UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ Commission file number: 34-0-26512 RENAISSANCERE HOLDINGS LTD. (Exact name of registrant as specified in its charter) BERMUDA 98-014-1974 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) RENAISSANCE HOUSE HM 19 8-12 EAST BROADWAY (Zip Code) PEMBROKE, BERMUDA (Address of principal executive offices) (441) 295-4513 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) 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 whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] The number of outstanding shares of RenaissanceRe Holdings Ltd.'s common stock, par value US $1.00 per share, as of September 30, 2003 was 70,323,752. Total number of pages in this report: 35 RENAISSANCERE HOLDINGS LTD. INDEX TO FORM 10-Q PART I -- FINANCIAL INFORMATION ITEM 1 -- Financial Statements Consolidated Balance Sheets as at September 30, 2003 3 (Unaudited) and December 31, 2002 Unaudited Consolidated Statements of Income for 4 the three and nine month periods ended September 30, 2003 and 2002 Unaudited Consolidated Statements of Changes in 5 Shareholders' Equity for the nine month periods ended September 30, 2003 and 2002 Unaudited Consolidated Statements of Cash Flows 6 for the nine month periods ended September 30, 2003 and 2002 Notes to Unaudited Consolidated Financial Statements 7 ITEM 2-- Management's Discussion and Analysis of Results of 14 Operations and Financial Condition ITEM 3-- Quantitative and Qualitative Disclosures About Market Risk 32 ITEM 4-- Disclosure Controls and Procedures 33 PART II-- OTHER INFORMATION 34 ITEM 1 -- Legal Proceedings ITEM 2 -- Changes in Securities and Use of Proceeds ITEM 3 -- Defaults Upon Senior Securities ITEM 4 -- Submission of Matters to a Vote of Security Holders ITEM 5 -- Other Information ITEM 6 -- Exhibits and Reports on Form 8-K Signature-- RenaissanceRe Holdings Ltd. 35 2 PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of United States Dollars, except per share amounts) The accompanying notes are an integral part of these financial statements. 3
AS AT -------------------------------------- SEPTEMBER 30, 2003 DECEMBER 31, 2002 ------------------ ----------------- (Unaudited) (Audited) ASSETS Fixed maturity investments available for sale, at fair value (Amortized cost $2,640,852 and $2,153,715 at September 30, 2003 and December 31, 2002, respectively) $ 2,698,720 $ 2,221,109 Short term investments 964,309 570,497 Other investments 224,699 129,918 Equity investment in reinsurance company at fair value (Cost $84,199 at September 30, 2003 and December 31, 2002) 136,432 120,288 Cash and cash equivalents 84,029 87,067 ----------- ----------- Total investments and cash 4,108,189 3,128,879 Premiums receivable 312,199 199,449 Ceded reinsurance balances 108,694 73,360 Losses recoverable 157,059 199,533 Accrued investment income 29,605 25,833 Deferred acquisition costs 95,376 55,853 Other assets 58,070 62,829 ----------- ----------- TOTAL ASSETS $ 4,869,192 $ 3,745,736 =========== =========== LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY LIABILITIES Reserve for claims and claim expenses $ 981,687 $ 804,795 Reserve for unearned premiums 538,262 331,985 Debt 350,000 275,000 Reinsurance balances payable 198,413 146,732 Other 121,613 97,013 ----------- ----------- TOTAL LIABILITIES 2,189,975 1,655,525 ----------- ----------- Minority Interest - Company obligated, mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 84,630 84,630 Minority Interest - DaVinci 416,942 363,546 SHAREHOLDERS' EQUITY Preference Shares 250,000 150,000 Common shares and additional paid-in capital 310,094 320,936 Unearned stock grant compensation -- (18,468) Accumulated other comprehensive income 110,101 95,234 Retained earnings 1,507,450 1,094,333 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 2,177,645 1,642,035 ----------- ----------- TOTAL LIABILITIES, MINORITY INTERESTS, AND SHAREHOLDERS' EQUITY $ 4,869,192 $ 3,745,736 =========== =========== RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (in thousands of United States Dollars, except per share amounts) (Unaudited) The accompanying notes are an integral part of these financial statements. 4
QUARTERS ENDED NINE MONTHS ENDED ------------------------------- -------------------------------- SEPT. 30, 2003 SEPT. 30, 2002 SEPT. 30, 2003 SEPT. 30, 2002 ------------- -------------- -------------- -------------- REVENUES Gross premiums written $ 313,317 $ 282,597 $ 1,211,044 $ 1,013,725 ============= ============== ============== ============== Net premiums written $ 236,570 $ 192,687 $ 987,163 $ 770,300 Decrease (increase) in unearned premiums 40,794 (1,377) (170,790) (243,940) ------------- -------------- -------------- -------------- Net premiums earned 277,364 191,310 816,373 526,360 Net investment income 28,280 23,737 93,823 73,021 Net foreign exchange gains 252 888 11,843 2,588 Other income 7,979 7,951 20,722 24,227 Net realized gains on investments 1,172 10,219 71,944 13,736 ------------- -------------- -------------- -------------- TOTAL REVENUES 315,047 234,105 1,014,705 639,932 ------------- -------------- -------------- -------------- EXPENSES Claims and claim expenses incurred 96,856 82,931 279,712 199,198 Acquisition expenses 56,317 23,802 139,154 62,719 Operational expenses 17,882 9,616 49,121 30,241 Corporate expenses 4,456 3,466 12,601 10,844 Interest expense 4,318 3,499 15,979 9,646 ------------- -------------- -------------- -------------- TOTAL EXPENSES 179,829 123,314 496,567 312,648 ------------- -------------- -------------- -------------- Income before minority interests and taxes and change in accounting principle 135,218 110,791 518,138 325,525 Minority Interest - Company obligated, mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 1,827 1,759 3,282 3,664 Minority interest - DaVinci 15,211 17,689 56,246 40,636 ------------- -------------- -------------- -------------- Income before taxes and change in accounting principle 118,180 91,343 458,610 281,225 Income tax benefit (expense) (37) (59) 18 (382) Cumulative effect of a change in accounting principle -- -- -- (9,187) ------------- -------------- -------------- -------------- NET INCOME 118,143 91,284 458,628 271,656 Dividends on Preference Shares 4,903 3,038 13,939 9,079 ------------- -------------- -------------- -------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 113,240 $ 88,246 $ 444,689 $ 262,577 ============= ============== ============== ============== Earnings per Common Share - basic $ 1.63 $ 1.30 $ 6.45 $ 3.90 Earnings per Common Share - diluted $ 1.59 $ 1.26 $ 6.27 $ 3.75 RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (in thousands of United States Dollars) (Unaudited) (1) Comprehensive income for the quarters ended September 30, 2003 and 2002 was $115.3 million and $112.4 million, respectively. The accompanying notes are an integral part of these financial statements. 5
2003 2002 ----------- ----------- Preference Shares Balance -- January 1 $ 150,000 $ 150,000 Issuance of Preference Shares 100,000 -- ----------- ----------- Balance -- September 30 250,000 150,000 ----------- ----------- Common Stock & additonal paid-in capital Balance -- January 1 320,936 264,623 Exercise of options, and issuance of stock and restricted stock awards 10,776 12,780 Miscellaneous offering expenses (3,150) (73) Cumulative effect of change in accounting for unearned stock grant compensation (18,468) -- Stock dividend -- 45,711 Repurchase of capital securities -- 30 ----------- ----------- Balance -- September 30 310,094 323,071 ----------- ----------- Unearned stock grant compensation Balance -- January 1 (18,468) (20,163) Cumulative effect of change in accounting for unearned stock grant compensation 18,468 -- Restricted stock grants awarded, net -- (7,710) Amortization -- 7,403 ----------- ----------- Balance -- September 30 -- (20,470) ----------- ----------- Accumulated other comprehensive income Balance -- January 1 95,234 16,295 Net unrealized gains on securities, net of adjustment (see disclosure) 14,867 22,214 ----------- ----------- Balance -- September 30 110,101 38,509 ----------- ----------- Retained earnings Balance -- January 1 1,094,333 814,269 Net income 458,628 271,656 Dividends paid on Common Shares (31,572) (29,177) Dividends paid on Preference Shares (13,939) (9,079) Stock dividend -- (45,711) ----------- ----------- Balance -- September 30 1,507,450 1,001,958 ----------- ----------- Total Shareholders' Equity $ 2,177,645 $ 1,493,068 =========== =========== COMPREHENSIVE INCOME Net income $ 458,628 $ 271,656 Other comprehensive income 14,867 22,214 ----------- ----------- Comprehensive income $ 473,495 $ 293,870 =========== =========== DISCLOSURE REGARDING NET UNREALIZED GAINS Net unrealized holding gains arising during period $ 86,811 $ 35,950 Net realized gains included in net income (71,944) (13,736) ----------- ----------- Change in net unrealized gains on securities $ 14,867 $ 22,214 =========== =========== RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (in thousands of United States Dollars) (Unaudited) The accompanying notes are an integral part of these financial statements. 6
2003 2002 ------------ ------------ CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net income $ 458,628 $ 271,656 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Amortization and depreciation 9,742 15,435 Unrealized (gains) losses included in net investment income (12,916) 2,191 Net realized investment gains (71,944) (13,736) Minority interest - DaVinci 56,246 40,636 Change in: Premiums receivable (112,750) (196,124) Ceded reinsurance balances (35,334) (76,937) Reserve for claims and claim expenses, net 219,366 157,520 Reserve for unearned premiums 206,277 318,532 Deferred acquisition costs (39,523) (43,104) Reinsurance balances payable 51,681 37,002 Other 32,279 39,098 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 761,752 552,169 ------------ ------------ CASH FLOWS USED IN INVESTING ACTIVITIES Proceeds from sales of investments 9,730,227 4,722,476 Purchases of investments available for sale (10,144,823) (5,658,227) Net purchases of short-term investments (393,812) 339,373 Net purchases of other investments (81,865) (60,804) Acquisition of subsidiary, net of cash acquired -- (23,495) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (890,273) (680,677) ------------ ------------ CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Issuance of senior debt, net of expenses 99,144 -- Sale of preference shares, net of expenses 96,850 -- Payment of bank loan - Glencoe U.S. (25,000) (8,500) Dividends paid - Common Shares (31,572) (29,177) Dividends paid - Preference Shares (13,939) (9,079) Issuance of senior debt - DaVinci -- 100,000 Increase in minority interests -- 22,000 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 125,483 75,244 ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (3,038) (53,264) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 87,067 139,715 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 84,029 $ 86,451 ============ ============ RenaissanceRe Holdings Ltd. and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Expressed in U.S. Dollars) (Unaudited) 1. The consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. This report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K. The consolidated financial statements include the accounts of RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its wholly-owned subsidiaries, including Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"), Glencoe Insurance Ltd. ("Glencoe"), Stonington Insurance Company ("Stonington"), Lantana Insurance Ltd. ("Lantana"), Glencoe U.S. Holdings Inc. ("Glencoe U.S.", formerly known as Renaissance U.S. Holdings, Inc.), RenaissanceRe Capital Trust (the "Trust"), Renaissance Investment Holdings Limited ("RIHL") and Renaissance Underwriting Managers, Ltd. ("Renaissance Managers"). DaVinciRe Holdings Ltd. ("DaVinciRe"), a partially-owned subsidiary, is also consolidated into the Company's financial statements. RenaissanceRe and its subsidiaries are collectively referred to herein as the "Company," and references herein to "our", "we", or "us" refer to the Company. All intercompany transactions and balances have been eliminated on consolidation. Our reinsurance operations write property catastrophe reinsurance and specialty reinsurance, principally provided through Renaissance Reinsurance. Our individual risk operations write direct insurance on both an admitted basis through Stonington and an excess and surplus lines basis through Glencoe and Lantana, and also provide reinsurance coverage, principally on a quota share basis, which we analyze on an individual risk basis. The Company also acts as underwriting manager and underwrites worldwide property catastrophe reinsurance programs and specialty reinsurance on behalf of joint ventures, including Top Layer Reinsurance Ltd. ("Top Layer Re") and DaVinci Reinsurance Ltd. ("DaVinci"). DaVinciRe and DaVinci were formed in October 2001 with other equity investors. The Company owns a minority equity interest in, but controls a majority of the outstanding voting power of, DaVinciRe. Minority interests represent the interests of external parties with respect to net income and shareholders' equity of the Trust and DaVinciRe. The Trust is the issuer of $100.0 million of outstanding mandatorily redeemable preferred capital securities ("Capital Securities"), of which $15.4 million have been repurchased by the Company, and holds a like amount of junior subordinated debentures issued by RenaissanceRe. RenaissanceRe's guarantee of the distributions on the preferred securities issued by the Trust, when taken together with RenaissanceRe's obligations under the expense reimbursement agreement with the Trust, provides a full and unconditional guarantee of amounts due on the Capital Securities issued by the Trust (See Note 12). Certain comparative information has been reclassified to conform to the current presentation. Because of the seasonality of the Company's business, the results of operations and cash flows for any interim period will not necessarily be indicative of results of operations and cash flows for the full fiscal year or subsequent quarters. 