10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 31, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 34-0-26512
RENAISSANCERE HOLDINGS LTD.
(Exact name of Registrant as specified in its charter)
Bermuda 98-013-8020
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Renaissance House, 8-12 East Broadway, Pembroke HM 19 Bermuda
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: Common Shares, par
value $1.00 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of Common Shares held by nonaffiliates of the
Registrant as of March 29, 1999 was $401,252,390 based on the closing sale price
of the Common Shares on the New York Stock Exchange on that date.
The number of Common Shares outstanding as of March 29, 1999 was
20,927,331.
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DOCUMENTS INCORPORATED BY REFERENCE
Sections of the Registrant's Annual Report to Shareholders mailed to
shareholders on or about March 30, 1999 (the "Annual Report") are incorporated
by reference into Part II of this Form 10-K. With the exception of the sections
of the Annual Report specifically incorporated by reference herein, the Annual
Report is not deemed to be filed as part of this Form 10-K.
Sections of the Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission (the "Commission") pursuant to Regulation
14A under the Securities Exchange Act of 1934 relating to the Registrant's
Annual General Meeting of Shareholders to be held on May 13, 1999 (the "Proxy
Statement") are incorporated by reference into Part III of this Form 10-K. With
the exception of the sections of the Proxy Statement specifically incorporated
by reference herein, the Proxy Statement is not deemed to be filed as part of
this Form 10-K.
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RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business..............................................................1
Item 2. Properties...........................................................24
Item 3. Legal Proceedings....................................................24
Item 4. Submission of Matters to a Vote of Security Holders..................24
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................................24
Item 6. Selected Consolidated Financial Data.................................24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................24
Item 7A Quantitative and Qualitative Disclosures about Market Risk...........24
Item 8. Financial Statements and Supplementary Data..........................25
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................25
PART III
Item 10. Directors and Executive Officers of the Company......................25
Item 11. Executive Compensation...............................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management.......25
Item 13. Certain Relationships and Related Transactions.......................25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....25
SIGNATURES....................................................................29
(i)
PART I
Unless the context otherwise requires, references herein to the "Company"
include RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its subsidiaries,
which principally include Renaissance Reinsurance Ltd. ("Renaissance
Reinsurance"), DeSoto Insurance Company ("DeSoto"), Nobel Insurance Company
("Nobel"), Glencoe Insurance Ltd. ("Glencoe"), Renaissance Services Ltd.
("Services"), Renaissance Reinsurance of Europe ("Renaissance Europe"),
Renaissance U.S. Holdings, Inc. ("Renaissance U.S."), Pembroke Managing Agents,
Inc. ("Pembroke") and Paget Insurance Agency, Inc. ("Paget"). Certain terms used
below are defined in the "Glossary of Selected Insurance Terms" appearing on
pages 21-23 of this Report.
Note on Forward-Looking Statements
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which, with respect to
future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. In particular, statements using verbs such as "expect",
"anticipate", "intends", "believe" or words of similar impact generally involve
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. Numerous
factors could cause the Company's actual results to differ materially from those
in the forward-looking statements, including the following: (i) the occurrence
of catastrophic events with a frequency or severity exceeding the Company's
estimates; (ii) a decrease in the level of demand for the Company's reinsurance
or insurance business, or increased competition owing to increased capacity in
the industry; (iii) any lowering or loss of one of the financial or
claims-paying ratings of the Company or one or more of its subsidiaries; (iv)
risks with implementing business strategies of the Company; (v) uncertainties in
the Company's reserving process; (vi) failure of the Company's reinsurers to
honor their obligations; (vii) actions of competitors including industry
consolidation; (viii) loss of services of any one of the Company's key executive
officers; (ix) the passage of federal or state legislation subjecting
Renaissance Reinsurance to supervision or regulation, including additional tax
regulation, in the United States or other jurisdictions in which the Company
operates; (x) challenges by insurance regulators in the United States to
Renaissance Reinsurance's claim of exemption from insurance regulation under the
current laws; (xi) changes in economic conditions, including currency rate
conditions which could affect the Company's investment portfolio; (xii)
uncertainties with respect to the Company's planned distribution of certain
operating units of Nobel Insurance Company; (xiii) risks relating to the Year
2000 issue; or (xiv) a contention by the United States Internal Revenue Service
that the Company or Renaissance Reinsurance is engaged in the conduct of a trade
or business within the U.S. The foregoing review of important factors should not
be construed as exhaustive; the Company undertakes no obligation to release
publicly the results of any future revisions it may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Item 1. Business
General
RenaissanceRe is a Bermuda based holding company, incorporated in 1993,
with operating subsidiaries engaged in reinsurance and insurance. The Company's
principal operating subsidiary, Renaissance Reinsurance provides property
catastrophe reinsurance coverage to insurers and reinsurers, primarily on an
excess of loss basis. During 1998, Renaissance Reinsurance wrote $207.2 million
of premium and, based on gross premiums written, Renaissance Reinsurance is one
of the largest providers of this coverage in the world. Excess of loss
catastrophe coverage generally provides coverage for claims arising from large
natural catastrophes, such as earthquakes and hurricanes, in excess of a
specified loss. In connection with the coverage it provides, Renaissance
Reinsurance is also exposed to claims arising from other natural and man-made
catastrophes such as winter storms, freezes, floods, fires and tornadoes.
RenaissanceRe is continuing to expand its primary insurance business
through internal growth and acquisition. In 1996 RenaissanceRe incorporated
Glencoe, which provides primary catastrophe-exposed property coverage on an
excess and surplus lines basis, and is eligible to write business in 29 states.
During 1998, Glencoe wrote $5.6 million of primary insurance premium.
In January 1998, RenaissanceRe began to provide personal lines coverages
through DeSoto, a wholly owned subsidiary of Glencoe. DeSoto is a special
purpose Florida homeowners insurance company that is licensed to assume and
renew homeowner policies from the Florida Joint Underwriting Authority (the
"JUA"), a state sponsored insurance company. During 1998, DeSoto wrote $26.7
million of primary homeowners insurance coverage.
On June 25, 1998, RenaissanceRe, through its U.S. holding company,
Renaissance U.S., completed its acquisition of the U.S. operating subsidiaries
of Nobel Insurance Limited, a Bermuda company ("Nobel Limited"), for $56.1
million. During the fourth quarter of 1998, RenaissanceRe recorded after tax
charges of $40.1 million related to Nobel Insurance Company ("Nobel"). As a
result of these charges, RenaissanceRe adopted a plan to exit each of Nobel's
current businesses. Nobel will continue to operate these business units on a
transitional basis. See "Primary Insurance Operations - Nobel" on page 8 of this
form 10-K.
Nobel is a Texas domiciled company admitted in 50 states and the District
of Columbia to write all insurance lines except life insurance, with statutory
surplus of $15 million at December 31, 1998. In connection with the acquisition
of Nobel, the Company also acquired four related operating companies: (i) Nobel
Managing Agents, Inc. ("NMA"), a Texas corporation that provides insurance
brokerage and risk management services; (ii) Nobel Insurance Agency, Inc.
("NIA"), a Texas corporation that serves as Nobel's commercial and personal
lines recording agency; (iii) Nobel Service Corporation ("NSC"), a Delaware
corporation which provides certain administrative and management services for
Nobel; and (iv) IAS Claim Services, Inc. ("IAS"), a Delaware corporation which
conducts claims adjusting services on behalf of the Company's U.S. primary
operations, as well as for third parties.
In October 1998, Renaissance Europe was incorporated under the laws of
Ireland as a wholly owned subsidiary of Renaissance Reinsurance to provide
certain property catastrophe reinsurance coverage in Europe.
On December 31, 1998, RenaissanceRe entered into an agreement to purchase a
10% percent interest in Inter-Ocean Holdings Ltd. Also, effective January 11,
1999, RenaissanceRe entered into a joint venture, Top Layer Reinsurance Ltd.,
with State Farm Mutual Automobile Insurance Company ("State Farm") to provide
high layer coverage for non-U.S. risks.
The Company's results depend to a large extent on the frequency and
severity of catastrophic events, and the coverage offered to clients impacted
thereby. In addition, from time to time, the Company may consider opportunistic
diversification into new ventures, either through organic growth or the
acquisition of other companies or books of business. In evaluating such new
ventures, the Company seeks an attractive return on equity, the ability to
develop or capitalize on a competitive advantage and opportunities that will not
detract from its core reinsurance operations. Accordingly, the Company regularly
reviews strategic opportunities and periodically engages in discussions
regarding possible transactions.
The property catastrophe reinsurance market and the primary insurance
market continued to be highly competitive in 1998. Because the primary
catastrophe reinsurance business has been one of the most profitable segments of
the market, it is the focus of much competition, which has resulted in lower
premiums measured on a risk-adjusted basis.
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Ratings
Renaissance Reinsurance has been assigned an "A" claims-paying ability
rating from each of Standard & Poor's Insurance Ratings Services ("S&P") and
A.M. Best Company, Inc. ("AM Best"), and Glencoe has been assigned an "A-"
claims-paying ability rating from A.M. Best, representing independent opinions
of the financial strength and ability of Renaissance Reinsurance and Glencoe to
meet their respective obligations to their policyholders. As a result of Nobel's
recent operating performance (See "Primary Insurance Operations - Nobel"), A.M.
Best has reduced the credit rating of Nobel from "A-" to "B+". Such ratings may
not reflect the considerations applicable to an investment in the Company.
The "A" range ("A+," "A" and "A-") is the third highest of four ratings
ranges within what S&P considers the "secure" category. Insurance companies
assigned a claims-paying ability rating in the "A" range are believed by S&P to
provide good financial security, but their capacity to meet policyholder
obligations is somewhat susceptible to adverse economic and underwriting
conditions.
"A (Excellent)" and "A- (Excellent)" are the third and fourth highest of
A.M. Best's sixteen ratings designations. Insurance companies assigned an "A" or
"A-" rating by A.M. Best are companies which, in A.M. Best's opinion, have
demonstrated excellent overall performance when compared to the standards
established by A.M.
The "B++ and B+ (Very Good)" ratings are the fifth and sixth highest of
A.M. Best's sixteen ratings designations and are included within what A.M. Best
considers the "secure" category. A.M. Best assigns a B+ rating to insurance
companies which in A.M. Best's view have, on balance, excellent financial
strength, operating performance and market profile and a good ability to meet
their ongoing obligations to policyholders.
