ANNUAL REPORT - 1996
Published on March 24, 1997
Exhibit 13.1
RENAISSANCERE
HOLDINGS
ANNUAL REPORT 1996
COMPANY OVERVIEW
RenaissanceRe Holdings Ltd. was formed in June 1993 and is the parent of
Renaissance Reinsurance Ltd. and Glencoe Insurance Ltd. Our principal business
is property catastrophe reinsurance written on a worldwide basis through
Renaissance Reinsurance Ltd. We are one of the largest providers of this
coverage in the world. We provide property catastrophe reinsurance coverage to
insurance companies and other reinsurers primarily on an excess of loss basis,
which means that we begin paying when their claims, from all of the homes,
businesses and properties that they insure from a particular catastrophe, exceed
a certain retained amount. Through Glencoe, which was incorporated in 1996, we
provide catastrophe exposed property coverage. In both our reinsurance business
and our insurance business, we provide catastrophe coverage, which means that we
reimburse for claims from large natural catastrophes such as hurricanes and
earthquakes, although we are also exposed to other types of claims. Events that
may have a significant effect on us will normally be on the evening news -
although it could be the news in England or Australia. Very large single events
or several smaller ones could produce adverse financial results for a quarter or
even a year. Our strategic approach is to excel at the three key success factors
for our business:
- - Underwriting - Through utilization of our proprietary exposure management and
pricing systems and capabilities.
- - Marketing - Through responsive, innovative client service.
- - Capital Management - Through matching our capital to our business needs.
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FINANCIAL HIGHLIGHTS
Return On Average Equity
[BAR GRAPH]
Book Value Per Share
[Bar Graph]
CONTENTS
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Our Mission
TO OBTAIN A PORTFOLIO OF PROPERTY CATASTROPHE AND OTHER INSURANCE AND
REINSURANCE RISKS THAT PRODUCES AN ATTRACTIVE RETURN ON CAPITAL AND IS
SIGNIFICANTLY BETTER THAN THE MARKET AVERAGE. WE DO THIS WHILE PROVIDING
EXCELLENT CLAIMS-PAYING SECURITY AND THOUGHTFUL, RESPONSIVE SERVICE TO OUR
CUSTOMERS.
LETTER TO SHAREHOLDERS
[PHOTOGRAPH OF CHAIRMAN]
Dear Fellow Shareholder:
As the financial and operating highlights on the prior page show, 1996 was
another good year - one in which we remained consistent to our mission (shown in
the sidebar on this page) and continued to effectively execute our underwriting,
marketing, and capital management strategies.
Last year saw increased price competition, which challenged us to remain
faithful to our underwriting discipline, and to maintain an attractive return on
our growing capital base. Our response was to work harder to serve our clients
even better in this more competitive marketplace.
In this letter, let me update you on marketplace trends, then turn to how we are
responding to them.
THE COMPETITIVE ENVIRONMENT
The two emotions that rule the stock market - fear and greed - similarly affect
the reinsurance market and we are now clearly in the "greed" phase. The most
important trends fall broadly within the availability and management of capital.
The capital available in many segments of the reinsurance market clearly exceeds
the opportunities to deploy it in the short run. This capital is primarily
internally generated capital by existing insurers and reinsurers both from
capital gains in their stock and bond portfolios, and accumulated operating
profits. In particular, the success of Lloyd's Reconstruction and Renewal Plan,
while acknowledged by most to be a good thing for the long run health of the
industry, has added new capital aggressively looking for business. Because the
property catastrophe business has been among the most profitable segments of the
market recently, it is the focus of much competition.
Fortunately, not all of the news is bad. First, acquisitions are withdrawing
capital, because cash used to acquire a company can no longer be deployed to
bear insurance risk, (unless the seller "recycles" that cash back into the
insurance business - which has not been happening, so far). Industry
consolidation has other beneficial effects on Renaissance's competitive
position: It continues the "flight to quality" trend, which benefits Renaissance
as a premier catastrophe specialist with over half a billion dollars of capital.
In addition, any reinsurance consolidation, no matter how well managed, causes
some business to become available to the market. However, one detrimental effect
has been that consolidation usually reduces the amount of reinsurance the
combined entity purchases. The loss of business due to our clients being
purchased caused approximately 40% of our 7.8% net decline in gross premiums
written last year, and may have a similar affect this year.
The second favorable trend is a widespread focus on capital management. Most
major reinsurers are explicitly discussing their strategies for maximizing
shareholder value and many are backing these statements up with actions. In
addition to capital market actions like share repurchases and dividends,
insurers and reinsurers are developing systems to link the impact of individual
underwriting decisions with return on equity and ultimately shareholder value.
As these systems come on line, I believe they will add to underwriting
discipline within the industry. We have been doing this since inception with our
Renaissance Exposure Management System (REMS(C)), which we discuss later in this
report.
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|"RENAISSANCERE WAS THE FIRST ONE ON BOARD, AND WHEN THAT HAPPENED IT WAS LIKE|
| OPENING THE FLOODGATES. EVERYONE WANTED TO FOLLOW RENAISSANCE'S LEAD." |
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Chuck Quackenbush
California Insurance Commissioner
ACHIEVEMENTS
1996 for us has been characterized by incremental improvements, rather than bold
new initiatives. Our responses to the competitive environment are:
RAISING THE BAR
Our main response has been to try to "raise the bar" for customer service to
reinforce our position as a "market of the first resort." This involves focusing
on three things:
1. speedy responses on quotations and claims,
2. designing custom products, and
3. assisting clients in interpreting their catastrophe modeling results.
Our response speed is best illustrated by the quote we provided to the
California Earthquake Authority, which is a state organization formed to provide
earthquake insurance in California. Part of its capacity to pay claims is
supported by an excess catastrophe reinsurance program. With $1.4 billion of
limit, this is by far the largest property catastrophe excess program in the
reinsurance market. To complete it required the participation of all major
reinsurers in the world. RenaissanceRe was one of the nine reinsurers asked to
provide lead price quotations for the program. And, as noted by the comment
above from California Insurance Commissioner Chuck Quackenbush, we were the
first company in the world to respond with a firm quotation. Our accomplishments
on items 2 and 3 are discussed in the "Marketing" section of this report.
STRENGTHENING THE TEAM
Effective client service requires top quality people to provide that service. To
meet our service goals, we realized that we needed to bring in a few additional
experienced reinsurance professionals to provide support and back-up to the
small senior management team that established RenaissanceRe. This program, and
the establishment of our primary insurance company, Glencoe Insurance Ltd., has
increased our total staff from 19 at the beginning of the year to 29 now. I do
not expect this type of growth every year but getting us fully staffed was an
important step in the maturation of our company.
CAPITAL MANAGEMENT
We have always been active managers of our capital to try to maximize return on
equity, and this year was no exception. We completed a secondary stock offering
in February that increased the liquidity of our stock. In June, we moved to The
New York Stock Exchange, which we believe will decrease transaction costs for
our shareholders. In November, we increased the capacity of our credit facility
to $200 million and improved both pricing and terms. In December, we repurchased
$72 million of stock from our founding shareholders and in January 1997,
repurchased an additional $28 million from public shareholders on the same
terms. This allowed us to return excess capital to our shareholders in a manner
that was both tax efficient and accretive to earnings per share.
GLENCOE INSURANCE LTD.
Our standards for evaluating any new ventures are:
1. Does it offer an attractive return on equity?
2. Do we understand and potentially have some competitive advantage
in the business?
3. Can we execute the plan for the new venture
without diverting focus from our core business?
The one expansion that met these tests was to form our primary insurance
company, Glencoe. It is located in Bermuda and will primarily write property
insurance that is exposed to natural catastrophes. It has been approved as a
non-admitted insurer in twenty-one states, including California, where it is
primarily covering earthquake exposure. Glencoe allows us to use, in the primary
property business, a modeling-intensive underwriting approach similar to the one
we have successfully used in the reinsurance market.
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| OUR STRATEGY |
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| OUR STRATEGY IS BASED ON SUPERIOR EXECUTION OF THREE KEY FACTORS: |
| |
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| - UNDERWRITING - SELECTING THE BUSINESS WE WANT. |
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| - MARKETING - OBTAINING THE BUSINESS THAT WE SELECT. |
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| - CAPITAL MANAGEMENT - MATCHING AN APPROPRIATE AMOUNT OF CAPITAL WITH THE |
| PORTFOLIO OF REINSURANCE RISKS. |
| |
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CHALLENGES
With the increasing competition in the catastrophe reinsurance market, our main
challenges for 1997 are to:
CONTINUE TO ENHANCE RELATIONSHIPS WITH OUR CUSTOMERS
We will continue to emphasize responsive service, custom product design, and
assisting our customers in better understanding their catastrophe exposures
through modeling.