2. The Company purchases 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 claims expenses from reinsurers in excess of various retentions and loss warranties. The Company would remain liable to the extent that any third-party reinsurance company fails to meet its obligations. The earned reinsurance premiums ceded were $188.4 million and $160.8 million for the nine month periods ended September 30, 2003 and 2002, respectively. In addition to loss recoveries, certain of the Company's ceded reinsurance contracts provide for recoveries of additional premiums, reinstatement premiums and for unrecovered no claims bonuses which are unrecoverable when losses are ceded to other reinsurance contracts. Total recoveries netted against claims and claim expenses incurred for the nine months ended September 30, 2003 were $20.1 million compared to $73.2 million for the nine months ended September 30, 2002. 3. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In the second quarter of 2002, the Company completed its initial 7 impairment review in compliance with the transition provisions of SFAS 142 and, as a result, the Company decided to record goodwill at zero value, the low end of an estimated range of values, and record a write-off of $9.2 million. In accordance with the provisions of SFAS 142, this is required to be recorded as a cumulative effect of a change in accounting principle in the statement of income and is required to be recorded as if this adjustment was recorded in the first quarter of 2002. 4. During 2002, the Company changed its policy regarding the classification of certain investments previously recorded as cash and cash equivalents. These investments were reclassified to short-term investments to more appropriately reflect the Company's investment strategy regarding those assets. 5. During the second quarter of 2003, the Company changed its policy regarding the classification of equity appreciation on certain hedge funds and private equity funds previously recorded as realized gains and losses. The equity appreciation on these investments has been reclassified to net investment income for all periods presented. 6. On August 8, 2003, the Company amended and restated its existing revolving credit agreement with a syndicate of commercial banks to increase the facility from $310 million to $400 million and to make certain other changes. No balance was outstanding as of December 31, 2002, or September 30, 2003. As amended, the agreement contains certain financial covenants. These covenants generally provide that consolidated debt to capital shall not exceed the ratio (the "Debt to Capital Ratio") of 0.35:1 and that consolidated shareholders' equity plus outstanding Capital Securities of RenaissanceRe and Renaissance Reinsurance shall equal or exceed $1.0 billion and $500 million, respectively. The scheduled commitment termination date under the amended agreement is August 8, 2006. 7. 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. The following tables set forth the computation of basic and diluted earnings per share: 8
- -------------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2003 2002 - -------------------------------------------------------------------------------------------------------------------- (in thousands of U.S. dollars except share and per share data) - -------------------------------------------------------------------------------------------------------------------- Numerator: Net income available to common shareholders $ 113,240 $ 88,246 ============== ================== Denominator: Denominator for basic earnings per common share - Weighted average common shares 69,307,078 67,865,217 Per common share equivalents of employee stock Options and restricted shares 1,879,549 2,406,866 -------------- ------------------ Denominator for diluted earnings per common share - Adjusted weighted average common shares and assumed conversions 71,186,627 70,272,083 ============== ================== Basic earnings per common share $ 1.63 $ 1.30 Diluted earnings per common share $ 1.59 $ 1.26 - -------------------------------------------------------------------------------------------------------------------- 8. The Board of Directors of the Company declared, and the Company paid, a dividend of $0.15 per share to shareholders of record on each of March 3, 2003, June 2, 2003 and September 10, 2003. On November 13, 2003, the Board of Directors declared a dividend of $0.15 per share payable on December 15, 2003, to shareholders of record on December 5, 2003. During the second quarter of 2002, RenaissanceRe effected a three-for-one stock split through a stock dividend of two additional common shares for each common share owned. All of the share and per share information provided in this 10-Q is presented as if the stock dividend had occurred for all periods presented. On August 7, 2003, the Board of Directors authorized the Company to purchase a portion of its outstanding common shares up to an aggregate purchase price of $150 million. This authorization includes the remaining amounts available under prior authorizations. The Company's decision to repurchase common shares will depend on, among other matters, the market price of the common shares and capital requirements of the Company. 9. Effective January 1, 2003, the Company adopted, prospectively, the fair value recognition provisions of SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for all stock-based employee compensation granted, modified or settled after January 1, 2003. Under the fair value recognition provisions of SFAS 123, the Company estimates the fair value of employee stock options and other stock-based compensation on the date of grant and amortizes this value as an expense over the vesting period. Prior to 2003, the Company followed Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its employee stock compensation. No option related employee compensation cost was recorded in net income prior to January 1, 2003 as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Under the prospective method of adoption selected by the Company under the provisions of SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," compensation cost recognized in 2003 includes all employee awards granted, modified, or settled after the beginning of the fiscal year. Results for prior periods have not been restated. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period. 9
- -------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2003 2002 - -------------------------------------------------------------------------------------------------------------------- (in thousands of U.S. dollars except share and per share data) - -------------------------------------------------------------------------------------------------------------------- Numerator: Net income available to common shareholders $ 444,689 $ 262,577 ============== ================== Denominator: Denominator for basic earnings per common share - Weighted average common shares 68,938,026 67,326,314 Per common share equivalents of employee stock Options and restricted shares 1,997,554 2,763,304 -------------- ------------------ Denominator for diluted earnings per common share - Adjusted weighted average common shares and assumed conversions 70,935,580 70,089,618 ============== ================== Basic earnings per common share $ 6.45 $ 3.90 Diluted earnings per common share $ 6.27 $ 3.75 - --------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2003 2002 ------------ ------------ Net income available to common shareholders, as reported $ 113,240 $ 88,246 add: stock based employee compensation cost included in determination of net income 3,829 2,423 less: fair value compensation cost under SFAS 123 5,204 4,115 ------------ ------------ Pro forma net income available to common shareholders $ 111,865 $ 86,554 ============ ============ Earnings per share Basic - as reported $ 1.63 $ 1.30 Basic - proforma $ 1.61 $ 1.28 Diluted - as reported $ 1.59 $ 1.26 Diluted - proforma $ 1.57 $ 1.23 - ------------------------------------------------------------------------------------------------------------- 10. The Company has two reportable segments: reinsurance operations and individual risk operations. The reinsurance segment, which includes the results of DaVinci, has three principal components, property catastrophe reinsurance, specialty reinsurance and catastrophe reinsurance written through our joint venture, DaVinci. During the third quarter of 2002, we renamed our primary segment "individual risk" to more accurately describe the risk characteristics of this business. We define our individual risk segment to include underwriting that involves understanding the characteristics of the original underlying insurance policy. Our individual risk operations write direct insurance on both an admitted basis through Stonington and an excess and surplus lines basis through Glencoe and Lantana, and also provide reinsurance coverage, principally on a quota share basis, which we analyze on an individual risk basis. Data for the three and nine month periods ended September 30, 2003 and 2002 are as follows: 10
- -------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2003 2002 ------------- --------------- Net income available to common shareholders, as reported $ 444,689 $ 262,577 add: stock based employee compensation cost included in determination of net income 9,030 6,539 less: fair value compensation cost under SFAS 123 12,866 12,679 ------------- --------------- Pro forma net income available to common shareholders $ 440,853 $ 256,437 ============= =============== Earnings per share Basic - as reported $ 6.45 $ 3.90 Basic - proforma $ 6.39 $ 3.81 Diluted - as reported $ 6.27 $ 3.75 Diluted - proforma $ 6.21 $ 3.66 - -------------------------------------------------------------------------------------------------------------- 11