Strategy
The principal components of the Company's business strategy are to:
o Focus on the property catastrophe reinsurance business. The Company's
primary focus is property catastrophe reinsurance, which represented
approximately 77% of the Company's gross premiums written in 1998, 91% in
1997 and 95% in 1996, respectively.
o Build a superior portfolio of property catastrophe reinsurance by utilizing
proprietary modeling capabilities. The Company assesses underwriting
decisions on the basis of the expected incremental return on equity of each
new reinsurance contract in relation to the Company's overall portfolio of
reinsurance contracts. To facilitate this, the Company has developed
REMS(C), a proprietary, computer-based pricing and exposure management
system. The Company utilizes REMS(C) to assess property catastrophe risks,
price treaties and limit aggregate exposure. The Company combines the
analyses generated by REMS(C) with its own knowledge of the client
submitting the proposed program to assess the premium offered against the
risk of loss that such program presents. See "Underwriting."
o Utilize the Company's capital base efficiently while maintaining prudent
risk levels in the Company's reinsurance portfolio. The Company manages its
risks through a variety of means, including the use of contract terms,
portfolio selection methodology, diversification criteria and probability
analyses. By using such measures and by employing its proprietary modeling
capabilities, the Company attempts to construct a portfolio of reinsurance
contracts which maximizes the use of its capital while optimizing the
risk-reward characteristics of its portfolio. The Company relies less on
traditional ratios, such as net premiums written to surplus, because the
Company believes that such statistics do not adequately reflect the risk in
the property catastrophe reinsurance business. Management believes the
level of net premiums written relative to surplus does not reflect the
composition of a reinsurer's attachment points, aggregate limits,
geographic diversification, and other material elements of the risk
exposures embodied in a reinsurer's book of business.
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o Capitalize on the experience and skill of management. The Company's senior
management team has extensive experience in the reinsurance and/or
insurance industries, with an average of approximately 18 years of
experience for each of the four senior executives of the Company.
Additionally, senior management is supported by an officer group with an
average of approximately eleven years of experience in the reinsurance
and/or insurance industries.
o Build and maintain long-term relationships with brokers and clients. The
Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company believes that its existing portfolio of
reinsurance business is a valuable asset given the renewal practices of the
reinsurance industry. The Company believes that it has established a
reputation with its brokers and clients for prompt response on underwriting
submissions, for fast claims payments and for the development of customized
reinsurance programs. See "Marketing."
o Maintain a low cost structure. Management believes that as a result of its
ability to maintain a small staff and by basing operations in the favorable
regulatory and tax environment of Bermuda, the Company is able to maintain
low operating costs relative to its capital base and net premiums earned.
As of March 29, 1999, the Company, including Nobel, had approximately 280
employees. Following the Nobel Acquisition, the Company employed
approximately 250 additional employees, and is subject to an increased
level of U.S. regulation through the businesses purchased from Nobel. See
"Regulation."
o Leverage the Company's modeling expertise by expanding into primary
insurance markets with significant natural catastrophe exposures. The
Company is pursuing opportunities in the United States to write an
increased level of catastrophe-exposed primary insurance. The Company is
exploring opportunities to write both personal and commercial coverages, on
a primary basis, where natural catastrophe exposures represent a
significant component of the overall exposure. In addition to Glencoe,
these opportunities are being pursued through the development of new
operations, such as DeSoto, or through acquisitions, such as the purchase
of the operating subsidiaries of Nobel.
Industry Trends
It is anticipated that the competitive pressures in the property
catastrophe reinsurance market that have existed since 1995 will continue
through 1999. During the past four years, these pressures have suppressed the
premiums for property catastrophe coverages. However, partially as a result of
the approximately $10.1 billion of U.S. catastrophe losses reported in 1998, as
estimated by Property Claims Services, the Company believes that the rate
reductions which have been evident in the past four years may subside. Also, the
Company believes that opportunities in certain select markets will continue to
exist which, because of the Company's competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, should enable the Company to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
The Company has entered the primary insurance business, focusing
particularly on catastrophe exposed business, with a view to leveraging the risk
assessment skills of the core reinsurance business. In addition, the Company
will continue to evaluate other new business opportunities, which may be related
or unrelated to its current insurance or reinsurance businesses.
The Company's financial strength has enabled it to pursue these
opportunities outside of the property catastrophe reinsurance market and into
the catastrophe exposed primary insurance market. The Company believes that its
financial strength will enable it to continue to pursue other opportunities in
the future; however, there can be no assurance that the Company's pursuit of
such opportunities will materially impact the Company's financial condition and
results of operations.
The year ended December 31, 1998 was the third worst year for insured U.S.
catastrophe losses as measured in nominal dollars and as reported by Property
Claims Services. In comparison, the year ended December 31, 1997 was a
relatively light year for natural catastrophe losses. Gross claims in 1998
included claims on a number of aggregate stop loss and excess of loss contracts,
as well as claims related to Hurricane Georges, the January Canadian Freeze,
Hurricane Bonnie and additional claims from various U.S. wind, hail, tornado and
flood claims. However,
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largely due to Renaissance Reinsurance's reinsurance protection, the net loss
ratio of Renaissance Reinsurance was not significantly impacted by the 1998
catastrophe loss events. Net reinsurance claims for Renaissance Reinsurance in
1998 were $42.4 million, or 25.0 percent of net premiums earned as compared with
$49.0 million in 1997 or 23.6 percent of net premiums earned. Due to the high
severity and low frequency of claims related to the property catastrophe
reinsurance business, there can be no assurance that Renaissance Reinsurance
will continue to experience this level of net claims in future years.
During recent fiscal years, there has been considerable consolidation among
the leading reinsurance brokerage firms; whereby 64.2 percent of the Company's
1998 assumed premiums were sourced from five reinsurance brokers. Although there
can be no assurance as to how this consolidation may affect the property
catastrophe reinsurance business and the business of the Company, the Company
believes that its relationships with the brokers will minimize any adverse
effect on the Company's business.
Also, during recent fiscal years, there has been considerable consolidation
among the Company's customers, which has been a partial contributor to the
reduction of the Company's reinsurance premiums. Although this consolidation may
continue to occur, the Company believes that its financial strength, its
position as one of the market leaders in the property catastrophe reinsurance
industry and its ability to provide innovative products to the industry will
enable the Company to maintain its current gross premium volume in the
reinsurance business.
Premium rates or other terms or conditions of trade may vary in the future,
the present level of demand may not continue and the present level of supply may
increase as a result of capital provided by recent or future market entrants or
by existing property catastrophe reinsurers. Some of the property catastrophe
reinsurers who have entered the worldwide reinsurance markets (or may enter them
in the future) have or could have more capital than the Company. The full effect
of this additional capital on the property catastrophe reinsurance market may
not be known for some time.
Management is aware of a number of new, proposed or potential legislative
or industry changes that may impact the worldwide demand for property
catastrophe reinsurance and other products offered by the Company. In the United
States, the states of Hawaii and Florida have implemented arrangements whereby
property insurance in catastrophe prone areas is provided through
state-sponsored entities. The California Earthquake Authority, the first
privately financed, publicly operated residential earthquake insurance pool,
provides earthquake insurance to California homeowners. Additionally, in recent
years the U.S. Congress has considered a number of proposals to establish a
federal program to provide reinsurance for state disaster insurance programs and
ensure the availability and affordability of insurance against catastrophic
natural disasters, respectively, and could impact upon the demand for, and
availability of, traditional reinsurance. In the United Kingdom, the government
has enacted a bill to allow insurers to build claim equalization reserves which
might reduce the amount of property reinsurance necessary in the marketplace.
Management is also aware of many potential initiatives by capital market
participants to produce alternative products that may compete with the existing
catastrophe reinsurance markets. Management is unable to predict the extent to
which the foregoing new, proposed or potential initiatives may affect the demand
for the Company's products or the risks which may be available for the Company
to consider underwriting.
Segment Information
Certain information regarding the Company's segments of operations are
provided on the following pages. Further information regarding the Company's
segments of operations are contained in Note 15 to the Consolidated Financial
Statements of the Company contained on page 42 of the Company's Annual Report to
Shareholders for the year ended December 31, 1998, and is incorporated herein by
reference thereto.
Reinsurance Products
The Company's property catastrophe reinsurance contracts are generally "all
risk" in nature. The Company's most significant exposure is to losses from
earthquakes and hurricanes, although the Company is also
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exposed to claims arising from other natural and man-made catastrophes, such as
winter storms, freezes, floods, fires and tornadoes, in connection with the
coverages it provides. The Company's predominant exposure under such coverage is
to property damage. However, other risks, including business interruption and
other non-property losses, may also be covered under the property reinsurance
contract when arising from a covered peril. In accordance with market practice,
the Company's property reinsurance contracts generally exclude certain risks
such as war, nuclear contamination or radiation.
Catastrophic events of significant magnitude have historically been
relatively infrequent, although the property catastrophe reinsurance market
experienced a high level of worldwide catastrophe losses in terms of both
frequency and severity during the period from 1987 to 1996 as compared to prior
years. However, because of the wide range of the possible catastrophic events to
which the Company is exposed, and because of the potential for multiple events
to occur in the same time period, the Company's business is volatile, and its
results of operations may reflect such volatility. Further, the Company's
financial condition may be impacted by this volatility over time or at any point
in time. The effects of claims from one or a number of severe catastrophic
events could have a material adverse effect on the Company. The Company expects
that increases in the values and concentrations of insured property and the
effects of inflation will increase the severity of such occurrences per year in
the future.
The Company seeks to moderate the volatility described in the preceding
paragraph through the use of contract terms, portfolio selection methodology,
diversification criteria and probability analyses. Also, consistent with its
risk management practices, the Company purchases property catastrophe coverage
for its own account to seek to further reduce the potential volatility of its
results.
Type of Reinsurance
The following table sets forth the Company's gross premiums written and
number of programs written by type of reinsurance.