CONTROL INTERNAL EXPENSES
With our premium falling, and our staff expanding, our expense ratio grew in
1996 and will grow further in 1997. Compared with other catastrophe reinsurers,
we no longer have a significant expense ratio advantage. This is acceptable
because of the high level of service that we provide our clients, but we will
not allow our expense level to cause us to be uncompetitive.
DEVELOP GLENCOE TO MEANINGFULLY CONTRIBUTE TO OUR RESULTS
Although we met our operational goals of forming, staffing and beginning to
write business in Glencoe, we did not meet our financial goals for return on
equity. We are devoting more resources this year to attempt to achieve these
goals.
MAINTAIN AN ATTRACTIVE RETURN ON EQUITY ON A RAPIDLY GROWING CAPITAL BASE
Even if Mother Nature is kind, it is likely that our return on average equity
for 1997 will fall below 30% for the first time because, as prices decline, our
business requires more capital per dollar of premium.
CONCLUSION
We established RenaissanceRe with a clear view
of what we wanted to represent - our "brand attributes," if you will. They
include excellent financial security, superior underwriting,
highly-collaborative, customer-focused marketing and value-based capital
management - all four are aided by our competitively distinguishing REMS risk
modeling capability. These attributes each imply a set of promises. To the
customer, for example, we must first represent security and service; to the
shareholder, we must offer the prospect of superior returns. All of our
management team is keenly aware that our success as an organization depends on
consistently honoring these promises.
Sincerely,
/s/ James N. Stanard
James N. Stanard
Chairman, President and Chief Executive Officer
6
IN ANY COMPETITIVE MARKET, DISCIPLINE IS THE SUCCESSFUL PLAYERS SECRET, AND
INFORMATION IS THE SECRET TO DISCIPLINE.
UNDERWRITING
The catastrophe reinsurance market is currently experiencing a degradation of
market discipline. Due to some interesting characteristics of the business,
there are few other businesses where discipline is harder to maintain than the
catastrophe business. Fortunately, these characteristics can significantly
advantage companies that have sophisticated analytical processes and excellent
market information.
RenaissanceRe has developed proprietary analytical and information systems.
They're embodied in our REMS system and they provide a significant advantage in
the current market conditions. We believe that as market discipline continues to
decline, the few organizations which can properly measure their clients'
exposures will capture an increasing share of the preferred market, and those
organizations which lack the ability to cost their products will find their true
costs to be much higher than expected.
IN THE CATASTROPHE BUSINESS, UNDERSTANDING THE TRUE COST OF THE PRODUCT IS STILL
A NEW CONCEPT.
In most businesses, measuring the cost of supplying a good or service is usually
a simple procedure. Law firms can determine the salaries paid to their
employees, shirt manufacturers can determine the costs to make shirts. In
catastrophe reinsurance, the major cost components are the claims paid for
catastrophic events. As catastrophe events by definition occur infrequently, the
catastrophe reinsurers' "opportunities" for true price discovery are rare.
Having the ability to understand and measure the cost of the catastrophe product
is crucially important for catastrophe reinsurers.
The advent of catastrophe modeling has provided the tools to determine the cost
of the catastrophe product. In the long run, companies which utilize and
understand this technology and thus better understand the costs of the products
they provide, will be the winners.
Catastrophe model usage differs greatly. Half a dozen vendors offer these
products but their results often vary significantly at the detailed county or
zip code level. Few companies use multiple models due to the significant
resources required to understand and utilize each of them.
RenaissanceRe is the leader in understanding these models and their usage; more
importantly, the REMS system is unique in its ability to quickly compare the
results of multiple models. We can utilize the information provided from each
separate vendor and avoid the "apples to oranges" comparisons which occur when
the client and the reinsurer use different models. Our annual commitment in this
area is several million dollars and we are committed to remaining the premier
user of this technology.
Because RenaissanceRe understands this technology, we have a unique ability to
properly assess the cost of each product we sell. To see the catastrophe
business as a simple commodity is a fallacy because different clients provide
significantly different types of exposures. RenaissanceRe has developed the
ability to clearly distinguish between underlying exposures, to assess and price
the products sold, resulting in a clear competitive advantage.
THE EFFECTS ON NET MARGINS OF GROSS PREMIUM ADJUSTMENTS ARE NOT PROPERLY
UNDERSTOOD AND MEASURED.
Industry participants estimate that the pricing for U.S. risks decreased last
year on average between 10 and 15%, while non-U.S. risks experienced price
reductions in the 15-20% range. Our own measures indicate that U.S. industry
premium levels have decreased by about 12%. Rarely, if ever, does this change in
gross pricing get translated directly into an effect on gross margins.
At RenaissanceRe, we calculate and assess the margins and expected return on
equity on every piece of business we consider. We also capture, in REMS,
information about virtually all industry contracts and use this information to
calculate and assess the effects of premium movements on both industry gross
margins and changes in expected return on equity. This information gives us a
unique and clear view into the opportunities and pitfalls of the market. We have
calculated that U.S. industry expected gross margins decreased by over 20%, and
expected return on equity for the U.S. market declined by over 25%.
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Selecting clients who are reducing their exposure profile is key to maintaining
a superior portfolio. Uniformity of premium movement provides an opportunity to
select clients with the most attractive exposure profiles. By identifying
clients who are actively controlling and reducing their catastrophe exposure,
gross margins can be maintained even in an environment of price reductions.
Conversely, if the client has increased exposure, a premium reduction can
quickly make a profitable client into an unprofitable one.
The table below demonstrates how the management of exposure can impact the
expected return on equity in a stable premium and declining premium environment.
In catastrophe exposure, the 80/20 rule is alive and well. Twenty percent of the
policies produce 80% of the problems. Companies who spend the time and resources
to use the outputs of the models quickly determine which 20% is causing their
problems and take underwriting actions to improve their portfolios.
At RenaissanceRe we invest a significant amount of our underwriting resources
applying the latest technology to differentiate between clients. Identifying
clients who are actively managing their exposures is crucial in a decreasing
rate environment. As some competitors lose discipline and decrease their
commitment to understanding the exposures, this enables us to focus our efforts
on the clients we determine to be improving their exposures.
"Normal" decisions in a skewed world lead to a lack
of discipline.
The following graph depicts two different potential outcome distributions. The
blue distribution depicts a "normal" distribution and is the type of
distribution with which most people are familiar. A key characteristic of a
normal distribution is that the mean (average) outcome is equal to the median
(midpoint) outcome. Another way to put this is that over a long time period, 50%
of the actual outcomes will be greater than average, while 50% of the actual
outcomes will be less than the average. The red distribution depicts a
representative outcome distribution for a catastrophe portfolio. As can be seen,
the mean or average value occurs not at the median value, but considerably to
the right of the mean value in the distribution. This means that, for a
catastrophe portfolio, about four out of five years should have outcomes which
are better than average, while in one out of five years the actual outcome will
be worse than average. Due to this "skewed" distribution, it is difficult to
retain discipline unless the risk takers have the proper tools to assess and
measure this risk.
[LINE GRAPH SHOWING CUMULATIVE PROBABILITY OF OUTCOMES AGAINST RESULTS]
At RenaissanceRe, REMS provides a consistent framework to assess risk and
provides the objective analytics required to make informed decisions in a skewed
outcome environment.
THE WAY FORWARD
Our mission is to obtain a portfolio of superior
catastrophe risk. Creating business strategies which embody analytical
approaches that address the shortcomings of traditional methods in the
catastrophe reinsurance market is essential to long term success. By maintaining
a consistent, sophisticated framework, it is easier to maintain discipline in
risk selection and portfolio creation. Forging strong relationships with
companies who are embracing and utilizing the available technology is a core
component to our strategy.
We are helping our clients to assess their catastrophe exposures and to apply
portfolio management techniques. This allows us to create win-win
relationships with our clients.
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| CLIENTS MUST HAVE CONFIDENCE IN OUR WILLINGNESS AND ABILITY TO SETTLE CLAIMS|
| PROMPTLY, DESIGN CUSTOM PRODUCTS, AND REMAIN COMMITTED TO PROVIDE MEANINGFUL|
| REINSURANCE CAPACITY OVER A LONG PERIOD OF TIME. A KEY ROLE OF MARKETING AT |
| RENAISSANCERE IS TO INSTILL AND THEN REINFORCE THAT CONFIDENCE. |
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MARKETING
The goal of marketing at RenaissanceRe is to build and sustain client preference
to transact business with us. We seek to be the "market of the first resort" for
our clients. We accomplish this by providing unsurpassed client service and
offering outstanding financial security.
SELECTIVE MARKETING
We have two distinct advantages when identifying prospective clients. As a
market leader, we have the opportunity to see virtually all property catastrophe
reinsurance programs, thereby obtaining valuable underwriting information. This
access, combined with our proprietary underwriting and risk management system,
REMS, enables us to identify companies with reinsurance programs that are best
suited for our portfolio. We are then distinctly proactive in soliciting
business from those companies, rather than from the entire universe of
prospects.