- -------------------------------------------------------------------------------------------------------------------- QUARTER ENDED SEPTEMBER 30, 2003 (IN THOUSANDS OF U.S. DOLLARS) REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL ----------------------------------------------------------------------- Gross premiums written $ 139,645 $ 173,672 $ - $ 313,317 Net premiums written 113,033 123,537 - 236,570 Income 99,475 6,834 6,931 113,240 ----------------------------------------------------------------------- Claims and claim expense ratio 28.9% 49.3% - 34.9% Expense ratio 20.7% 42.3% - 26.8% ----------------------------------------------------------------------- Combined ratio 49.6% 91.6% - 61.7% ======================================================================= - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- QUARTER ENDED SEPTEMBER 30, 2002 (IN THOUSANDS OF U.S. DOLLARS) REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL ----------------------------------------------------------------------- Gross premiums written $ 201,351 $ 81,246 $ - $ 282,597 Net premiums written 133,317 59,370 - 192,687 Income 66,316 8,645 13,285 88,246 ----------------------------------------------------------------------- Claims and claim expense ratio 44.4% 38.0% - 43.3% Expense ratio 14.3% 33.9% - 17.5% ----------------------------------------------------------------------- Combined ratio 58.7% 71.9% - 60.8% ======================================================================= - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS OF U.S. DOLLARS) REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL ----------------------------------------------------------------------- Gross premiums written $ 875,841 $ 335,203 $ 1,211,044 Net premiums written 736,309 250,854 987,163 Income 320,549 27,837 96,303 444,689 ----------------------------------------------------------------------- Claims and claim expense ratio 28.9% 49.7% - 34.3% Expense ratio 18.3% 37.1% - 23.0% ----------------------------------------------------------------------- Combined ratio 47.2% 86.8% - 57.3% ======================================================================= - -------------------------------------------------------------------------------------------------------------------- (1) Income for the reinsurance and individual risk segments represents net underwriting income. Net underwriting income consists of net premiums earned less claims and claims expenses incurred, acquisition costs, and operational expenses. (2) Income for the other segment consists of net investment income, net foreign exchange gains, other income and net realized gains on investments, partially offset by corporate expenses, interest expense, minority interest expenses, cumulative effect of change in accounting principle, income tax benefit (expense), and dividends on preference shares. 11. The provision for income taxes is based on income recognized for financial statement purposes and includes the effects of temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement bases and tax bases of assets and liabilities using enacted tax rates. RenaissanceRe's U.S. subsidiaries and Lantana are subject to U.S. tax. The net deferred tax asset of $4.0 million is net of a $30.1 million valuation allowance. Net operating loss carryforwards and future tax deductions will be available to offset regular taxable U.S. income during the carryforward period (which expires during the period ranging from 2018 through 2022), subject to certain limitations. 12. In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). The provisions of SFAS 150 required the Company's Capital Securities to be classified on the balance sheet as liabilities with effect from July 1, 2003, and for the related minority interest to be recorded as interest expense. On November 7, 2003, the FASB issued FASB Staff Position 150-3, which, among other matters, deferred indefinitely the effective date of SFAS 150 with respect to the classification of certain mandatorily redeemable noncontrolling interests under SFAS 150, and therefore required the reversal of any effects of the adoption of SFAS 150 regarding the Company's Capital Securities. As a result, the Company continues to classify the Capital Securities as minority interest on the consolidated balance sheet and continues to classify the related dividends as minority interest expense in the consolidated income statement. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"), which requires consolidation of all Variable Interest Entities ("VIE") by the investor that will absorb a majority of the VIE's expected losses or residual returns if they occur. FIN 46 is effective immediately for VIEs created after January 31, 2003 and is expected to become effective in the Company's fourth quarter of 2003 for all other existing transactions. We do not expect, based on the authoritative literature currently available, that the adoption of FIN 46 will have a material impact on our financial condition and results of operations. 13. Subsequent Events 12
- -------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS OF U.S. DOLLARS) REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL ----------------------------------------------------------------------- Gross premiums written $ 828,716 $ 185,009 $ - $ 1,013,725 Net premiums written 617,336 152,964 - 770,300 Income 223,352 10,850 28,375 262,577 ----------------------------------------------------------------------- Claims and claim expense ratio 37.3% 42.5% - 37.8% Expense ratio 15.4% 37.5% - 17.7% ----------------------------------------------------------------------- Combined ratio 52.7% 80.0% - 55.5% ======================================================================= - -------------------------------------------------------------------------------------------------------------------- The Company is in the process of negotiating a long-term strategic investment, along with three partners, MBIA Inc. ("MBIA"), Partner Re and Koch Financial, to form a new financial guaranty reinsurer, Channel Re. The Company anticipates that Channel Re will be a stable, long-term financial guaranty reinsurer, and will benefit from a strong alignment of interests with MBIA. Channel Re is expected to have a senior management team comprised of seasoned industry professionals. Upon inception, Channel Re would assume a portfolio of in-force business from MBIA, participate in MBIA's reinsurance treaty and provide facultative reinsurance support to MBIA. The Company's total financial commitment is expected to be in the range of $115 - $125 million, and Channel Re is expected to produce attractive financial returns for its shareholders. The consummation of the transaction remains subject to final documentation, numerous closing conditions, regulatory approval and the completion of the process to obtain appropriate financial strength ratings. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of our results of operations for the three and nine month periods ended September 30, 2003 and 2002 and financial condition as of September 30, 2003. This discussion and analysis should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. We also caution readers regarding certain forward-looking statements made in this 10-Q and direct readers to the Safe Harbor disclosures included in this 10-Q. GENERAL RenaissanceRe Holdings Ltd. was formed in 1993 to provide reinsurance to cover the risk of natural and man-made catastrophes. Since our formation, we have become one of the largest writers of catastrophe reinsurance and we are recognized as a leader in the utilization of sophisticated computer models to construct a superior portfolio of these coverages. Over the past two years, there have been significant market dislocations across the worldwide insurance and reinsurance markets and a substantial increase in the amount of premium that meets our hurdle rates. Currently, we conduct our business through two reportable segments, Reinsurance and Individual Risk. Reinsurance Our reinsurance segment has three main components: 1) Catastrophe reinsurance written for our own account - our traditional core business. Our subsidiary, Renaissance Reinsurance, is one of the world's premier providers of this coverage. This coverage protects against large natural catastrophes, such as earthquakes and hurricanes, as well as claims arising from other natural and man-made catastrophes such as winter storms, freezes, floods, fires, tornadoes and explosions. We offer this coverage to insurance companies and other reinsurers primarily on an excess of loss basis. This means that we begin paying when our customers' claims from a catastrophe exceed a certain retained amount. 2) Specialty reinsurance covering certain targeted classes of non-catastrophe business where we believe we have a sound basis for underwriting and pricing the risk that we assume: our portfolio of these lines currently includes catastrophe exposed workers' compensation and personal accident, aviation, property per risk, surety, finite and terrorism. We believe that we are seen as a market leader in certain of these classes of business and that we have a growing reputation as a "first call" market in these lines. 3) Catastrophe and specialty reinsurance written for the account of joint ventures we have established to expand our access to capital and leverage our catastrophe underwriting skill to produce fee income. In 1999, we formed Top Layer Re with State Farm to provide high layer coverage for non-U.S. risks. Renaissance Reinsurance and State Farm each own 50% of Top Layer Re. We formed DaVinciRe in 2001 with State Farm and other private investors to write property catastrophe reinsurance side-by-side with Renaissance Reinsurance. We own a minority of DaVinciRe's outstanding equity but control a majority of its outstanding voting power, and accordingly, DaVinciRe's financial results are consolidated in our financial statements. We act as the exclusive underwriting manager for these joint ventures in return for management fees and a profit participation (such fees earned from DaVinciRe are eliminated in consolidation). We actively consider additional joint venture opportunities which may write various classes of risk. We cannot assure you we will complete such new ventures or that they will contribute materially to our results. Individual Risk Our individual risk business, which is written on an excess and surplus lines basis by Glencoe and Lantana and on an admitted basis by Stonington, has also experienced substantial growth in 2003. We define our individual risk segment to include underwriting that involves understanding the characteristics of the original underlying insurance policy. Our individual risk segment provides insurance both on a direct and on a surplus lines basis and also provides reinsurance on a quota share basis. During the third quarter of 2003, our individual risk segment has begun writing certain types of casualty insurance. We are in the process of building our infrastructure to address the additional management and operational risks associated with these coverages. 14 The individual risk business which Glencoe writes is primarily produced through three distribution channels: 1) Brokers - where Glencoe writes primary insurance through brokers on a risk-by-risk basis; 2) Program Managers - where Glencoe writes primary insurance through a small number of high quality, specialized program managers, who produce business under well-defined underwriting guidelines, and provide related back-office functions; and 3) Quota Share Reinsurance - where Glencoe writes quota share reinsurance with primary insurers who, similar to our program managers, provide most of the back-office and support functions. In addition to the reinsurance and insurance coverages discussed above, from time to time, we consider opportunistic diversification into new ventures, either through organic growth, the formation of new joint ventures, or the acquisition of other companies or books of business of other companies. This potential diversification includes opportunities to write targeted classes of non-catastrophe business, both directly for our own account and through possible new joint venture opportunities. In evaluating such new ventures, we seek an attractive return on equity, the ability to develop or capitalize on a competitive advantage, and opportunities that will not detract from our core reinsurance and individual risk operations. Accordingly, we regularly review strategic opportunities and periodically engage in discussions regarding possible transactions, although there can be no assurance that we will complete any such transactions or that any such transaction would contribute materially to our results of operations or financial condition. SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES CLAIMS AND CLAIM EXPENSE RESERVES We believe that the most significant judgment made by management is our estimate of the claims and claim expense reserves. Claim reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs of claims incurred, and it is possible that the ultimate liability may materially exceed or be materially less than such estimates. Such estimates are not precise in that, among other matters, 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. Adjustments to our prior year estimated claims reserves will impact our current year net income by increasing our net income if the prior year estimated claims reserves prove to be overstated, or by reducing our net income if the prior year estimated claims reserves prove to be insufficient. Changes to prior year estimated claims reserves had the following impact on our net income: during the first nine months of 2003, we reduced prior year estimated claims reserves by $50.0 million and accordingly, our