Catastrophe Excess of Loss Reinsurance. Catastrophe excess of loss
reinsurance provides coverage to primary insurers when aggregate claims and
claim expenses from a single occurrence of a covered peril exceed the attachment
point specified in a particular contract. A portion of the Company's property
catastrophe excess of loss contracts limit coverage to one occurrence in a
contract year, but most such contracts provide for coverage of a second
occurrence after the payment of a reinstatement premium. The coverage provided
under excess of loss retrocessional contracts may be on a worldwide basis or
limited in scope to selected geographic areas. Coverage can also vary from "all
property" perils to limited coverage on selected perils, such as "earthquake
only" coverage.
Excess of Loss Retrocessional Reinsurance. The Company also enters into
retrocessional contracts pursuant to which it provides property catastrophe
coverage to other reinsurers or retrocedents. In providing
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retrocessional reinsurance, the Company focuses on property catastrophe
retrocessional reinsurance which covers the retrocedent on an excess of loss
basis when aggregate claims and claim expenses from a single occurrence of a
covered peril and from a multiple number of reinsureds exceed a specified
attachment point. The coverage provided under excess of loss retrocessional
contracts may be on a worldwide basis or limited in scope to selected geographic
areas. Coverage can also vary from "all property" perils to limited coverage on
selected perils, such as "earthquake only" coverage. In general, excess of loss
retrocessional contracts are for a term of one year. Retrocessional coverage is
characterized by high volatility, principally because retrocessional contracts
expose a reinsurer to an aggregation of losses from a single catastrophic event.
In addition, the information available to retrocessional underwriters concerning
the original primary risk can be less precise than the information received from
primary companies directly. Moreover, exposures from retrocessional business can
change within a contract term as the underwriters of a retrocedent alter their
book of business after retrocessional coverage has been bound.
Proportional Retrocessional Reinsurance. The Company writes proportional
retrocessions of catastrophe excess of loss reinsurance treaties when it
believes that premium rates and volume are attractive. In such proportional
retrocessional reinsurance, the Company assumes a specified proportion of the
risk on a specified coverage and receives an equal proportion of the premium.
The ceding insurer receives a commission, based upon the premiums ceded to the
reinsurer, and may also be entitled to receive a profit commission based on the
ratio of losses, loss adjustment expense and the reinsurer's expenses to
premiums ceded. A proportional retrocessional catastrophe reinsurer is dependent
upon the ceding insurer's underwriting, pricing and claims administration to
yield an underwriting profit, although the Company generally obtains detailed
underwriting information concerning the exposures underlying the proportional
retrocessions of catastrophe excess of loss reinsurance treaties written by the
Company. In addition, all of the Company's proportional retrocessions of
catastrophe excess of loss reinsurance contracts have aggregate per event risk
exposure limits.
Marine, Aviation and Other Reinsurance. The Company has also written
short-tail marine and aviation reinsurance and retrocessional reinsurance for
selected domestic and foreign insurers and reinsurers. Marine and aviation risks
involve primarily property damage, although certain marine and aviation risks
may involve casualty coverage arising from the same event causing the property
claim. Coverage is generally written in excess of a substantial attachment
point, so events likely to cause a claim will occur infrequently, such as the
destruction of a drilling platform, the loss of a satellite or the loss of a
sizable vessel and its contents. Although the Company focuses on writing
catastrophe excess of loss reinsurance, the Company also writes risk excess of
loss reinsurance and retrocessions. The risk excess of loss treaties in which
the Company participates generally contain limited reinstatement provisions. In
selected cases, the Company also writes customized financial reinsurance
contracts when the expected returns are particularly attractive.
Primary Insurance Operations; Glencoe, DeSoto, and Nobel
The Company is pursuing opportunities in the United States to write an
increased amount of catastrophe-exposed primary insurance. The Company expects
to write both personal and commercial coverages, on a primary basis, where
natural catastrophe exposures represent a significant component of the overall
exposure.
Glencoe - In January 1996, the Company incorporated Glencoe in Bermuda as
an excess and surplus lines insurance company. Glencoe is pursuing opportunities
in the catastrophe-exposed primary insurance business in the United States, and
is writing policies that primarily are exposed to earthquake and wind perils.
Glencoe is eligible to do business in the United States on an excess and surplus
lines basis in 29 states. For the year ended December 31, 1998, Glencoe
generated gross premiums written of $5.6 million, and net income of $4.0
million. For the year ended December 31, 1997, Glencoe generated gross premiums
written of $7.0 million and net income of $2.4 million. For the year ended
December 31, 1996, Glencoe generated gross premiums written of $1.6 million and
net income of $0.9 million.
DeSoto - In September 1997, Glencoe organized DeSoto in Florida to pursue
the assumption of policies from the Florida Residential Property and Casualty
Joint Underwriting Association (the "JUA"). In January 1998, the Company began
to provide personal lines coverages through DeSoto with an initial assumption of
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approximately 12,000 policies with an in-force premium of approximately $10
million. For the year ended December 31, 1998 DeSoto generated $26.7 million of
gross written premium and net income of $3.3 million.
Nobel - On June 25, 1998, the Company completed its acquisition of the U.S.
operating subsidiaries of Nobel Limited for $56.1 million. Between September and
December 1998, the Company contributed an additional $9 million of capital to
Nobel. As part of the transaction, the Company provided Nobel Limited with a
limited recourse loan of $8.9 million to support the liquidation of Nobel
Limited. The Company currently estimates that Nobel, after satisfying its
liabilities, will have the ability to repay $7.9 million of this loan. The gross
assets and gross liabilities purchased in the transaction were $188.1 million
and $155.9 million, respectively, thereby resulting in the recognition of $23.9
million of goodwill, which is being amortized on a straight line basis over a 20
year period (subsequently written down to $14.0 million due to the fourth
quarter charge described below). The Company accounted for this acquisition
using the purchase method of accounting and issued no shares as part of the
purchase.
During the fourth quarter of 1998, the Company recorded an after tax charge
of $40.1 million, consisting of $29.6 million of adverse development on Nobel's
casualty and surety books of business, a goodwill write-down of $6.6 million,
and other related costs of $3.9 million. As a result of Nobel's operating
performance, A.M. Best reduced the credit rating of Nobel from "A-" to "B+" and
Nobel is seeking to sell or reinsure its principal businesses and reserves,
specifically the casualty, surety, low-value dwelling and bail bond businesses.
While the Company intends to pursue an exit from these businesses, there can be
no assurance that the Company will complete any specific transactions and, if
sales transactions do occur, there can be no assurance that the Company will
receive its estimated fair value of the Nobel businesses. Accordingly, the
future results of the Company's operations could be adversely affected by a
potential write-down of goodwill, a partial write-off of the deferred tax asset
or by other costs or loss in value which could occur during the transaction
process. Nobel will continue to operate these business units on a transitional
basis. Subsequent to the sale of the businesses, Renaissance U.S. expects to
retain ownership of Nobel along with its licenses in the 50 states of America
although there can be no assurance that such licenses can be successfully
maintained following such sales.
Nobel has been engaged in the following lines of business however, as
discussed above, the Company is seeking to exit the Commercial Casualty,
Personal Lines and Bail Bonds businesses of Nobel.
Commercial Casualty Programs. The commercial casualty insurance program
offered by Nobel consists of: combined single limit automobile liability;
automobile physical damage; combined single limit comprehensive general
liability; combined single limit excess liability; and motor truck cargo
coverage. Additionally, Nobel assists insureds in placing workers' compensation
coverages with various state assigned risk pools and property coverages with
unaffiliated insurers.
Personal Lines Program. Nobel writes a Personal Lines Program comprised of
homeowners and fire policies covering homes valued up to $140,000, but which is
predominated by lower value dwellings (the "LVD Program"). Nobel is a leading
provider of low-value dwelling insurance in South Carolina, and also provides
this coverage in other states.
Bail Bond. Nobel presently writes bail bond insurance through four General
Agents. Nobel is indemnified through collateral provided to the producing and
General Agent and as such retains all business written.
Claim Adjusting Service Business. Renaissance U.S. owns IAS Claims
Services, Inc., a Delaware company based in Texas. This company provides claim
adjusting services and is divided into two divisions, IAS and Cat Crew. IAS
offers a broad range of routine and custom claims services tailored to the
insurance carrier's specifications. CAT Crew appraises and adjusts catastrophic
events on a nationwide basis. The claim adjusting service businesses provide
services both to the Company's primary insurance operations and to third
parties.
As a result of the Company's plan to sell or reinsure the remaining
businesses of Nobel, it is anticipated that the gross written premiums in 1999
related to Nobel will be substantially lower than the $31 million of gross
written premiums Nobel received in 1998.
-8-
Potential Diversification
From time to time, the Company may consider opportunistic diversification
into new ventures, either through organic growth or the acquisition of other
companies or books of business. In evaluating such new ventures, the Company
seeks an attractive return on equity, the ability to develop or capitalize on a
competitive advantage and opportunities that will not detract from its core
reinsurance operations. Accordingly, the Company regularly reviews strategic
opportunities and periodically engages in discussions regarding possible
transactions. However, there can be no assurance that the Company will enter
into any such agreement in the future, or that any consummated transaction would
contribute materially to the Company's results.
Geographic Diversification
The Company seeks to diversify its exposure across geographic zones. The
Company writes the majority of its business within the United States because the
returns obtained relative to the risks involved are currently most attractive in
the United States and because it is able to obtain the most detailed
underwriting information on U.S. risks. Within the United States, the Company's
zones of highest exposure are Southern California, Northern California,
metropolitan New York, New Madrid (midwestern United States) and Southern
Florida. The following table sets forth the percentage of the Company's gross
insurance and reinsurance premiums written allocated to the territory of
coverage exposure.
- - ---------------
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic zone (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe.
See Note 13 to Consolidated Financial Statements.
-9-
Program Limits
The following table sets forth the number of the Company's reinsurance
programs in force at December 31, 1998 by aggregate program limits.
Aggregate
Program Number of
Limit Programs
----------- --------
$50-60 million................................................ 4
$40-50 million................................................ 3
$30-40 million................................................ 8
$20-30 million................................................ 11
$10-20 million................................................ 53
Less than $10 million......................................... 262
---
Total...................................................... 341
===
Underwriting
The Company's primary underwriting goal is to construct a portfolio of
reinsurance and insurance contracts that maximizes the return on shareholders'
equity subject to prudent risk constraints.