Our marketing is very selective and of a collaborative nature. Our targeted
customer base is less than 500 companies so our marketing can be, and is, highly
customized. We presently have about 230 client companies and just over 400
reinsurance programs with those clients. A typical client pays us over $500,000
of premium annually, frequently over $1,000,000. This is by design. Focusing on
fewer clients that cede us substantial premium enables us to invest more time
and resources to understand their needs and to provide custom solutions. Being a
client's major reinsurer motivates them to invest the time and resources
necessary to provide us with superior underwriting information.
CLIENT SERVICE AND INNOVATIVE PRODUCTS
We pay attention to the specific needs of each client, rather than try to sell
an "off the shelf" product appropriate for an "average" customer. Some customers
are sophisticated buyers and know precisely what type of reinsurance they wish
to purchase. Others have fewer internal resources and seek assistance in
designing solutions to their property exposure management problems. In either
case, we must understand their needs to properly serve them.
In order to thoroughly understand the client's exposures, detailed underwriting
information is shared, often over several years. We go over this information
with our clients, discussing their exposure management techniques in detail. We
often assist them in interpreting the results of studies given to them by
catastrophe exposure modeling vendors. As a result of this sharing of
information and ideas, we develop strong relationships with our clients. We have
the ability to differentiate between a prospect or client that does a good job
managing their catastrophe exposure and one that does not. Clients want to do
business with reinsurers that demonstrate this capability and are able to
suggest alternative methods of exposure management.
Once we understand the client's needs, we respond to those needs quickly and
thoughtfully. REMS is an extremely useful tool for our experienced underwriters.
After underwriting information has been reviewed by our underwriters and entered
into REMS, appropriate alternative reinsurance structures can be designed and
priced, with speed that is unmatched in the industry.
We have broadened our product offerings to better serve our clients by providing
innovative solutions to their property exposure management needs. An example of
such a product is an aggregate freeze loss reinsurance contract. This contract
protects the client against abnormally high freeze losses occurring during a
specified period. "Off the shelf" vendor models do not include information
necessary to enable a reinsurance underwriter to accurately price such a
product. We have developed this capability which is at our underwriter's
disposal in REMS.
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Clients and brokers increasingly wish to do business with fewer well-capitalized
specialist reinsurers. RenaissanceRe has the financial strength and the
willingness to provide substantial capacity on attractive programs. In 1996, we
wrote several programs with limits greater than $10 million, with the largest
limit provided being just under $35 million. During the year, we received a
rating of "A" by A. M. Best and Standard & Poor's. These developments reinforced
clients' confidence in our ability to pay claims quickly and remain committed to
provide reinsurance capacity over a long period of time.
A GLOBAL BUSINESS
RenaissanceRe diversifies property exposures geographically. We currently write
approximately 60% of our business in the United States by design. There is
strong demand for our products and services in the U.S. and we receive the best
underwriting information from our U.S. clients.
Our U.S. book of business is more heavily weighted to regional accounts which
gives us a high level of diversification. The value of this diversification to
us is discussed in the "Measuring Insurance Risk" section. Our U.S. strategic
marketing focus from the time the company was formed was to work closely with
regional companies to assure maximum diversification. We have also been
successful developing a diversified book of business providing limited territory
coverage for nationwide writers.
Approximately 40% of our business is located outside of the U.S. Of our
international book, our largest market is the United Kingdom, followed by
Continental Europe, Japan and Australia/New Zealand. Similar to the U.S., demand
for our products and services is high in the United Kingdom and the underwriting
information is good and improving.
Premiums By Geographic Area
(as of December 31, 1996)
[PIE CHART]
RETROCESSIONAL BUSINESS
A retrocession is reinsurance issued to another reinsurance company.
RenaissanceRe continues to be one of the leading retrocessional writers in the
world. The supply of retrocessional capacity is much smaller than the supply of
primary reinsurance capacity, creating a "niche" within the property catastrophe
field. Often, the underwriting information provided is not as detailed as we
would like, so our authorization ratio is low. However, our REMS system provides
us with a unique capability to utilize valuable underwriting data from the
retrocession client's (known as a retrocedant) own underwriting data, enabling
us to evaluate this business with the same rigor as primary reinsurance. This
capability effectively allows us to "drill down" to the detailed exposure data
provided to them by their primary insurance company clients. REMS is invaluable
in demonstrating to the retrocedant that we differentiate based upon exposures,
when underwriting their account.
TRADITIONAL VALUES
The reinsurance business continues to change and evolve. We are very much a part
of this process, bringing new technology to the property catastrophe reinsurance
business. At RenaissanceRe we add the traditional values of responsive service,
respect for the customer, outstanding security, and integrity to this innovative
technology. It is this combination that makes RenaissanceRe unique.
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CAPITAL MANAGEMENT
_______________________________________________________________________________
| |
| IN JANUARY, CAPITALIZED GLENCOE INSURANCE LTD., WITH $50 MILLION. |
| - IN JANUARY, INCREASED THE COMPANY'S CREDIT FACILITY TO $150 MILLION. |
| - IN FEBRUARY, COMPLETED A SECONDARY OFFERING OF 3 MILLION COMMON SHARES. |
| - IN FEBRUARY, INCREASED THE COMMON SHARE DIVIDEND 25 PERCENT TO 20 CENTS |
| PER QUARTER. |
| - IN APRIL, ASSIGNED AN "A" (EXCELLENT) RATING FROM A.M. BEST COMPANY. |
| - IN JUNE, LISTED ON THE NEW YORK STOCK EXCHANGE. |
| - IN OCTOBER, ASSIGNED AN "A" RATING FROM STANDARD & POOR'S CORPORATION. |
| - IN DECEMBER, INCREASED THE COMPANY'S CREDIT FACILITY TO $200 MILLION. |
| - IN DECEMBER, INITIATED THE REPURCHASE OF 2.9 MILLION COMMON SHARES. |
| - FOR THE YEAR, ACHIEVED A RETURN ON EQUITY OF 30.2 PERCENT. |
|______________________________________________________________________________|
The goal of capital management is to assure unquestioned claims-paying ability
for our clients, while at the same time assuring attractive returns for our
shareholders. Clearly this involves trade-offs, which can be assessed more fully
with sophisticated analytical tools. During 1996, RenaissanceRe completed a
state-of-the-art, multi-currency, asset-liability optimization model. This model
was developed in conjunction with Tillinghast and Falcon Asset Management, and
utilizes liability data provided by REMS. It enables further integration of our
liability, asset and capital decisions.
CAPITAL MANAGEMENT STRATEGY
RenaissanceRe continues to accomplish its capital management goal by following
the three principles discussed in last year's annual report.
- First, like all insurance enterprises, capital is needed to
support our underwriting activities. At RenaissanceRe, the
required amount of capital is measured precisely and
continuously utilizing REMS. Each underwriting decision is
made in a portfolio context based on the incremental
capital required. This disciplined approach integrates our
capital management and underwriting decisions.
- Second, capital invested in the business is matched to the
capital needs generated by our underwriting activities.
- Third, the Company seeks access to the full breadth of the
capital markets to assure our capital structure is the most
efficient available.
1996: A TRANSITIONAL YEAR
For its first three years of operations, RenaissanceRe was capital constrained
and accessed the capital markets to build capital. The Company's need for
capital in its principal business, property catastrophe reinsurance, grew
modestly in 1996, even though premiums declined. This is because the Company
matches capital to exposure, not to premium, and in a declining price
environment more capital is needed to support each premium level. The
combination of the Company's excellent earnings, and the small growth in capital
needed to support our property catastrophe business, caused a transition to a
surplus capital position in 1996.
CAPITAL MANAGEMENT PROCESS
The Company follows a three-step process in managing its capital position.
1. Our preference is to reinvest in our core business, property catastrophe
underwriting, to support a growing portfolio and to fund investments that
fortify our long-term market position.
2. We look to deploy capital in new business/acquisition opportunities that meet
the following criteria:
- The opportunity must have the potential to generate an attractive return
on equity.
- RenaissanceRe must understand and be able to provide a competitive
advantage to the business.
- The opportunity must not divert focus from our existing businesses.
11
One new business opportunity met all three criteria for business opportunities
last year, Glencoe Insurance Ltd. Glencoe is a Bermuda-based insurer. Its
business goal is to utilize RenaissanceRe's underwriting, marketing and capital
management skills in the primary insurance marketplace. It writes "catastrophe
exposed property" business, which is property insurance where the main exposure
is a catastrophe peril.
Glencoe achieved several significant goals in 1996:
- Licensed to do business in California.
- Minority investments closed with two
New York Stock Exchange-listed, value-adding organizations.