net income was increased by $50.0 million; during the first nine months of 2002, we increased prior year estimated claims reserves by $4.9 million, and accordingly our net income was decreased by $4.9 million. Also see Financial Condition - Reserves for Claims and Claims Expenses. For our property catastrophe reinsurance operations, we initially set our case reserves based on case reserves and other reserve estimates reported by insureds and ceding companies. We then add to these case reserves, our estimates for additional case reserves, and an estimate for incurred but not reported ("IBNR") reserves. These estimates are generally based upon our experience with similar claims, our knowledge of potential industry loss levels for each loss, and industry information which we gather and retain in our REMS(C) modeling system. Our estimates of claims resulting from catastrophic events is inherently difficult because of the variability and uncertainty associated with property catastrophe claims. In reserving for our individual risk and specialty reinsurance coverages we do not have the benefit of a significant amount of our own historical experience in these lines, which we believe further increases the uncertainty of these estimates. We utilize the Bornhuetter-Ferguson actuarial method to estimate our IBNR for our specialty reinsurance and individual risk coverages. The utilization of the Bornhuetter-Ferguson technique requires a company to estimate an ultimate claims and claim expense ratio for each line of business. We select our estimates of the ultimate claims and claim expense ratios by reviewing industry standards, and adjusting these standards based upon the type and terms of the coverages we offer and the terms of the coverages we offer. We intend to establish our estimates for these classes of business prudently, but we cannot assure you we will succeed in this. Because any reserve estimate is an insurer's estimate of its ultimate liability, and because there are numerous factors which affect reserves but cannot be determined with certainty in advance, our ultimate payments will vary, perhaps materially, from our initial estimate of reserves. Therefore, because of these inherent uncertainties, we have developed a reserving philosophy that attempts to incorporate prudent assumptions and estimates. 15 During the first, second and third quarters of 2003, we reduced prior year net accident year reserves by $11.8 million, $12.7 million and $25.5 million, respectively. For the remainder of the year, assuming future reported and paid claims activity is consistent with that of recent quarters, and barring unforeseen circumstances, we believe that as our reserves on older accident years continue to age, it is likely that we will again experience a net reduction to our older accident year reserves. All of our estimates are reviewed annually with an independent actuarial firm. We also review our assumptions and our methodologies on a quarterly basis. If we determine that our estimates need adjusting, such adjustments are recorded in the quarter in which they are identified. Although we believe we are cautious in our assumptions, and in the application of these methodologies, we cannot be certain that our ultimate payments will not vary, perhaps materially, from the estimates we have made. As of September 30, 2003, our IBNR reserves were $612.3 million, and a 5% change in these IBNR reserves would equate to a $30.6 million adjustment to claims and claim expenses incurred, which would represent 6.7% of our net income earned in the first nine months of 2003, and 0.6% of shareholders' equity as at September 30, 2003. PREMIUMS We recognize premiums as income over the terms of the related contracts and policies. Our written premiums are based on policy and contract terms and include estimates based on information received from both insureds and ceding companies. We record adjustment premiums in the period in which they occur. We book premiums on non-proportional contracts in accordance with the contract terms. Premiums written on losses occurring contracts are typically earned over the contract period. Premiums on risks attaching contracts are generally earned as reported by the cedants, which typically is over double the contract period. Management makes estimates based on judgment and historical experience for periods during which no information has yet been received. Such estimates are subject to adjustment in subsequent periods when actual figures are recorded. The minimum and deposit premium on excess policies are usually determined by the contract wording. In the absence of defined amounts in the contract, management estimates written premium on these contracts based on historical experience and judgment. In our individual risk business, it is often necessary to estimate portions of premiums written by program managers. Management estimates this premium based on discussions with program managers and also based on historical experience and judgment. Total premiums estimated as of September 30, 2003 and 2002 were $97.0 million and $60.7 million, respectively. We record ceded premiums on the same basis as assumed premiums. Reinstatement premiums are estimated by management, based on the contract terms, at the time of the loss occurrence giving rise to the reinstatement. SUMMARY OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2002 A summary of the significant components of our revenues and expenses is as follows: 16 The $25.0 million increase in net income in the quarter ended September 30, 2003, compared to the quarter ended September 30, 2002, was primarily the result of the following items: o a $29.2 million increase in underwriting income from our Renaissance reinsurance operations due primarily to an increase in net earned premiums to $145.7 million from $118.2 million, primarily as a result of our success in capitalizing on market opportunities during 2003 and 2002, resulting in higher earned premiums in 2003 compared to 2002. Also, during the third quarter of 2003, we recorded reductions to prior years' loss reserves which were partially offset by an increase in underwriting expenses, plus o a $4.0 million increase in underwriting income from DaVinci due primarily to an increase in net earned premiums to $49.8 million from $42.3 million, primarily due to our ability to capitalize on market opportunities as discussed above, offset by an increase in the losses incurred to $13.8 from $11.2 million as a result of the specialty premiums written by DaVinci in 2003 which typically have a higher loss ratio than our property catastrophe book, less o a $1.8 million decrease in underwriting income from our individual risk operations which resulted from an increase in premiums earned which was offset by an increase in incurred losses to $40.3 million from $11.7 million and an increase in acquisition costs to $31.4 million from $8.0 million. Also, the losses for the individual risk business benefited from a reduction of prior years' loss reserves. Such reduction was partially offset by an increase to the current quarter loss ratio to reflect early reported losses on an incepting program, as well as to reflect additional case reserves, and incurred but not reported losses. The increase in our net earned premiums in our individual risk segment to $81.8 million in 2003 from $30.8 million in 2002, which was primarily the result of positive market conditions and our efforts to continue to increase premiums in this segment of our business and also the assumption of $50 million of premium from an in-force book of business; plus o a $4.5 million increase in net investment income, primarily due to an increase in our invested assets due to our strong cash flow from operations and the $196 million of net proceeds from our Series B Preference Shares and 5.875% Senior Notes sold in the first quarter of 2003 and equity appreciation during this period on our hedge funds and private equity funds of $3.5 million (a loss of $2.3 million in the third quarter of 2002), partially offset by a reduction in investment returns due to lower interest rates, less 17
- ------------------------------------------------------------------------------------------------------------------ SUMMARY OF RESULTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------ Quarter ended September 30, 2003 2002 - ------------------------------------------------------------------------------------------------------------------ Net underwriting income - Renaissance $ 73,386 $ 44,232 Net underwriting income - DaVinci 26,089 22,084 --------------------------- Total underwriting income - Reinsurance (1) 99,475 66,316 Net underwriting income - Individual Risk (1) 6,834 8,645 Other income 7,979 7,951 Net investment income 28,280 23,737 Interest and preferred share dividends (11,048) (8,296) Corporate expenses, taxes, foreign exchange gains and other (4,241) (2,637) Minority Interest - DaVinci (15,211) (17,689) --------------------------- Net income before realized gains 112,068 78,027 Net realized gains on investments 1,172 10,219 --------------------------- Net income available to common shareholders $ 113,240 $ 88,246 =========================== Net income per common share - diluted $ 1.59 $ 1.26 Net income before realized gains on investments per common share - diluted $ 1.57 $ 1.11 (1) Net underwriting income consists of net premiums earned less claims and claim expenses incurred, acquisition costs and operational expenses. See table on page 19 for a reconciliation of underwriting income. - ------------------------------------------------------------------------------------------------------------------ o a $2.8 million increase in interest and preference share dividends, which was primarily due to the additional dividends and interest accrued on the Series B Preference Shares and 5.875% Senior Notes sold in the first quarter of 2003, plus o a $2.5 million decrease related to the interests owned by other investors in DaVinci (Minority Interests), less o a $9.0 million decrease in net realized gains on investments, which is simply produced as a result of our ongoing management of our portfolio investments and the existing investment market conditions at that time. Gross Premiums Written Gross Premiums Written for the third quarter of 2003 and 2002 were as follows: Our reinsurance premiums will fluctuate from quarter to quarter depending on the movement of large reinsurance programs in and out of our portfolio. The decrease during the third quarter was primarily the result of a loss of programs where we chose not to renew the coverages due to decreasing economic terms of the contracts. The increase in our Individual Risk premiums was the result of the assumption of a $50 million in-force book of business as well as our efforts to continue to increase premiums in this segment of our business. Underwriting Results - -------------------- The underwriting results of an insurance or reinsurance company are discussed frequently by reference to its claims ratio, expense ratio, and combined ratio. The claims ratio is the result of dividing claims and claim expenses incurred by net premiums earned. The expense ratio is the result of dividing underwriting expenses (acquisition costs and operational expenses) by net premiums earned. The combined ratio is the sum of the claims ratio and the expense ratio. The table below sets forth our net premiums earned, claims and claim expenses and underwriting expenses by segment and their corresponding claims, expense and combined ratios: 18