Management assesses underwriting decisions on the basis of the expected
incremental return on equity of each new reinsurance contract in relation to the
Company's overall portfolio of reinsurance contracts. To facilitate this,
Management has developed REMS(C), a proprietary, computer-based pricing and
exposure management system. Management utilizes REMS(C) to assess property
catastrophe risks, price treaties and limit aggregate exposure. REMS was
developed with consulting assistance from Tillinghast, an actuarial consulting
unit of Towers, Perrin, Forster & Crosby, Inc., and AIR, the developer of the
CATMAP(TM) system. REMS(C) has analytic and modeling capabilities that assist
the Company's underwriters in assessing the catastrophe exposure risk and return
of each incremental reinsurance contract in relation to the Company's overall
portfolio of reinsurance contracts. The Company has licensed and integrated into
REMS(C) six commercially available catastrophe computer models in addition to
the Company's base model. The Company uses these models to validate and stress
test its base REMS(C) results. In addition, the Company stress tests its
exposures and potential future results by increasing the frequency and severity
of catastrophic events above the levels embedded in the models purchased from
the outside consultants. Management combines the analyses generated by REMS(C)
with its own knowledge of the client submitting the proposed program to assess
the premium offered against the risk of loss which such program presents.
REMS(C) provides more precise exposure information than is generally
analyzed currently throughout the property catastrophe reinsurance industry.
REMS(C) combines computer-generated statistical simulations that estimate
catastrophic event probabilities with exposure and coverage information on each
client's reinsurance contract to produce expected claims for reinsurance
programs submitted to the Company. REMS(C) then uses simulation techniques to
generate 40,000 years of catastrophic event activity, including events causing
in excess of $250 billion in insured industry losses. From this 40,000 year
simulation, the Company is able to obtain expected claims, expected profits and
a probability distribution of potential outcomes for each program in its
portfolio and for its total portfolio.
Management believes that REMS(C) provides the Company's underwriters with
several competitive advantages which are not generally available. These include
(i) the ability to simulate 40,000 years of catastrophic event activity compared
to a much smaller sample in generally available models, allowing the Company to
analyze its exposure to a greater number and combination of potential events,
(ii) the ability to analyze the incremental impact of an individual reinsurance
contract on the Company's overall portfolio, and (iii) the ability to collect
detailed data from a wide variety of sources which allows the Company to measure
geographic exposure at a detailed level.
-10-
For its property catastrophe reinsurance business, the Company has
developed underwriting guidelines that limit the amount of exposure it will
underwrite directly for any one cedent, the exposure to claims from any single
catastrophic event and the exposure to losses from a series of catastrophic
events. The Company also attempts to distribute its exposure across a range of
attachment points.
As part of its pricing and underwriting process, the Company also assesses
a variety of factors, including the reputation of the proposed cedent and the
likelihood of establishing a long-term relationship with the cedent; the
geographic area in which the cedent does business and its market share;
historical loss data for the cedent and, where available, for the industry as a
whole in the relevant regions, in order to compare the cedent's historical
catastrophe loss experience to industry averages; the cedent's pricing
strategies; and the perceived financial strength of the cedent.
During 1998, consistent with its risk management practices and the
availability of coverage responsive to the company's risk profile, the Company
increased the level of property catastrophe reinsurance coverage purchased for
its own account. Ceded premiums written in the Company's reinsurance operations
during 1998 were $47.7 million compared to $31.6 million in 1997. Additionally,
the Company's primary operations had ceded premiums of $27.7 million (compared
to $9 million in 1997). To the extent that appropriately priced coverage is
available, the Company anticipates continued use of its reinsurance to reduce
potential volatility of its results. Glencoe markets its products through a
diverse group of surplus lines brokers operating primarily in cat exposed
states.
Marketing
The Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company focuses its marketing efforts on targeted
brokers and insurance and reinsurance companies, placing primary emphasis on
existing clients. Management believes that its existing portfolio of business is
a valuable asset given the renewal nature of the reinsurance industry and,
therefore, attempts to continually strengthen relationships with its existing
brokers and clients. The Company also targets prospects that are deemed likely
to enhance the risk/return composition of its portfolio, that are capable of
supplying detailed and accurate underwriting data and that potentially add
further diversification to the Company's book of business. Glencoe markets its
products through a diverse group of surplus lines brokers operating primarily in
cat exposed states.
Management believes that primary insurers' and brokers' willingness to use
a particular reinsurer is based not just on pricing terms, but on the financial
security of the reinsurer, its claim paying ability ratings, perceptions of the
quality of a reinsurer's service, the reinsurer's willingness to design
customized programs, its long-term stability and its commitment to provide
reinsurance capacity. Management believes that the Company has established a
reputation with its brokers and clients for prompt response on underwriting
submissions and for fast claims payments. Since the Company selectively writes
large lines on a limited number of property catastrophe reinsurance contracts,
it can establish reinsurance terms and conditions on these contracts that are
attractive in its judgment, make large commitments to the most attractive
programs and provide superior client responsiveness. In addition, the Company
acts as sole reinsurer on certain property catastrophe reinsurance contracts,
which allows the Company to take advantage of its ability to develop customized
reinsurance programs. Management believes that such customized programs help the
Company to develop long-term relationships with brokers and clients.
The reinsurance brokers perform data collection, contract preparation and
other administrative tasks, enabling the Company to market its reinsurance
products cost effectively by maintaining a smaller staff. The Company believes
that by maintaining close relationships with brokers, it is able to obtain
access to a broad range of potential reinsureds. Subsidiaries and affiliates of
E.W. Blanch & Co., J&H Marsh & McLennan, Inc., AON Re Group, Herbert Clough
Inc., and Bates Turner, L.L.C. (a GE Capital Services Company, an affiliate of
GE Investments) accounted for approximately 23.2%, 18.8%, 12.6%, 5.4% and 4.2%,
respectively, of the Company's net premiums written in 1998. During such period,
Renaissance Reinsurance issued authorization for coverage on programs submitted
by 35 brokers worldwide. The Company received approximately 1,164 program
submissions during 1998. The Company is highly selective and, from such
submissions, the Company issued authorizations for coverage in 1998 for only 341
programs, or 29.3% of the program submissions received.
-11-
Reserves
The Company incurred claims of $112.8 million, $50 million, and $86.9
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
reserve for claims and claim expenses includes estimates for unpaid claims and
claim expenses on reported losses as well as an estimate of losses incurred but
not reported. The reserve is based on individual claims, case reserves and other
reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in the consolidated statement
of income in the period in which they become known and are accounted for as
changes in estimates.
For the Company's reinsurance operations, estimates of claims and claim
expenses are based in part upon the estimation of claims resulting from
catastrophic events. Estimation by the Company of claims resulting from
catastrophic events based upon its own historical claim experience is inherently
difficult because of the Company's short operating history and the potential
severity of property catastrophe claims. Therefore, the Company utilizes both
proprietary and commercially available models, as well as historical reinsurance
industry property catastrophe claims experience, for purposes of evaluating
future trends and providing an estimate of ultimate claims costs.
On both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to reasonably estimate ultimate expected
claims and claim expenses. The period of time from the reporting of a loss to
the Company to the settlement of the Company's liability may be significant.
During this period, additional facts and trends will be revealed. As these
factors become apparent, case reserves will be adjusted, sometimes requiring an
increase in the overall reserves of the Company, and at other times requiring a
reallocation of IBNR reserves to specific case reserves. These estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates.
Claim reserves represent estimates, including actuarial and statistical
projections at a given point in time, of an insurer's or reinsurer's
expectations of the ultimate settlement and administration costs of claims
incurred, and it is possible that the ultimate liability may exceed or be less
than such estimates. Such estimates are not precise in that, among other things,
they are based on predictions of future developments and estimates of future
trends in claim severity and frequency and other variable factors such as
inflation. During the claim settlement period, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward. Even after such adjustments, ultimate liability may exceed or be less
than the revised estimates. Moreover, reserve estimates by relatively new
property catastrophe reinsurers, such as the Company, may be inherently more
volatile than the reserve estimates of a reinsurer with a more established
claims history.
Investments
As of December 31, 1998, the Company held investments and cash totaling
$942.3 million with net unrealized depreciation of $5.1 million. The Company's
strategy is to maximize its underwriting profitability and fully deploy its
capital through its underwriting activities; consequently, the Company has
established an investment policy which it considers to be conservative. The
Company's investment guidelines, which are established by Management and
approved by the Company's Board of Directors, stress preservation of capital,
market liquidity, and diversification of risk. Notwithstanding the foregoing,
the Company's investments are subject to market-wide risks and fluctuations, as
well as to risks inherent in particular securities. The primary objective of the
portfolio, as set forth in such guidelines, is to maximize investment returns
consistent with these policies. To achieve this objective, the Company's current
fixed income investment guidelines call for an average credit quality of "AA" as
measured by Standard & Poor's Ratings Group.
-12-
Primarily because of the potential for large claims payments, the Company's
investment portfolio is structured to provide a high level of liquidity. The
table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
At December 31,
--------------------------
1998 1997 1996
------ ------ ------
(in millions)
Investments available for sale at fair value ..... $825.0 $710.2 $603.5
Equity securities, at fair value ................. 1.6 26.4 --
Cash and cash equivalents ........................ 115.7 122.9 199.0
------ ------ ------
Total invested assets ............................ $942.3 $859.5 $802.5
====== ====== ======
The growth in the Company's portfolio of invested assets for the year ended
December 31, 1998 resulted primarily from net cash provided by operating
activities of $102.5 million and the assets purchased in the Nobel acquisition,
partially offset by $42.7 million utilized in purchasing Common Shares and $26.7
million utilized to pay aggregate quarterly dividends. The Company's investment
income also increased during this period, largely as a result of the increased
size of the fixed income portfolio.
At December 31, 1998, the Company's invested asset portfolio had a dollar
weighted average rating of AA, an average duration of 2.76 years and an average
yield to maturity of 5.45 percent before investment expenses.
The Company's investment portfolio is subject to the risks of further
declines in realizable value. The Company attempts to mitigate these risks
through the active management of its portfolio.