- Full initial staff recruited.
- Excellent market reception.
- Profitable for first year of operation.
Glencoe did not achieve its premium or return on equity goals, however.
Despite modestly higher capital needs in our core business and our investment in
Glencoe, RenaissanceRe generated excess capital in 1996.
3.Return excess capital to shareholders.
At the end of the year the Company commenced a $100 million share repurchase
program to return capital. In December 1996, the Company repurchased 2.1
million of its Common Shares at a price of $34.50 per Common Share for
approximately $72 million from its founding institutional shareholders in a
private transaction. In January 1997, the Company repurchased 0.8 million of
its Common Shares at a price of $34.50 per Common Share, for approximately $28
million in a public tender offer. These actions were in line with our capital
management principles, and the Company's goal of maximizing return on equity.
The Company's capital grew in 1996 after giving effect to both repurchases and
is sufficient, in conjunction with the Company's access to the capital
markets, to support anticipated 1997 business activity.
CLAIMS RATINGS
The Company's ability to demonstrate unquestioned claims-paying ability was
ratified by two major rating agencies in 1996. Renaissance Reinsurance Ltd.
received "A" claims-paying ability ratings from both A. M. Best and Standard &
Poor's.
RETROCESSIONAL COVERAGE
During 1996, the Company increased its utilization of retrocessional coverage,
which is purchased to protect the Company's capital position in the event of a
major catastrophe or series of catastrophes.
Glencoe Insurance Ltd., purchased its initial reinsurance program in the second
half of 1996 to begin establishing its access to the reinsurance marketplace.
These coverages enhance the Company's capital stability and improve its
capability to actively underwrite after a major catastrophe.
INVESTMENT PHILOSOPHY AND MANAGEMENT
As a result of analyses generated by the multi-currency, asset/liability model
completed in 1996 the Company is establishing a $50 million allocation to
publicly-traded equity securities for implementation in 1997, and is modestly
increasing the credit and duration risk it is allowing its fixed income managers
to undertake. Based on the analyses generated, these actions require little
incremental capital, and increase the Company's expected return on equity.
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MEASURING INSURANCE RISK
The insurance business is built on the principle of shifting financial risk from
the insured to the insurer. This section explores how insurance companies
generally, and RenaissanceRe specifically, make decisions about and price that
risk. We will focus on the risk that our shareholders' equity fluctuates (rather
than our stock price, which can reflect many additional influences).
These risks are usually broken into three categories:
1. ASSET RISK - the fluctuation in the value of the assets that we hold.
2. INSURANCE (OR LIABILITY) RISK - fluctuations in insured claim amounts.
3. BUSINESS RISK - risks from changes in the market conditions; loss of key
clients; loss of key employees, etc.
We explicitly model categories 1 & 2 (and much of management time is devoted to
considering and dealing with category 3); but for now we will look only at risk
#2 - insurance risk. Modeling insurance risk in the property catastrophe
business is, in many ways, an easier problem than for a traditional multi-line
insurer or reinsurer because our losses will normally be caused by major events
(usually hurricanes and earthquakes). In last year's report we described how
these events can be modeled; now we will look at translating these modeled
probabilities into financial decisions.
The first question is, "what rate of return do we require to put our capital at
risk?", (i.e., our hurdle rate). Our mission statement affirms that this must be
an attractive one to our shareholders.
The second question is, given our current capital position, how much insurance
risk should we take, or equivalently, "how much capital is required to support a
given portfolio of risk?". Using the catastrophe models, we can estimate a
probability distribution of possible loss outcomes; by combining the loss
distribution with premiums, expenses, etc., we get a probability distribution of
our net worth. The next step is to establish capital rules. We use several
different rules, but most of them are based on what portion of our capital we
are willing to risk to events or combinations of events at certain probability
levels. For example, we are willing to expose a larger portion of our capital
base to a 1 in 100 year event than we would be to a 1 in 20 year event, etc.
The final question is, "how should we price and select individual reinsurance
contracts to construct a portfolio of business that meets our hurdle rate?". The
approach that we take in our REMS system - as shown in the chart - is to rerun
the entire portfolio both with and without the new contract; this enables us to
calculate the marginal impact of the contract on both the expected profit and
the required capital of the portfolio, to calculate a marginal return on capital
(i.e., expected profit divided by required capital).
[FLOWCHART]
13
This process leads directly to an underwriting discipline to select those
contracts with marginal returns on capital above the hurdle rate. This is how we
implement the section of our mission statement calling for a portfolio
"significantly better than the market average."
One of the powerful benefits of this approach is the way it integrates capital
management with the individual underwriting process. Theoretically we should
write every contract available in the market that meets our hurdle rate
requirements. These contracts taken together comprise our portfolio, on which we
calculate required capital. If required capital exceeds actual capital, then we
should add to capital (assuming that we have set our hurdle rate higher than our
cost of incremental capital). This is why we continually added to our initial
$141 million capital from June of 1993 until 1996. This year, when our actual
capital exceeded what we could responsibly deploy, based on reinsurance market
conditions, we initiated our recent share buybacks.
An additional step is looking at this process from our clients' points of view.
When they reinsure risk, they free-up capital in trade for paying a fixed
premium. By analyzing their portfolio before and after the transaction, we can
calculate their expected cost of this freed-up capital (assuming that they apply
similar rules for required capital). The key point is that because the risk that
they are reinsuring is closely related (highly correlated) with their entire
portfolio, removing it will free up a relatively large amount of capital. The
risk we take on is less closely related to our portfolio (less correlated) and
therefore uses less capital (even though we are both using similar risk-bearing
rules on our entire portfolios). The expected profit to us is the same as the
expected cost to them, so the return on capital for us can be substantially
higher than the cost of capital generated for the client -- a win-win
transaction (and the basic theoretical justification for the existence of the
insurance business).
Of course, this discussion oversimplifies the process. It is a significant
practical challenge to design a system that is fast and simple enough for
underwriters to use, while being complex enough to reflect all major decision
variables. We also must remember that model results are only estimates of the
likelihood of future events; they are not "facts."
Finally, the best system in the world would not add to shareholder value if it
is not effectively used in the day-to-day decision-making process. This means
selecting and training our underwriters not only to use the models all the time,
but to understand the models' internal assumptions and weaknesses well enough to
know how much weight to put on model results in each underwriting decision.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The Company provides property catastrophe reinsurance as well as other
reinsurance to selected insurers and reinsurers on a worldwide basis through its
wholly-owned subsidiary, Renaissance Reinsurance Ltd. ("Renaissance
Reinsurance"), and catastrophe exposed primary insurance through its
majority-owned subsidiary, Glencoe Insurance Ltd. ("Glencoe"). The Company's
results depend to a large extent on the frequency and severity of catastrophic
events, and the concentration and coverage offered to clients impacted thereby.
The Company adheres to strict underwriting guidelines and surplus constraints to
deploy its capital in those regions and on programs where the Company believes
the return on its capital will be maximized. The Company manages its capital
deployment through the use of modeling techniques which assist the Company's
underwriters in selecting risks that the Company believes will provide the
maximum return on shareholders' equity. The Company's proprietary models assist
its underwriters in estimating the impact of a wide range and combination of
possible future property catastrophe events on the Company's results of
operations and financial condition. Because of the wide range and potential
combination of these events, the Company's business is volatile and its results
of operations and financial condition will reflect this volatility.
While property catastrophe reinsurance represented approximately 95% of the
Company's gross written premiums in 1996 and 1995 and is the Company's primary
focus, the Company may seek to take advantage of perceived opportunities in
other insurance and reinsurance markets.
RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to year ended December 31, 1995
For the year ended December 31, 1996, net income available to Common
Shareholders was $156.2 million compared to $162.8 million for the year ended
December 31, 1995. The decrease was primarily due to a decrease in gross
premiums written, an increase in ceded reinsurance premiums and an increase in
operating expenses, which were partially offset by an increase in net investment
income. The above factors, combined with an 8% increase in the weighted average
shares outstanding, after completion of the initial public offering of 3,105,000
Common Shares in July 1995 (the "Initial Public Offering"), resulted in a
decrease in earnings per Common Share to $6.01 for the year ended December 31,
1996 from $6.75 for the year ended December 31, 1995.
Gross premiums written for the year ended December 31, 1996 decreased 7.8% to
$269.9 million from $292.6 million for the year ended December 31, 1995. The
decline in the gross premiums written was primarily related to the competitive
market for property catastrophe reinsurance. The principal components of the
decline related to a decrease in premiums from renewing business of 8.8%, an
11.8% decrease in premiums due to the Company not renewing coverage, and a
decrease in reinstatement premiums of 1.3%, which was partially offset by a
14.1% increase in premiums related to new business.