- ------------------------------------------------------------------------- Quarter ended September 30, 2003 2002 -------------------------------- Cat Premium Renaissance $ 84,780 $ 114,756 DaVinci 22,735 38,491 -------------------------------- Total Cat Premium 107,515 153,247 Renaissance Specialty Reinsurance 29,806 48,104 DaVinci Specialty Reinsurance 2,324 - -------------------------------- Total Reinsurance 139,645 201,351 Individual risk premiums 173,672 81,246 -------------------------------- Total gross premiums written $ 313,317 $ 282,597 ================================ - ------------------------------------------------------------------------- The reduction in our reinsurance claims and claims expense ratio was partially due to the increase in earned premiums related to our property catastrophe business, including DaVinci, which increased from $104.4 million for the third quarter of 2002 to $141.6 million for the third quarter of 2003, which typically have a lower claims and claims expense ratio compared to our specialty reinsurance business. Also, during the third quarter of 2003, due to favorable loss development on prior years' loss reserves, we recorded reductions to prior year reinsurance loss. The increase in our claims and claims expense ratio for our individual risk business primarily relates to an increase to the current quarter claims and claims expense ratio to reflect early reported losses on an incepting program, as well as to reflect additional case reserves, and incurred but not reported losses. Additionally, partially offsetting this increase was a reduction in prior years' loss reserves related to losses reported on prior year programs which were lower than our original estimates on such programs. Our underwriting expenses consist of acquisition costs and operational expenses. Acquisition costs consist of costs to acquire premiums and are principally comprised of broker commissions and excise taxes. Acquisition costs are driven by contract terms and are normally a set percentage of premiums. Operational expenses consist of salaries and other general and administrative expenses. The increase in the expense ratio is due to a higher volume of individual risk and specialty reinsurance premiums in the third quarter of 2003 compared to the third quarter of 2002. These types of business generate higher underwriting expenses relative to premium volume than traditional catastrophe reinsurance. Other Income 19
- --------------------------------------------------------------------------------------- Quarter ended September 30, 2003 2002 - --------------------------------------------------------------------------------------- Reinsurance net earned premiums $ 195,578 $ 160,542 Individual risk net earned premiums 81,786 30,768 ------------ ------------ Total net earned premiums $ 277,364 $ 191,310 ============ ============ Reinsurance claims and claim expenses $ 56,527 $ 71,233 Individual risk claims and claim expenses 40,329 11,698 ------------ ------------ Total claims and claim expenses $ 96,856 $ 82,931 ============ ============ Reinsurance underwriting expenses $ 39,576 $ 22,993 Individual risk underwriting expenses 34,623 10,425 ------------ ------------ Total underwriting expenses $ 74,199 $ 33,418 ============ ============ Reinsurance net underwriting income $ 99,475 $ 66,316 Individual risk net underwriting income 6,834 8,645 ------------ ------------ Total net underwriting income $ 106,309 $ 74,961 ============ ============ Reinsurance claims and claim expense ratio 28.9% 44.4% Individual risk claims and claim expense ratio 49.3% 38.0% Total claims and claim expense ratio 34.9% 43.3% Reinsurance underwriting expense ratio 20.7% 14.3% Individual risk underwriting expense ratio 42.3% 33.9% Total underwriting expense ratio 26.8% 17.5% Reinsurance combined ratio 49.6% 58.7% Individual risk combined ratio 91.6% 71.9% Total combined ratio 61.7% 60.8% - --------------------------------------------------------------------------------------- Our other income is principally generated from our equity pick-up from our 50% ownership of Top Layer Re, the annual management fee we receive from Platinum Underwriters Holdings Ltd. ("Platinum"), the underwriting of contracts related to physical variables, and other miscellaneous activities. We also generate fees from our joint venture with DaVinci; however, because DaVinci is consolidated in our financial statements, these fees are not recorded in other income, but are instead recorded in our consolidated underwriting results. We also receive fees from certain placements of structured quota share reinsurance agreements for participations in our property catastrophe book of business. These fees are also not recorded in other income, but instead are recorded as reductions to acquisition costs and underwriting expenses. The fee income, equity pick up and other items as reported in other income are detailed below. Also provided is a summary of all fees from joint venture relationships, including fee income, our profits earned on our capital at risk in the joint ventures and other items. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002 A summary of the significant components of our revenues and expenses are as follows: 20
- -------------------------------------------------------------------------------------------------------------------------------- QUARTERS ENDED ---------------------------------------------------- SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------- ---------------------- As Reported Fee income $ 3,530 $ 941 Equity pick up 5,272 4,923 Other items (823) 2,087 ---------------------- ---------------------- Total other income - as reported $ 7,979 $ 7,951 ====================== ====================== Summary of all income from joint venture relationships (1) ---------------------------------------------------------- Fee income (2) $ 19,312 $ 14,106 Profits earned from capital at risk in joint ventures 14,112 13,622 Other items (823) 2,087 ---------------------- ---------------------- Total $ 32,601 $ 29,815 ====================== ====================== (1) Reported GAAP presentation adjusted to reflect: - fee income and our interest in DaVinci as if DaVinci were accounted for under the equity method - other fee income on managed cat business which is reflected on the income statement as a reduction of acquisition and operational expenses (2) Excludes fee income received on capital invested by RenaissanceRe. - -------------------------------------------------------------------------------------------------------------------------------- The $182.1 million increase in net income for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, was primarily the result of the following items: o a $74.9 million increase in underwriting income from our Renaissance reinsurance operations due primarily to an increase in net earned premiums to $459.2 million from $372.1 million, primarily due to our ability to capitalize on market opportunities during 2003 and 2002, particularly our success with a number of large property catastrophe programs and our success in continuing to gain market share in our specialty reinsurance business. Also, during the first nine months of 2003, we recorded reductions to prior years' loss reserves, plus o the $22.3 million increase in underwriting income from DaVinci due primarily to an increase in net earned premiums to $145.7 million from $100.1 million, primarily due to our ability to capitalize on market opportunities as discussed above. Also, during the first nine months of 2003, we recorded a reduction in prior years' loss reserves, plus o a $17.0 million increase in underwriting income from our individual risk operations which resulted from the increase in our net earned premiums in our individual risk segment to $211.5 million in 2003 from $54.1 million in 2002, which was again the result of positive market conditions and our efforts to continue to increase premiums in this segment of our business. The increase in net premiums earned was partially offset by an increase in the loss ratio for the individual risk segment to reflect early reported losses on incepting programs, as well as to reflect additional case reserves, and IBNR losses. Also the losses for the individual risk business benefited from reductions to prior years' loss reserves, plus o a $20.8 million increase in net investment income, primarily due to an increase in our invested assets due to our strong cash flow from operations and the $196 million of net proceeds from the Series B Preference Shares and 5.875% Senior Notes sold in the first quarter of 2003 and equity appreciation on our hedge funds and private equity funds of $12.9 million ($2.2 million in the first nine months of 2002), partially offset by a reduction in investment returns due to lower interest rates, plus o a net $7.9 million reduction in corporate expenses, taxes and other, which was primarily due to an increase in foreign exchange gains of $9.3 million, less 21
- ------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF RESULTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------- Net underwriting income - Renaissance $ 241,819 $ 166,900 Net underwriting income - DaVinci 78,730 56,452 ------------------------------- Total underwriting income - Reinsurance (1) 320,549 223,352 Net underwriting income - Individual Risk (1) 27,837 10,850 Other income 20,722 24,227 Net investment income 93,823 73,021 Interest and preferred share dividends (33,200) (24,148) Corporate expenses, taxes, foreign exchange gains and other (740) (8,638) Minority Interest - DaVinci (56,246) (40,636) ------------------------------- Net income before realized gains and change in accounting principle 372,745 258,028 Net realized gains on investments 71,944 13,736 Cumulative effect of a change in accounting principle - (9,187) ------------------------------- Net income available to common shareholders $ 444,689 $ 262,577 =============================== Net income per common share - diluted $ 6.27 $ 3.75 Net income before realized gains on investments and change in accounting principle per common share - diluted $ 5.25 $ 3.68 (1) Net underwriting income consists of net premiums earned less claims and claim expenses incurred, acquisition costs and operational expenses. See table on page 23 for a reconciliation of underwriting income. - ------------------------------------------------------------------------------------------------------------------------------- o a $9.1 million increase in interest and preferred share dividends, which was primarily due to the additional dividends and interest accrued on the Series B Preference Shares and 5.875% Senior Notes issued in the first quarter of 2003, less o a $3.5 million decrease in other income, primarily due to a decrease in income from contracts related to physical variables, partially offset by an increase in fee income related to our managed catastrophe business and an increase in our equity pick up from our joint venture, Top Layer Re, less o an $15.6 million increase related to the interests owned by other investors in DaVinci, plus o a $58.2 increase in net realized gains on investments, which was primarily a consequence of a general repositioning of the invested asset portfolio in response to changing market conditions. In addition, we substantially reduced our holdings in our mortgage backed securities portfolio during the second quarter, which also contributed to realized gains. Gross Premiums Written Gross Premiums Written for the first nine months of 2003 and 2002 were as follows: The changes in our gross premiums written for the nine months ended September 30, 2003 were primarily due to the following: 1) Our total Specialty Reinsurance premiums for Renaissance and DaVinci for the nine month period ended September 30, 2003 increased to $272.2 million from $220.8 million for the nine months ended September 30, 2002. This increase of $51.4 million, or 23%, is primarily due to our increased focus and success on building our book of specialty reinsurance premiums and the increase is relatively in line with our expectations; and 2) Our continuing build-out of our individual risk operations, and our continued success in utilizing selected producers to assist us in growing this book of business. Underwriting Results The table below sets forth our net premiums earned, claims and claim expenses and underwriting expenses by segment and their corresponding claims, underwriting expense and combined ratios: 22
- --------------------------------------------------------------------- Nine months ended September 30, 2003 2002 ------------------------------- Cat Premium Renaissance $ 457,710 $ 439,403 DaVinci 145,953 168,554 ------------------------------- Total Cat Premium 603,663 607,957 Renaissance Specialty Reinsurance 249,445 220,759 DaVinci Specialty Reinsurance 22,733 - ------------------------------- Total Reinsurance 875,841 828,716 Individual risk premiums 335,203 185,009 ------------------------------- Total gross premiums written $ 1,211,044 $ 1,013,725 =============================== - --------------------------------------------------------------------- The reduction in our reinsurance claims and claims expense ratio was primarily due to reductions in prior year reserves we recorded for the nine months ended September 30, 2003 due to favorable loss development on prior years' loss reserves. The increase in the claims and claims expense ratio for the individual risk segment is primarily due to early reported losses on incepting programs, as well as to reflect additional case reserves, and IBNR losses. The individual risk segment also benefited from reductions to prior years' loss reserves as the losses reported to date on the prior year programs are lower than our original estimates on such programs. Our underwriting expenses consist of acquisition costs and operational expenses. Acquisition costs consist of costs to acquire premiums and are principally comprised of broker commissions and excise taxes. Acquisition costs are driven by contract terms and are normally a set percentage of premiums. Operational expenses consist of salaries and other general and administrative expenses. The increase in the expense ratio is due to a higher volume of individual risk and specialty reinsurance premiums in the first nine months of 2003 compared to the first nine months of 2002. These types of business generate higher underwriting expenses relative to premium volume than traditional catastrophe reinsurance. Other Income The fee income, equity pick up and other items as reported in other income (as described in more detail on page 20) for the nine month period ending September 30, 2003 and 2002 are set forth below. Also provided is a summary of all fees from joint venture relationships, including fee income, our profits earned on our capital at risk in the joint ventures and other items. 23
