10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 15, 1999
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: September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The number of outstanding shares of RenaissanceRe Holding Ltd.'s common stock,
par value US $1.00 per share, as of September 30, 1999 was 20,483,570.
Total number of pages in this report: 29
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets as of September 30, 1999 3
(Unaudited) and December 31, 1998
Unaudited Consolidated Statements of Operations for 4
the three and nine month periods ended September 30, 1999 and 1998
Unaudited Consolidated Statements of Changes in Shareholders' 5
Equity for the nine month period ended September 30, 1999
and 1998
Unaudited Consolidated Statements of Cash Flows 6
for the nine month period ended September 30, 1999 and 1998
Notes to Unaudited Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of 14
Results of Operations and Financial Condition
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 27
Part II -- Other Information 28
Item 1 -- Legal Proceedings
Item 2 -- Changes in Securities
Item 3 -- Defaults Upon Senior Securities
Item 4 -- Submission of Matters to a Vote of Security Holders
Item 5 -- Other Information
Item 6 -- Exhibits and Reports on Form 8-K
Signature - RenaissanceRe Holdings Ltd. 29
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Part I - Financial information
Item 1 - Financial statements
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
The accompanying notes are an integral part of these financial statements
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three and nine month periods ended September 30, 1999 and 1998
(in thousands of United States Dollars, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 1999 and 1998
(in thousands of United States Dollars)
(Unaudited)
(1) Note - comprehensive income for the quarters ended September 30, 1999 and
1998 were $(0.6) and $3.8 mil., respectively.
The accompanying notes are an integral part of these financial statements
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
(in thousands of United States Dollars in thousands)
(Unaudited)
The accompanying notes are an integral part of these financial statements
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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") for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. The
consolidated financial statements include the accounts of RenaissanceRe
Holdings Ltd. ("RenaissanceRe") and its wholly owned subsidiaries,
including Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"), Glencoe
Insurance Ltd. ("Glencoe"), Renaissance U.S. Holdings, Inc. ("Renaissance
U.S.") and RenaissanceRe Capital Trust (the "Trust"). Other related
entities include DeSoto Insurance Company ("DeSoto"), a wholly owned
subsidiary of Glencoe; Nobel Insurance Company ("Nobel"), a wholly owned
subsidiary of Renaissance U.S.; and Renaissance Reinsurance of Europe
("Renaissance Europe"), a subsidiary of Renaissance Reinsurance.
RenaissanceRe and its subsidiaries are collectively referred to herein as
the "Company". All intercompany transactions and balances have been
eliminated on consolidation. Minority interests represent the interests of
external parties in respect of net income and shareholders' equity of
Glencoe and the Trust. Certain comparative information has been
reclassified to conform to the current presentation. Because of the
seasonality of the Company's business, the results of operations for any
interim period will not necessarily be indicative of results of operations
for the full fiscal year.
2. Significant Accounting Policies
a) Segment Reporting
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In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which revises
disclosure requirements about operating segments and establishes standards
for related disclosures about products and services, geographic areas and
major customers. SFAS No. 131 requires that public business enterprises
report financial and descriptive information about their reportable
operating segments. The Company's reportable segments are the reinsurance
and primary insurance segments. The Company adopted SFAS No. 131 as of
December 31, 1998.
b) Derivative Instruments and Hedging Activities
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 2000. Currently, the
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Company does not expect the adoption of SFAS No. 133 to have a material
impact on its consolidated financial statements.
3. The Company utilizes reinsurance to reduce its exposure to large losses.
The Company currently has in place contracts that provide for recovery of a
portion of certain claims and claims expenses from reinsurers in excess of
various retentions and loss warranties. The Company would remain liable to
the extent that any third party reinsurance company fails to meet its
obligations. The earned reinsurance premiums ceded were $89.7 and $35.2
million for the nine months ended September 30, 1999 and 1998,
respectively. Other than loss recoveries, certain of the Company's ceded
reinsurance contracts provide for recoveries of additional premiums,
reinstatement premiums and coverage for lost no claims bonuses which are
incurred when losses are ceded to those reinsurance contracts. Total
recoveries netted against premiums and claims and claim expenses incurred
for the nine months ended September 30, 1999 were $85.9 million compared to
$55.5 million for the nine months ended September 30, 1998.