Ceded premiums written were $18.3 million for the year ended December 31, 1996
compared to $2.7 million for the year ended December 31, 1995. Net premiums
written were $251.6 million for the year ended December 31, 1996 compared with
$290.0 million for year ended December 31, 1995.
15
During 1996, the Company increased its utilization of retrocessional coverage,
which is purchased to protect the Company's capital position in the event of a
major catastrophe or a series of catastrophes. The Company anticipates that its
utilization of retrocessional coverage will increase in 1997.
Approximately 95% of the Company's gross premiums written in 1996 were in
respect of property catastrophe reinsurance. The remaining gross premiums
written in 1996 consisted primarily of aviation and marine coverages. The
Company's gross premiums written (in thousands) by geographic region were:
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 predominately from Europe and Japan. See
Note 11 to Consolidated Financial Statements.
The table below sets forth the Company's combined ratio and components thereof:
Claims and claim adjustment expenses for the year ended December 31, 1996 were
$86.9 million. Included in the expenses for the year are provisions of $15
million for claims incurred from Hurricane Fran which struck North Carolina
during the third quarter of 1996, $9.3 million for claims incurred by regional
midwestern clients related to the severe wind and hail storms during the second
quarter of 1996, $8.3 million for losses related to the Northeast U.S. winter
storms in the first quarter of 1996, and $7.0 million for Northwestern U.S.
floods in December of 1996. Also, during 1996, there was $12.1 million of
development on prior year losses, which primarily related to a $3.2 development
on losses related to the 1994 Northridge Earthquake and a net development of
$3.5 million for Hurricanes Luis, Marilyn and Opal which occurred in 1995. In
comparison, claims and claim adjustment expenses for the year ended December 31,
1995 were $110.6 million or 38.3 percent of net premiums earned.
Estimates of claims and claim adjustment expenses are based in part upon the
prediction 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 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.
16
Underwriting expenses (consisting of brokerage commissions, excise taxes and
other costs directly related to underwriting reinsurance contracts) for the year
ended December 31, 1996 were 17.0% of net premiums earned, compared to 13.7% for
the year ended December 31, 1995. The primary contributors to the increase in
underwriting expense ratios were lower net earned premium and additional
operating costs related to the hiring of additional professional staff.
Net investment income (excluding net realized investment gains and losses) for
the year ended December 31, 1996 was $44.2 million, compared to $32.3 million
for the year ended December 31, 1995. The increase in investment income resulted
primarily from the increase in the amount of invested assets which was primarily
the result of the cash flow provided by operating activities and increased
borrowings under the Company's Revolving Credit Facility. The Company's
investment portfolio at December 31, 1996 had an average yield on fair value of
6.14% before investment management expenses. The Company recorded net realized
losses of $2.9 million on the sale of investments compared to net realized gains
of $2.3 million for the year ended December 31, 1995.
The Company's cash and cash equivalents at December 31, 1996 included $25.3
million of investments in currencies other than the U.S. dollar, representing
approximately 3.2% of the Company's invested assets. The remaining 96.8% of the
Company's invested assets were in U.S. dollar denominated foreign investments.
The Company realized net foreign exchange gains for each of the years ended
December 31, 1996 and 1995 of $.8 million and $3.0 million, respectively. The
exchange gains in 1996 resulted primarily from the weakening of the U.S. dollar
against the Great Britain pound, and in 1995 resulted from the weakening of the
U.S. dollar against most European currencies, the Japanese yen and the
Australian dollar. The Company's foreign currency policy is to hold foreign
currency amounts equal to estimated net foreign currency liabilities. In
addition, the Company maintains foreign currency assets in anticipation of
future potential foreign currency fluctuations that may arise from potential
future claims liabilities. All changes in the exchange rates are recognized
currently on the Company's income statement. 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.
Year ended December 31, 1995 compared to year ended December 31, 1994
Net income available to Common Shareholders increased 68.9% to $162.8 million
for the year ended December 31, 1995 from the $96.4 million reported for the
year ended December 31, 1994, primarily due to an increase in underwriting
profit and higher net investment income. The increase in underwriting profit was
the result of increased net premiums earned in conjunction with a lower combined
ratio. The increase in net investment income resulted from an increase in
invested assets at a slightly higher investment yield. Because of the increased
net premiums earned and net investment income, total revenues increased to
$326.6 million for the year ended December 31, 1995, compared to $261.4 million
for the year ended December 31, 1994. Earnings per share increased to $6.75 for
the year ended December 31, 1995 from $4.24 for the year ended December 31,
1994. Primarily as a result of the Company's Initial Public Offering, weighted
average Common Shares outstanding increased to 24.1 million for the year ended
December 31, 1995 from 22.8 million for the year ended December 31, 1994.
17
Gross premiums written for the year ended December 31, 1995 increased 7.0% to
$292.6 million from $273.5 million for the year ended December 31, 1994. The
principal components of the $19.1 million increase in premiums written were a
$44.4 million increase in premiums written from new clients and a $19.9 million
increase in premiums written from adjustments in coverage, terms, conditions and
pricing with clients that renewed coverage with the Company, offset by a $43.3
million decrease in premiums written due to the Company not renewing coverage
and a $1.9 million decrease in reinstatement premium. Net premiums earned for
the year ended December 31, 1995 increased 19.0% to $288.9 million from $242.8
million for the year ended December 31, 1994. Reinstatement premiums for the
year ended December 31, 1995 were $17.0 million, compared to $18.9 million for
the year ended December 31, 1994.
Approximately 95% of the Company's gross premiums written in 1995 were in
respect of property catastrophe reinsurance. The remaining gross premiums
written in 1995 consisted primarily of aviation and marine coverages. The
Company's gross premiums written (in thousands) by geographic region were:
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 predominately from Europe and Japan. See
Note 11 to Consolidated Financial Statements.
The table below sets forth the Company's combined ratio and components thereof:
Claims and claim adjustment expenses for the year ended December 31, 1995 were
$110.6 million. Hurricane Marilyn, which struck several Caribbean islands,
resulted in claims of $14.3 million, the Company's largest claim incurred for
1995. Other events that caused claims of more than $7.0 million were the
destruction of a factory by a fire in January 1995, Hurricane Opal, which struck
the Florida panhandle and continued northward through the mid-Atlantic states,
Hurricane Luis, which struck several Caribbean islands, Texas hailstorms in
April 1995, flooding in Norway in June 1995 and additional claims related to the
1994 Northridge, California earthquake.
Underwriting expenses for the year ended December 31, 1995 were 13.7% of premium
earned, compared to 14.6% for the year ended December 31, 1994.
18
Net investment income (excluding net realized investment gains and losses) for
the year ended December 31, 1995 was $32.3 million, compared to $14.9 million
for the year ended December 31, 1994. The increase in investment income resulted
primarily from the increase in the amount of invested assets. The increase in
invested assets in 1995 from 1994 was primarily the result of cash flow provided
by operating activities, prior borrowings under the Revolving Credit Facility
and the net proceeds of the Initial Public Offering, partially offset by the
retirement of the Company's Series B 15% Cumulative Redeemable Voting Preference
Shares, par value $1.00 per share (the "Series B Preference Shares"). The
Company realized gains on sales of investments of $2.3 million for the year
ended December 31, 1995, compared to $0.2 million for the year ended December
31, 1994. The Company's investment portfolio at December 31, 1995 had an average
yield on fair value of 6.09% before investment management expenses.
The Company's cash and cash equivalents at December 31, 1995 included $29.5
million of investments in currencies other than the U.S. dollar, representing
approximately 4.4% of the Company's invested assets. The remaining 95.6% of the
Company's invested assets were in U.S. dollar denominated foreign investments.
The Company realized net foreign exchange gains for each of the years ended
December 31, 1995 and 1994 of $3.0 million. The exchange gains in 1995 and 1994
resulted from the weakening of the U.S. dollar against most European currencies,
the Japanese yen and the Australian dollar.
LIQUIDITY AND CAPITAL RESOURCES
In December 1996, the Company repurchased 2.1 million of its Common Shares from
the founding institutional investors at $34.50 per share, or $72 million.
Subsequently, in December 1996, the Company initiated and in January 1997 the
Company completed a fixed price tender offer and repurchased .8 million shares
from the public shareholders at $34.50 per share, or $28 million.
ASSET QUALITY OF FIXED MATURITY PORTFOLIO
(as of December 31, 1996)
[PIE CHART]
On December 12, 1996, the Company amended and restated its Revolving Credit
Facility with a syndicate of commercial banks. The amended and restated credit
facility provides for the borrowing of up to $200 million on terms generally
extended to prime borrowers, at an interest rate, at the Company's option, of
either the base rate of the lead bank or the LIBOR rate plus a spread ranging
from 25 to 50 basis points. The full amount of the Revolving Credit Facility is
available until December 1, 1999 with two optional one year extensions, if
requested by the Company and approved by the lenders. As of December 31, 1996,
$150 million was outstanding under this agreement.