- -------------------------------------------------------------------------------------------------- Nine months ended September 30, 2003 2002 - -------------------------------------------------------------------------------------------------- Reinsurance net earned premiums $ 604,916 $ 472,211 Individual risk net earned premiums 211,457 54,149 ----------------- ----------------- Total net earned premiums $ 816,373 $ 526,360 ================= ================= Reinsurance claims and claim expenses $ 174,523 $ 176,204 Individual risk claims and claim expenses 105,189 22,994 ----------------- ----------------- Total claims and claim expenses $ 279,712 $ 199,198 ================= ================= Reinsurance underwriting expenses $ 109,844 $ 72,655 Individual risk underwriting expenses 78,431 20,305 ----------------- ----------------- Total underwriting expenses $ 188,275 $ 92,960 ================= ================= Reinsurance net underwriting income $ 320,549 $ 223,352 Individual risk net underwriting income 27,837 10,850 ----------------- ----------------- Total net underwriting income $ 348,386 $ 234,202 ================= ================= Reinsurance claims and claim expense ratio 28.9% 37.3% Individual risk claims and claim expense ratio 49.7% 42.5% Total claims and claim expense ratio 34.3% 37.8% Reinsurance underwriting expense ratio 18.3% 15.4% Individual risk underwriting expense ratio 37.1% 37.5% Total underwriting expense ratio 23.0% 17.7% Reinsurance combined ratio 47.2% 52.7% Individual risk combined ratio 86.8% 80.0% Total combined ratio 57.3% 55.5% - -------------------------------------------------------------------------------------------------- CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets." In the second quarter of 2002, the Company completed its initial impairment review in compliance with the transition provisions of SFAS 142 and, as a result, the Company decided to record goodwill at zero value, the low end of an estimated range of values, and wrote off the balance of its goodwill during the second quarter of 2002, which totaled $9.2 million. In accordance with the provisions of SFAS 142, this was required to be recorded as a cumulative effect of a change in accounting principle in the consolidated statement of income and was required to be recorded retroactive to January 1, 2002. FINANCIAL CONDITION RenaissanceRe is a holding company, and we therefore rely on dividends from our subsidiaries and investment income to make principal, interest and dividend payments on our debt and capital securities, and to make dividend payments to our preference shareholders and common shareholders. The payment of dividends by our Bermuda subsidiaries is, under certain circumstances, limited under Bermuda insurance law, which require our Bermuda insurance subsidiaries to maintain certain measures of solvency and liquidity. At September 30, 2003, the statutory capital and surplus of our Bermuda insurance subsidiaries was $2,286.2 million, and the amount of capital and surplus required to be maintained was $430.9 million. Our U.S. insurance subsidiary, Stonington, is also required to maintain certain measures of solvency and liquidity. At September 30, 2003, the statutory capital and surplus of Stonington was $21.4 million and the amount of capital and surplus required to be maintained was $8.6 million. For the nine months ended September 30, 2003, Renaissance Reinsurance declared dividends to RenaissanceRe of $289.9 million compared to $224.3 million for the same period in 2002. CASH FLOWS Our operating subsidiaries have historically produced sufficient cash flows to meet their own expected claims payments and operational expenses and to provide dividend payments to us. Our 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, we maintain a $400.0 million revolving credit facility to meet additional capital requirements, if necessary. 24
- ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED ---------------------------------------------------- SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 ---------------------- ---------------------- As Reported Fee income $ 6,008 $ 2,941 Equity pick up 17,833 16,059 Other items (3,119) 5,227 ---------------------- ---------------------- Total other income - as reported $ 20,722 $ 24,227 ====================== ====================== Summary of all income from joint venture relationships (1) ---------------------------------------------------------- Fee income (2) $ 55,132 $ 38,295 Profits earned from capital at risk in joint ventures 48,336 37,478 Other items (3,119) 5,227 ---------------------- ---------------------- Total $ 100,349 $ 81,000 ====================== ====================== (1) Reported GAAP presentation adjusted to reflect: - fee income and our interest in DaVinci as if DaVinci were accounted for under the equity method - other fee income on managed cat business which is reflected on the income statement as a reduction of acquisition and operational expenses (2) Excludes fee income received on capital invested by RenaissanceRe. - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operations in the first nine months of 2003 were $761.8 million, which principally consisted of net income of $458.6 million, plus $206.3 million for increases in reserves for unearned premiums, plus $219.4 million for increases to net reserves for claims and claim expenses, partially offset by an increase of $112.8 million in premiums receivable. Because a large portion of the coverages we provide typically can produce losses of high severity and low frequency, it is not possible to accurately predict our future cash flows from operating activities. As a consequence, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. We have generated cash flows from operations in 2002 and the first nine months of 2003, significantly in excess of our operating commitments. To the extent that capital is not utilized in our reinsurance or individual risk segments, we will consider using such capital to invest in new opportunities. We would also consider returning capital to shareholders in the form of share repurchases under certain circumstances. We are currently authorized by our Board to repurchase up to $150.0 million of our shares. RESERVES FOR CLAIMS AND CLAIMS EXPENSES As discussed in the Summary of Critical Accounting Policies and Estimates, the most significant judgment made by management is the estimation of the claims and claim expense reserves. Because of the variability and uncertainty associated with loss estimation, it is possible that our individual case reserves are incorrect, possibly materially. A large portion of our coverages provide protection from natural and man-made catastrophes which are generally infrequent, but can be significant, such as losses from hurricanes and earthquakes. Our claims and claim expense reserves will generally fluctuate, sometimes materially, based upon the occurrence of a significant natural or man-made catastrophic loss for which we provide reinsurance. Our claims reserves will also fluctuate based on the payments we make for these large loss events. The timing of our payments on loss events can be affected by the event causing the loss, the location of the loss, and whether our losses are from policies with insurers or reinsurers. During 2002 and continuing in the first nine months of 2003, we increased our specialty reinsurance and individual risk gross written premiums (See - "Gross Written Premiums"). The addition of these lines of business adds complexity to our claims reserving process and therefore adds uncertainty to our claims reserve estimates, as the reporting of information, the setting of initial reserves and the loss settlement process for these lines of business vary from our traditional property catastrophe line of business. For our reinsurance and individual risk operations, our estimates of claims reserves include case reserves reported to us as well as our estimate of IBNR losses to us. Our case reserves and our estimates for IBNR reserves are based on 1) claims reports from insureds and program managers, 2) our underwriters' experience in setting claims reserves, 3) the use of computer models where applicable and 4) historical industry claims experience. For some classes of business we also use statistical and actuarial methods to estimate ultimate expected claims and claim expenses. We review our claims reserves on a regular basis. During the nine months ended September 30, 2003 our net incurred claims and claim expenses were $279.7 million and our net paid losses were $59.3 million. IBNR reserves at September 30, 2003 were $612.3 million compared to $462.9 million at December 31, 2002 (See Summary of Critical Accounting Policies and Estimates). 25
- --------------------------------------------------------------------------- As at September 30, As at December 31, 2003 2002 ---------------------------------------- Gross reserves $ 981,687 $ 804,795 Recoverables 157,059 199,533 ---------------------------------------- Net reserves $ 824,628 $ 605,262 ======================================== Shareholders' equity 2,177,645 1,642,035 Gross reserves as a % of equity 45.1% 49.0% Net reserves as a % of equity 37.9% 36.9% - --------------------------------------------------------------------------- CAPITAL RESOURCES Our total capital resources as at September 30, 2003 and December 31, 2002 were as follows: During the first nine months of 2003, our capital resources increased primarily as a result of three items: 1) our net income of $458.6 million; 2) the issuance of $100 million of Series B Preference Shares; and 3) the issuance of $100 million of 5.875% Senior Notes. On April 19, 2002, DaVinci entered into a credit agreement providing for a $100 million committed revolving credit facility. On May 10, 2002, DaVinci borrowed the full $100 million available under this facility to repay $100 million of bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor Renaissance Reinsurance is a guarantor of this facility and the lenders have no recourse against us or our subsidiaries other than DaVinci under this facility. Pursuant to the terms of the $400.0 million facility maintained by RenaissanceRe, a default by DaVinci in its obligations will not result in a default under the RenaissanceRe facility. As of September 30, 2003, the full amount was outstanding under this facility. Interest rates on the facility are based on a spread above LIBOR, and averaged approximately 2.2% during the first nine months of 2003, compared to 2.7% for the same period in 2002. The credit agreement contains certain covenants requiring DaVinci to maintain a debt to capital ratio of 30% or below and a minimum net worth of $230 million. As at September 30, 2003, DaVinci was in compliance with the covenants of this agreement. With the increased opportunities to grow our business at the beginning of 2003, we decided to increase our capital resources through the following activities: 1. In January 2003, we issued $100 million of 5.875% Senior Notes due February 15, 2013. Interest on the notes is payable on February 15 and August 15 of each year, commencing August 15, 2003. The notes can be redeemed by us prior to maturity subject to payment of a "make-whole" premium; however, we have no current intentions of calling the notes. The notes, which are senior obligations, contain various covenants, including limitations on mergers and consolidations, restriction as to the disposition of stock of designated subsidiaries and limitations on liens on the stock of designated subsidiaries. 2. In February 2003, we issued 4,000,000 $1.00 par value Series B preference shares at $25 per share. The shares may be redeemed at $25 per share at our option on or after February 4, 2008. Dividends are cumulative from the date of original issuance and are payable quarterly in arrears at 7.3%, commencing June 1, 2003 when, if, and as declared by the Board of Directors. If we submit a proposal to our shareholders concerning an amalgamation or submit any proposal that, as a result of any changes to Bermuda law, requires approval of the holders of these preference shares to vote as a single class, we may redeem the shares prior to February 4, 2008 at $26 per share. The preference shares have no stated maturity and are not convertible into any other securities of the Company. 26