Included in losses and premiums recoverable are recoverables of $30.1
million which are related to retroactive reinsurance agreements. In
accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," adverse development related to
these retroactive reinsurance contracts are required to be included in
claims and claim expenses incurred as they become known. However, the
offsetting recoverable is deferred and reflected in the statement of
operations in future periods, based on the recovery method. As of September
30, 1999, the Company has deferred $16.4 million (as of December 31, 1998 -
$27.6 million) of recoveries related to a retroactive reinsurance contract.
This has been included in reinsurance balances payable on the consolidated
balance sheet. As the amounts are recovered, the recoveries will offset
claims and claim expenses incurred in the consolidated statement of
operations. During the first nine months of 1999, the Company recognized
$11.2 million as claim recoveries under this contract.
4. Interest expense on outstanding loans was $5.8 million for the nine month
period ended September 30, 1999 and $3.0 million for the same period in the
previous year. The increase in interest expense is due to additional
borrowings of $50 million in 1998 and $150 million in 1999. See "Financial
Condition Capital Resources and Shareholders' Equity" for further
discussion.
On September 1, 1999, the Company paid a semi-annual dividend of $4.3
million on Company obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinated debentures of the
Company ("Capital Securities").
5. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options and
restricted stock grants. The following table sets forth the computation of
basic and diluted earnings per share:
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6. The Board of Directors of the Company declared, and the Company paid, a
dividend of $0.35 per share to shareholders of record on each of February
18, May 28, and August 19, 1999. On November 4, 1999, the Board of
Directors declared a dividend of $0.35 per share payable on December 2,
1999 to shareholders of record on November 18, 1999.
7. In May 1999, the Company announced a $25 million share repurchase program.
Through September 30, 1999 the Company repurchased 1,389,500 shares at a
cost of $48.6 million. Also, through September 30, 1999 the Company
repurchased $5.9 million of the
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Capital Securities recognizing a gain of $0.9 million, which was reflected
in additional paid-in capital.
8. As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
two reportable segments: reinsurance operations and primary operations.
The reinsurance segment provides property catastrophe reinsurance as well
as other reinsurance to selected insurers and reinsurers on a worldwide
basis. The primary segment provides insurance both on a direct and on a
surplus lines basis for commercial and homeowners catastrophe-exposed
property business. Also included in the primary segment are commercial
auto and general liability covers as well as surety business which provides
coverage to small and mid-size contractors. Segment data for the three and
nine month periods ended September 30, 1999 and 1998 are as follows:
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The Company's Bermuda holding company is the primary contributor to the
results reflected in "Other" segment. The pre tax loss of the holding
company primarily consisted of interest expense on bank loans, the minority
interest on the Capital Securities, and realized investment losses on the
sales of investments, partially offset by investment income on the assets
of the holding company.
9. On June 25, 1998, RenaissanceRe, through its U.S. holding company,
Renaissance U.S., completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel
Limited"), for $56.1 million. The Company has accounted for this
acquisition using the purchase method of accounting.
Operating results of Nobel and its affiliates acquired by the Company have
been included in the consolidated financial statements from their date of
acquisition. As required by Accounting Principles Board Opinion No. 16, the
following selected unaudited pro forma information is being provided to
present a summary of the combined results of the Company and Nobel and its
affiliates assuming the acquisition of Nobel and its affiliates had
occurred as of January 1 of each year. The pro forma data is for
informational purposes only and does not necessarily represent results
which would have occurred if the acquisition had taken place on the basis
assumed above, nor is it indicative of the results of future combined
operations.
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As of September 30, 1999, the Company has completed the sale and/or
reinsurance of Nobel's principal business units. Accordingly, future
periods will reflect a reduced impact from Nobel and its affiliates.
10. The provision for income taxes is based on income recognized for financial
statement purposes and includes the effects of temporary differences
between financial and tax reporting. Deferred tax assets and liabilities
are determined based on the difference between the financial statement
bases and tax bases of assets and liabilities using enacted tax rates.