The credit agreement limits the payment of dividends by the Company to the
amount by which the Company's total shareholders' equity exceeds $300 million
and requires, among other things, that various financial maintenance tests be
met over the term of the agreement. See Note 6 to Consolidated Financial
Statements.
In July 1995, the Company completed the Initial Public Offering of its Common
Shares. The net proceeds of approximately $54.3 million were used to reduce the
Company's then outstanding borrowings under the Revolving Credit Facility and
for general corporate purposes.
19
Cash flows from operating activities resulted principally from premium income,
net of paid losses, acquisition costs and other related expenses and investment
income. The Company is unable to predict its cash flows from operating
activities, as it may be required to make large catastrophe claims payments to
its clients. As a consequence, cash flows from operating activities may
fluctuate between individual quarters and years.
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 (in thousands) the aggregate amounts of investments available
for sale and cash, cash equivalents and short-term investments comprising the
Company's portfolio of invested assets.
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an AA rating as
measured by Standard & Poor's Ratings Group ("S&P"). At December 31, 1996, the
invested asset portfolio had an average rating of AA, and an average duration of
1.25 years.
The Company's investment portfolio consists of debt securities with fixed
maturities and short-term investments denominated solely in U.S. dollars and
cash and cash equivalents denominated in U.S. dollars and currencies other than
U.S. dollars. The portfolio does not contain any direct investments in real
estate or mortgage loans.
All fixed income securities in the Company's investment portfolio are classified
as securities available for sale and are carried at fair value. Any unrealized
gains or losses as a result of changes in fair value over the period such
investments are held are not reflected in the Company's statement of operations,
but rather are reflected in shareholders' equity. See Notes 2 & 3 to
Consolidated Financial Statements.
The growth in the Company's portfolio of invested assets for the year ended
December 31, 1996 resulted from net cash provided by operating activities of
$174.8 million offset by net cash used in financing activities of $44.8 million.
For the year ended December 31, 1995 net invested assets increased as a result
of cash provided by operating activities of $195.2 million and cash provided by
financing activities of $29.9 million.
During 1996, the Company developed a multi-currency asset/liability optimization
model in conjunction with Tillinghast and Falcon Asset Management to integrate
asset, liability and capital decisions. As a result of this study, it was
determined that the Company could diversify its investment portfolio to include
investments in common stocks with minimal increase in overall corporate risk.
The analysis showed that the diversification benefits of equities offset their
greater volatility, and therefore, would not require significant additional
capital. During 1997 the Company intends to reallocate $50 million of its fixed
maturity portfolio to equity securities.
20
As a holding company, the Company relies on cash dividends and other permitted
payments from its subsidiaries to make principal and interest payments on
outstanding indebtedness of the Company and to pay cash dividends, if any, to
the Company's shareholders. The payment of dividends by the Company's
subsidiaries to the Company is limited under Bermuda law and regulations,
including Bermuda insurance law. The Insurance Act, 1978, amendments thereto and
related regulations of Bermuda, requires the Company's subsidiaries to maintain
minimum solvency margins and minimum liquidity ratios and prohibits dividends
which would result in a breach of these requirements. Under the Act, Renaissance
Reinsurance is classified as a Class 4 insurer, and as such, dividend payments
are limited to 25% of the prior years' statutory capital and surplus, unless the
directors of Renaissance Reinsurance attest that a dividend in excess of this
amount would not cause Renaissance Reinsurance to fail to meet its relevant
margins. During 1996 Renaissance Reinsurance paid aggregate cash dividends of
$135.6 million to the Company. See Notes 7 and 14 to Consolidated Financial
Statements.
In January 1996, the Company capitalized a new subsidiary, Glencoe, with a $50.0
million capital contribution. In June 1996 the Company sold a 29.9% interest in
Glencoe to certain strategic investors, in a private placement. The amounts
related to the interests of these strategic investors is reflected as minority
interest on the Consolidated Balance Sheet at December 31, 1996.
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, 1996 and 1995, the
Company had outstanding letters of credit aggregating $62.1 million and $58.5
million, respectively.
Neither the Company nor its subsidiaries have material commitments for capital
expenditures. Based on its current operating plans, the Company believes that
its liquidity will be adequate in both the short term and the long term.
CURRENCY
The Company's functional currency is the U.S. dollar. The Company writes a
substantial portion of its business in currencies other than U.S. dollars and
may, from time to time, experience significant exchange gains and losses and
incur underwriting losses in currencies other than U.S. dollars, which will in
turn affect the Company's financial statements. See Note 2 to Consolidated
Financial Statements.
The Company maintains a portion of its foreign currency premiums in the original
currency cash investments in anticipation of actual and potential claims.
EFFECTS OF INFLATION
The effects of inflation on the Company are implicitly considered in pricing and
estimating reserves for unpaid claims and claim adjustment expenses. The actual
effects of inflation on the results of the Company cannot be accurately known
until claims are ultimately settled.
21
CONSOLIDATED BALANCE SHEETS
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF INCOME
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), formerly Renaissance Holdings
Ltd., was formed under the laws of Bermuda on June 7, 1993 and serves as the
holding company for its wholly-owned subsidiary, Renaissance Reinsurance Ltd.
("Renaissance Reinsurance") and its majority-owned subsidiary, Glencoe Insurance
Ltd. ("Glencoe"), both of which are also incorporated under the laws of Bermuda.
Renaissance Reinsurance primarily provides property catastrophe reinsurance
coverage to insurers and reinsurers on a worldwide basis. Renaissance
Reinsurance commenced its reinsurance underwriting operations on June 15, 1993.
Glencoe primarily provides catastrophe exposed property coverage on an insurance
and reinsurance basis. Glencoe commenced its insurance underwriting operations
on January 2, 1996.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of United
States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe and its subsidiaries, Renaissance Reinsurance and
Glencoe. RenaissanceRe, Renaissance Reinsurance and Glencoe are collectively
referred to herein as the "Company." All intercompany transactions and balances
have been eliminated on consolidation. Minority interests represent the
interests of external parties in respect of net income and shareholders' equity
of Glencoe. Certain comparative information has been reclassified to conform to
current presentation.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported and disclosed amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PREMIUM REVENUES AND RELATED EXPENSES
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are estimated based on information received from ceding companies and any
subsequent differences arising on such estimates are recorded in the period in
which they are determined. Unearned premium reserves represent the portion of
premiums written that relate to the unexpired terms of contracts and policies in
force. Such reserves are computed by pro rata methods based on statistical data
or reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim adjustment expenses,
based on historical and current experience, and anticipated investment income
related to those premiums are considered in determining the recoverability of
deferred acquisition costs.
26
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
The reserve for claims and claim adjustment expenses includes estimates for
unpaid claims and claim adjustment expenses on reported losses as well as an
estimate of losses incurred but not reported. The reserve is based on reports
and individual case estimates received from 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 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 results of operations in the period in
which they become known and are accounted for as changes in estimates.
INVESTMENTS
Fixed maturity investments are considered available for sale and are reported at
fair value. The net unrealized appreciation or depreciation on investments
available for sale is included as a separate component of shareholders' equity.
Investment transactions are recorded on the trade date with balances pending
settlement reflected separately in the balance sheet. Short-term investments,
which have a maturity of one year or less when purchased, are carried at cost,
which approximates fair value.
Realized gains or losses on the sale or maturity of investments are determined
on the basis of the specific identification method. Investments which are
considered to have permanently declined in value are written down to estimated
realizable values. Net investment income, consisting of interest, net of
investment expenses, is recognized when earned. The amortization of premium and
accretion of discount for fixed maturity securities is computed utilizing the
interest method. The effective yield utilized in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when necessary, based on the market value of securities with similar terms and
quality.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures with respect to certain financial instruments are
included separately herein where appropriate. The carrying values of other
financial instruments, including the bank loan payable, reinsurance premiums
receivable and accrued investment income, approximate their fair value due to
the short-term nature of the balances.
EARNINGS PER SHARE
Earnings per share was calculated by dividing net income available to Common
Shareholders by weighted average common and common equivalent shares
outstanding. For the years ended December 31, 1996, 1995, and 1994, weighted
average common and common equivalent shares outstanding were 26.0 million, 24.1
million, and 22.8 million, respectively. Weighted average shares for the years
ended December 31, 1996, 1995, and 1994 included 25.5 million, 23.8 million and
22.5 million weighted average Common Shares outstanding, respectively. Common
equivalent shares are calculated on the basis of the treasury stock method.
27
FOREIGN EXCHANGE
The Company's functional currency is the United States dollar. Monetary assets
and liabilities denominated in foreign currencies are translated at exchange
rates in effect at the balance sheet date. Revenues and expenses denominated in
foreign currencies are translated at the prevailing exchange rate at the
transaction date. Exchange gains and losses are included in the determination of
net income.