- ----------------------------------------------------------------------------------------------------------------------- September 30, December 31, (in thousands of U.S. dollars) 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Common shareholders' equity $ 1,927,645 $ 1,492,035 Preference Shares 250,000 150,000 ------------------ ------------------ Total shareholders' equity 2,177,645 1,642,035 7% senior notes - due 2008 150,000 150,000 5.875% senior notes - due 2013 100,000 - Term loan and borrowed revolving credit facility payable (Glencoe U.S.) - 25,000 DaVinci revolving credit facility - borrowed 100,000 100,000 Revolving Credit Facility - unborrowed (RenaissanceRe) 400,000 310,000 Company obligated mandatorily redeemable capital securities of a subsidiary trust 84,630 84,630 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CAPITAL RESOURCES $ 3,012,275 $ 2,311,665 ================== ================== - ----------------------------------------------------------------------------------------------------------------------- Our subsidiary, RenaissanceRe Capital Trust, has issued capital securities which pay cumulative cash distributions at an annual rate of 8.54%, payable semi-annually. During 2002, RenaissanceRe repurchased $3.0 million of the Capital Securities. The sole asset of the Trust consists of our junior subordinated debentures in an amount equal to the outstanding capital securities. The Indenture relating to these junior subordinated debentures contains certain covenants, including a covenant prohibiting us from the payment of dividends if we are in default under the Indenture. We were in compliance with all of the covenants of the Indenture at December 31, 2002 and September 30, 2003. The capital trust securities mature on March 1, 2027. Generally Accepted Accounting Principles do not allow these securities to be classified as a component of shareholders' equity (See Note 12). On August 8, 2003, we amended and restated our existing revolving credit agreement with a syndicate of commercial banks to increase the facility from $310 million to $400 million and to make certain other changes. No balance was outstanding as of December 31, 2002 or at September 30, 2003. As amended, the agreement contains certain financial covenants. These covenants generally provide that the Debt to Capital Ratio shall not exceed 0.35:1 and that consolidated shareholders' equity plus outstanding Capital Securities of RenaissanceRe and Renaissance Reinsurance shall equal or exceed $1.0 billion and $500 million, respectively. The scheduled commitment termination date under the amended agreement is August 8, 2006. Our subsidiary, Glencoe U.S., had a $10.0 million term loan and $15.0 million revolving loan facility with a syndicate of commercial banks. Interest rates on the facility were based upon a spread above LIBOR, and averaged 1.8% during the first nine months of 2003, compared to 2.4% during the same period in 2002. The term loan and revolving credit facility were repaid in full in June 2003 in accordance with the mandatory repayment provisions and terminated. SHAREHOLDERS' EQUITY During the first nine months of 2003, our consolidated shareholders' equity increased by $535.6 million to $2.2 billion as of September 30, 2003, from $1.6 billion as of December 31, 2002. The significant components of the change in shareholders' equity included net income of $458.6 million, the issuance of $100 million of Series B Preference Shares and an increase in net unrealized gains on investments of $14.9 million, partially offset by dividends to common and preference shareholders of $45.5 million. INVESTMENTS At September 30, 2003, we held investments and cash totaling $4.1 billion (compared to $3.1 billion at December 31, 2002). Our investment portfolio is subject to the risk of declines in realizable value. We attempt to mitigate this risk through diversification and active management of our portfolio. The table below shows the aggregate amounts of our invested assets: The $979.3 million growth in our portfolio of invested assets for the nine months ended September 30, 2003 resulted primarily from net cash provided by operating activities of $761.8 million, the proceeds from our sale of $100 million of 5.875% Senior Notes and the proceeds from our sale of $100 million of Series B Preference Shares. 27
- ------------------------------------------------------------------------------------------------------------ (in thousands of U.S. dollars) September 30, 2003 December 31, 2002 - ------------------------------------------------------------------------------------------------------------ Fixed maturity investments available for sale, at fair value $2,698,720 $2,221,109 Other investments 224,699 129,918 Short term investments 964,309 570,497 Equity investment in reinsurance company 136,432 120,288 Cash and cash equivalents 84,029 87,067 - ------------------------------------------------------------------------------------------------------------ TOTAL INVESTED ASSETS $4,108,189 $3,128,879 - ------------------------------------------------------------------------------------------------------------ The equity investment in reinsurance company relates to our November 1, 2002 purchase of 3,960,000 common shares of Platinum in a private placement transaction. In addition, we received a ten-year warrant to purchase up to 2.5 million additional common shares of Platinum for $27.00 per share. We purchased the common shares and warrant for an aggregate price of $84.2 million. As at September 30, 2003, we own 9.2% of Platinum's outstanding common shares. We have recorded our investments in Platinum at fair value, and at September 30, 2003 the aggregate fair value was $136.4 million, compared to $120.3 million as at December 31, 2002. The aggregate unrealized gain of $52.2 million on the Platinum investment is included in accumulated other comprehensive income, of which $25.2 million represents our estimate of the value of the warrant. Because our coverages include substantial protection for damages resulting from natural and man-made catastrophes, we may become liable for substantial claim payments on short-term notice. Accordingly, our investment portfolio is structured to preserve capital and provide a high level of liquidity which means that the large majority of our investment portfolio consists of highly rated fixed income securities, including U.S. Treasuries, Aaa-rated sovereign , supranational, mortgage backed and asset backed securities. At September 30, 2003, our invested asset portfolio of fixed maturities and short term investments had a dollar weighted average rating of AA, an average duration of 2.0 years and an average yield to maturity of 2.5%. At September 30, 2003, $18.3 million of cash and cash equivalents were invested in currencies other than the U.S. dollar, which represented less than 1% of our invested assets. For the first nine months of 2003, we recorded an increase of $58.2 million in net realized gains on investments to $71.9 million from $13.7 million for the same period in 2002. The increase was primarily a consequence of a general repositioning of the invested asset portfolio in response to changing market conditions. In addition, we substantially reduced our holdings in our mortgage backed securities portfolio during the second quarter, which also contributed to realized gains. A portion of our investment assets are directly held by our subsidiary Renaissance Investment Holdings Ltd. ("RIHL"), a Bermuda company we organized for the primary purpose of holding the investments in high quality marketable securities for RenaissanceRe, our operating subsidiaries and certain of our joint venture affiliates. We believe that RIHL permits us to consolidate and substantially facilitate our investment management operations. RenaissanceRe and each of our participating operating subsidiaries and affiliates have transferred to RIHL marketable securities or other assets, in return for a subscription of RIHL equity interests. Each RIHL share is redeemable by the subscribing companies for cash or in marketable securities. Over time, the subsidiaries and joint ventures who participate in RIHL are expected to both subscribe for additional shares and redeem outstanding shares, as our and their respective liquidity needs change. RIHL is currently rated AAAf/S2 by Standards & Poor's Ratings Group. NON-INDEMNITY INDEX TRANSACTIONS We have assumed risk through derivative instruments under which losses could be triggered by an industry loss index or geological or physical variables. During the first nine months of 2003, we recorded a loss on non-indemnity index transactions of $2.4 million, compared to gains of $3.2 million for the same period in 2002. We report these gains or losses in other income. EFFECTS OF INFLATION The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local or regional economy. The anticipated effects on us are considered in our catastrophe loss models. The effects of inflation are also considered in pricing and in estimating reserves for unpaid claims and claim expenses. The actual effects of this post-event inflation on our results cannot be accurately known until claims are ultimately settled. OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS As of September 30, 2003, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K. 28 CURRENT OUTLOOK We believe that the principal components of our operations - property catastrophe reinsurance, specialty reinsurance, including the fees and profits we earn as the exclusive underwriting manager of the property catastrophe and specialty reinsurance premiums of our joint ventures, and individual risk, continue to display strong fundamentals. Currently, we believe that prices in certain specialty casualty insurance markets have risen to levels that offer us additional opportunities to deploy our capital and accordingly, during the third quarter, we have begun writing casualty insurance premiums in certain niche markets. Because of these opportunities, and continued opportunities in the primary property markets, we believe that our premiums in our individual risk segment for the full year 2003 will grow substantially as compared with the total individual risk premiums for 2002. Recognizing that there are many segments of the casualty market that remain unattractive even after recent price increases, we intend to be selective and write business only in those segments that we believe can produce an acceptable return on capital. We are hiring staff, and building systems, to support our entry into the specialty casualty business. We expect to supplement our internal resources with external service providers, including, most importantly, a select number of leading program managers and third party claims administrators. We have assembled a team of professionals in our U.S. operations to support this initiative, which will include internal auditing and oversight of these external service providers. In our reinsurance segment, we believe that the specialty reinsurance markets in which we operate continue to present attractive opportunities. We believe that, as a result of factors including our reputation for superior service, prompt claims payment and financial strength, and our investment in modeling and other analytic tools, we have developed a leadership position in certain segments of this market, and we will continue to see opportunities for overall growth in our 2003 consolidated specialty reinsurance premiums. For our property catastrophe reinsurance operations, we believe that as a result of the additional capacity provided by the new capital entering the market subsequent to the World Trade Center tragedy, combined with comparably light catastrophe losses thus far in 2003, pricing in the property catastrophe market has leveled off and we have started to see initial indications of reduced pricing in select instances. As a consequence of the current pricing environment, we currently expect gross managed catastrophe premium in 2003 to be approximately in line with gross managed catastrophe premiums for 2002. To the extent that industry pricing of our products does not meet our hurdle rate, we would expect to reduce our catastrophe premiums. The current market environment is also providing us with increased opportunities for our joint venture and structured product initiatives. In evaluating these initiatives, we are not only considering alternatives in the property catastrophe markets, but are also considering opportunities in other areas of the insurance and reinsurance markets, either through organic growth, the formation of new joint ventures, or the acquisition of other companies or books of business of other companies. The potential Channel Re transaction, as described in Note 13, is an example of such an opportunity. In evaluating such new ventures, we seek an attractive return on equity, the ability to develop or capitalize on a competitive advantage, and opportunities that will not detract from our core reinsurance and individual risk operations. This diversification may include new opportunities to write additional targeted classes of non-catastrophe business, both directly for our own account and through possible new joint ventures. We are currently in the process of reviewing certain opportunities and periodically engage in discussions regarding possible transactions, although there can be no assurance that we will complete any such transactions or that any such transaction would contribute materially to our results of operations or financial condition. 