Under the terms of certain reinsurance contracts, the Company may be
required to provide letters of credit to reinsureds in respect of reported
claims and/or unearned premiums. The Company has obtained a facility providing
for the issuance of letters of credit. This facility is secured by a lien on a
portion of the Company's investment portfolio. At December 31, 1998 the Company
had outstanding letters of credit aggregating $42.0 million. Also, in connection
with the Company's January 11, 1999 investment in Top Layer Reinsurance Ltd.,
the Company has committed $50 million of collateral in the form of a letter of
credit. This letter of credit is also secured by a portion of the Company's
investments.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked
securities and derivative instruments under which losses could be triggered by
an industry loss index or natural parameters. For the year ended December 31,
1998, the Company's activities with respect to these securities has approximated
$3 million of fees and risk premiums. To date the Company has not experienced
any losses from such securities or derivatives. In the fourth quarter of 1998,
the Company recorded a recovery of $7.5 million on a non-indemnity catastrophe
index transaction. The Company has included this amount as other income in its
financial statements. The Company may in the future utilize other derivative
instruments.
Market Sensitive Instruments
The Company's investment portfolio includes investments which are subject
to changes in market values with changes in interest rates. The aggregate
hypothetical loss generated from an immediate adverse parallel shift in the
treasury yield curve of 100 basis points would be a decrease in total return of
3.2 percent, which equates to a decrease in market value of approximately $28
million on a portfolio valued at approximately $877 million at December 31,
1998. An immediate time horizon was used as this presents the worst-case
scenario.
-13-
Investment Agreements
The Company has entered into an Investment Advisory Agreement with GE
Investment Management Incorporated ("GE Investment Management"). GE Investment
Management manages 68.1% of the Company's investment portfolio, subject to the
Company's investment guidelines. The terms of the related Investment Advisory
Agreement were determined in arms' length negotiations. The performance of, and
the fees paid to, GE Investment Management under the Investment Advisory
Agreement are reviewed periodically by the Investment Committee of the Board.
Such fees paid to GE Investment Management aggregated $0.4 million for the year
ended December 31, 1998.
The following table summarizes the fair value of the investments and cash
and cash equivalents of the Company as of the dates indicated.
December 31,
------------------------
Type of Investment 1998 1997 1996
------------------ ------ ------ ------
(in millions)
Fixed Maturities Available for Sale:
U.S. Government and agency debt securities ..... $564.6 $248.3 $ --
U.S. Corporates ................................ 137.8 -- --
Non-U.S. government debt securities ............ 30.6 256.9 239.4
Non-U.S. corporate debt securities ............. 67.0 188.6 329.6
Non-U.S. mortgage backed securities ............ -- 6.9 34.5
------ ------ ------
Subtotal ................................... 800.0 700.7 603.5
Equity Securities .............................. 1.6 26.4 --
Short-term investments .............................. 25.0 9.5 --
Cash and cash equivalents ........................... 115.7 122.9 199.0
------ ------ ------
Total fixed maturity investments, equity
securities, short-term investments and
cash and cash equivalents .................. $942.3 $859.5 $802.5
====== ====== ======
The following table summarizes the fair value by contractual maturities
of the Company's fixed maturity investment portfolio as of the dates indicated.
December 31,
---------------------------------
(in millions) 1998 1997 1996
------- ------- -------
Due in less than one year ............... $ 193.7 $ 74.6 $ 56.1
Due after one through five years ........ 393.7 473.0 457.1
Due after five through ten years ........ 121.4 90.9 90.3
Due after ten years ..................... 91.2 62.2 --
------- ------- -------
Total ................................... $ 800.0 $ 700.7 $ 603.5
------- ======= =======
Maturity and Duration of Fixed Maturity Portfolio
Currently, the Company maintains a target duration of approximately three
years on a weighted average basis, reflecting Management's belief that it is
important to maintain a liquid, shorter-duration portfolio to better assure the
Company's ability to pay claims on a timely basis. The actual portfolio duration
may not exceed the target duration by more than two years. From time to time,
the Company expects to reevaluate the target duration in light of
-14-
estimates of the duration of its liabilities and market conditions, including
the level of interest rates, from time to time.
Quality of Debt Securities in Portfolio
The Company's guidelines for its various investment classes have strict
restrictions on credit quality, duration and benchmark relative exposures. The
overall investment portfolio guidelines stipulate that the overall rating of the
portfolio, including cash and cash equivalents, be at least AA and no more than
20% of the composite portfolio may be below investment grade securities.
The following table summarizes the composition of the fair value of the
fixed maturity portfolio as of the dates indicated by rating as assigned by S&P
or, with respect to non-rated issues, as estimated by the Company's investment
managers.
December 31,
-----------------------------------------
Rating 1998 1997 1996
------ ----- ----- -----
AAA 70.9% 56.9% 28.1%
AA 4.3 12.2 50.1
A 9.2 14.9 20.2
BBB 3.7 5.0 1.6
BB 5.2 4.9 --
B 2.2 6.1 --
NR 4.5 -- --
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Foreign Currency Exposures
The Company's functional currency is the United States ("U.S.") dollar. The
Company writes a substantial portion of its business in currencies other than
U.S. dollars and may, from time to time, experience significant exchange gains
and losses and incur underwriting losses in currencies other than U.S. dollars,
which will in turn affect the Company's financial statements.
The Company's foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including loss reserves and reinsurance balances payable.
All changes in the exchange rates are recognized currently in the Company's
statement of income. As a result of the Company's exposure to foreign currency
fluctuations, it is anticipated that during periods in which the U.S. dollar
appreciates, the Company will likely recognize foreign exchange losses.
Diversification
The Company at year end had allocations to the following asset classes:
U.S. Governments and agencies, U.S. Corporates, Emerging Market Debt and U.S.
High Yield, Municipals, cat-linked securities and cash and cash equivalents.
During 1999, the Company expects to allocate $100 million to Mortgage-Backed
securities, will reduce the allocations to U.S. Government and agency and
Municipals and may consider further modification to its investment allocations.
-15-
Competition
The property catastrophe reinsurance industry is highly competitive and is
undergoing a variety of challenging developments, including a marked trend
toward greater consolidation. The Company competes, and will continue to
compete, with major U.S. and non-U.S. property catastrophe insurers, reinsurers,
and certain underwriting syndicates. Many of these competitors have greater
financial, marketing and management resources than the Company. In addition, new
companies may enter the property catastrophe reinsurance market or existing
reinsurers may deploy additional capital in the property catastrophe reinsurance
market. The Company cannot predict what effect any of these developments may
have on the Company and its business.
Competition in the types of reinsurance business that the Company
underwrites is based on many factors, including premium charges and other terms
and conditions offered, services provided, speed of claims payment, ratings
assigned by independent rating agencies, the perceived financial strength and
the experience of the reinsurer in the line of reinsurance to be written. The
number of jurisdictions in which a reinsurer is licensed or authorized to do
business is also a factor. Some of the reinsurers who have entered the Bermuda
and London-based reinsurance markets have or could have greater financial,
marketing or managerial resources than the Company. Ultimately, increasing
competition could affect the Company's ability to attract business on terms
having the potential to yield an attractive return on equity.
The primary insurance business is also highly competitive. Primary insurers
compete on the basis of factors including selling effort, product, price,
service and financial strength. The Company generally seeks to adjust its
overall primary insurance pricing and pricing to individual customers to achieve
underwriting profits and, as a result, may lose primary insurance business to
competition offering competitive insurance products at lower prices. The
Company's competitors in the primary insurance market include independent
insurance companies, subsidiaries or affiliates of major worldwide insurance
companies, underwriting syndicates and others. While the Company has determined
to seek to sell the principal business lines of Nobel, the Company will continue
to offer primary insurance through Glencoe and other potential subsidiaries.
Management is also aware of many potential initiatives by capital market
participants to produce alternative products that may compete with the existing
catastrophe reinsurance markets. Among other things, over the last several years
capital markets participants, including exchanges and financial intermediaries,
have developed financial products intended to compete with traditional
reinsurance, the usage of which has grown in volume. In addition, the tax
policies of the countries where the Company's clients operate can affect demand
for reinsurance. Management is unable to predict the extent to which the
foregoing new, proposed or potential initiatives may affect the demand for the
Company's products or the risks which may be available for the Company to
consider underwriting.
Employees
As of March 29, 1999, the Company and its subsidiaries employed
approximately 280 people. The Company believes that its employee relations are
satisfactory. None of the Company's employees are subject to collective
bargaining agreements, and the Company knows of no current efforts to implement
such agreements at the Company.
Many Bermuda based employees of RenaissanceRe and Renaissance Reinsurance,
including all of the Company's senior management, are employed pursuant to work
permits granted by the Bermuda authorities. These permits expire at various
times over the next few years. The Company has no reason to believe that these
permits would not be extended at expiration upon request, although no assurance
can be given in this regard.
-16-
Regulation
Bermuda
The Insurance Act 1978, as amended, and Related Regulations. The Insurance
Act, which regulates the business of Renaissance Reinsurance and Glencoe,
provides that no person shall carry on an insurance business in or from within
Bermuda unless registered as an insurer under the Insurance Act by the Minister.
Renaissance Reinsurance and Glencoe are registered as a Class 4 and a Class 3
insurer under the Insurance Act, respectively. The Minister, in deciding whether
to grant registration, has broad discretion to act as he thinks fit in the
public interest. The Minister is required by the Insurance Act to determine
whether the applicant is a fit and proper body to be engaged in the insurance
business and, in particular, whether it has, or has available to it, adequate
knowledge and expertise. In connection with the applicant's registration, the
Minister may impose conditions relating to the writing of certain types of
insurance.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions, and sub-committees
thereof supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set forth below.
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with a requirement made of it under
the Insurance Act or, if in the opinion of the Minister, after consultation with
the Insurance Advisory Committee, the insurer has not been carrying on business
in accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, the
latter of which is required to be filed annually with the Registrar of Companies
(the "Registrar"), who is the chief administrative officer under the Insurance
Act. The auditor must be approved by the Minister as the independent auditor of
the insurer. The approved auditor may be the same person or firm which audits
the insurer's financial statements and reports for presentation to its
shareholders.