The Company has U.S. net operating loss carryforwards and future tax
deductions of $22.3 million which are expected to be available to offset
regular taxable U.S. income during the carryforward period (through 2018),
subject to certain limitations. The tax benefits of these items are
reflected in the accompanying table of deferred tax assets and liabilities.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1999
are presented below:
Deferred tax assets:
Net operating loss carryforwards $ 11,304
Retroactive reinsurance gain 5,571
Claims reserves, principally due to
discounting for tax 3,227
Unearned premiums 416
Other 2,243
-----------
22,761
Deferred tax liabilities:
Deferred policy acquisition costs (261)
Unrealized gains 214
Other 539
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Net deferrred tax asset $ 23,253
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11. Subsequent to the quarter ended September 30, 1999, the Company entered
into the following transactions:
a. Effective October 5, 1999 the Company re-negotiated its revolving
credit facility increasing the aggregate amount available under the
facility from $200 million to $275 million. Effective November 8, 1999
the facility was increased to $300 million. The interest rate under
the new facility is 72.5 basis points above LIBOR.
b. Effective October 28, 1999 the Company purchased an additional $4.5
million of its Capital Securities, recognizing a gain of $0.9 million,
which is reflected in additional paid-in capital.
c. Effective November 4, 1999 the Company's Board of Directors authorized
the Company to buy back an additional $25 million of common stock.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is a discussion and analysis of the Company's results of
operations for the three months and nine months ended September 30, 1999 and
1998 and financial condition as of September 30, 1999. This discussion and
analysis should be read in conjunction with the attached unaudited consolidated
financial statements and notes thereto and the audited consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
General
The Company provides reinsurance and insurance where risk of natural catastrophe
represents a significant component of the overall exposure. 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.
In addition, from time to time, the Company may consider opportunistic
diversification into new ventures, either through organic growth or the
acquisition of other companies or books of business. In evaluating such new
ventures, the Company seeks an attractive return on equity, the ability to
develop or capitalize on a competitive advantage and opportunities that will not
detract from its core reinsurance operations. Accordingly, the Company
regularly reviews strategic opportunities and periodically engages in
discussions regarding possible transactions.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1999 compared to the quarter ended September
30, 1998
For the quarter ended September 30, 1999, net income available to common
shareholders was $24.0 million or $1.17 per share, compared to $20.4 million or
$0.91 per share for the same quarter in 1998.
Gross premiums written for the third quarter of 1999 and 1998 were as follows:
Quarter ended
(in thousands) 30-Sep-99 30-Sep-98
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Renaissance Reinsurance $ 79,466 $ 54,377
Nobel 12,703 18,297
DeSoto 2,951 3,338
Glencoe 2,462 2,105
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$ 97,582 $ 78,117
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The 46.1 percent increase in written premiums for Renaissance Reinsurance was
the result of a 42.6 percent increase in premiums related to new business, a
11.2 percent decrease in premiums due to the Company not renewing coverage and a
14.7 percent increase related to changes in pricing, participation level and
coverage on renewed business.
As discussed in the Company's 1998 10-K and its 10-Q's for the quarters ended
March 31 and June 30, 1999, the Company has entered into agreements which
provide for the sale or reinsurance of Nobel's principal operating units.
Accordingly, the Company expects a decrease in future premium volumes, interest
income, and related expenses. (See Financial Condition -- Nobel).
During 1999, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the third quarter of 1999, ceded premiums
written were $39.3 million, compared with $11.7 million for the same quarter in
1998. The $27.6 million increase in ceded premiums written is a result of
Renaissance Reinsurance purchasing $17.8 million of additional reinsurance
protection during the third quarter of 1999. Also, in conjunction with the
process of discontinuing the operations at Nobel, Nobel ceded the majority of
its $12.7 million gross written premiums for the quarter, reflecting net
written premiums of only $0.8 million.
The table below sets forth the Company's combined ratio and components thereof,
split by segment for the quarters ended September 30, 1999 and 1998:
Claims and claim expenses incurred for the quarter ended September 30, 1999, as
a percentage of net earned premiums, were lower for the quarter ended September
30, 1999 due to the inclusion of $7.4 million of losses related to Nobel in the
comparative quarter ended September 30, 1998. The Reinsurance operations
included net losses of $13.7 million or 29.4% of net premiums earned, compared
with $8.4 million for the same period in 1998 or 19.8% of net premiums earned.