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, cash equivalents include money
market instruments with an original maturity of ninety days or less.
STOCK INCENTIVE COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under Statement of Financial Accounting
Standards No. 123 ("FAS 123") requires the use of option valuation models that
were not developed for use in valuing employee stock options. It is the opinion
of management that disclosure of the pro forma impact of fair values, if
material, provides a more relevant and informative presentation of the impact of
stock options issued to employees than financial statement recognition of such
amounts. Under APB 25, the Company recognizes compensation expense for stock
option grants to the extent that the fair value of the stock exceeds the stock
option exercise price at the date of grant.
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on
investments available for sale are as follows:
28
Contractual maturities of fixed maturity securities are shown below. Expected
maturities, which are best estimates, will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. All mortgage-backed securities mature
within five years.
The weighted average contractual maturity of the total carrying value of fixed
maturity investments available for sale as of December 31, 1996 and 1995 was 3.7
years and 4.2 years, respectively.
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by ratings assigned by rating agencies (e.g. Standard &
Poor's Corporation) or, with respect to non-rated issues, as estimated by the
Company's investment managers.
INVESTMENT INCOME
The components of net investment income are as follows:
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The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
Proceeds from maturities and sales of fixed maturity investments were $317.6
million, $268.6 million and $118.8 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company's investments are primarily invested in U.S. dollar denominated
foreign investments. At December 31, 1996, the Company's investments in cash and
cash equivalents included $25.3 million of investments in non-U.S. dollar
currencies, representing approximately 3.2% of invested assets. At December 31,
1995, cash and cash equivalents included $29.5 million of investments in
non-U.S. dollar currencies, representing approximately 4.4% of invested assets.
NOTE 4. CEDED REINSURANCE
The Company utilizes reinsurance to reduce its exposure to large losses in peak
zones. The Company currently has in place contracts that provide for recovery of
a portion of certain claims and claim expenses from reinsurers in excess of
various retentions and loss warranties. If reinsurers are unable to meet their
obligations under the agreements, the Company would remain liable to the extent
that any reinsurance company fails to meet its obligation. To date, there have
been no losses reported to indicate that the Company's reinsurance coverage will
be reached, and there are no amounts recoverable for claims and claim expenses
from reinsurers.
NOTE 5. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Estimates of claims and claim adjustment expenses are based in part upon the
prediction 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 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. As the Company's book of business matures and property
catastrophe claims data improves, the Company anticipates that its process of
establishing reserves may improve and may result in more refined estimates of
claims and claim adjustment expenses.
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Activity in the liability for unpaid claims and claim adjustment expense is
summarized as follows:
During 1996, the Company incurred $11.8 million of claims and claim expenses for
1995 and prior periods primarily as a result of reserve increases for claims
related to the Northridge, California earthquake and a retrocessional quota
share contract. The additional development on both of these claims was partially
offset by additional premiums received under the reinsured contracts. During
1995, the Company incurred $29.6 million of claims and claim expenses for 1994
and prior periods primarily as a result of reserve increases for claims related
to the Northridge, California earthquake, reserve changes related to a
retrocessional quota share contract and a large industrial catastrophe that
occurred late in 1994. The additional development on these claims was partially
offset by additional premiums received under the reinsured contracts. The
Company's total reserve for incurred but not reported claims was $42.7 million
at the end of 1996 compared to $29.1 million at the end of 1995.
NOTE 6. BANK LOAN PAYABLE
On December 12, 1996, the Company amended and restated its Revolving Credit
Facility with a syndicate of commercial banks. The amended and restated credit
facility provides for the borrowing of up to $200 million on terms generally
extended to prime borrowers, at an interest rate, at the Company's option, of
either the base rate of the lead bank or the LIBOR rate plus a spread ranging
from 25 to 50 basis points. The full amount of the Revolving Credit Facility is
available until December 1, 1999 with two optional one year extensions, if
requested by the Company and approved by the lenders. As of December 31, 1996,
$150 million was outstanding under this agreement.
The credit agreement limits the payment of dividends by the Company to the
amount by which the Company's total shareholders' equity exceeds $300 million
and requires, among other things, that various financial maintenance tests be
met over the term of the agreement.
Interest payments on the Company's credit facility totaled $6.9 million, $5.8
million and $0.1 million for the years ended December 31, 1996, 1995 and 1994
respectively.
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NOTE 7. SHAREHOLDERS' EQUITY
The Company's 200,000,000 authorized $1.00 par value Common Shares consists of
three separate series with differing voting rights as follows:
The Diluted Voting I Shares and the Diluted Voting II Shares (together the
Diluted Voting Shares) were authorized at a special general meeting of
shareholders on December 23, 1996 and subsequent to the authorization,
affiliates of General Electric Investment Corporation (GEI) exchanged 5.7
million Common Shares for 4.2 million Diluted Voting I Shares and 1.5 million
Diluted Voting II Shares, and as such are the sole holders of such diluted
voting securities.
The Diluted Voting Shareholders vote together with the Common Shareholders. The
Diluted Voting I Shares are limited to a fixed voting interest in the Company of
up to 9.9 percent. Each Diluted Voting II Share has a one-third vote on most
corporate matters. The Diluted Voting Shareholders are entitled to the same
rights, including receipt of dividends and the right to vote on certain
significant corporate matters, and are subject to the same restrictions as the
Common Shareholders. The Company currently does not intend to register or list
the Diluted Voting Shares on The New York Stock Exchange.
On December 13, 1996, the Board of Directors approved a Capital Plan which is
comprised of two components. First, the Company purchased an aggregate of
2,085,361 Common Shares at $34.50 per share for an aggregate price of $71.9
million on a pro rata basis from its founding institutional investors. Second,
the Company commenced a tender offer for 813,190 Common Shares at $34.50 per
share for an aggregate price of $28.1 million. The two transactions that
comprise the capital plan are expected to return a total of $100 million to
shareholders through the repurchase and cancellation of Common Shares.
In February 1996, the Company paid for the costs of a secondary offering of the
Company's Common Shares sold by the founding institutional investors pursuant to
the registration rights agreement by and among the Company, the founding
institutional investors and certain officers and employees of the Company. The
Company incurred costs of $0.5 million with respect to the registration of
shares which is reflected as a reduction to additional paid-in capital on the
balance sheet.
On July 26, 1995, the Company issued 3,105,000 Common Shares for proceeds, net
of fees, discounts and commissions, of approximately $56.3 million in an initial
public offering (the IPO). Costs associated with the IPO, totaling approximately
$2.0 million were deducted from the related proceeds. The net amount received in
excess of Common Share par value was recorded as additional paid-in capital.
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In March 1995, the Company adopted a plan of recapitalization (the
Recapitalization) and completed certain other transactions designed to produce a
capital structure comprised entirely of Common Shares. In connection therewith:
- - The Company effected a consolidation and subdivision of its authorized share
capital allocated to Common Shares of U.S. $1.00 par value each and
reallocated the entire $200 million authorized capital of the Company to its
Common Shares. The Company issued a stock dividend of one fully-paid Common
Share for each two issued and outstanding Common Shares (the "Stock
Dividend"). This issuance reclassified $7.5 million to the Company's Common
Shares from additional paid-in capital.
- - The Series A Preference Shares were converted into 21,037,500 Common Shares.
- - 673,500 Common Shares were issued to USF&G in the form of a stock dividend.
575,584 of such shares were issued to restore USF&G's economic position in
the Company (i.e., ownership percentage) to the level immediately preceding
the Recapitalization. 99,416 of such shares were granted in the form of a
special stock dividend, in exchange for USF&G's surrender of certain rights
as holder of all the then-outstanding Common Shares in connection with
conversion of the Series A Preference Shares. In connection with the 99,416
shares granted, the approximately $1.2 million fair value of such shares, as
determined by the Company's Board of Directors, has been reflected in the
financial statements as a non-cash organizational expense for the year ended
December 31, 1995.
In May, 1994 the Company received $100 million with respect to the issuance of
1,000,000 Series B Preference Shares at a price of U.S. $100 each to the
founding institutional investors. Dividends related to the Series B Preference
Shares amounted to $2.5 million and $12.9 million in 1995 and 1994,
respectively. In December, 1994 the Company redeemed 575,414 Series B Preference
Shares, and in April 1995 all remaining Series B Preference Shares and
accumulated dividends were redeemed.
NOTE 8. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
The Company has in force several treaties with USF&G, subsidiaries of USF&G and
affiliates of GEI covering property catastrophe risks in several geographic
zones. The terms of these treaties were determined in arms-length negotiations
and the Company believes that such terms are comparable to terms the Company
would expect to negotiate in similar transactions with unrelated parties. For
the years ended December 31, 1996, 1995 and 1994, the Company received $27.9
million, $45.7 million and $28.1 million in reinsurance premiums and deposits
related to these treaties, respectively.
