150,000 150,000
Minority interest -
Capital Securities 100,000 100,000
Shareholders' equity 612,232 598,703
-------------------------
Total Capital Resources $962,232 $898,703
-------------------------
- - --------------------------------------------------------------------------------
The Company has a $200 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. Interest rates on the facility
are based on a spread above LIBOR and have averaged 6.12 percent during 1998
(6.07 percent in 1997). The credit agreement contains certain financial
covenants including requirements of a consolidated debt to capital ratio of
0.35:1; a consolidated net worth of not less than 125 percent of consolidated
debt; and 80 percent of invested assets to be rated BBB- or better. As at
December 31, 1998, and 1997, the Company had $50 million outstanding under the
facility. Under the terms of the agreement, and if the Company is in compliance
with the covenants thereunder, the Company has access to an additional $150
million should the need arise. The Company was in compliance with all the
covenants of this revolving credit and term loan agreement as at December 31,
1998.
In conjunction with the purchase of Nobel, Renaissance U.S. has a $35
million term loan and $15 million revolving loan facility with a syndicate of
commercial banks. Interest
- - --------------------------------------------------------------------------------
22 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 23
- - --------------------------------------------------------------------------------
rates on the facility are based upon a spread above LIBOR, and averaged 6.03
percent. The Credit Agreement contains certain financial covenants, the primary
one being that, RenaissanceRe, being its principal guarantor, maintain a ratio
of liquid assets to debt service of 4:1. This five year term loan has mandatory
repayment provisions approximating 25 percent in each of years two through five.
The Company was in compliance with all the covenants of this term loan and
revolving loan facility as at December 31, 1998.
The Capital Securities pay cumulative cash distributions at an annual rate
of 8.54 percent, payable semi-annually. The Indenture relating to the Capital
Securities contains certain covenants, including a covenant prohibiting the
payment of dividends by the Company if the Company shall be in default under the
Indenture. The Company was in compliance with all of the covenants of the
Indenture at December 31, 1998. The Capital Securities mature on March 1, 2027.
Such securities are required to be classified as minority interest, rather than
as a component of shareholders' equity of the Company.
Under the terms of certain reinsurance contracts, the Company may be
required to provide letters of credit to reinsureds in respect of reported
claims and/or unearned premiums. The Company has obtained a facility providing
for the issuance of letters of credit. This facility is secured by a lien on a
portion of the Company's investment portfolio. At December 31, 1998 the Company
had outstanding letters of credit aggregating $42.0 million (1997 $24.7
million). Also in connection with the Top Layer Re investment, the Company has
committed $50 million of collateral in the form of a letter of credit.
In order to encourage employee ownership of Common Shares, the Company has
guaranteed certain loan and pledge agreements (collectively, the "Employee
Credit Facility") between certain employees of the Company (the "Participating
Employees") and Bank of America Illinois ("BofA"). Pursuant to the terms of the
Employee Credit Facility, BofA has agreed to loan the Participating Employees up
to an aggregate of $25 million and the balance outstanding as of December 31,
1998 was $19.1 million. Each loan under the Employee Credit Facility is required
to be initially collateralized by the respective Participating Employee with
Common Shares or other collateral acceptable to BofA. If the value of the
collateral provided by a Participating Employee subsequently decreases, such
Participating Employee is required to contribute additional collateral in the
amount of such deficiency. Loans under the Employee Credit Facility are
otherwise non-recourse to the Participating Employees. Given the level of
collateral, the Company does not presently anticipate that it will be required
to honor any guarantees under the Employee Credit Facility, although there can
be no assurance that the Company will not be so required in the future.
Shareholders' Equity
During 1998, shareholders' equity increased by $13.5 million, from $598.7
million at December 31, 1997, to $612.2 million at December 31, 1998. The
significant components of the increase included net income from continuing
operations of $74.6 million, a decrease in the unrealized depreciation on
investments of $5.0 million and share option and restricted stock movement of
$3.3 million partially offset by the payment of dividends of $26.7 million and
the purchase of common stock of $42.7 million.
In May 1998, the Company announced a $25 million share repurchase program.
An additional $25 million share repurchase program was announced in September
1998. Through December 31, 1998, the Company had repurchased an aggregate of
1,020,670 shares under these programs at a total cost of $42.7 million.
Significant capital transactions during 1997 included:
o On June 23, 1997, in conjunction with a secondary offering for the
Company's founding institutional shareholders, the Company purchased and
cancelled 700,000 Common Shares at $36.29 per share for an aggregate purchase
price of $25.4 million from the Company's founding institutional shareholders or
their successors.
o On December 13, 1996, the Board of Directors approved a capital plan,
which was comprised of two components. First the Company purchased and cancelled
2,085,361 Common shares at $34.50 per share from its founding institutional
investors or their successors for an aggregate purchase price of $71.9 million.
Second, on January 22, 1997, the Company completed a fixed price tender offer
and purchased and cancelled 813,190 Common Shares from its public shareholders
at $34.50 per share for an aggregate purchase price of $28.1 million.
Investments
As of December 31, 1998, the Company held investments and cash totaling
$942.3 million with net unrealized depreciation of $5.1 million.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Primarily because of the potential for large claims payments, the Company's
investment portfolio is structured to provide a high level of liquidity.
The table below shows the aggregate amounts of investments available for
sale, equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
- - --------------------------------------------------------------------------------
(in thousands) 1998 1997
-------------------------
Investments available for
sale, at fair value $799,995 $700,665
Equity securities,
at fair value 1,630 26,372
Cash, cash equivalents and
short term investments 140,684 132,430
-------------------------
Total Invested Assets $942,309 $859,467
-------------------------
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The growth in the Company's portfolio of invested assets for the year ended
December 31, 1998 resulted primarily from net cash provided by operating
activities of $102.5 million, partially offset by realized losses generated by
the sale of securities from the Company's emerging market debt portfolio. The
Company's investment income also increased during this period, largely as a
result of the increased size of the fixed income portfolio.
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an AA rating as
measured by Standard & Poor's Ratings Group. At December 31, 1998, the Company's
invested asset portfolio had a dollar weighted average rating of AA, an average
duration of 2.76 years and an average yield to maturity of 5.45 percent, before
investment expenses.
During 1998, the Company reduced it's exposure to emerging market debt
securities from $144.5 million at December 31, 1997 to $58.8 million at December
31, 1998. The Company's investment portfolio, specifically the remaining
allocation of emerging market debt securities, is subject to the risks of
further declines in realizable value. The Company attempts to mitigate this risk
through the active management of its portfolio.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked securities
and derivative instruments under which losses could be triggered by an industry
loss index or natural parameters. For the year ended December 31, 1998, the
Company's activities with respect to these securities has approximated $3
million of fees and risk premiums. To date the Company has not experienced any
losses from such securities or derivatives. In the fourth quarter of 1998, the
Company recorded a recovery of $7.5 million on a non-indemnity catastrophe index
transaction. This amount was included in other income. The Company may in the
future utilize other derivative instruments.
MARKET SENSITIVE INSTRUMENTS
In accordance with the Securities and Exchange Commission's Financial Reporting
Release No. 48, the Company's investment portfolio includes investments which
are subject to changes in market values with changes in interest rates. The
aggregate hypothetical loss generated from an immediate adverse parallel shift
in the treasury yield curve of 100 basis points would cause a decrease in total
return of 3.2 percent, which equates to a decrease in market value of
approximately $28 million on a portfolio valued at $877 million at December 31,
1998. An immediate time horizon was used as this presents the worst-case
scenario.
CURRENCY
The Company's functional currency is the United States ("U.S.") dollar. The
Company writes a substantial portion of its business in currencies other than
U.S. dollars and may, from time to time, experience significant exchange gains
and losses and incur underwriting losses in currencies other than U.S. dollars,
which will in turn affect the Company's financial statements. See Note 2 to the
Consolidated Financial Statements.
The Company's foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including loss reserves and reinsurance balances payable.
All changes in the exchange rates are recognized currently in the Company's
statement of income. As a result of the Company's exposure to foreign currency
fluctuations, it is anticipated that during periods in which the U.S. dollar
appreciates, the Company will likely recognize foreign exchange losses.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on the
Company are implicitly considered in the
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24 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 25
- - --------------------------------------------------------------------------------
Company's catastrophe loss models. The effects of inflation are also considered
in pricing and in estimating reserves for unpaid claims and claim adjustment
expenses. The actual effects of inflation on the results of the Company cannot
be accurately known until claims are ultimately settled.
YEAR 2000 READINESS DISCLOSURES
Certain computer programs and embedded computer chips use only the last two
digits to refer to a year. Therefore, during computer operations, the "00" may
be interpreted as being the year 1900, instead of the Year 2000. If not
corrected, many computer systems could fail or create erroneous results.
Computer systems, equipment and programs that are free from the Year 2000
problem are generally referred to as being compliant.
Year 2000 - Internal Systems
The Company has completed an assessment of its internal business applications
and computer systems, including those used in underwriting, policy processing
and recording policy details. The Company believes that all critical business
applications and systems will function properly with respect to dates associated
with the Year 2000 problem. The Company has backup systems in place for power,
certain infrastructure facilities and computer systems in the event of such
system failures. While there can be no assurance that these systems will be free
from failure, the Company believes that any failure from its internal systems
will not materially impact the Company's results of operations or financial
condition.
