10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 13, 1997
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number: 34-0-26512
RenaissanceRe Holdings Ltd.
---------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-013-8020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Renaissance House
8-12 East Broadway
Pembroke, Bermuda HM 19
(Address of principal executive offices) (Zip Code)
(441) 295-4513
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
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The number of outstanding shares of RenaissanceRe Holding Ltd.'s common shares,
par value US $1.00 per share, as of June 30, 1997 was 22,364,105.
Total number of pages in this report: 18 (including exhibits)
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
2
Part I -- Financial Information
Item 1 -- Financial Statements
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(United States Dollars)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements
3
Consolidated Statements of Operations
(United States Dollars)
(in thousands, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements
4
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(United States Dollars in thousands)
(Unaudited)
The accompanying notes are an integral part of these financial statements
5
RenaissanceRe Holdings Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
(unaudited)
1. The consolidated financial statements have been prepared on the basis of
United States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe Holdings Ltd. (the "Company") and its subsidiaries,
including Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") and Glencoe
Insurance Ltd. ("Glencoe"). In the opinion of management, these financial
statements reflect all the normal recurring adjustments necessary for a fair
presentation of the Company's financial position at June 30, 1997 and December
31, 1996, its results of operations for the three month and six month periods
ended June 30, 1997 and 1996 and cash flows for the three month and six month
periods ended June 30, 1997 and 1996. These consolidated financial statements
should be read in conjunction with the 1996 audited consolidated financial
statements and related notes thereto. Because of the seasonality of the
Company's business, the results of operations for any interim period will not
necessarily be indicative of results of operations for the full fiscal year.
2. Earnings per share ("EPS") is calculated by dividing net income available
to common shareholders by weighted average common shares and common share
equivalents outstanding.
For the quarter ended June 30, 1997, the Company had 23,260,000 weighted
average common shares outstanding consisting of 22,841,000 weighted average
common shares and 419,000 weighted average common share equivalents issuable
pursuant to the Company's stock option plans. For the quarter ended June 30,
1996, the Company had 26,076,000 weighted average common shares outstanding
consisting of 25,608,000 weighted average common shares and 468,000 weighted
average common share equivalents issuable pursuant to the Company's stock option
plans.
For the six months ended June 30, 1997, the Company had 23,277,000 weighted
average common shares outstanding, consisting of 22,851,000 weighted average
common shares and 426,000 weighted average common share equivalents issuable
pursuant to the Company's stock option plans. For the six months ended June 30,
1996, the Company had 26,081,000 weighted average common shares outstanding,
consisting of 25,607,000 weighted average common shares and 474,000 weighted
average common share equivalents issuable pursuant to the Company's stock option
plans. Total common shares outstanding as at June 30, 1997 and 1996 were
22,364,105 and 25,609,668, respectively.
3. During the quarter ended June 30, 1997, the Board of Directors of the
Company declared, and the Company paid, a dividend of $0.25 per share to
shareholders of record as of May 22, 1997.
4. On June 23, 1997 the Company completed a secondary offering of 3.4 million
common shares (including shares sold to cover over-allotment options) at $38.00
per share. All shares sold were owned by the Company's founding institutional
shareholders or their successors, and the Company did not receive any of the
proceeds of the offering. Expenses of $700,000 related to the offering were
charged to paid-in capital during the second quarter of 1997.
6
Concurrent with the secondary offering on June 23, 1997, the Company also
purchased, for cancellation, an aggregate of 700,000 common shares at $36.29 per
share, or an aggregate purchase price of $25.4 million, from the Company's
founding institutional shareholders or their successors (the "Company
Purchase").
5. On March 7, 1997 the Company completed the sale of $100 million aggregate
liquidation amount of "Company Obligated, Mandatorily Redeemable Capital
Securities of Subsidiary Trust holding solely $103,092,783.51 of the Company's
8.54% Junior Subordinated Debentures due March 1, 2027" ("Capital Securities")
issued by RenaissanceRe Capital Trust (the "Trust"), a newly created subsidiary
business trust of the Company. The Capital Securities pay cumulative cash
distributions at an annual rate of 8.54 percent, payable semi-annually
commencing September 1, 1997. Proceeds from the offering were used to repay a
portion of the Company's outstanding indebtedness under its bank loan with a
syndicate of commercial banks (the "Revolving Credit Facility").
The financial statements of the Trust will be consolidated into the
Company's consolidated financial statements. The Trust is a wholly owned
subsidiary of the Company.
6. In January 1997, the Company completed a fixed price tender offer and
repurchased and cancelled 813,190 Common Shares from the public shareholders at
$34.50 per share, or an aggregate purchase price of $28.1 million (the "Tender
Offer").