29 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 contained in this report. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). 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, us. In particular, statements using words such as "may", "should", "estimate", "expect", "anticipate", "intends", "believe", "predict" or words of similar import 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 its objectives or plans will be achieved. Numerous factors could cause the Company's actual results to differ materially from those addressed by the forward-looking statements, including the following: 1. the occurrence of natural or man-made catastrophic events with a frequency or severity exceeding our estimates; 2. a decrease in the level of demand for our reinsurance or insurance business, or increased competition in the industry; 3. the lowering or loss of one of the financial or claims-paying ratings of ours or one of more of our subsidiaries; 4. risks associated with implementing our business strategies and initiatives for organic growth, including risks relating to managing that growth; 5. acts of terrorism or acts of war; 6. slower than anticipated growth in our fee-based operations, including risks associated with retaining our existing partners and attracting potential new partners; 7. uncertainties in our reserving process, which we believe are increasing as we diversify into new product classes; 8. failures of our brokers or program managers to honor their obligations, including their obligations to make third party payments for which we might be liable; 9. risks relating to the collectibility of our reinsurance, including both our reinsurance and individual risk operations, as well as risks relating to the availability of coverage from creditworthy providers. 10. extraordinary events affecting our clients, such as bankruptcies and liquidations, and the risk that we may not retain or replace our large clients in all future periods; 11. loss of services of any one of our key executive officers; 12. 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 we operate; 13. changes in economic conditions, including interest rate, currency, equity and credit conditions which could affect our investment portfolio; 14. changes in insurance regulations in the United States or other jurisdictions in which we operate, including potential challenges to Renaissance Reinsurance's claim of exemption from insurance regulation under current laws, and the risk of increased global regulation of the insurance and reinsurance industry; 30 15. a contention by the United States Internal Revenue Service that our Bermuda subsidiaries, including Renaissance Reinsurance, are subject to U.S. taxation; and 16. actions of competitors, including industry consolidation, the launch of new entrants and the development of competing financial products. The factors listed above should not be construed as exhaustive. Certain of these factors are described in more detail from time to time in our filings with the Securities and Exchange Commission. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 31 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are principally exposed to three types of market risk: interest rate risk, equity risk and foreign currency risk. The Company's investment guidelines permit, subject to specific approval, investments in derivative instruments such as futures, options and foreign currency forward contracts for purposes other than trading. The Company anticipates that any such investments would be limited to duration management, foreign currency exposure management or to obtain an exposure to a particular financial market. INTEREST RATE RISK Our investment portfolio includes fixed maturity investments available for sale and short-term investments, whose market values will fluctuate 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 2.0%, which equated to a decrease in market value of approximately $73.3 million on a portfolio valued at $3,663.0 million at September 30, 2003. At December 31, 2002, the decrease in total return would have been 2.25%, which equated to a decrease in market value of approximately $62.8 million on a portfolio valued at $2,791.6 million. The foregoing reflects the use of an immediate time horizon, since this presents the worst-case scenario. Credit spreads are assumed to remain constant in these hypothetical examples. EQUITY RISK We are exposed to equity price risk due to our investment in the common shares and warrant to purchase additional common shares of Platinum (see Investments), which we carry on our balance sheet at fair value. The risk is the potential for loss in fair value resulting from the adverse changes in Platinum's common stock. The aggregate fair value of this investment in Platinum was $136.4 million as at September 30, 2003 compared to $120.3 million as at December 31, 2002. A hypothetical 10 percent decline in the price of Platinum stock, holding all other factors constant, would have resulted in a $15.5 million decline in fair value, which would be recorded in net unrealized gains (losses) on securities and included in other comprehensive income in shareholders' equity. FOREIGN CURRENCY RISK Our functional currency is the U.S. dollar. We write a substantial portion of our business in currencies other than U.S. dollars and may, from time to time, experience exchange gains and losses and incur underwriting losses in currencies other than U.S. dollars, which will in turn affect our consolidated financial statements. Our foreign currency policy is generally to hold foreign currency assets, including cash, investments and receivables, that approximate the net monetary foreign currency liabilities, including claims and claim expense reserves and reinsurance balances payable. We may have short-term accumulations of non-dollar assets or liabilities. All changes in exchange rates are recognized currently in our statements of income. When necessary, the Company will use foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar denominated assets and liabilities. As of September 30, 2003, the Company had notional exposure of $26.9 million related to foreign currency forward and option contracts. These contracts are recorded at fair value which is determined principally by obtaining quotes from independent dealers and counterparties. The fair value of these contracts as of September 30, 2003 was a loss of $0.4 million. The Company had no investments in these foreign currency derivative instruments as of December 31, 2002. 32 Item 4. DISCLOSURE CONTROLS AND PROCEDURES Disclosure Controls and Internal Controls: We have designed various controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act to help ensure that information required to be disclosed in our periodic Exchange Act reports, such as this quarterly report, is captured, processed, summarized and reported on a timely and accurate basis. Our disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our senior management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on financial statements. Limitations on the effectiveness of controls: Our Board of Directors and management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, we believe that the design of any prudent control system must reflect appropriate resource constraints, such that the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, there can be no absolute assurance that all control issues and instances of fraud, if any, applicable to us have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some individuals, by collusion of more than one person, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. An evaluation was performed under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Company's management, including our Chief Executive Officer and Chief Financial Officer, concluded, subject to the limitations noted above, that the Company's disclosure controls and procedures as of September 30, 2003 are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 33 PART II -- OTHER INFORMATION Item 1 -- Legal Proceedings We are, from time to time, a party to litigation and arbitration that arises in the normal course of our business operations. While any proceeding contains an element of uncertainty, we believe that we are not presently a party to any such litigation or arbitration that is likely to have a material adverse effect on our business or operations. Item 2 -- Changes in Securities and Use of Proceeds None Item 3 -- Defaults Upon Senior Securities None Item 4 -- Submission of Matters to a Vote of Security Holders None Item 5 -- Other Information None Item 6 -- Exhibits and Reports on Form 8-K a. Exhibits: 31.1 Certification of James N. Stanard, Chief Executive Officer of RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of John M. Lummis, Chief Financial Officer of RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of James N. Stanard, Chief Executive Officer of RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of John M. Lummis, Chief Financial Officer of RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. b. Current Reports on Form 8-K: On July 24, 2003, the Company furnished a report on Form 8-K containing the Company's press release, issued on July 22, 2003, reporting its preliminary results for its second quarter ended June 30, 2003. In accordance with Item 12 of Form 8-K, the Form 8-K and the press release attached as an exhibit thereto were furnished and not filed with the Securities Exchange Commission. 34 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. RENAISSANCERE HOLDINGS LTD. By: /s/ John M. Lummis ------------------ John M. Lummis Chief Financial Officer Date: November 14, 2003 Exhibit 31.1 CERTIFICATIONS I, James N. Stanard, Chief Executive Officer of RenaissanceRe Holdings Ltd., (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ James N. Stanard -------------------- James N. Stanard Chief Executive Officer Exhibit 31.2 CERTIFICATION I, John M. Lummis, Chief Financial Officer of RenaissanceRe Holdings Ltd., (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ John M. Lummis ------------------ John M. Lummis Chief Financial Officer EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of RenaissanceRe Holdings Ltd. (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James N. Stanard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James N. Stanard - -------------------- James N. Stanard Chief Executive Officer November 14, 2003 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of RenaissanceRe Holdings Ltd. (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John M. Lummis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John M. Lummis - ------------------ John M. Lummis Chief Financial Officer November 14, 2003