Year 2000 Exposure from Third Parties; Contingency Plan
The Company has evaluated its potential exposures from the non-compliance,
if any, of its vendors' and customers' systems with the Year 2000. The Company
does not believe that there will be any significant disruption of business from
such vendors and customers. However, there can be no assurance that the systems
of its vendors and customers, on which the Company relies for supporting
information and certain services, will be Year 2000 compliant and will not have
an adverse effect on the Company's business operations, financial results or
financial condition.
The Company has a contingency plan in the event that certain communication
systems, key utilities, or vendor systems prove not to be Year 2000 compliant.
However, the Company realizes that any reasonable contingency plan cannot
accurately account for all possible scenarios which may arise as a result of
Year 2000 related computer problems. The Company evaluates the status of its
Year 2000 exposures and modifies its contingency plan as needed.
Year 2000 Policy Coverage
In addition to the risks and costs associated with its internal systems and
third party vendors, the Company continues to evaluate its underwriting risk
arising from potential losses associated with Year 2000 failures. Variables
which may affect the pervasiveness and severity of Year 2000 problem include,
but are not limited to, the magnitude of the amount of costs and expenses
directly attributable to Year 2000 failures, the portion of such amount, if any,
that constitutes insurable losses, and the extent of governmental intervention.
The Company does not believe that Year 2000 losses should be covered under the
standard forms of contracts that it provides. However, some Year 2000 related
losses may or may not be determined to be covered under standard insurance and
reinsurance contracts, depending upon the specific contract language, the
applicable case law, and the facts and circumstances of each loss. The Company's
Year 2000 initiative seeks to minimize its potential Year 2000 underwriting
exposure by (1) performing an underwriting evaluation of potential Year 2000
exposures; (2) non-renewing certain contracts where the Company believes the
potential risk from Year 2000 losses is too great, and (3) structuring
reinsurance contractual language to mitigate potential exposure. The Company
cannot be certain that these steps will adequately minimize its Year 2000
underwriting exposures, and given the potential magnitude of the Year 2000
problem, it is possible, the Company may incur Year 2000 insurance coverage
related losses. The Company believes it is taking reasonable and appropriate
measures in the course of its business operations and client relationship to
mitigate such Year 2000 related exposures.
CURRENT OUTLOOK
As discussed in Note 8 to the Consolidated Financial Statements, and in
Financial Condition - Nobel, during the fourth quarter of 1998, Nobel recorded
an after tax charge of $40.1 million. As a result of this charge, the Company
has decided to sell or reinsure the remaining businesses and reserves of Nobel.
Based on the above, it is anticipated that the gross premiums written in 1999
related to Nobel will be substantially lower than the $31 million of gross
premiums
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
written in 1998. At this time, there can be no guaranty, that the completion of
the sale and reinsurance transactions will occur, and if they do occur, there
can be no guaranty that the Company will receive its estimated fair value of the
Nobel businesses. Accordingly, the future results of the Company's operations
could be adversely affected by a potential write-down of goodwill, a partial
write-off of the deferred tax asset and other costs or loss in value which could
occur during the transaction process.
It is anticipated that the competitive pressures in the property
catastrophe reinsurance market that have existed since 1995 will continue
through 1999. During the past four years, these pressures have suppressed the
premiums for property catastrophe coverages. However, partially as a result of
the $10.1 billion of U. S. catastrophe losses reported in 1998, as estimated by
Property Claims Services, the Company believes that the rate reductions, which
have been evident in the past four years, may subside. Also, the Company
believes that opportunities in certain select markets will continue to exist
which, because of the Company's competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, should enable the Company to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
The Company has entered the primary insurance business, focusing
particularly on catastrophe exposed business, with a view to leveraging the risk
assessment skills of the core reinsurance business. In addition, the Company
will continue to evaluate other new business opportunities, which may be related
or unrelated to its current insurance or reinsurance businesses.
The Company's financial strength has enabled it to pursue these
opportunities outside of the property catastrophe reinsurance market and into
the catastrophe exposed primary insurance market. The Company believes that its
financial strength will enable it to continue to pursue other opportunities in
the future, however, there can be no assurance that the Company's pursuit of
such opportunities will materially impact the Company's financial condition and
results of operations.
During recent fiscal years, there has been considerable consolidation among
the leading reinsurance brokerage firms; whereby 64.2 percent of the Company's
assumed premiums are sourced from five reinsurance brokers. Although there can
be no assurance as to how this consolidation may affect the property catastrophe
reinsurance business and the business of the Company, the Company believes that
its valued relationships with the brokers will minimize any effect on the
Company's business.
Also, during recent fiscal years, there has been considerable consolidation
among the Company's customers which has been a partial contributor to the
reduction of the Company's premiums. Although this consolidation may continue to
occur, the Company believes that its financial strength, its position as one of
the market leaders in the property catastrophe reinsurance industry and its
ability to provide innovative products to the industry will minimize any effect
on the Company's business.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Currently, the Company does not expect the adoption of SFAS No. 133 to have a
material impact on its consolidated financial statements.
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26 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 27
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========================================
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL STATEMENTS
========================================
Management is responsible for the integrity of the consolidated financial
statements and other financial information presented in this annual report. The
accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, applying certain
estimates and judgements as required.
The Company's internal controls are designed so that transactions are
authorized and executed in accordance with management's authorization, to
provide reasonable assurance as to the integrity and reliability of the
financial statements and to adequately safeguard the assets against unauthorized
use or disposition. Such controls are based on established policies and
procedures and are implemented by qualified personnel with an appropriate
segregation of duties.
Ernst & Young, independent auditors, are retained to audit the Company's
consolidated financial statements and express their opinion thereon. Their
accompanying report is based on audits conducted in accordance with auditing
standards generally accepted in the United States, which includes the
consideration of the Company's internal controls and an examination, on a test
basis, of evidence supporting the amounts and disclosures in the financial
statements. These procedures enable them to obtain a reasonable assurance about
whether the financial statements are free of material misstatement and provide a
reasonable basis for their opinion.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with the independent auditors, both privately and with management present, to
review accounting, auditing, internal controls and financial reporting matters.
/s/ James N. Stanard /s/ John M. Lummis
James N. Stanard John M. Lummis
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
========================================
REPORT OF INDEPENDENT AUDITORS
========================================
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF RENAISSANCERE HOLDINGS LTD.:
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young
Hamilton, Bermuda
January 26, 1999
- - --------------------------------------------------------------------------------
Consolidated
- - --------------------------------------------------------------------------------
====================
BALANCE SHEETS
====================
RenaissanceRe Holdings Ltd. and Subsidiaries
At December 31, (in thousands of United States dollars, except per share amounts) 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Assets
Investments and cash
Fixed maturity investments available for sale, at fair value $ 799,995 $ 700,665
(Amortized cost $804,968 and $712,946 at December 31, 1998
and 1997, respectively)(Note 3)
Equity securities, at fair value (cost $1,801 and $24,229 at
December 31, 1998 and 1997, respectively)(Note 3) 1,630 26,372
Short term investments, at cost 24,983 9,501
Cash and cash equivalents 115,701 122,929
---------------------------------
Total investments and cash 942,309 859,467
Reinsurance premiums receivable 96,761 56,568
Ceded reinsurance balances 41,370 17,454
Losses and premiums recoverable (Note 4) 200,379 --
Accrued investment income 9,968 12,762
Deferred acquisition costs 10,997 5,739
Other assets 54,380 8,759
---------------------------------
Total Assets $ 1,356,164 $ 960,749
---------------------------------
Liabilities, Minority Interests and Shareholders' Equity
Liabilities
Reserve for claims and claim expenses (Note 5) $ 298,829 $ 110,037
Reserve for unearned premiums 94,466 57,008
Bank loans (Note 6) 100,000 50,000
Reinsurance balances payable 121,658 21,778
Other 28,979 9,541
---------------------------------
Total Liabilities 643,932 248,364
---------------------------------
Minority interest - Company obligated, mandatorily redeemable capital securities
of a subsidiary trust holding solely junior subordinated
debentures of the Company (Note 7) 100,000 100,000
Minority interest - Glencoe -- 13,682
Commitments and contingencies (Note 18)
Shareholders' Equity (Note 9)
Common Shares: $1 par value-authorized 225,000,000 shares;
issued and outstanding at December 31, 1998 - 21,645,913
shares (1997 - 22,440,901 shares) 21,646 22,441
Additional paid-in capital 17,389 52,481
Unearned stock grant compensation (Note 16) (8,183) (4,731)
Accumulated other comprehensive income (5,144) (10,155)
Retained earnings 586,524 538,667
---------------------------------
Total Shareholders' Equity 612,232 598,703
---------------------------------
Total Liabilities, Minority Interests and Shareholders' Equity $ 1,356,164 $ 960,749
---------------------------------
Book value per Common Share $ 28.28 $ 26.68
---------------------------------
See accompanying notes to the consolidated financial statements.