The primary reason for the increase in net losses for the Reinsurance operations
was due to the frequency of catastrophic events reported in the quarter ended
September 30, 1999, including earthquakes in Turkey and Taiwan, Hurricane Floyd,
and Typhoon Bart. Although individually none of these events contributed
materially to the losses reported during the quarter, in the aggregate these
events were the primary cause of the increase in the quarterly losses.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $7.5 million for the quarter ended September
30, 1999 and for the same period in 1998. Operating expenses for the third
quarter of 1999 decreased to $8.8 million compared with $9.6 million for the
same quarter of 1998. Although total operating expenses decreased, operating
expenses as a percentage of earned premiums have increased slightly due to the
continuation of certain administrative costs for Nobel, with no corresponding
net premiums earned.
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Net investment income, excluding realized investment gains and losses, for the
third quarter of 1999 was $15.7 million, compared to $13.3 million for the same
period in 1998. The increase in net investment income reflects an increase in
investment yields and an increase in invested assets, partially due to the $150
million of increased borrowings under the Company's revolving credit facility.
Interest expense and minority interest for the quarter ended September 30, 1999
increased to $4.5 million from $3.5 million for the same period in 1998. The
increase was primarily related to $150 million of additional borrowings under
the Company's revolving credit facility, $125 million of which was drawn on
August 13, 1999. See Financial Condition - Capital Resources and Shareholders'
Equity.
For the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
For the nine months ended September 30, 1999, net income available to common
shareholders was $78.0 million or $3.74 per share, compared to $84.6 million or
$3.74 per share for the same period in 1998.
Gross premiums written for the nine months ended September 30, 1999 and 1998
were as follows:
The 34.0 percent increase in written premiums for Renaissance Reinsurance was
the result of a 45.1 percent increase in premiums related to new business,
timing differences and non-recurring business, a 18.5 percent decrease in
premiums due to the Company not renewing coverage and a 17.4 percent increase
related to changes in pricing, participation level and coverage on renewed
business. The purchase of Nobel was completed in June of 1998, and accordingly
premiums written in the first nine months of 1998 reflect only three months of
premiums written by Nobel, whereas the gross premiums written for the nine
months ended September 30, 1999 reflect three quarters of premiums related to
Nobel. The 1998 premium volume in DeSoto includes its initial assumption of
approximately 12,000 policies and in force premium of approximately $10 million.
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As discussed in the Company's 1998 10-K and its 10-Q's for the quarters ended
March 31 and June 30, 1999, the Company has entered into agreements which
provide for the sale or reinsurance of Nobel's principal operating units.
Accordingly, the Company expects a decrease in future premium volumes, interest
income, and related expenses. (See Financial Condition -- Nobel).
During 1999, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the first nine months of 1999, ceded
premiums written were $110.6 million, compared with $59.1 million for the same
period in 1998. The increase in ceded premiums primarily relates to two items;
1) Renaissance Reinsurance purchased a greater amount of reinsurance coverage
for the first nine months of 1999 ($70.9 million), compared with the first nine
months of 1998 ($39.8 million), and 2) with the reduction in the operations at
Nobel, Nobel has ceded the majority of its gross premiums written, totaling $24
million of ceded premium in the first nine months of 1999 compared with $5.0
million for the first nine months of 1998.
The table below sets forth the Company's combined ratio and components thereof,
split by segment for the nine months ended September 30, 1999 and 1998:
Claims and claim expenses incurred for the nine months ended September 30, 1999,
as a percentage of net earned premiums, increased from the prior year due to a
$19 million increase in losses for the Reinsurance operations. The increase in
losses of the Reinsurance operations primarily related to 1) increased
catastrophic events during the third quarter of 1999 (Hurricane Floyd,
earthquakes in Turkey and Taiwan and Typhoon Bart); 2) losses related to
Australia hail storms and Oklahoma tornadoes during the second quarter of 1999;
and 3) initial reserve estimates on events occurring during the first quarter of
1999, partially offset by reductions in reserves relating to accident years 1997
and prior.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $20.3 million for the nine months ended
September 30, 1999 and $19.4 million for the same period in 1998. Although
operating expenses, as a percentage of net premiums earned, remained relatively
flat for the period, total operating expenses for the first nine months of 1999
increased to $27.4 million compared with $23.8 million for the same period of
1998. The primary cause for the increase in operating expenses was an increase
in operating costs associated with the Company's primary operations, and certain
one time costs, including severance costs, related to Nobel and the
discontinuance of the majority of its operations.