7. Interest paid was $2.5 million for the six months ended June 30, 1997 and
$2.9 million for the same period in the previous year.
8. In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share.
SFAS No. 128 simplifies the standards for computing EPS previously found in APB
Opinion No. 15, Earnings per Share. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures. Management does not believe this new pronouncement
will materially affect the Company's current disclosures as the Company's
capital structure is not considered complex nor is there significant dilution
from other securities or contracts to issue common stock.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods and requires
restatement of all prior-period EPS data presented. Earlier application is not
permitted.
If SFAS No. 128 had been effective for the current reporting period, the
pro-forma effects would be as follows:
7
In June 1997 FASB issued SFAS 130 and SFAS 131.
SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. The Company is presently considering the
disclosure alternatives.
SFAS 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial periods beginning after December 15,
1997. Earlier application is encouraged. The Company is presently considering
the disclosure alternatives.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the quarter ended June 30, 1997 compared to the quarter ended June 30,
1996
For the quarter ended June 30, 1997, net income was $37.0 million or $1.59
per share, compared to $39.3 million or $1.51 per share for the same quarter in
1996. The decrease in reported net income was primarily related to lower net
premiums earned, resulting from lower in force gross premiums as well as higher
ceded reinsurance premiums, partially offset by lower claims and claim
adjustment expenses and increased investment income and reduced investment and
foreign exchange losses. Per share earnings amounts for 1997 benefited from a
lower number of weighted average shares outstanding as a result of share
repurchases in late 1996 and in 1997.
Gross premiums written for the second quarter of 1997 declined 10.8 percent
to $34.8 million from the $39.0 million reported for the same quarter of 1996.
The decline in gross premiums written was primarily related to the Company's
decision not to renew certain contracts due to the competitive market for
property catastrophe reinsurance as well as lower overall pricing on reinsurance
contracts. The 10.8 percent premium decrease was the result of a 22.1 percent
decrease in premiums due to the Company not renewing coverage and a 11.8 percent
decrease related to changes in pricing, participation level and coverage on
renewed business, which was partially offset by a 23.1 percent increase in
premiums related to new business.
Net premiums written for the second quarter of 1997 were $20.6 million
compared with $32.7 million for the second quarter of 1996. Net premiums earned
for the second quarter of 1997 were $51.5 million, compared to $62.0 million for
the same quarter of 1996, a decrease of 17.0 percent. Total revenues for the
second quarter of 1997 decreased to $63.8 million from $70.2 million reported
for the same quarter of 1996.
During 1997, the Company has expanded its reinsurance coverage to limit its
losses from certain large exposures. During the second quarter of 1997, ceded
premiums written were $14.2 million compared to $6.3 million for the same
quarter in 1996.
The table below sets forth the Company's combined ratio and components
thereof for the quarters ended June 30, 1997 and 1996:
9
Claims and claim adjustment expenses incurred for the quarter ended June
30, 1997 were $11.1 million or 21.6 percent of net premiums earned. In
comparison, claims and claim adjustment expenses for the quarter ended June 30,
1996 were $19.3 million or 31.2 percent of net premiums earned.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $5.9 million the quarter ended June 30,
1997 compared to $6.1 million for the same quarter in 1996. Operating expenses
for the second quarter of 1997 increased to $6.1 million compared with $3.8
million for the same quarter of 1996 as a result of increased staffing at
Renaissance Reinsurance and the continued development of Glencoe.
Net investment income (excluding net realized investment gains and losses)
was $12.2 million for the quarter ended June 30, 1997 compared to $10.3 million
for the same period in 1996. The increase in net investment income for the
quarter was primarily the result of higher average invested assets, which
resulted primarily from cash provided by operations.
Interest expense and minority interest for the quarter ended June 30, 1997
increased to $3.0 million from $1.2 million for the same period in 1996. The
increase was primarily related to the accrual of the distribution on the $100.0
million aggregate liquidation amount of Capital Securities that were issued
during the first quarter of 1997.
For the six months ended June 30, 1997 compared to the six months ended
June 30, 1996
For the six months ended June 30, 1997, net income was $72.4 million or
$3.11 per share, compared to $78.5 million or $3.01 per share for the same
period in 1996. The decrease in reported net income was primarily related to
lower net premiums earned, resulting from lower in force gross premiums as well
as higher ceded reinsurance premiums, partially offset by lower claims and claim
adjustment expenses. Per share amounts for 1997 benefited from a lower number
of weighted average shares outstanding as a result of share repurchases in late
1996 and in 1997.