Renaissance Reinsurance has entered into Investment Advisory Agreements with
each of Warburg, Pincus Investment Counsellors, Inc., ("Counsellors"), an
affiliate of E.M. Warburg, Pincus & Co., LLC and GE Investment Management, an
affiliate of GEI. Counsellors and GE Investment Management currently each manage
approximately 40% of Renaissance Reinsurance's investment portfolio, subject to
Renaissance Reinsurance's investment guidelines. The terms of the Investment
Advisory Agreements were determined in arms-length negotiations. The performance
of, and the fees paid to, Counsellors and GE Investment Management under the
Investment Advisory Agreements are reviewed periodically by the Board. Such fees
paid to Counsellors and GE Investment Management aggregated $0.5 million and
$0.6 million, respectively for the year ended December 31, 1996, respectively.
33
During the years ended December 31, 1996, 1995 and 1994, the Company received
58.5%, 47.9%, and 53.9%, respectively, of its premium assumed from its five
largest reinsurance brokers. Subsidiaries and affiliates of Marsh & McLennan,
Incorporated, E. W. Blanch Co., Inc., Greig Fester Limited, Alexander Howden
Reinsurance Brokers, Ltd. and Bates, Turner Inc. (a GE Capital Services Company,
an affiliate of GEI) accounted for approximately 15.2%, 14.9%, 11.5%, 10.1% and
6.8%, respectively, of the Company's net premiums written in 1996.
NOTE 9. DIVIDENDS
During 1996, four regular quarterly dividends of $0.20 per share were paid to
shareholders of record as of February 20, May 16, August 20, and November 19.
During 1995 the Company paid a dividend of $0.16 per share, payable to
shareholders of record as of November 21. The total amount of dividends paid in
1996 and 1995 were $20.5 million and $4.1 million, respectively.
NOTE 10. TAXATION
Under current Bermuda law, neither RenaissanceRe, Renaissance Reinsurance nor
Glencoe are required to pay taxes in Bermuda on either income or capital gains.
NOTE 11. SEGMENT INFORMATION
Financial information relating to gross premiums assumed from ceding companies
by geographic area is as follows:
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 and Japan.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company's employees that are not subject to U.S. taxation may participate in
a contributory savings and investment plan. Each employee in the non-U.S. plan
may contribute to the plan. Employee contributions are matched at a rate of 100
percent of the first six percent of compensation contributed to the plan.
The Company's employees that are subject to U.S. taxation participate in a
defined contribution savings and investment plan. Employee contributions are
matched at a rate of 50 percent, subject to IRS and ERISA regulations. In
addition the Company provides a health benefit plan providing hospital, medical
and other health benefits.
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NOTE 13. STOCK INCENTIVE COMPENSATION PLANS
The Company adopted the disclosure-only option under FAS 123, as of December 31,
1996. The pro forma impacts of the fair value accounting provisions of FAS 123
were immaterial on 1996 and 1995 net income.
The Company has a stock option plan under which all employees of the Company and
its subsidiaries may be granted stock options. A stock option award under the
Company's stock option plan allows for the purchase of the Company's Common
Shares at a price that is generally equal to the market price of the Common
Shares on the date of grant. Options to purchase Common Shares are granted
periodically by the Board of Directors and generally expire ten years from the
date of grant.
Information with respect to stock options follows:
In 1996, the Company established a Non-Employee Director Stock Plan to issue
stock options and shares of restricted stock. The maximum number of shares which
may be issued under the Plan shall not exceed 100,000 Common Shares. Under this
plan, 6,000 options to purchase Common Shares and 546 restricted Common Shares
were issued in 1996.
Under the Company's 1993 Stock Incentive Plan, options for 100,000 Common Shares
(base options) were issued to employees. The exercise price of the base options
was one U.S. dollar per share, which approximated fair value at the date of
grant for 85,000 of the base options. The remaining 15,000 base options were
granted when the exercise price of one U.S. dollar per share was below estimated
fair value per share, and, as such, the difference of approximately $1 million
between the estimated $11.83 per share fair value at the date of grant, as
determined by the Company's Board of Directors and the $1.00 exercise price was
reflected in the accompanying financial statements as a non-cash compensation
charge. In connection with the Recapitalization, the base option plan was
amended to allow for the immediate exercise of all base options into 787,500
restricted Common Shares with a vesting schedule identical to the original base
option plan. In connection with the issuance of the restricted Common Shares in
1995, the $2.5 million fair value of such shares, based on fair value as
determined by the Company's Board of Directors, has been reflected in the
financial statements as a non-cash compensation expense.
35
Compensation expense for these plans in 1995 and 1994 was $2.8 million and $0.8
million, respectively. There was no compensation expense related to employee
stock option plans in 1996.
In addition, the Company provides certain employees the ability to borrow, at
current market rates, such amounts necessary to satisfy the tax obligations on
certain stock awards. The loans mature no later than the date that the grants
that gave rise to the tax liability expire. All such loans are reflected as a
separate component of shareholders' equity.
NOTE 14. STATUTORY REQUIREMENTS
Under the Insurance Act, 1978, amendments thereto and related regulations of
Bermuda ("The Act"), Renaissance Reinsurance and Glencoe are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires Renaissance Reinsurance and Glencoe to maintain
certain measures of solvency and liquidity during the period. As at December 31,
1996 the statutory capital and surplus of the Company's subsidiaries was $595.0
million and the amount required to be maintained was $124.5 million.
Under the Act, Renaissance Reinsurance is classified as a Class 4 insurer, and
is therefore restricted to the payment of dividends in the amount of 25% of the
prior years statutory capital and surplus, unless the directors of Renaissance
Reinsurance attest that a dividend in excess of this amount would not cause
Renaissance Reinsurance to fail to meet its relevant margins. During 1996,
Renaissance Reinsurance paid aggregate cash dividends of $135.6 million to
RenaissanceRe Holdings Ltd.
NOTE 15. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS AND FIXED ASSETS
The Company is finalizing an operating lease with respect to its offices. Future
minimum rental payments are expected to approximate $600,000 per annum and will
continue through September 30, 2001. In addition, the Company is party to
certain lease commitments with respect to housing on behalf of certain officers
of the Company.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As of December 31, 1996, the Company did not maintain any financial instruments
that exposed the Company to any off-balance sheet risks.
CONCENTRATION OF CREDIT RISK
None of the Company's investments exceeded 10% of shareholders' equity at
December 31, 1996.
LETTERS OF CREDIT
Effective as of December 31, 1996 the Company's bankers have issued letters of
credit of approximately $62.1 million in favor of certain ceding companies. The
letters of credit are secured by cash and cash equivalents of similar amounts.
36
EMPLOYMENT AGREEMENTS
The Board of Directors has authorized the execution of employment agreements
between the Company and its executive officers for periods up to December 31,
1997. These agreements provide for compensation in the form of salary, bonus,
options to purchase shares in the Company, participation in benefit plans and
reimbursement of certain expenses.
NOTE 16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(certain amounts have been reclassified)
37
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENAISSANCERE HOLDINGS LTD.
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 1996 and 1995
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
accounting principles generally accepted in the United States.
Ernst & Young
Hamilton, Bermuda
January 15, 1997
38
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.
CATASTROPHIC 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."
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."
COMBINED RATIO The sum of the expense ratio and the claims/claim adjustment
expense ratio. This ratio measures the ratio of underwriting expenses and
claims/claims adjustment expenses to earned premium. A combined ratio over 100%
generally indicates unprofitable underwriting prior to the consideration of
investment income.
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."
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 increases 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.)
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, 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.
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 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,
or retrocessionaire, all or part of the 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 net risks, to protect against catastrophic losses, to stabilize
financial ratios and to obtain additional underwriting capacity.
39
DIRECTORS AND OFFICERS
40
FINANCIAL AND INVESTOR INFORMATION
For general information about the Company or for copies of the annual report,
quarterly earnings releases and Forms 10-K and 10-Q, please contact:
John D. Nichols, Jr.
Vice President and Treasurer
Tel: 441-295-4513
Internet: jdn@renre.com
STOCK INFORMATION
The Company's stock is listed on The New York Stock Exchange under the symbol
RNR.
INDEPENDENT AUDITORS
Ernst & Young
Hamilton, Bermuda
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.P.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
USA
Web site: www.cmssonline.com
All written requests should be sent to:
Shareholder Services
RenaissanceRe Holdings Ltd.
Renaissance House
8-12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
41
RENAISSANCERE HOLDINGS LTD.
Renaissance House
8-12 East Broadway
Pembroke HM19, Bermuda
Tel: 441-295-4513
Fax: 441-292-9453
Internet: jdn@renre.com
Web site: www.renre.com
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