Net investment income, excluding realized investment gains and losses, for the
nine months ended September 30, 1999 was $42.9 million, compared to $39.6
million for the same period in 1998. The increase in net investment income
reflects an increase in investment yields and an
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increase in invested assets, partially due to the $150 million of increased
borrowings under the Company's revolving credit facility.
Corporate expenses increased to $8.6 million for the nine months ended September
30, 1999, compared with $2.9 million for the same period in 1998. The increase
primarily relates to a write-off of $6.6 million of goodwill related to the
purchase of the operating subsidiaries of Nobel Limited.
Interest expense and minority interest for the nine months ended September 30,
1999 increased to $11.9 million from $10.0 million for the same period in 1998.
The increase was primarily related to $150 million of additional borrowings
under the Company's revolving credit facility, $125 million of which was drawn
on August 13, 1999.
FINANCIAL CONDITION
Liquidity and Capital Requirements
As a holding company, RenaissanceRe relies on investment income and cash
dividends and permitted payments from its subsidiaries to make principal
payments, interest payments, cash distributions on outstanding obligations and
pay quarterly dividends, if any, to its shareholders. The payment of dividends
by the Company's Bermuda subsidiaries to RenaissanceRe is, under certain
circumstances, limited under Bermuda insurance law. The Bermuda Insurance Act of
1978, amendments thereto (the "Act") and related regulations of Bermuda require
the Company's Bermuda subsidiaries to maintain certain measures of solvency and
liquidity. As at September 30, 1999 the statutory capital and surplus of the
Company's Bermuda subsidiaries was $655.0 million, and the amount required to be
maintained was $101.0 million.
Glencoe is also eligible as an excess and surplus lines insurer in a number of
states in the U.S. There are various capital and surplus requirements in these
states, with the most onerous requiring Glencoe to maintain a minimum of $15
million in capital and surplus. In this regard, the declaration of dividends
from retained earnings and distributions from additional paid-in capital are
limited to the extent that the above requirements are met. Through September 30,
1999, Renaissance Reinsurance paid aggregate cash dividends of $64.4 million
compared to $94.8 for the same period in 1998.
The Company's U.S. insurance subsidiaries are subject to various statutory and
regulatory restrictions regarding the payment of dividends. The restrictions are
primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amounted to $29.1 million at
September 30, 1999 and the amount required to be maintained was $27.6 million.
RenaissanceRe's subsidiaries also maintain a concentration of investments in
high quality liquid securities, which management believes will provide
sufficient liquidity to meet extraordinary claims payments should the need
arise. Also, the Company maintains a revolving credit facility from which it has
recently drawn $125 million bringing the balance of bank loans to $250
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million as of September 30, 1999. See Financial Condition - Capital Resources
and Shareholders' Equity.
Nobel
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As previously announced, during the fourth quarter of 1998 the Company recorded
an after-tax charge of $40.1 million, related to the operations of Nobel and its
affiliates. As a result, during the first nine months of 1999, the Company
completed the reinsurance of the casualty and surety books of business and
signed agreements under which its bail and low-value dwelling books of business
have been assumed by third parties, with obligations to make certain future
payments to Nobel based on future revenues and/or profitability of these
businesses. Also, Nobel has completed the sale of its IAS/Cat Crew subsidiary
to its management team in an earn-out transaction.
The Company expects that Nobel and its affiliates will continue to conduct
certain functions of the casualty, surety, low-value dwelling and bail
businesses on a transitional basis. Renaissance U.S. expects to retain
ownership of Nobel along with its licenses in the 50 U.S. states, although there
can be no assurance that such licenses can be successfully maintained following
such sales.
Cash Flows
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The Company's Bermuda operating subsidiaries have historically produced
sufficient cash flows to meet expected claims payments and operational expenses
and to provide dividend payments to RenaissanceRe.