Loss Reserve Specialist. Every Registered Class 3 and Class 4 insurer is
required to submit an annual loss reserve opinion when filing the Annual
Statutory Financial Return. This opinion must be issued by a Loss Reserve
Specialist. The Loss Reserve Specialist, who will normally be a qualified
casualty actuary, must be approved by the Minister.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and surplus,
and detailed notes thereto). The insurer is required to give detailed
information and analyses regarding premiums, claims, reinsurance and
investments. The Statutory Financial Statements are not prepared in accordance
with GAAP and are distinct from the financial statements prepared for
presentation to the insurer's shareholders under the Companies Act 1981 of
Bermuda, which financial statements may be prepared in accordance with GAAP. The
insurer is required to submit the Annual Statutory Financial Statements as part
of the Annual Statutory Financial Return.
Minimum Solvency Margin. The Insurance Act provides that the statutory
assets of an insurer must exceed its statutory liabilities by an amount greater
than the prescribed minimum solvency margin which varies with the type of
business of the insurer and the insurer's net premiums written and loss reserve
level. The minimum solvency margin for a Class 4 insurer is the greatest of
$100.0 million, 50% of net premiums written (with a credit for reinsurance ceded
not exceeding 25% of gross premiums) and 15% of loss and loss expense provisions
and other insurance reserves. The minimum solvency margin for a Class 3 insurer
is the greatest of $1.0 million, 20% of the
-17-
first $6.0 million of net premiums written plus 15% of net premiums written in
excess of $6.0 million, and 15% of loss and loss expense provisions and other
insurance reserves.
Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity
ratio for general business. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances
to affiliates, real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities (by interpretation, those not
specifically defined).
Annual Statutory Financial Return. An insurer is required to file with the
Registrar a Statutory Financial Return no later than four months after the
insurer's financial year end (unless specifically extended). The Statutory
Financial Return includes, among other items, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the Statutory
Financial Statements themselves; the opinion of the approved Loss Reserve
Specialist and certain details concerning ceded reinsurance. The solvency
certificate and the declaration of the statutory ratios must be signed by the
principal representative and at least two directors of the insurer, who are
required to state whether the Minimum Solvency Margin and, in the case of the
solvency certificate, the Minimum Liquidity Ratio, have been met, and the
independent approved auditor is required to state whether in its opinion it was
reasonable for them to so state and whether the declaration of the statutory
ratios complies with the requirements of the Insurance Act. The Statutory
Financial Return must include the opinion of a Loss Reserve Specialist in
respect of the loss and loss expense provisions of the insurer. Where an
insurer's accounts have been audited for any purpose other than compliance with
the Insurance Act, a statement to that effect must be filed with the Statutory
Financial Return.
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new insurance
business; not to vary any insurance contract if the effect would be to increase
the insurer's liabilities; not to make certain investments; to realize certain
investments; to maintain in Bermuda, or transfer to the custody of a Bermuda
bank, certain assets; not to declare or pay any dividends or other distributions
or to restrict the making of such payments and/or to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of the Company and its Subsidiaries is
at the Company's offices at Renaissance House, 8-12 East Broadway, Pembroke HM
19 Bermuda and Mr. John D. Nichols, the Company's Vice President, and Glencoe's
Company's Vice President, and Treasurer, is the principal representative of
Renaissance Reinsurance and Glencoe, respectively. Without a reason acceptable
to the Minister, an insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease to act as such,
unless thirty days' notice in writing to the Minister is given of the intention
to do so. It is the duty of the principal representative, within thirty days of
his reaching the view that there is a likelihood of the insurer for which he
acts becoming insolvent or its coming to his knowledge, or his having reason to
believe, that an event has occurred, to make a report in writing to the Minister
setting out all the particulars of the case that are available to him. Examples
of such an event include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the Minister relating to a solvency margin
or a liquidity or other ratio.
-18-
United States and Other
Renaissance Reinsurance is not admitted to do business in any jurisdiction
except Bermuda. The insurance laws of each state of the United States and of
many other countries regulate the sale of insurance and reinsurance within their
jurisdictions by alien insurers, such as Renaissance Reinsurance, which are not
admitted to do business within such jurisdiction. With some exceptions, such
sale of insurance or reinsurance within a jurisdiction where the insurer is not
admitted to do business is prohibited. Renaissance Reinsurance does not intend
to maintain an office or to solicit, advertise, settle claims or conduct other
insurance activities in any jurisdiction other than Bermuda where the conduct of
such activities would require that Renaissance Reinsurance be so admitted.
Glencoe is eligible to write insurance in 29 states and is subject to the
regulation and reporting requirements of these states. In accordance with
certain requirements of the National Association of Insurance Commissioners (the
"NAIC"), Glencoe has established, and is required to maintain, a trust funded
with a minimum of $15.0 million as a condition of its status as a licensed,
non-admitted insurer in the U.S.
DeSoto is a licensed insurer in Florida and the businesses acquired from
Nobel are subject to regulation in all 50 U.S. states and the District of
Columbia. The Company's U.S. operations are subject to extensive regulation
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance commissioners. Such regulation generally is designed to
protect policyholders rather than investors, and relates to such matters as the
standard of solvency which must be met and maintained; the licensing of insurers
and their agents; the nature of and extermination of the affairs of insurance
companies, which includes periodic market conduct examinations by the regulatory
authorities; annual and other reports, prepared on a statutory accounting basis,
required to be filed on the financial condition of insurers or for other
purposes; establishment and maintenance of reserves for unearned premiums and
losses; and requirements regarding numerous other matters. In general, regulated
insurers must file all rates for directly underwritten insurance with the
insurance department of each state in which they operate on an admitted basis;
however, reinsurance generally is not subject to rate regulation. Further, state
insurance statutes typically place limitations on the amount of dividends or
other distributions payable by insurance companies in order to protect their
solvency. Florida, the jurisdiction of incorporation of DeSoto, requires that
dividends be paid only out of earned surplus and limits the annual amount
payable without the prior approval of the Florida Insurance Department to the
greater of 10% of policyholders' surplus adjusted for unrealized gains or 100%
of prior year statutory net income. Texas, the jurisdiction of incorporation of
Nobel, currently requires that dividends be paid only out of earned statutory
surplus and limits the annual amount of dividends payable without the prior
approval of the Texas Insurance Department to the greater of 10% of statutory
capital and surplus at the end of the previous calendar year or 100% of
statutory net income from operations for the previous calendar year. These laws
also impose prior approval requirements for certain transactions with
affiliates.
Further, as a result of the Company's ownership of DeSoto and Nobel, under
the terms of applicable state statutes, any person or entity desiring to
purchase more than 10 percent of the Company's outstanding voting securities is
required to obtain prior regulatory approval for the purchase.
The NAIC has established eleven financial ratios to assist state insurance
departments in their oversight of the financial condition of insurance companies
operating in their respective states. The NAIC calculates these ratios based on
information submitted by insurers on an annual basis and shares the information
with the applicable state insurance departments. The failure of the Company's
U.S. insurance subsidiaries to comply with the acceptable range of such ratios
could have an adverse effect on the Company.
In their ongoing effort to improve solvency regulations, the NAIC and
individual states have enacted certain laws and statutory financial statement
reporting requirements. For example, NAIC rules require audited statutory
financial statements as well as actuarial certification of loss and loss
adjustment expense reserves therein. Other activities are focused on greater
disclosure of an insurer's reliance on reinsurance and changes in its
reinsurance programs and stricter rules on accounting for certain overdue
reinsurance. In addition, the NAIC has implemented risk-based capital
requirements for property and casualty insurance companies (see below). These
-19-
regulatory initiatives, and the overall focus on solvency, may intensify the
restructuring and consolidation of the insurance industry. It is also possible
that the U.S. Congress may enact legislation regulating the insurance industry.
While the impact of these regulatory efforts on the Company's operations cannot
be quantified until enacted, the Company believes it will be adequately
positioned to compete in an environment of more stringent regulation.
The NAIC has implemented a risk-based capital measurement formula to be
applied to all property/casualty insurance companies, which formula calculates a
minimum required statutory net worth based on the underwriting, investment,
credit loss reserve and other business risks applicable to the insurance
company's operations. An insurance company that does not meet threshold
risk-based capital measurement standards could be required to reduce the scope
of its operations and ultimately could become subject to statutory receivership
proceedings.
The Company's U.S. insurance subsidiaries are subject to guaranty fund laws
which can result in assessments, up to prescribed limits, for losses incurred by
policyholders as a result of the impairment or insolvency of unaffiliated
insurance companies. Typically, an insurance company is subject to the guaranty
fund laws of the states in which it conducts insurance business; however,
companies which conduct business on a surplus lines basis in a particular state
are generally exempt from that state's guaranty fund laws. The Company does not
expect the amount of any such guaranty fund assessments to be paid by the
Company in 1999 to be material.
The expansion of the Company's operations through Glencoe, DeSoto and
Nobel, with the potential further expansion of the Company into additional
insurance markets, could expose the Company or subsidiaries of the Company to
increasing regulatory oversight. However, the Company intends to continue to
conduct its operations so as to minimize the likelihood that RenaissanceRe or
Renaissance Reinsurance will become subject to U.S. regulation.
Other Available Information
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. For further information regarding the Company,
reference is made to such reports, proxy statements and other information which
are available as described under "Available Information" and "Incorporation of
Certain Documents by Reference."
-20-
GLOSSARY OF SELECTED INSURANCE TERMS
Attachment point The amount of loss (per occurrence or in
the aggregate, as the case may be) above
which excess of loss reinsurance becomes
operative.
Broker One who negotiates contracts of
insurance or reinsurance, receiving a
commission for placement and other
services rendered, between (1) a policy
holder and a primary insurer, on behalf
of the insured party, (2) a primary
insurer and reinsurer, on behalf of the
primary insurer, or (3) a reinsurer and
a retrocessionaire, on behalf of the
reinsurer.
Catastrophe excess of loss reinsurance A form of excess of loss reinsurance
that, subject to a specified limit,
indemnifies the ceding company for the
amount of loss in excess of a specified
retention with respect to an
accumulation of losses resulting from a
"catastrophe cover."
Cede; Cedent; Ceding company When a party reinsures its liability
with another, it "cedes" business and is
referred to as the "cedent" or "ceding
company."
Claim expenses The expenses of settling claims,
including legal and other fees and the
portion of general expenses allocated to
claim settlement costs.
Claim reserves Liabilities established by insurers and
reinsurers to reflect the estimated cost
of claims payments and the related
expenses that the insurer or reinsurer
will ultimately be required to pay in
respect of insurance or reinsurance it
has written. Reserves are established
for losses and for claim adjustment
expenses.