Gross premiums written for the first six months of 1997 declined 13.6
percent to $155.2 million from the $179.6 million reported for the same period
in 1996. The decline in gross premiums written was primarily related to the
Company's decision not to renew certain contracts due to the competitive market
for property catastrophe reinsurance as well as lower overall pricing on
reinsurance contracts. The premium decrease of 13.6 percent was the result of
a 19.3 percent decrease in premiums due to the Company not renewing coverage and
a 7.3 percent decrease related to changes in pricing, participation level and
coverage on renewed business, which was partially offset by a 13.0 percent
increase in premiums related to new business.
During 1997, the Company has expanded its reinsurance coverage and for the
first six months of 1997, ceded premiums written were $17.0 million compared to
$8.2 million for the same period in 1996.
10
Net premiums written for the first six months of 1997 were $138.2 million
compared with $171.4 million for the same period in 1996. Net premiums earned
for first six months of 1997 were $107.4 million, compared to $123.7 million for
the same period in 1996, a decrease of 13.2 percent. Total revenues for the
first six months of 1997 decreased to $130.4 million from $141.3 million
reported for the same period in 1996.
The table below sets forth the Company's combined ratio and components
thereof for the six months ended June 30, 1997 and 1996:
Claims and claim adjustment expenses incurred for the six months ended June
30, 1997 were $25.3 million or 23.6 percent of net premiums earned. In
comparison, claims and claim adjustment expenses for the six months ended June
30, 1996 were $39.3 million or 31.8 percent of net premiums earned.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $12.3 million the six months ended June 30,
1997 compared to $12.4 million for the same period in 1996. Operating expenses
for first six months of 1997 increased to $12.0 million compared with $7.1
million for the same period in 1996 as a result of increased staffing at
Renaissance Reinsurance and the continued development of Glencoe.
Corporate expenses for the first six months of 1997 were $2.6 million and
included transaction-related fees of $1.5 million in respect of the issuance of
the $100.0 million aggregate liquidation amount of Capital Securities in March
of 1997.
Net investment income (excluding net realized investment gains and losses)
was $24.3 million for the six months ended June 30, 1997 compared to $20.3
million for the same period in 1996. The increase in net investment income for
the first six months of 1997 was primarily the result of higher average invested
assets, primarily related to cash provided by operations and the proceeds from
the Capital Securities, which was partially offset by amounts used to repay
amounts outstanding under the Revolving Credit Facility.
Interest expense and minority interest for the six months ended June 30,
1997 increased to $5.4 million from $2.8 million for the same period in 1996.
The increase was primarily related to the accrual of the distribution on the
$100.0 million of Capital Securities that were issued during the first quarter
of 1997.
11
Liquidity and Capital Resources
As a holding company, the Company relies on cash dividends and other
permitted payments from its subsidiaries to make principal, interest payments
and cash distributions on outstanding obligations and pay dividends, if any, to
the Company's shareholders. The payment of dividends by the Company's
subsidiaries to the Company is, under certain circumstances, limited under
Bermuda insurance law. The Bermuda Insurance Act of 1978, amendments thereto
and related regulations of Bermuda, require the Company's subsidiaries to
maintain a minimum solvency margin and a minimum liquidity ratio. There are
presently no significant restrictions on the payment of dividends by the
Company's subsidiaries to the Company.
Cash flows from operating activities resulted principally from premium and
investment income, net of paid losses, acquisition costs and other related
expenses. Because of the high severity and low frequency of the coverages
written by the Company and the seasonality of the Company's business, it is not
possible to accurately predict the future cash flows from operating activities.
As a consequence, cash flows from operating activities may fluctuate between
individual quarters and years.
Neither the Company nor its subsidiaries currently 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 and long
term.
On June 23, 1997, the Company completed a secondary offering of 3.4 million
common shares at $38.00 per share (including shares sold to cover overallotment
options). All shares sold were owned by the Company's founding institutional
shareholders or their successors, and the Company did not receive any of the
proceeds of the offering. Expenses of $700,000 related to the offering were
charged to paid-in capital during the second quarter of 1997.
Concurrent with the secondary offering on June 23, 1997, the Company also
purchased, for cancellation, an aggregate of 700,000 common shares at $36.29 per
share or an aggregate purchase price of $25.4 million from the Company's
founding institutional shareholders or their successors.