Cash flows from operating activities for the nine months ended September 30,
1999 resulted principally from premium and investment income, reinsurance
recoveries, net of paid losses, acquisition costs and underwriting expenses.
Cash flows from operations in the first nine months of 1999 were $84.5 million,
compared to $74.8 million for the same period in 1998. The Company has produced
cash flows from operations for the full years of 1998 and 1997 significantly in
excess of its commitments. To the extent that capital is not utilized in the
Company's reinsurance business, the Company will consider using such capital to
invest in new opportunities or will consider returning such capital to its
shareholders.
Because of the potential high severity and low frequency of losses on the
coverages written by the Company, and the seasonality of the Company's business,
it is not possible to accurately predict the Company's future cash flows from
operating activities. As a consequence, cash flows from operating activities
may fluctuate, perhaps significantly, between individual quarters and years.
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Reserves
During the nine months ended September 30, 1999 the Company incurred net claims
of $56.1 million and paid net losses of $20.2 million. The Company's policy of
purchasing reinsurance coverage continues to have a favorable impact on net
incurred claims. Due to the high severity and low frequency of losses related
to the property catastrophe insurance and reinsurance business, there can be no
assurance that the Company will continue to experience this level of losses.
For the Company's reinsurance operations, estimates of claims and claim expenses
are based in part upon estimation of claims resulting from catastrophic events.
Estimation by the Company of claims resulting from catastrophic events based
upon its own historical claim experience is inherently difficult because of the
Company's short operating history and the potential severity of property
catastrophe claims. Therefore, the Company utilizes both proprietary and
commercially available models, as well as historical reinsurance industry
property catastrophe claims experience, for purposes of evaluating future trends
and providing an estimate of ultimate claims costs.
With respect to both the Company's reinsurance and primary operations, the
Company uses statistical and actuarial methods to reasonably estimate ultimate
expected claims and claim expenses. The period of time between the reporting of
a loss to the Company and the settlement of the Company's liability may be
several years. During this period, additional facts and trends may be revealed.
As these factors become apparent, case reserves may be adjusted, sometimes
requiring an increase in the overall reserves of the Company, and at other times
requiring a reallocation of IBNR reserves to specific case reserves. These
estimates are reviewed regularly and such adjustments, if any, are reflected in
results of operations in the period in which they become known and are accounted
for as changes in estimates.
Capital Resources and Shareholders' Equity
The total capital resources of the Company as at September 30, 1999 and December
31, 1998 was as follows:
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RenaissanceRe has a $200 million revolving credit agreement with a syndicate of
commercial banks. During the third quarter of 1999, the Company drew down an
additional $125 million under this facility, bringing total drawings under the
facility to $200 million as of September 30, 1999. The funds drawn during the
quarter were deposited in the accounts of RenaissanceRe and have increased the
liquidity at the parent company. The additional borrowings are available, if
necessary, to be contributed to the operating subsidiaries following a large
catastrophic event. As of September 30, 1999 the liquidity at the Parent
Company, RenaissanceRe, is greater than $230 million.
Subsequent to September 30, 1999 the Company re-negotiated the revolving credit
facility and, among other things, increased the commitment from $200 million to
$300 million. See Footnote 11, Subsequent Events.
Interest rates on the facility are based on a spread above LIBOR and averaged
approximately 5.6 percent during the first nine months of 1999 (6.1 percent for
the same period in 1998). The credit agreement contains certain financial
covenants including requirements of a consolidated debt to capital ratio of
0.35:1; a consolidated net worth of not less than 125 percent of consolidated
debt; and 80 percent of invested assets to be rated BBB- or better. The Company
was in compliance with all the covenants of this revolving credit and term loan
agreement as at September 30, 1999.
In connection with the Company's purchase of Nobel in June 1998, Renaissance
U.S. has a $35 million term loan and $15 million revolving loan facility with a
syndicate of commercial banks. Interest rates on the facility are based upon a
spread above LIBOR, and averaged approximately 5.8 percent during the first nine
months of 1999. The Credit Agreement contains certain financial covenants, the
primary one being that RenaissanceRe, as the principal guarantor, maintains a
ratio of liquid assets to debt service of 4:1. This five year term loan has
mandatory repayment provisions approximating 25 percent in each of years two
through five. The Company was in compliance with all the covenants of this term
loan and revolving loan facility as at September 30, 1999.