Excess of loss reinsurance A generic term describing reinsurance
that indemnifies the reinsured against
all or a specified portion of losses on
underlying insurance policies in excess
of a specified amount, which is called a
"level" or "retention." Also known as
non-proportional reinsurance. Excess of
loss reinsurance is written in layers. A
reinsurer or group of reinsurers accepts
a band of coverage up to a specified
amount. The total coverage purchased by
the cedent is referred to as a "program"
and will typically be placed with
predetermined reinsurers in
pre-negotiated layers. Any liability
exceeding the outer limit of the program
reverts to the ceding company, which
also bears the credit risk of a
reinsurer's insolvency.
Funded cover A form of insurance where the insured
pays premiums to a reinsurer to serve
essentially as a deposit in order to
offset future losses. On a funded cover,
there is generally limited or no
transfer of risk for catastrophe losses
from the insured to the reinsurer.
Generally accepted accounting
principles Accounting principles as set forth in
opinions of the Accounting Principles
Board of the American Institute of
-21-
Certified Public Accountants and/or
statements of the Financial Accounting
Standards Board and/or their respective
successors and which are applicable in
the circumstances as of the date in
question.
Incurred but not reported Reserves for estimated losses that have
been incurred by insureds and reinsureds
but not yet reported to the insurer or
reinsurer including unknown future
developments on losses which are known
to the insurer or reinsurer.
Layer The interval between the retention or
attachment point and the maximum limit
of indemnity for which a reinsurer is
responsible.
Net premiums written Gross premiums written for a given
period less premiums ceded to reinsurers
and retrocessionaires during such
period.
Proportional reinsurance A generic term describing all forms of
reinsurance in which the reinsurer
shares a proportional part of the
original premiums and losses of the
reinsured. (Also known as pro rata
reinsurance, quota share reinsurance or
participating reinsurance.) In
proportional reinsurance the reinsurer
generally pays the ceding company a
ceding commission. The ceding commission
generally is based on the ceding
company's cost of acquiring the business
being reinsured (including commissions,
premium taxes, assessments and
miscellaneous administrative expense)
and also may include a profit factor.
Reinstatement premium The premium charged for the restoration
of the reinsurance limit of a
catastrophe contract to its full amount
after payment by the reinsurer of losses
as a result of an occurrence.
Reinsurance An arrangement in which an insurance
company, the reinsurer, agrees to
indemnify another insurance or
reinsurance company, the ceding company,
against all or a portion of the
insurance or reinsurance risks
underwritten by the ceding company under
one or more policies. Reinsurance can
provide a ceding company with several
benefits, including a reduction in net
liability on individual risks and
catastrophe protection from large or
multiple losses. Reinsurance also
provides a ceding company with
additional underwriting capacity by
permitting it to accept larger risks and
write more business than would be
possible without a concomitant increase
in capital and surplus, and facilitates
the maintenance of acceptable financial
ratios by the ceding company.
Reinsurance does not legally discharge
the primary insurer from its liability
with respect to its obligations to the
insured.
Retention The amount or portion of risk that an
insurer retains for its own account.
Losses in excess of the retention level
are paid by the reinsurer. In
proportional treaties, the retention may
be a percentage of the original policy's
limit. In excess of loss
-22-
business, the retention is a dollar
amount of loss, a loss ratio or a
percentage.
Retrocessional Reinsurance;
Retrocessionaire A transaction whereby a reinsurer cedes
to another reinsurer, the
retrocessionaire, all or part of the
reinsurance that the first reinsurer has
assumed. Retrocessional reinsurance does
not legally discharge the ceding
reinsurer from its liability with
respect to its obligations to the
reinsured. Reinsurance companies cede
risks to retrocessionaires for reasons
similar to those that cause primary
insurers to purchase reinsurance: to
reduce net liability on individual
risks, to protect against catastrophic
losses, to stabilize financial ratios
and to obtain additional underwriting
capacity.
Risk excess of loss reinsurance A form of excess of loss reinsurance
that covers a loss of the reinsured on a
single "risk" in excess of its retention
level of the type reinsured, rather than
to aggregate losses for all covered
risks, as does catastrophe excess of
loss reinsurance. A "risk" in this
context might mean the insurance
coverage on one building or a group of
buildings or the insurance coverage
under a single policy, which the
reinsured treats as a single risk.
Statutory accounting principles ("SAP") Recording transactions and preparing
financial statements in accordance with
the rules and procedures prescribed or
permitted by United States state
insurance regulatory authorities
including the NAIC, which in general
reflect a liquidating, rather than going
concern, concept of accounting.
Underwriting The insurer's or reinsurer's process of
reviewing applications submitted for
insurance coverage, deciding whether to
accept all or part of the coverage
requested and determining the applicable
premiums.
Underwriting capacity The maximum amount that an insurance
company can underwrite. The limit is
generally determined by the company's
retained earnings and investment
capital. Reinsurance serves to increase
a company's underwriting capacity by
reducing its exposure from particular
risks.
Underwriting expenses The aggregate of policy acquisition
costs, including commissions, and the
portion of administrative, general and
other expenses attributable to
underwriting operations.
-23-
Item 2. Properties
The Company leases office space in Bermuda, where its executive offices are
located.
Nobel owns a 39,000 square foot building at 8001 LBJ Freeway, Dallas,
Texas, which is occupied by the corporate and commercial lines insurance
operations. Approximately 10,000 square feet of this building is leased to
unrelated tenants. Additionally, Nobel owns a 24,000 square foot building at
6923 North Trenholm Road, Columbia South Carolina, of which approximately 22,300
square feet is occupied by the personal lines insurance operation. Approximately
1,700 square feet of the building is leased to unrelated tenants.
IAS, the Company's claim adjusting operation, leases and occupies
approximately 9,423 square feet of office space for its home office and
Dallas-based service operation at 1485 Richardson Drive, Richardson, Texas. IAS
leases office space for its branch offices located in various cities in the
United States.
Item 3. Legal Proceedings
The Company is, from time to time, a party to litigation and arbitration
that arises in the normal course of its business operations. While any
proceeding contains an element of uncertainty, the Company believes that it is
not presently a party to any such litigation or arbitration that would have a
material adverse effect on its business or operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information with respect to the market for the Common Shares and
related shareholder matters is contained under the caption "Financial and
Investor Information" on page 50 of the Company's Annual Report to Shareholders
for the year ended December 31, 1998 (the "Annual Report") and is incorporated
herein by reference thereto in response to this item.
Item 6. Selected Consolidated Financial Data
Selected Consolidated Financial Data is listed on page 14 of the Annual
Report and is incorporated herein by reference thereto in response to this item.
The selected financial data of the Company should be read in conjunction with
the Consolidated Financial Statements of the Company and related Notes thereto
contained in the Annual Report and incorporated herein by reference thereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information with respect to Management's discussion and analysis of
financial condition and results of operations is contained under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" on pages 15 through 26 of the Annual Report and is incorporated
herein by reference thereto in response to this item.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information with regard to Quantitative and Qualitative Disclosures
About Market Risk is contained on page 13 of this Form 10-K under the caption
"Market sensitive instruments."
-24-
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company are contained on pages
28 through 48 of the Annual Report and are incorporated herein by reference
thereto in response to this item. Reference is made to Item 14(a) of this Report
for the Schedules to the Consolidated Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
This information with respect to directors and officers of the Company is
contained under the captions "Directors and Executive Officers of the Company"
on pages 4 through 6 of the Company's Definitive Proxy Statement in respect of
the Annual General Meeting of Shareholders to be held on May 13, 1999 (the
"Proxy Statement") and "Proposal 1" on page 23 of the Proxy Statement, and is
incorporated herein by reference thereto in response to this item.
Item 11. Executive Compensation
The information with respect to executive compensation is contained under
the subcaption "Executive Officer and Director Compensation" on pages 14 through
22 of the Proxy Statement, and is incorporated herein by reference thereto in
response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information with respect to security ownership of certain beneficial
owners and Management is contained under the caption "Security Ownership of
Certain Beneficial Owners, Management and Directors" on pages 7 through 9 of the
Proxy Statement, and is incorporated herein by reference thereto in response to
this item.
Item 13. Certain Relationships and Related Transactions
The information with respect to certain relationships and related
transactions is contained under the caption "Certain Relationships and Related
Transactions" on pages 10 and 11 of the Proxy Statement, and is incorporated
herein by reference thereto in response to this item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a) Financial Statements and Exhibits.
1 The Consolidated Financial Statements of the Company and related Notes
thereto are contained on pages 28 through 48 of the Company's 1998 Annual
Report to Shareholders are incorporated herein by reference thereto.
2. The Schedules to the Consolidated Financial Statements of the Company are
listed in the accompanying Index to Schedules to Consolidated Financial
Statements and are filed as part of this Report.