- - --------------------------------------------------------------------------------
28 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 29
- - --------------------------------------------------------------------------------
Consolidated
- - --------------------------------------------------------------------------------
========================
STATEMENTS OF INCOME
========================
RenaissanceRe Holdings Ltd. and Subsidiaries
Years Ended December 31, 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
(in thousands of United States dollars, except per share amounts)
Revenues
Gross premiums written $ 270,460 $ 228,287 $ 269,913
-------------------------------------------------
Net premiums written $ 195,019 $ 195,752 $ 251,564
Decrease in unearned premiums 9,928 15,738 1,264
-------------------------------------------------
Net premiums earned 204,947 211,490 252,828
Net investment income (Note 3) 52,834 49,573 44,280
Foreign exchange gains (losses) (153) (3,442) 789
Other income 9,789 -- --
Net realized losses on investments (Note 3) (6,890) (2,895) (2,938)
-------------------------------------------------
Total Revenues 260,527 254,726 294,959
-------------------------------------------------
Expenses
Claims and claim expenses incurred (Note 5) 112,752 50,015 86,945
Acquisition costs 26,506 25,227 26,162
Operational expenses 34,525 25,131 16,731
Corporate expenses 18,924 3,218 2,298
Interest expense 4,473 4,271 6,553
-------------------------------------------------
Total Expenses 197,180 107,862 138,689
-------------------------------------------------
Income before minority interests and taxes 63,347 146,864 156,270
Minority interest - Company obligated, mandatorily
redeemable capital securities of a subsidiary trust
holding solely junior subordinated debentures of the
Company (Note 7) (8,540) (6,998) --
Minority interest - Glencoe (705) (617) (110)
-------------------------------------------------
Income before taxes 54,102 139,249 156,160
Income tax benefit (Note 13) 20,475 -- --
-------------------------------------------------
Net Income Available to Common Shareholders $ 74,577 $ 139,249 $ 156,160
-------------------------------------------------
Earnings per Common Share - basic $ 3.39 $ 6.19 $ 6.15
Earnings per Common Share - diluted $ 3.33 $ 6.06 $ 6.01
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
- - --------------------------------------------------------------------------------
Consolidated
- - --------------------------------------------------------------------------------
======================================
STATEMENTS OF SHAREHOLDERS' EQUITY
======================================
RenaissanceRe Holdings Ltd. and Subsidiaries
Years Ended December 31, (in thousands of United States dollars) 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
Common stock
Balance -- January 1 $ 22,441 $ 23,531 $ 25,605
Exercise of stock options 104 248 11
Net stock grants awarded 122 175 --
Repurchase of shares (1,021) (1,513) (2,085)
-------------------------------------------------
Balance -- December 31 21,646 22,441 23,531
-------------------------------------------------
Paid-in capital
Balance -- January 1 52,481 102,902 174,370
Exercise of stock options 769 (3,640) (93)
Secondary registration costs -- (1,300) (515)
Net stock grants awarded 5,842 6,464 --
Repurchase of shares (41,703) (51,945) (70,860)
-------------------------------------------------
Balance -- December 31 17,389 52,481 102,902
-------------------------------------------------
Unearned stock grant compensation & loans to officers
Balance -- January 1 (4,731) (3,868) (2,728)
Net stock grants awarded (5,964) (4,731) --
Amortization / reduction on loans 2,512 3,868 (1,140)
-------------------------------------------------
Balance -- December 31 (8,183) (4,731) (3,868)
-------------------------------------------------
Accumulated other comprehensive income
Balance -- January 1 (10,155) 1,577 2,699
Net unrealized gains (losses) on securities, net of
adjustment (see disclosure) 5,011 (11,732) (1,122)
-------------------------------------------------
Balance -- December 31 (5,144) (10,155) 1,577
-------------------------------------------------
Retained earnings
Balance -- January 1 538,667 422,061 286,390
Net income 74,577 139,249 156,160
Dividends paid (26,720) (22,643) (20,489)
-------------------------------------------------
Balance -- December 31 586,524 538,667 422,061
-------------------------------------------------
Total shareholders' equity $ 612,232 $ 598,703 $ 546,203
-------------------------------------------------
Comprehensive Income
Net income $ 74,577 $ 139,249 $ 156,160
Change in comprehensive income 5,011 (11,732) (1,122)
-------------------------------------------------
Comprehensive income $ 79,588 $ 127,517 $ 155,038
-------------------------------------------------
Disclosure Regarding Net Unrealized Gains (Losses)
Net unrealized holding losses arising during period $ (1,879) $ (14,627) $ (4,060)
Net realized losses included in net income 6,890 2,895 2,938
-------------------------------------------------
Net unrealized gains (losses) on securities $ 5,011 $ (11,732) $ (1,122)
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
- - --------------------------------------------------------------------------------
30 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 31
- - --------------------------------------------------------------------------------
Consolidated
- - --------------------------------------------------------------------------------
============================
STATEMENTS OF CASH FLOWS
============================
RenaissanceRe Holdings Ltd. and Subsidiaries
Years Ended December 31, (in thousands of United States dollars) 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
Net income $ 74,577 $ 139,249 $ 156,160
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 14,488 1,121 296
Realized loss on investments 6,890 2,895 2,938
Reinsurance balances, net 54,187 3,823 16,906
Ceded reinsurance balances (34,245) 2,328 (17,756)
Accrued investment income 3,572 1,151 938
Reserve for unearned premiums 5,132 (8,610) 5,173
Reserve for claims and claim expenses, net (8,530) 4,617 4,976
Other, net (13,579) 6,710 2,197
-------------------------------------------------
Net cash provided by operating activities 102,492 153,284 171,828
-------------------------------------------------
Cash Flows Applied to Investing Activities:
Proceeds from maturities and sales of investments 783,735 697,532 317,582
Purchase of investments available for sale (828,299) (829,193) (404,888)
Net sales (purchases) of short-term investments (2,189) -- 4,988
Purchase of equities -- (81,452) --
Proceeds from sale of equities 30,550 57,958 --
Purchase of minority interest in Glencoe (15,204) (5,185) --
Proceeds from sale of minority interest in Glencoe -- 3,000 15,126
-------------------------------------------------
Net cash applied to investing activities (31,407) (157,340) (67,192)
-------------------------------------------------
Cash Flows Applied to Financing Activities:
Purchase of Common Shares (42,724) (53,458) (73,460)
Net proceeds from (repayment of) bank loan 50,000 (100,000) 50,000
Acquisition of subsidiary, net of cash acquired (58,869) -- --
Proceeds from issuance of Capital Securities -- 100,000 --
Dividends paid (26,720) (22,643) (20,489)
Repayments from (loans to) officers -- 4,104 (868)
-------------------------------------------------
Net cash applied to financing activities (78,313) (71,997) (44,817)
-------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (7,228) (76,053) 59,819
Cash and Cash Equivalents, Beginning of Year 122,929 198,982 139,163
-------------------------------------------------
Cash and Cash Equivalents, End of Year $ 115,701 $ 122,929 $ 198,982
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
========================
NOTES
TO CONSOLIDATED
FINANCIAL STATEMENTS
========================
(amounts in tables in thousands of dollars, except per share amounts)
Note 1. Organization
- - --------------------------------------------------------------------------------
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), was formed under the laws of
Bermuda on June 7, 1993 and serves as the holding company for its subsidiaries,
Renaissance Reinsurance Ltd., ("Renaissance Reinsurance"), Glencoe Insurance
Ltd., ("Glencoe"), Renaissance U.S. Holdings, Inc. ("Renaissance U.S.") and
RenaissanceRe Capital Trust (the "Trust"). Renaissance Reinsurance commenced
underwriting operations on June 15, 1993 and provides property catastrophe and
reinsurance coverage to insurers and reinsurers on a worldwide basis. Glencoe
commenced insurance underwriting operations on January 2, 1996 and provides
catastrophe exposed property coverage on an insurance and reinsurance basis.
In January 1998, the Company began to provide personal lines coverages
through DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of
Glencoe. DeSoto is a special purpose Florida homeowners insurance company that
is licensed to assume and renew homeowners policies from the Florida Joint
Underwriting Association, a state sponsored insurance company.
On June 25, 1998, Renaissance U.S. completed its acquisition of the U.S.
operating subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel
Limited"), for $56.1 million. See Note 8.
In October 1998, Renaissance Reinsurance of Europe ("Renaissance Europe")
was incorporated under the laws of Ireland as a wholly owned subsidiary of
Renaissance Reinsurance to provide certain property catastrophe reinsurance
coverage in Europe.
Note 2. Significant Accounting Policies
- - --------------------------------------------------------------------------------
Basis of presentation
The consolidated financial statements have been prepared on the basis of United
States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe and its subsidiaries, which are collectively referred
to herein as the "Company". All intercompany transactions and balances have been
eliminated on consolidation. Minority interests represent the interests of
external parties in respect of net income and shareholders' equity of Glencoe
and the Trust (See Note 7). Certain comparative information has been
reclassified to conform with the current year presentation.
Use of estimates in financial statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported and
disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Premiums and related expenses
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on policy and contract terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserve for unearned premiums represents the portion of premiums
written that relate to the unexpired terms of contracts and
- - --------------------------------------------------------------------------------
32 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 33
- - --------------------------------------------------------------------------------
policies in force. Such reserves are computed by pro-rata methods based on
statistical data or reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage
expenses incurred at the time a contract or policy is issued, are deferred and
amortized over the period in which the related premiums are earned. Deferred
policy acquisition costs are limited to their estimated realizable value based
on the related unearned premiums. Anticipated claims and claim expenses, based
on historical and current experience, and anticipated investment income related
to those premiums are considered in determining the recoverability of deferred
acquisition costs.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management. For retroactive reinsurance contracts, the amount by which
liabilities associated with the reinsured policies exceed the amount paid for
reinsurance coverage is deferred and amortized into income using the recovery
method.
Claims and claim expenses
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves, and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in the consolidated statement
of income in the period in which they become known and are accounted for as
changes in estimates.
Investments and cash
Investments are considered available for sale and are reported at fair value.