On March 7, 1997 the Company completed the sale of $100.0 million aggregate
liquidation amount of the Capital Securities issued by the Trust. The proceeds
of the Capital Securities offering were invested by the Trust in $100.0 million
aggregate principal amount of the 8.54% Junior Subordinated Deferrable Interest
Debentures (the "Junior Subordinated Debentures") issued by the Company. The
Capital Securities pay cumulative cash distributions at an annual rate of 8.54
percent, payable semi-annually commencing September 1, 1997. Proceeds from the
offering were used to repay a portion of the Company's outstanding indebtedness.
Pursuant to its obligations with respect to the Capital Securities and the
Junior Subordinated Debentures, the Company shall not declare or pay any
dividends or distributions on, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of the Company's capital stock if the
Company shall be in default with respect to certain of its obligations under the
Capital Securities or if the Company shall have given notice of its intention to
defer its payment obligations with respect to the Capital Securities and shall
not have rescinded such notice.
12
In January 1997, the Company repurchased from the public shareholders and
cancelled 813,190 common shares for a total value of $28.1 million through the
completion of the Tender Offer.
On December 12, 1996 the Company amended and restated the Revolving Credit
Facility. The amended and restated 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. The Revolving Credit Facility contains certain covenants that restrict
the ability of the Company and its subsidiaries to pay dividends in certain
circumstances. Payment of dividends by the Company is limited under the
Revolving Credit Facility to the amount by which the Company's total
shareholders' equity exceeds $300.0 million, and requires, among other things,
that various financial maintenance tests be met over the term of the Facility.
As of June 30, 1997, $50 million was outstanding under the Revolving Credit
Facility, and the Company had $150 million of unused borrowing capacity
thereunder.
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. As a result of this study, the Company invested $49.7
million in non-U.S. equity securities during the first six months of 1997. At
June 30, 1997, the Company's investments in equity securities had a fair value
of $55.1 million and an unrealized gain position of $5.4 million.
The Company's investment portfolio had a fair value of $820.7 million at
June 30, 1997 and consisted of fixed maturity investments of $657.4 million,
equity security investments of $55.1 million, and cash and cash equivalents of
$108.2 million. At June 30, 1997, the fixed maturity investment portfolio had
an average rating of AA as measured by Standard & Poor's Ratings Group, an
average duration of 2.2 years and an average yield to maturity of 6.6 percent
before investment expenses.
The Company's equity securities and its investment in cash and cash
equivalents include $55.1 million and $14.5 million of investments in non-U.S.
currencies, respectively, representing approximately 8.5 percent of total
invested assets. The remaining 91.5 percent of the Company's invested assets
are invested in U.S. Dollar denominated investments. The portfolio does not
contain any direct investments in real estate or mortgage loans.
The Company believes that its readily marketable portfolio of investments
and available credit line will provide it with adequate liquidity to fund its
operating cash needs.
13
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
None.
Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
None.
Item 2 -- Changes in Securities
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
(a) The Registrant's 1997 Annual General Meeting of Shareholders was held
on May 8, 1997.
(b) Proxies were solicited by Registrant's management pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); there was no solicitation in opposition to
management's nominees as listed in the proxy statement; and all of
such nominees were elected for a one year term.
(c) The following matters were voted upon at the Annual General Meeting
with the voting results as indicated:
1. Election of Directors for RenaissanceRe Holdings Ltd.:
14
2. Proposal to consider, and if thought fit, approve an amendment to the
1993 Stock Incentive Plan:
Votes For Votes Against Abstain
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13,152,732 776,848 5,230
3. Proposal to amend the Company's Bye Laws to create a class of
preference shares and (ii) to make certain related changes reflecting a
capital structure consisting of preference shares as well as common
shares:
Votes For Votes Against Abstain
---------- ------------- -------
12,563,278 1,366,920 4,770
4. Proposal to appoint Ernst & Young independent auditors of the Company
for the 1997 fiscal year:
Votes For Votes Against Abstain
---------- ------------- -------
15,214,565 3,675 1,600
5. Election of Directors for Renaissance Reinsurance Ltd.:
6. Proposal to appoint Ernst & Young independent auditors of Renaissance
Reinsurance for the 1997 fiscal year:
Votes For Votes Against Abstain
---------- ------------- -------
15,214,340 4,200 1,300
Proxies were solicited by the Registrant's management pursuant to
Regulation 14A under the Exchange Act; there was no solicitation in
opposition to management's nominees as listed in the proxy statement; and
all of such nominees were elected for a one year term.
15
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 27 - Financial Data Schedule
b. Current Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on May 23, 1997.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
RenaissanceRe Holdings Ltd.
Date: August 13, 1997
By: /s/ Keith S. Hynes
----------------------------
Keith S. Hynes
Senior Vice President and
Chief Financial Officer
17