3. The following exhibits are included in this Report:
3.1 Memorandum of Association.*
-25-
3.2 Amended and Restated Bye-Laws.##
3.3 Memorandum of Increase in Share Capital of Company.###
4.1 Specimen Common Share certificate.*
10.1 Investment Management Agreement, dated as of November 1, 1993, between GE
Investment Management Incorporated and Renaissance Reinsurance Ltd.*
10.2 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.3 Agreement and Plan of Recapitalization, dated as of March 26, 1995, by
and among RenaissanceRe Holdings, Ltd., Renaissance Reinsurance Ltd. and
Investors named therein.*
10.4 Third Amended and Restated Employment Agreement, dated as of July 1,
1997, between Renaissance Reinsurance Ltd. and James N. Stanard, amended
and restated as of June 3, 1998.##
10.5 Form of Employment Agreement, dated as of June 23, 1997, between
Renaissance Reinsurance Ltd. and certain executive officers.#
10.6 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.####
10.7 Third Amended and Restated Credit Agreement, dated as of December 12,
1996, among RenaissanceRe Holdings Ltd., various financial institutions
which are, or may become, parties thereto (the "Lenders"), Fleet National
Bank of Connecticut and Mellon Bank, N.A. as Co-Agents, and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.+++
10.8 First Amendment to Amended and Restated Credit Agreement, dated as of
September 8, 1997, among RenaissanceRe Holdings Ltd., the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent.+
10.9 Second Amendment Agreement, dated as of June 15, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.##
10.10 Third Amendment Agreement, dated as of December 31, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.
10.11 Equity Purchase Agreement, dated as of December 13, 1996, by and among
RenaissanceRe Holdings Ltd., Warburg, Pincus Investors, L.P., Trustees of
General Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.^
10.12 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.####
10.13 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.####
10.14 Stock Purchase Agreement, dated December 19, 1997, by and among
RenaissanceRe Holdings Ltd. and Renaissance U.S. Holdings, Inc. and Nobel
Insurance Limited and Nobel Holdings, Inc.++
-26-
10.15 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.16 Amended and Restated Shareholders Agreement, dated as of March 23, 1996,
by and among Warburg, Pincus Investors, L.P., Trustees of General
Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.####
10.17 Amended and Restated Registration Rights Agreement, dated as of March 23,
1996, by and among Warburg, Pincus Investors, L.P., PT Investments Inc.,
GE Private Placement Partners I-Insurance, Limited Partnership and United
States Fidelity and Guaranty Company.####
10.18 Amended and Restated Declaration of Trust of RenaissanceRe Capital Trust,
dated as of March 7, 1997, among the Company, as Sponsor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as Delaware
Trustee, and the Administrative Trustees named therein.^^
10.19 Indenture, dated as of March 7, 1997, among the Company, as Sponsor, and
The Bank of New York, as Debenture Trustee.^^
10.20 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between the Company and The Bank of New York, as Trustee.^^
10.21 Registration Rights Agreement, dated March 7, 1997, among the Company,
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Brothers Inc.^^
10.22 Credit Agreement between Renaissance U.S. Holdings Inc. the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent, dated as of June 24, 1998.##
10.23 First Amendment to Credit Agreement between Renaissance U.S. Holdings
Inc. the Lenders named therein, and Bank of America National Trust and
Savings Association as Administrative Agent, dated as of December 31,
1998.
10.24 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings, Ltd.,
as Guarantor, and Bank of America National Trust & Savings Association.##
13.1 Annual Report to Shareholders of RenaissanceRe Holdings Ltd. for the year
ended December 31, 1998 (with the exception of the information
incorporated by reference into Items 5, 7, 8 and 14 of this Report, such
Annual Report to Shareholders is furnished for the information of the
Commission and is not deemed "filed" as part of this Report).
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
27.1 Financial Data Schedule for the Year Ended December 31, 1998.
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K with the Commission during
the fourth quarter of 1998.
-27-
- - ----------------
* Incorporated by reference to the Registration Statement on Form S-1 of the
Company (Registration No. 33-70008) which was declared effective by the
Commission on July 26, 1995.
^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 16, 1996, relating to an event which
occurred on December 31, 1996.
^^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1997, relating to certain events
which occurred on March 7, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the Commission on
October 22, 1997.
++ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on January 6, 1998, relating to certain events
which occurred on December 19, 1997.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the Commission on March 21,
1997.
# A substantially similar form of Employment Agreement has been entered into
with each of Messrs. Hynes, Lummis and Eklund.
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Commission on August 4,
1998.
### Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, filed with the Commission on May 14,
1998.
#### Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 31,
1998.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Hamilton, Bermuda
on March 29, 1999.
RENAISSANCERE HOLDINGS LTD.
/s/ James N. Stanard
----------------------------------------
James N. Stanard
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
-29-
-30-
RENAISSANCERE HOLDINGS LTD AND SUBSIDIARIES.
INDEX TO SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Auditors on Schedules............................... S-2
I Summary of Investments other than Investments in Related
Parties at December 31, 1998.................................... S-3
III Condensed Financial Information of the Registrant.................... S-4
V Supplementary Insurance Information for the years ended
December 31, 1998, 1997 and 1996................................ S-7
VI Reinsurance for the years ended December 31, 1998, 1997 and 1996..... S-8
X Supplementary Information Concerning Property-Casualty
Insurance Operations............................................. S-9
Schedules other than those listed above are omitted for the reason that
they are not applicable.
S-1
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
To the Board of Directors and Shareholders
of RenaissanceRe Holdings Ltd.
We have audited the consolidated financial statements of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated January 26, 1999; such financial statements and our report
thereon are incorporated by reference elsewhere in this Annual Report on Form
10-K. Our audits also included the financial statement schedules listed in item
14(a)(2) of this Annual Report on Form 10-K for the year ended December 31,
1998. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Hamilton, Bermuda
January 26, 1999
S-2
SCHEDULE I
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(millions of United States dollars)
S-3
SCHEDULE III
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD.
BALANCE SHEETS
(Parent Company)
(thousands of United States dollars, except per share amounts)
S-4
SCHEDULE III (Cont'd.)
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF INCOME
(Parent Company)
(thousands of United States dollars)
S-5
SCHEDULE III (Cont'd.)
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(Continued)
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF CASH FLOWS
(Parent Company)
(thousands of United States dollars)
S-6
SCHEDULE V
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(thousands of United States dollars)
S-7
SCHEDULE VI
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
REINSURANCE
(thousands of United States dollars)
S-8
SCHEDULE X
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(Expressed in United States Dollars)
(dollars in thousands)
S-9
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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EXHIBITS
to
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
RenaissanceRe Holdings Ltd.
a) Financial Statements and Exhibits.
1 The Consolidated Financial Statements of the Company and related Notes
thereto are contained on pages 28 through 48 of the Company's 1998 Annual
Report to Shareholders are incorporated herein by reference thereto.
2. The Schedules to the Consolidated Financial Statements of the Company are
listed in the accompanying Index to Schedules to Consolidated Financial
Statements and are filed as part of this Report.
3. The following exhibits are included in this Report:
3.1 Memorandum of Association.*
3.2 Amended and Restated Bye-Laws.##
3.3 Memorandum of Increase in Share Capital of Company.###
4.1 Specimen Common Share certificate.*
10.1 Investment Management Agreement, dated as of November 1, 1993, between GE
Investment Management Incorporated and Renaissance Reinsurance Ltd.*
10.2 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.3 Agreement and Plan of Recapitalization, dated as of March 26, 1995, by
and among RenaissanceRe Holdings, Ltd., Renaissance Reinsurance Ltd. and
Investors named therein.*
10.4 Third Amended and Restated Employment Agreement, dated as of July 1,
1997, between Renaissance Reinsurance Ltd. and James N. Stanard, amended
and restated as of June 3, 1998.##
10.5 Form of Employment Agreement, dated as of June 23, 1997, between
Renaissance Reinsurance Ltd. and certain executive officers.#
10.6 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.####
10.7 Third Amended and Restated Credit Agreement, dated as of December 12,
1996, among RenaissanceRe Holdings Ltd., various financial institutions
which are, or may become, parties thereto (the "Lenders"), Fleet National
Bank of Connecticut and Mellon Bank, N.A. as Co-Agents, and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.+++
10.8 First Amendment to Amended and Restated Credit Agreement, dated as of
September 8, 1997, among RenaissanceRe Holdings Ltd., the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent.+
10.9 Second Amendment Agreement, dated as of June 15, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.##
10.10 Third Amendment Agreement, dated as of December 31, 1998, among
RenaissanceRe Holdings Ltd., the Lenders identified therein and Bank of
America National Trust and Savings Association, as Administrative Agent
for the Lenders.
10.11 Equity Purchase Agreement, dated as of December 13, 1996, by and among
RenaissanceRe Holdings Ltd., Warburg, Pincus Investors, L.P., Trustees of
General Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.^^
10.12 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.####
10.13 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.####
10.14 Stock Purchase Agreement, dated December 19, 1997, by and among
RenaissanceRe Holdings Ltd. and Renaissance U.S. Holdings, Inc. and Nobel
Insurance Limited and Nobel Holdings, Inc.++
10.15 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.16 Amended and Restated Shareholders Agreement, dated as of March 23, 1996,
by and among Warburg, Pincus Investors, L.P., Trustees of General
Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.####
10.17 Amended and Restated Registration Rights Agreement, dated as of March 23,
1996, by and among Warburg, Pincus Investors, L.P., PT Investments Inc.,
GE Private Placement Partners I-Insurance, Limited Partnership and United
States Fidelity and Guaranty Company.####
10.18 Amended and Restated Declaration of Trust of RenaissanceRe Capital Trust,
dated as of March 7, 1997, among the Company, as Sponsor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as Delaware
Trustee, and the Administrative Trustees named therein.^^
10.19 Indenture, dated as of March 7, 1997, among the Company, as Sponsor, and
The Bank of New York, as Debenture Trustee.^^
10.20 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between the Company and The Bank of New York, as Trustee.^^
10.21 Registration Rights Agreement, dated March 7, 1997, among the Company,
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Brothers Inc.^^
10.22 Credit Agreement between Renaissance U.S. Holdings Inc. the Lenders named
therein, and Bank of America National Trust and Savings Association as
Administrative Agent, dated as of June 24, 1998.##
10.23 First Amendment to Credit Agreement between Renaissance U.S. Holdings
Inc. the Lenders named therein, and Bank of America National Trust and
Savings Association as Administrative Agent, dated as of December 31,
1998.
10.24 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings, Ltd.,
as Guarantor, and Bank of America National Trust & Savings Association.##
13.1 Annual Report to Shareholders of RenaissanceRe Holdings Ltd. for the year
ended December 31, 1998 (with the exception of the information
incorporated by reference into Items 5, 7, 8 and 14 of this Report, such
Annual Report to Shareholders is furnished for the information of the
Commission and is not deemed "filed" as part of this Report).
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
27.1 Financial Data Schedule for the Year Ended December 31, 1998.
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K with the Commission
during the fourth quarter of 1998.
- - ----------------
* Incorporated by reference to the Registration Statement on Form S-1 of the
Company (Registration No. 33-70008) which was declared effective by the
Commission on July 26, 1995.
^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 16, 1996, relating to an event which
occurred on December 31, 1996.
^^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1997, relating to certain events
which occurred on March 7, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the Commission on
October 22, 1997.
++ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on January 6, 1998, relating to certain events
which occurred on December 19, 1997.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the Commission on March 21,
1997.
# A substantially similar form of Employment Agreement has been entered into
with each of Messrs. Hynes, Lummis and Eklund.
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Commission on August 4,
1998.
### Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, filed with the Commission on May 14,
1998.
#### Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 31,
1998.