The net unrealized appreciation or depreciation on investments is included in
accumulated other comprehensive income. Investment transactions are recorded on
the trade date with balances pending settlement reflected in the balance sheet
as a component of other assets.
Realized gains or losses on the sale of investments are determined on the
basis of the specific identification method and include adjustments to the net
realizable value of investments for declines in value that are considered to be
other-than-temporary. Net investment income includes interest and dividend
income together with amortization of market premiums and discounts and is net of
investment management and custody fees. The amortization of premium and
accretion of discount for fixed maturity securities is computed utilizing the
interest method. The effective yield utilized in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when such prices are not available, by reference to broker or underwriter bid
indications.
Short term investments, which have a maturity of one year or less when
purchased, are carried at cost which approximates fair value. For the purposes
of the statements of cash flows, cash equivalents include money market
instruments with a maturity of ninety days or less when purchased.
Goodwill
The Company amortizes goodwill recorded in connection with its business
combinations on a straight-line basis over the expected recovery period,
principally twenty years. Goodwill is periodically reviewed for impairment and
amounts deemed unrecoverable are adjusted accordingly. Goodwill is included in
other assets on the consolidated balance sheet and is expensed through corporate
expenses in the consolidated statement of income.
Earnings per share
Basic earnings per share is based on weighted average common shares and excludes
any dilutive effects of options and restricted stock. Diluted earnings per share
assumes the exercise of all dilutive stock options and restricted stock grants.
See Note 10.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Foreign exchange
The Company's functional currency is the United States dollar. Revenues and
expenses denominated in foreign currencies are translated at the prevailing
exchange rate at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates in effect at
the balance sheet date, which may result in the recognition of exchange gains or
losses which are included in the determination of net income.
Stock incentive compensation plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under SFAS No. 123 requires the use of option
valuation models that were not necessarily developed for use in valuing employee
stock options. It is the opinion of management that disclosure of the pro-forma
impact of fair values provides a more relevant and informative presentation of
the impact of stock options issued to employees than financial statement
recognition of such amounts. Under APB 25, the Company recognizes compensation
expense for stock option grants to the extent that the fair value of the stock
exceeds the stock option exercise price at the measurement date.
Taxation
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is established for any portion of a deferred tax asset that
management believes will not be realized.
New accounting pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires an enterprise to (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately in the
equity section of a statement of financial position. SFAS No. 130 requires net
unrealized appreciation (depreciation) on the Company's available for sale
investments, which were previously reported separately in shareholders' equity,
to be included in other comprehensive income. Prior year financial statements
have been reclassified to conform to the 1998 presentation. The adoption of this
accounting statement had no financial impact on the Company's net income or
shareholders' equity. Currently, other than the net unrealized loss on the
Company's investments available for sale, there are no other Company balances
which are required to be included as a component of other comprehensive income.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which revises disclosure requirements
about operating segments and establishes standards for related disclosures about
geographic areas and major customers. SFAS No. 131 requires that public business
enterprises report financial and descriptive information about their reportable
operating segments. The Company's reportable operating segments are the
reinsurance and primary insurance segments. The statement requires presentation
of prior year comparative information.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Currently, the Company does not expect the adoption of SFAS No. 133 to have a
material impact on its consolidated financial statements.
- - --------------------------------------------------------------------------------
34 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 35
- - --------------------------------------------------------------------------------
Note 3. Investments
- - --------------------------------------------------------------------------------
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
- - ---------------------------------------------------------------------------------------------------------------
Gross Gross
December 31, 1998 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------
U.S. Government bonds $560,068 $5,183 $ (641) $564,610
Non-U.S. government bonds 34,694 -- (4,067) 30,627
Non-U.S. corporate bonds 73,192 1,822 (8,044) 66,970
U.S. corporate bonds 137,014 1,599 (825) 137,788
------------------------------------------------------------------
$804,968 $8,604 $(13,577) $799,995
------------------------------------------------------------------
Gross Gross
December 31, 1997 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------
U.S. Government bonds $248,287 $ 15 $ (18) $248,284
Non-U.S. government bonds 263,463 1,892 (8,512) 256,843
Non-U.S. corporate bonds 194,320 1,808 (7,513) 188,615
Non-U.S. mortgage-backed securities 6,876 47 -- 6,923
------------------------------------------------------------------
$712,946 $3,762 $(16,043) $700,665
------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------
The gross unrealized gains and losses on equity securities were as follows:
- - ---------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
- - ---------------------------------------------------------------------------------------------------------------
Equity securities, December 31, 1998 $ 1,801 $ -- $ (171) $ 1,630
- - ---------------------------------------------------------------------------------------------------------------
Equity securities, December 31, 1997 $ 24,229 $ 3,777 $ (1,634) $ 26,372
- - ---------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Contractual maturities of fixed maturity securities are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
- - --------------------------------------------------------------------------------
December 31, 1998 Amortized Fair
Cost Value
------------------------
Due within one year $192,392 $193,680
Due after one through
five years 393,213 393,750
Due after five through
ten years 123,355 121,388
Due after ten years 96,008 91,177
-------------------------
$804,968 $799,995
-------------------------
- - --------------------------------------------------------------------------------
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by ratings assigned by rating agencies (e.g. Standard &
Poor's Corporation) or, with respect to non-rated issues, as estimated by the
Company's investment managers.
- - --------------------------------------------------------------------------------
At December 31, 1998 1997
-----------------------
AAA 70.9% 56.9%
AA 4.3 12.2
A 9.2 14.9
BBB 3.7 5.0
BB 5.2 4.9
B 2.2 6.1
NR 4.5 --
----------------------
100.0% 100.0%
----------------------
- - --------------------------------------------------------------------------------
Investment income
The components of net investment income are as follows:
- - --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
---------------------------------------
Fixed
maturities $45,392 $42,183 $36,335
Short term
investments 2,354 -- 53
Cash and cash
equivalents 6,831 9,338 9,460
--------------------------------------
54,577 51,521 45,848
Investment
expenses 1,743 1,948 1,568
--------------------------------------
Net investment
income $52,834 $49,573 $44,280
--------------------------------------
- - --------------------------------------------------------------------------------
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
- - --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
---------------------------------------
Gross realized gains $ 13,192 $ 4,741 $ 1,240
Gross realized losses (20,082) (7,636) (4,178)
---------------------------------------
Net realized losses
on investments (6,890) (2,895) (2,938)
Unrealized gains
(losses) 5,011 (11,732) (1,122)
---------------------------------------
Total realized and
unrealized losses
on investments $ (1,879) $(14,627) $ (4,060)
---------------------------------------
- - --------------------------------------------------------------------------------
Proceeds from maturities and sales of fixed maturity investments were $783.7
million, $697.5 million and $317.6 million for the years ended December 31,
1998, 1997 and 1996, respectively. Proceeds from the sales of equity securities
were $30.5 million and $58.0 million for the years ended December 31, 1998 and
1997.
At December, 31 1998 and 1997 approximately $21.0 million and $15.0 million,
respectively, of cash and investments at fair value were on deposit with various
regulatory authorities as required by law.
- - --------------------------------------------------------------------------------
36 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 37
- - --------------------------------------------------------------------------------
Derivative Instruments
The Company has assumed and ceded risk through catastrophe and weather linked
securities and derivative instruments under which losses or recoveries are
triggered by an industry loss index or geological or physical variables. Net
related fees and risk premiums assumed and ceded are not material to the
Company's operations. During 1998, the Company recognized a gain on a
non-indemnity catastrophe index transaction of $7.5 million which is included as
a component of other income.
NOTE 4. CEDED REINSURANCE
- - --------------------------------------------------------------------------------
The Company utilizes reinsurance to reduce its exposure to large losses. The
Company currently has in place contracts that provide for recovery of a portion
of certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. The Company would remain liable to the extent
that any reinsurance company fails to meet its obligations . The earned
reinsurance premiums ceded were $68.1 million, $25.1 million and $12.9 million
for 1998, 1997 and 1996, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance
contracts also provide for recoveries of additional premiums, reinstatement
premiums and lost no claims bonuses which are incurred when losses are ceded to
these reinsurance contracts. Total recoveries netted against premiums and claims
and claim expenses incurred for the year ended December 31, 1998 were $110.1
million.
Included in losses and premiums recoverable are recoverables of $79.4
million related to retroactive reinsurance agreements. In accordance with SFAS
No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts", adverse development related to these retroactive
reinsurance contracts is required to be included in claims and claim expenses
incurred as it becomes known. However, the offsetting recoverable is deferred
and reflected in the statement of income based on the recovery method. As of
December 31, 1998, the Company has deferred $27.6 million of recoveries related
to retroactive reinsurance contracts. This has been included in reinsurance
balances payable on the consolidated balance sheet. In future years, as the
amounts are recovered, the recoveries will offset claims and claim expenses
incurred in the consolidated statement of income.
NOTE 5. RESERVE FOR CLAIMS
AND CLAIM EXPENSES
- - --------------------------------------------------------------------------------
For the Company's reinsurance operations estimates of claims and claim expenses
are based in part upon the estimation of claims resulting from catastrophic
events. Estimation by the Company of claims resulting from catastrophic events
based upon its own historical claim experience is inherently difficult because
of the Company's short operating history and the potential severity of property
catastrophe claims. Therefore, the Company utilizes both proprietary and
commercially available models, as well as historical reinsurance industry
property catastrophe claims experience, for purposes of evaluating future trends
and providing an estimate of ultimate claims costs.
On both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to reasonably estimate ultimate expected
claims and claim expenses. The period of time from the reporting of a loss to
the Company, and the settlement of the Company's liability may be several years.
During this period, additional facts and trends will be revealed. As these
factors become apparent, case reserves will be adjusted, sometimes requiring an
increase in the overall reserves of the Company, and at other times requiring a
reallocation of IBNR reserves to specific case reserves. These estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Activity in the liability for unpaid claims and claim expenses is summarized as
follows:
- - ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
--------------------------------------------
Reserves as of January 1 $110,037 $105,421 $100,445
Net reserves assumed in respect of acquired company 55,317 -- --
Net incurred related to:
Current year 96,431 50,015 75,118
Prior years 16,321 -- 11,827
--------------------------------------------
Total net incurred 112,752 50,015 86,945
--------------------------------------------
Net paid related to:
Current year 49,671 3,740 26,415
Prior years 30,923 41,659 55,554
--------------------------------------------
Total net paid 80,594 45,399 81,969
--------------------------------------------
Total net reserves as of December 31 197,512 110,037 105,421
Losses recoverable as of December 31 101,317 -- --
--------------------------------------------
Total gross reserves as of December 31 $298,829 $110,037 $105,421
--------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
The prior year development in 1998 was due primarily to adverse development in
the Nobel Insurance Company ("Nobel") surety and casualty losses partially
offset by favorable development on property catastrophe reserves for 1997 and
prior years. The Company had no development of prior year reserves in 1997.
During 1996, the Company incurred $11.8 million of claims and claim expenses for
1995 and prior periods primarily as a result of reserve increases for claims
related to the Northridge, California earthquake and a retrocessional quota
share contract. The additional development on both of these claims was partially
offset by additional premiums received under the reinsured contracts. The
Company's total gross reserve for incurred but not reported claims was $135.4
million as of December 31, 1998 (1997- $66.5 million).
NOTE 6. BANK LOANS
- - --------------------------------------------------------------------------------
The Company has a $200 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. Interest rates on the facility
are based on a spread above LIBOR and have averaged 6.12 percent during 1998
(6.07 percent in 1997). The credit agreement contains certain financial
covenants including requirements of a consolidated debt to capital ratio of
0.35:1; a consolidated net worth of not less than 125 percent of consolidated
debt; and 80 percent of invested assets to be rated BBB- or better. As at
December 31, 1998, and 1997, the Company had $50 million outstanding under the
facility. Under the terms of the agreement, and if the Company is in compliance
with the covenants thereunder, the Company has access to an additional $150
million should the need arise. The Company was in compliance with all the
covenants of this revolving credit and term loan agreement as at December 31,
1998.
In conjunction with the purchase of Nobel, Renaissance U.S. has a $35 million
term loan and $15 million revolving loan facility with a syndicate of commercial
banks. Interest rates on the facility are based upon a spread above LIBOR, and
averaged 6.03 percent during 1998. The Credit Agreement contains certain
financial covenants, the primary one being that, RenaissanceRe, being its
principal guarantor, maintain a ratio of liquid assets to debt service of 4:1.
This
- - --------------------------------------------------------------------------------
38 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 39
- - --------------------------------------------------------------------------------
five year term loan has mandatory repayment provisions approximating 25 percent
in each of years two through five. The Company was in compliance with all the
covenants of this term loan and revolving loan facility as at December 31, 1998.
Interest payments on the above loans totaled $4.4 million, $4.6 million and
$6.9 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Fair value of bank loans approximate the carrying values, because such loans
reprice frequently.
NOTE 7. CAPITAL SECURITIES
- - --------------------------------------------------------------------------------
On March 7, 1997 the Company issued $100 million of "Company Obligated,
Mandatorily Redeemable Capital Securities of a Subsidiary Trust holding solely
$103,092,783 of the Company's 8.54 percent Junior Subordinated Debentures due
March 1, 2027" ("Capital Securities") issued by the Trust. The Capital
Securities pay cumulative cash distributions at an annual rate of 8.54 percent,
payable semi-annually. Proceeds from the offering were used to repay a portion
of the Company's outstanding indebtedness. Effective September 11, 1997 the
Trust exchanged the Capital Securities for substantially the same securities
registered under the Securities Act of 1933. The Trust is a wholly owned
subsidiary of the Company and is consolidated into the Company's consolidated
financial statements. The Capital Securities and the related accrued dividends,
are reflected in the consolidated financial statements as a minority interest.
NOTE 8. ACQUISITION
- - --------------------------------------------------------------------------------
On June 25, 1998, the Company completed its acquisition of the U.S. operating
subsidiaries of Nobel Limited, for $56.1 million. The Company also provided
Nobel Limited with a limited recourse loan of $8.9 million to support the
liquidation of Nobel Limited. The Company currently estimates that Nobel
Limited, after satisfying its liabilities, will have the ability to repay $7.9
million of this loan, which is reflected in other assets. The gross assets and
gross liabilities purchased in the transaction were $188.1 million and $155.9
million, respectively, thereby resulting in the recognition of $23.9 million of
goodwill (subsequently written down to $14.0 million due to the fourth quarter
charge described below). The Company issued no shares as part of the purchase
and has accounted for this acquisition using the purchase method of accounting.
The Company partially financed the acquisition with bank debt. See Note 6.
During the fourth quarter of 1998, the Company recorded an after tax charge
of $40.1 million, consisting of $29.6 million of adverse development on Nobel
Insurance Company's ("Nobel") casualty and surety books of business, a goodwill
write-down of $6.6 million, and other related costs of $3.9 million. As a result
of these charges, the Company concluded that it was in the best interest of
shareholders to sell or reinsure the remaining Nobel businesses and reserves,
specifically the casualty, surety, low-value dwelling and bail bond businesses.
Nobel will continue to operate these business units during the sales process.
Subsequent to the sale of the remaining businesses, Renaissance U.S will retain
ownership of Nobel along with its licenses in the 50 states of America.
In conjunction with the fourth quarter charges, Renaissance U.S. has
recorded a deferred tax asset of $22.0 million, which is reflected in other
assets on the consolidated balance sheet. The Company believes the future
operations of Nobel, combined with other operating subsidiaries of Renaissance
U.S., will enable it to utilize the net operating loss carry-forward.
Contemporaneously with the Nobel acquisition, Nobel entered into a
retroactive reinsurance contract. This contract provides Nobel with $38 million
of protection from adverse development on its pre October 1, 1997 casualty book
of business. See Note 4.
NOTE 9. SHAREHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
On May 5, 1998, the shareholders voted to increase the authorized capital to an
aggregate of 325,000,000 shares consisting of 225,000,000 Common Shares and
100,000,000 Preference Shares. The Company's 225,000,000 authorized $1.00 par
value Common Shares consist of three separate series with differing voting
rights as follows:
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
December 31, 1998 Issued and
Authorized Outstanding
-------------------------------
Full Voting Common
Shares (the
Common Shares) 206,570,583 18,879,196
(includes all shares
registered and available
to the public)
Diluted Voting Class I
Common Shares 16,789,776 2,448,504
(the Diluted Voting
I Shares)
Diluted Voting Class II
Common Shares 1,639,641 318,213
(the Diluted Voting -------------------------------
II Shares)
225,000,000 21,645,913
-------------------------------
- - --------------------------------------------------------------------------------
The Diluted Voting I Shares and the Diluted Voting II Shares (together the
Diluted Voting Shares) were authorized at a special general meeting of
shareholders on December 23, 1996 and subsequent to the authorization,
affiliates of General Electric Investment Corporation exchanged 5.7 million
Common Shares for 4.2 million Diluted Voting I Shares and 1.5 million Diluted
Voting II Shares, and as such are the sole holders of such diluted voting
securities.
The Diluted Voting Shareholders vote together with the common shareholders.
The Diluted Voting I Shares are limited to a fixed voting interest in the
Company of up to 9.9 percent on most corporate matters. Each Diluted Voting II
Share has a one-third vote on most corporate matters. The Diluted Voting
Shareholders are entitled to the same rights, including receipt of dividends and
the right to vote on certain significant corporate matters, and are subject to
the same restrictions as the common shareholders. The Company currently does not
intend to register or list the Diluted Voting Shares on the New York Stock
Exchange.
In May and September of 1998 the Company announced share repurchase
programs of $25 million each. For the year ended December 31, 1998 the Company
repurchased a total of 1,020,670 Common Shares of the Company for an aggregate
price of $42.7 million.
On June 23, 1997, concurrent with a secondary offering, the Company
purchased for cancellation 700,000 Common Shares at $36.29 per share for an
aggregate price of $25.4 million from the Company's founding institutional
shareholders or their successors.
On December 13, 1996, the Board of Directors approved a capital plan which
was comprised of two components. First, the Company purchased 2,085,361 Common
Shares at $34.50 per share for an aggregate price of $71.9 million on a pro-rata
basis from its founding institutional investors. Second, on January 22, 1997 the
Company completed a fixed price tender offer for 813,190 Common Shares at $34.50
per share for an aggregate price of $28.1 million.
In November 1997, June 1997 and February 1996, the Company paid for the
costs of secondary offerings of the Company's Common Shares sold by the founding
institutional investors. The Company incurred costs of $0.6, $0.7 and $0.5
million, respectively, with respect to the registrations which are reflected as
a reduction to additional paid-in capital on the consolidated balance sheet.
NOTE 10. EARNINGS PER SHARE
- - --------------------------------------------------------------------------------
As of December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share."
The numerator in both the Company's basic and diluted earnings per share
calculations is identical. The following table sets forth the reconciliation of
the denominator from basic to diluted weighted average shares outstanding (in
thousands of per share amounts):
- - --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
------------------------------------
Weighted average
shares - basic 22,021 22,496 25,388
Per share equivalents
of employee stock
options and
restricted shares 407 471 607
------------------------------------
Weighted average
shares - diluted 22,428 22,967 25,995
------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
40 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 41
- - --------------------------------------------------------------------------------
NOTE 11. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
- - --------------------------------------------------------------------------------
The Company has in force several treaties with subsidiaries of The St. Paul
Companies, and affiliates of General Electric Investments ("GEI") covering
property catastrophe risks in several geographic regions. The terms of these
treaties were determined in arms length negotiations and the Company believes
that such terms are comparable to terms the Company would expect to negotiate in
similar transactions with unrelated parties. For the years ended December 31,
1998, 1997 and 1996, the Company received $13.7 million, $19.2 million and $27.9
million in reinsurance premiums and deposits related to these treaties,
respectively.
The Company currently has in place an investment advisory agreement with GE
Investment Management, an affiliate of GEI. GE Investment Management currently
manages 68.1 percent of the Company's investment portfolio, subject to the
Company's investment guidelines. The terms of the investment advisory agreement
was determined in arms length negotiations. The performance of, and the fees
paid to GE Investment Management are reviewed periodically by the Board. Such
fees paid to related party investment advisors aggregated to $0.4 million, $1.2
million and $1.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
During the years ended December 31, 1998, 1997 and 1996, the Company
received 64.2%, 70.1%, and 58.5%, respectively, of its premium assumed from its
five largest reinsurance brokers. Subsidiaries and affiliates of E. W. Blanch &
Co., J&H Marsh & McLennan, Inc., AON Re Group, Herbert Clough Inc., and Bates
Turner L.L.C. (a GE Capital Services Company, an affiliate of GEI) accounted for
approximately 23.2%, 18.8%, 12.6%, 5.4% and 4.2%, respectively, of the Company's
premiums written in 1998.
NOTE 12. DIVIDENDS
- - --------------------------------------------------------------------------------
During 1998, four regular quarterly dividends of $0.30 per share were paid to
shareholders of record as of February 18, May 20, August 19, and November 19.
During 1997, four regular quarterly dividends of $0.25 per share were paid to
shareholders of record as of February 19, May 22, August 20, and November 20.
During 1996, four regular quarterly dividends of $0.20 per share were paid to
shareholders of record as of February 20, May 16, August 20, and November 19.
The total amount of dividends paid to Common Shareholders during 1998, 1997 and
1996 was $26.7 million, $22.6 million and $20.5 million, respectively.
NOTE 13. TAXATION
- - --------------------------------------------------------------------------------
Under current Bermuda law, neither RenaissanceRe, Renaissance Reinsurance, nor
Glencoe are required to pay taxes in Bermuda on either income or capital gains.
Income from U.S. company operations is subject to taxes imposed by U.S.
authorities. Renaissance Europe will be subject to the taxation laws of Ireland.
The U.S. companies have a net operating loss carryforward of $16.1 million
which will be available to offset regular taxable U.S. income during the
carryforward period (through 2018). As of December 31, 1998 a deferred tax asset
of $22.0 million is included in other assets on the consolidated balance sheet.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
The income tax expense (benefit) consists of:
- - --------------------------------------------------------------------------------
Year Ended December 31, 1998
Current Deferred Total
-----------------------------------------
U.S. federal $ 1,580 $(22,191) $(20,611)
U.S. state and local 136 -- 136
-----------------------------------------
$ 1,716 $(22,191) $(20,475
-----------------------------------------
- - --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 are
presented below:
- - --------------------------------------------------------------------------------
1998
--------
Deferred tax assets:
Allowance for doubtful accounts $ 258
Unearned premiums 1,342
Claims reserves, principally due
to discounting for tax 4,497
Retroactive reinsurance gain 9,384
Net operating loss carryforwards 5,483
Accrued expenses 2,040
Other 711
--------
23,715
Deferred tax liabilities:
Deferred policy acquisition costs (643)
Unrealized gains (166)
Other (881)
--------
Net deferred tax asset $ 22,025
--------
- - --------------------------------------------------------------------------------
NOTE 14. GEOGRAPHIC INFORMATION
- - --------------------------------------------------------------------------------
Financial information relating to gross premiums by geographic region is as
follows:
Year Ended
December 31, 1998 1997 1996
- - --------------------------------------------------------------------------------
United States $191,658 $123,717 $126,611
Worldwide (exclu-
ding U.S.) 26,380 32,005 38,746
Worldwide 20,584 27,930 44,460
Europe (including
the United
Kingdom) 18,532 21,007 31,534
Other 9,374 16,738 18,958
Australia and
New Zealand 3,932 6,890 9,604
----------------------------------------
Total Gross
Premiums
Written $270,460 $228,287 $269,913
----------------------------------------
- - --------------------------------------------------------------------------------
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written is predominantly from Europe and Japan.
NOTE 15. SEGMENT REPORTING
- - --------------------------------------------------------------------------------
As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company has two
reportable segments: reinsurance operations and primary operations. The
reinsurance segment provides property catastrophe reinsurance as well as other
reinsurance to selected insurers and reinsurers on a worldwide basis. The
primary segment provides insurance both on a direct and on a surplus lines basis
for commercial and homeowners catastrophe-exposed property business. Also
included in the primary segment are commercial auto and general liability covers
as well as surety business which provides coverage to small and mid-size
contractors. Data for the three years ended December 31, 1998, 1997 and 1996 was
as follows:
- - --------------------------------------------------------------------------------
42 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 43
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 Reinsurance Primary Other Total
--------------------------------------------------------------
Gross premiums written $ 207,189 $ 63,271 $ -- $ 270,460
Total revenues 216,976 42,229 1,322 260,527
Pre-tax profit (loss) 126,768 (51,438) (21,228) 54,102
Assets 897,656 369,801 88,707 1,356,164
--------------------------------------------------------------
Claims and claim expense ratio 25.0% 200.2% -- 55.0%
Underwriting expense ratio 28.1% 37.1% -- 29.8%
--------------------------------------------------------------
Combined ratio 53.1% 237.3% -- 84.8%
--------------------------------------------------------------
Year Ended December 31, 1997
--------------------------------------------------------------
Gross premiums written $ 221,246 $ 7,041 $ -- $ 228,287
Total revenues 242,076 6,909 5,741 254,726
Pre-tax profit (loss) 146,209 2,421 (9,381) 139,249
Assets 795,043 84,211 81,495 960,749
--------------------------------------------------------------
Claims and claim expense ratio 23.6% 25.0% -- 23.7%
Underwriting expense ratio 22.6% 86.1% -- 23.8%
--------------------------------------------------------------
Combined ratio 46.2% 111.1% -- 47.5%
--------------------------------------------------------------
Year Ended December 31, 1996
--------------------------------------------------------------
Gross premiums written $ 268,361 $ 1,552 $ -- $ 269,913
Total revenues 289,645 2,780 2,534 294,959
Pre-tax profit (loss) 161,855 900 (6,595) 156,160
Assets 778,122 52,478 74,164 904,764
--------------------------------------------------------------
Claims and claim expense ratio 34.4% -- -- 34.3%
Underwriting expense ratio 16.2% * -- 17.0%
--------------------------------------------------------------
Combined ratio 50.6% -- -- 51.3%
--------------------------------------------------------------
* Primary expense ratio is not relevant for 1996, as this was the initial year of operations
and earned premium was $.2 million.
- - --------------------------------------------------------------------------------------------------
The activities of the Company's Bermuda and U.S. holding companies are the
primary contributors to the results reflected in the other segment. The pre tax
loss of the holding companies primarily consisted of interest expense on bank
loans, the minority interest on the Capital Securities, goodwill amortization
and goodwill writedowns related to Nobel, and realized investment losses on the
sales of investments, partially offset by investment income on the assets of the
holding companies.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NOTE 16. STOCK INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
- - --------------------------------------------------------------------------------
The Company has a stock option plan under which all employees of the Company and
its subsidiaries may be granted stock options. A stock option award under the
Company's stock option plan allows for the purchase of the Company's Common
Shares at a price that is generally equal to the five day average closing price
of the Common Shares prior to the date of grant. Options to purchase Common
Shares are granted periodically by the Board of Directors and generally expire
ten years from the date of grant.
The Company adopted the disclosure-only method under SFAS No. 123,
"Accounting for Stock Based Compensation", as of December 31, 1996, and
continues to account for stock-based compensation plans under Accounting
Principles Board Opinion No. 25. In accordance with SFAS No. 123, the fair value
of option grants is estimated on the date of grant using the Black-Scholes
option pricing model for pro-forma footnote purposes with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively;
dividend yield of 2.7, 2.5 and 2.5 percent, expected option life of five years
for all years, and expected volatility of 24.94, 25.09 and 25.09 percent. The
risk-free interest rate was assumed to be 5.5 percent in 1998, 6.0 percent in
1997 and 6.5 percent in 1996. If the compensation cost had been determined based
upon the fair value method recommended in SFAS No. 123, the Company's net income
would have been $71.8 million, $135.4 million and $155.4 million for each of
1998, 1997 and 1996, respectively, and the Company's earnings per share on a
diluted basis would have been $3.20, $5.89 and $5.98 for each of 1998, 1997 and
1996, respectively.
The following is a table of the changes in options outstanding for 1998,
1997 and 1996, respectively:
- - ------------------------------------------------------------------------------------------------------------------------------------
Options Weighted
available Options average exercise Fair value Range of exercise
for grant outstanding price of options prices
----------------------------------------------------------------------------------
Balance, December 31, 1995 1,998,350 901,650 $13.59
Options granted:
Exercise price at market price (424,349) 424,349 $29.41 $ 7.86 $29.25 - $29.55
Options exercised (28,738) $14.91
----------------------------------------------------------------------------------
Balance, December 31, 1996 1,574,001 1,297,261 $18.74
Authorized 1,000,000
Options granted:
Exercise price at market price (705,949) 705,949 $37.49 $ 9.67 $34.18 - $44.61
Options forfeited 144,436 (144,436) $28.91
Options exercised (571,967) $15.23
Shares turned in or withheld 114,287
Restricted stock issued (174,704)
Restricted stock forfeited 8,249
----------------------------------------------------------------------------------
Balance, December 31, 1997 1,960,320 1,286,807 $26.67
Options granted:
Exercise price at market price (486,079) 486,079 $45.05 $10.84 $34.97 - $48.00
Options forfeited 16,225 (16,225) $33.45
Options exercised (136,891) $17.69
Shares turned in or withheld 59,928
Restricted stock issued (136,313)
Restricted stock forfeited 461
----------------------------------------------------------------------------------
Balance, December 31, 1998 1,414,542 1,619,770 $35.62
----------------------------------------------------------------------------------
Total options exercisable at
December 31, 1998 581,227
- - ------------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
44 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 45
- - --------------------------------------------------------------------------------
During 1997, the shareholders approved an increase of 1,000,000 shares under the
Company's 1993 Amended Stock Incentive Plan. The total number of shares
available under the plan is 4,000,000 shares. The shareholders also approved the
issuance of share-based awards, the issuance of restricted Common Shares under
the plan and an adjustment in the calculation of shares available for issuance
thereunder by deeming the number of shares tendered to, or withheld by the
Company in connection with certain option exercises and in satisfaction of tax
withholding liabilities to be so available.
In 1996, the Company established a Non-Employee Director Stock Plan to
issue stock options and shares of restricted stock. In 1997, the shareholders
approved an increase of authorized shares available for issuance thereunder from
100,000 Common Shares to 200,000 Common Shares. In 1998, 6,000 options to
purchase Common Shares and 939 restricted Common Shares were granted. In 1997,
24,000 options to purchase Common Shares and 1,870 restricted Common Shares were
issued. The options and restricted Common Shares vest ratably over three years.
During 1997, the Company's Board of Directors approved an employee stock
bonus plan. Under the plan, eligible employees may elect to receive a grant of
Common Shares of up to 50 percent of their bonus in lieu of cash, with an
associated grant from the Company of an equal number of restricted shares. The
restricted Common Shares vest ratably over three years. During the restricted
period, the employee receives dividends and votes the restricted Common Shares,
but the restricted shares may not be sold, transferred or assigned. In 1998, the
Company issued 33,036 shares with a value of $1.5 million under this plan and in
1997, the Company issued 46,424 shares with a value of $1.7 million.
Additionally, during 1998 the Board of Directors granted 103,277 restricted
shares with a value of $4.5 million to certain executive officers. In 1997,
128,279 restricted shares with a value of $4.9 million were awarded to certain
executive officers. The shares granted to executive officers vest ratably over
four years. At the time of grant, the market value of the shares awarded under
these plans is recorded as unearned stock grant compensation and is presented as
a separate component of shareholders' equity. The unearned compensation is
charged to operations over the vesting period. Compensation expense related to
these plans was $2.5 million in 1998.
All of the Company's employees are eligible for defined contribution
pension plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 17. STATUTORY REQUIREMENTS
- - --------------------------------------------------------------------------------
Under the Insurance Act, 1978, amendments thereto and related regulations of
Bermuda ("The Act"), Renaissance Reinsurance and Glencoe are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires Renaissance Reinsurance and Glencoe to maintain
certain measures of solvency and liquidity during the period. As at December 31,
1998 the statutory capital and surplus of the Bermuda subsidiaries was $655.3
million and the amount required to be maintained under Bermuda law was $101
million.
Under the Act, Renaissance Reinsurance is classified as a Class 4 insurer,
and is therefore restricted as to the payment of dividends in the amount of 25
percent of the prior year's statutory capital and surplus, unless at least two
members of the board of directors attest that a dividend in excess of this
amount would not cause Renaissance Reinsurance to fail to meet its relevant
margins. During 1998, Renaissance Reinsurance paid aggregate cash dividends of
$102.1 million to RenaissanceRe.
Glencoe is also eligible as an excess and surplus lines insurer in a number
of states in America. There are various capital and surplus requirements in
these states, with the most onerous requiring the Company to maintain a minimum
of $15 million in capital and surplus. In this regard the declaration of
dividends from retained earnings and distributions from additional paid-in
capital are limited to the extent that the above requirements are met.
The Company's U.S. insurance subsidiaries are subject to various statutory
and regulatory restrictions regarding the payment of dividends. The restrictions
are primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amounted to $25.2 million at
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
December 31, 1998 and the amount required to be maintained was $20.7 million.
NOTE 18. COMMITMENTS AND CONTINGENCIES
- - --------------------------------------------------------------------------------
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and except for U.S. Government bonds, none of the Company's
investments exceeded 10 percent of shareholders' equity at December 31, 1998.
Concentrations of credit risk with respect to reinsurance balances are limited
due to their dispersion across various companies and geographies.
Financial instruments with off-balance sheet risk
Except for the derivatives discussed in Note 3, as of December 31, 1998 the
Company was not a party to any financial instruments that exposed the Company to
any off-balance sheet risks.
Letters of credit
As of December 31, 1998 the Company's bankers have issued letters of credit of
approximately $42.0 million in favor of certain ceding companies. The letters of
credit are secured by cash and investments of similar amounts.
Employment agreements
The Board of Directors has authorized the execution of employment agreements
between the Company and certain officers. These agreements provide for severance
payments under certain circumstances, as well as accelerated vesting of options
and restricted stock grants, under a change in control, as defined therein and
by the Company's stock option plan.
Employee Credit Facility
In June of 1997, the Company executed a credit facility in order to encourage
direct, long-term ownership of the Company's stock, and to facilitate purchases
of the Company's stock by officers of the Company. Under the terms of the
facility, the purchases are financed by personal loans to the officers from the
bank. Such loans are collateralized by the stock purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. In addition, the Company has agreed to provide loans to the
officers for interest payments under the bank loans. At December 31, 1998, the
bank loans guaranteed by the Company totaled $19.1 million. At December 31,
1998, the common stock that collateralizes the loans had a fair value of $33.2
million.
Litigation
The Company is party to various lawsuits arising in the normal course of
business. The Company does not believe that any of the litigation will have a
material impact on its consolidated financial statements.
NOTE 19. SUBSEQUENT EVENT
- - --------------------------------------------------------------------------------
Effective January 11, 1999, Top Layer Reinsurance Ltd. was formed as a joint
venture between the Company and State Farm Mutual Automobile Insurance Company
to provide property catastrophe reinsurance for high layer, non-U.S. risks. In
connection with this joint venture, the Company has provided capital of $0.6
million and has provided a $50 million letter of credit. The letter of credit is
secured by a portion of the Company's investments.
- - --------------------------------------------------------------------------------
46 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 47
- - --------------------------------------------------------------------------------
NOTE 20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30, December 31,
1998 1997 1998 1997 1998 1997 1998* 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
Net premiums earned $46,097 $55,901 $47,041 $51,463 $58,666 $52,995 $ 53,143 $51,131
Net investment income 13,629 12,125 12,629 12,216 13,305 12,653 13,271 12,579
Net foreign exchange
gains (losses) (24) (1,643) (827) 479 49 (356) 649 (1,922)
Other income -- -- 347 -- 642 -- 8,800 --
Net realized investment
gains (losses) 1,236 166 (2,163) (302) (5,833) 1,053 (130) (3,812)
-----------------------------------------------------------------------------------------------
Total revenue $60,938 $66,549 $57,027 $63,856 $66,829 $66,345 $75,733 $57,976
-----------------------------------------------------------------------------------------------
Claims and claim
expenses incurred $ 7,876 $14,238 $10,294 $11,106 $26,696 $14,673 $ 67,886 $ 9,998
Net income (loss) $35,674 $35,437 $28,538 $37,005 $20,372 $35,408 $(10,007) $31,399
Earnings (loss) per share-basic $ 1.60 $ 1.56 $ 1.28 $ 1.63 $ 0.93 $ 1.59 $ (0.46) $ 1.41
Earnings (loss) per share-diluted $ 1.57 $ 1.52 $ 1.26 $ 1.59 $ 0.91 $ 1.56 $ (0.46) $ 1.38
Weighted average shares-basic 22,298 22,779 22,237 22,700 21,962 22,233 21,568 22,271
Weighted average shares-diluted 22,708 23,295 22,728 23,201 22,393 22,699 21,874 22,673
Claims and claim expense ratio 17.1% 25.5% 21.9% 21.6% 45.5% 27.7% 127.7% 19.6%
Underwriting expense ratio 27.7% 22.0% 28.2% 23.4% 29.2% 24.1% 33.7% 25.9%
-----------------------------------------------------------------------------------------------
Combined ratio 44.8% 47.5% 50.1% 45.0% 74.7% 51.8% 161.4% 45.5%
-----------------------------------------------------------------------------------------------
* Loss in fourth quarter of 1998 was principally from Nobel operations. See Note 8.
- - ------------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NOTE 21. CONSOLIDATED UNAUDITED
PRO FORMA STATEMENTS
- - --------------------------------------------------------------------------------
Operating results of Nobel and its affiliates acquired by the Company have been
included in the consolidated financial statements from their date of
acquisition. As required by Accounting Principles Board Opinion No.16, the
following selected unauditted pro forma information is being provided to present
a summary of the combined results of the Company and Nobel and its affiliates
assuming the acquisition of Nobel and its affiliates had occurred as of January
1 of each year. The pro forma data is for informational purposes only and does
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above.
- - --------------------------------------------------------------------------------
Pro forma Statements:
Years Ended December 31, 1998 1997
--------------------------
Total revenues $294,239 $305,239
Net income 60,320 142,426
Earnings per Common
Share-basic $ 2.74 $ 6.33
Earnings per Common
Share-diluted $ 2.69 $ 6.20
--------------------------
- - --------------------------------------------------------------------------------
48 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT 49
- - --------------------------------------------------------------------------------
==========================
DIRECTORS AND OFFICERS
==========================
(as of March 1, 1999)
BOARD OF DIRECTORS OFFICERS OF RENAISSANCERE Kevin J. O'Donnell
HOLDINGS LTD. AND Vice President
James N. Stanard (3)(4) SUBSIDIARIES Renaissance Reinsurance Ltd.
Chairman of the Board
James N. Stanard Russell M. Smith
Arthur S. Bahr (1)(2) Chairman of the Board Vice President
Retired President Renaissance Reinsurance Ltd.
General Electric Investment Corporation Chief Executive Officer
RenaissanceRe Holdings Ltd. J. Alex Richards
Assistant Vice President
Thomas A. Cooper (1)(2)(4) William I. Riker Renaissance Services Ltd.
TAC Associates President
Chief Operating Officer John R. Wineinger
Edmund B. Greene Renaissance Reinsurance Ltd. Assistant Vice President
Retired Renaissance Services Ltd.
General Electric Company David A. Eklund
Executive Vice President Craig W. Tillman
Chief Underwriting Officer Assistant Vice President
Gerald L. Igou (3) Renaissance Reinsurance Ltd. Glencoe Insurance Ltd.
General Electric Investment Corporation
John M. Lummis Robert L. Ricker
Senior Vice President President
Kewsong Lee (1) Chief Financial Officer DeSoto Insurance Company
E. M. Warburg, Pincus & Co., L.L.C. RenaissanceRe Holdings Ltd.
Ian D. Branagan
Paul J. Liska (1)(3) Yves Dujardin Divisional Director
The St. Paul Companies, Inc. Vice President Renaissance Reinsurance of Europe
Renaissance Reinsurance Ltd.
Lisa J. Marshall
Conyers, Dill and Pearman Robert E. Hykes
Vice President
Howard H. Newman (2)(3)(4) Renaissance Services Ltd.
E. M. Warburg, Pincus & Co., L.L.C.
Martin J. Merritt
Scott E. Pardee (1)(3)(4) Vice President
Massachusetts Institute of Technology Controller
Company Secretary
William I. Riker RenaissanceRe Holdings Ltd.
Renaissance Reinsurance Ltd.
John D. Nichols, Jr.
Committees of the Board: Vice President
Renaissance Reinsurance Ltd.
(1) Audit
(2) Compensation
(3) Investment
(4) Transaction
- - --------------------------------------------------------------------------------
==========================
FINANCIAL AND INVESTOR
INFORMATION
==========================
For general information about the Company or for copies of the annual report,
quarterly earnings releases and Forms 10-K and 10-Q, please contact:
Martin J. Merritt
Vice President, Controller and Company Secretary
Tel. 441-299-7230
Internet: mjm@renre.com
STOCK INFORMATION
The Company's stock is listed on The New York Stock Exchange under the symbol
RNR.
The following table sets forth the high and low closing sales prices per
share, as reported on The New York Stock Exchange Composite Tape for the four
fiscal quarters of 1998 and 1997:
1998 Price Range 1997 Price Range
High Low High Low
--------------------------------------------------
First Quarter 50.06 40.00 40.00 32.63
Second Quarter 50.25 43.25 39.63 34.13
Third Quarter 47.63 41.50 45.88 37.88
Fourth Quarter 42.88 34.81 49.94 39.88
--------------------------------------------------
INDEPENDENT AUDITORS
Ernst & Young
Hamilton, Bermuda
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
USA
Web site: www.chasemellon.com
All written requests should be sent to:
The Company Secretary
RenaissanceRe Holdings Ltd.
Renaissance House
8-12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
- - --------------------------------------------------------------------------------
50 RenaissanceRe Holdings Ltd. 1998 ANNUAL REPORT
Concept & Project Supervision: Investor Access Corporation, NYC
Design: George/Gerard Design, Inc., NYC
WF&G Draft
3/25/99
Exhibit 21.1
SUBSIDIARIES OF RENAISSANCERE HOLDINGS LTD.
1. 100% of the issued and outstanding capital shares of Renaissance
Reinsurance Ltd., a company organized under the laws of Bermuda, is owned
by RenaissanceRe Holdings Ltd.
2. 100% of the issued and outstanding capital shares of Glencoe Insurance
Ltd., a company organized under the laws of Bermuda, is owned by
RenaissanceRe Holdings Ltd.
3. 100% of the issued and outstanding capital shares of DeSoto Insurance
Company, a company organized under the laws of Florida, is owned by Glencoe
Insurance Ltd.
4. 100% of the issued and outstanding capital shares of Renaissance Services
Ltd., a company organized under the laws of Bermuda, is owned by
RenaissanceRe Holdings Ltd.
5. 100% of the issued and outstanding capital shares of Renaissance U.S.
Holdings, Inc., a corporation organized under the laws of Delaware, is
owned by RenaissanceRe Holdings Ltd.
6. 100% of the issued and outstanding capital shares of Nobel Insurance
Company, an insurance company organized under the laws of Texas, is owned
by Renaissance U.S. Holdings Inc.
7. 100% of the issued and outstanding capital shares of Nobel Service
Corporation, a corporation organized under the laws of Texas, is owned by
Nobel Insurance Company.
8. 100% of the issued and outstanding capital shares of IAS Claim Services,
Inc., a corporation organized under the laws of Delaware, is owned by
Renaissance U.S. Holdings Inc.
9. 100% of the issued and outstanding capital shares of Nobel Insurance
Agency, Inc., a corporation organized under the laws of Texas, is owned
beneficially by Renaissance U.S. Holdings Inc.
10. 100% of the issued and outstanding capital shares of Nobel Managing Agents,
Inc., a corporation organized under the laws of Texas, is owned by Nobel
Insurance Company.
11. 100% of the issued and outstanding capital shares of Paget Insurance
Agency, Inc., a corporation organized under the laws of Florida, is owned
beneficially by Renaissance U.S. Holdings Inc.
12. 100% of the issued and outstanding capital shares of Pembroke Managing
Agents, Inc., a corporation organized under the laws of Florida, is owned
beneficially by Renaissance U.S. Holdings Inc.
13. 50% of the issued and outstanding capital shares of Top Layer Reinsurance
Ltd., a company organized under the laws of Bermuda, is owned by
Renaissance Reinsurance Ltd.
14. 99% of the issued and outstanding capital shares of Renaissance Reinsurance
of Europe, a
company organized under the laws of Ireland, is owned by Renaissance
Reinsurance Ltd., with the remaining 1% owned by RenaissanceRe Holdings
Ltd.
15. 100% of the Common Securities of RenaissanceRe Capital Trust, a Delaware
statutory business trust, are owned by RenaissanceRe Holdings Ltd. Such
Common Securities represent approximately 3% of the outstanding beneficial
interests in the Trust, and 100% of the ordinary voting power.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors of
RenaissanceRe Holdings Ltd.
We consent to the incorporation by reference in the registration statements on
Form S-8 (Nos. 333-06339 and 333-61015) and on Form S-3 (No. 333-61709) of
RenaissanceRe Holdings Ltd. of our report dated January 26, 1999, relating to
the consolidated financial statements of RenaissanceRe Holdings Ltd. and
Subsidiaries as of and for the years ended December 31, 1998 and 1997 and for
each of the years in the three year period ended December 31, 1998 and our
report dated January 26, 1999 on the schedules included in the Company's 1998
Annual Report on Form 10-K, which reports are incorporated by reference/included
in the December 31, 1998 Annual Report on Form 10-K of RenaissanceRe Holdings
Ltd.
/s/ Ernst & Young
Hamilton, Bermuda
March 31, 1999
7
1,000
12-MOS
DEC-31-1998
DEC-31-1998
799,995
0
0
1,630
0
0
826,608
115,701
101,317
10,997
1,356,164
298,829
94,466
0
0
100,000
100,000
0
21,646
590,586
1,356,164
204,947
52,834
(6,890)
9,636
112,752
26,506
34,525
54,102
(20,475)
74,577
0
0
0
74,577
3.39
3.33
110,037
96,431
16,321
49,671
30,923
298,829
(16,321)