The Capital Securities pay cumulative cash distributions at an annual rate of
8.54 percent, payable semi-annually. The Indenture relating to the Capital
Securities contains certain covenants, including a covenant prohibiting the
payment of dividends by the Company if the Company shall be in default under the
Indenture. The Company was in compliance with all of the covenants of the
Indenture at September 30, 1999.
During the first nine months of 1999, shareholders' equity increased by $0.6
million, from $612.2 million at December 31, 1998 to $612.8 million at September
30, 1999. The significant components of the change included an increase in the
unrealized depreciation on investments of $11.7 million, the payment of
dividends of $22.0 million and the repurchase of common shares of $48.6 million,
offset by net income from continuing operations of $78.0 million.
Investments
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The table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an average AA
rating as measured by Standard & Poor's Ratings Group. At September 30, 1999,
the invested asset portfolio had a dollar weighted average rating of AA, an
average duration of 2.75 years and an average yield to maturity of 6.8 percent,
prior to investment expenses.
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 accumulated other comprehensive income in the
consolidated statement of shareholders' equity, in accordance with SFAS No. 115
and 130.
As at September 30, 1999 the Company held investments and cash totaling $1.1
billion with a net unrealized depreciation balance of $16.8 million. The
Company's investment portfolio is subject to the risks of declines in realizable
value. The Company attempts to mitigate this risk through the diversification
and active management of its portfolio.
At September 30, 1999, $14.0 million of cash and cash equivalents were invested
in currencies other than the U.S. dollar, which represented less than 1 percent
of the Company's invested assets.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked securities
and derivative instruments under which losses could be triggered by an industry
loss index or natural parameters. For the nine months ended September 30, 1999
the Company's activities with respect to these securities has approximated $1.1
million of fees and risk premiums compared to $2.2 million for the same period
in 1998. To date the Company has not experienced any losses from such securities
or derivatives. The Company may in the future also utilize other derivatives.
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Effects of Inflation
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on the Company are implicitly considered in the Company's catastrophe loss
models. The effects of inflation are also considered in pricing and in
estimating reserves for unpaid claims and claim expenses. The actual effects of
this post event inflation on the results of the Company cannot be accurately
known until claims are ultimately settled.
Year 2000 Readiness Disclosures
Certain computer programs and embedded computer chips use only the last two
digits to refer to a year. Therefore, during computer operations, the "00" may
be interpreted as being the year 1900, instead of the Year 2000. If not
corrected, many computer systems could fail or create erroneous results.
Computer systems, equipment and programs that are free from the Year 2000
problem are generally referred to as being compliant.
Year 2000 - Internal Systems
The Company has completed an assessment of its internal business applications
and computer systems, including those used in underwriting, policy processing
and recording policy details. The Company believes that all critical business
applications and systems will function properly with respect to dates associated
with the Year 2000. The Company has backup systems in place for power, certain
infrastructure facilities and computer systems in the event of such system
failures. While there can be no assurance that these systems will be free from
failure, the Company believes that any failure from its internal systems will
not materially impact the Company's results of operations or financial
condition.
Year 2000 Exposure from Third Parties; Contingency Plan
The Company has evaluated its potential exposures from the non-compliance, if
any, of its vendors' and customers' systems with the Year 2000. The Company
does not believe that there will be any significant disruption of business from
such vendors and customers. However, there can be no assurance that the systems
of its vendors and customers, on which the Company relies for supporting
information and certain services, will be Year 2000 compliant and will not have
an effect on the Company's business operations, financial results or financial
condition.
The Company has a contingency plan in the event that certain communication
systems, key utilities, or vendor systems prove not to be Year 2000 compliant.
However, the Company realizes that any reasonable contingency plan cannot
accurately account for all possible scenarios which may arise as a result of
Year 2000 related computer problems. The Company has evaluated the status of its
Year 2000 exposures and has modified its contingency plan as needed.
Year 2000 Policy Coverage
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In addition to the risks and costs associated with its internal systems and
third party vendors, the Company continues to evaluate its underwriting risk
arising from potential losses associated with Year 2000 failures. Variables
which may affect the pervasiveness and severity of Year 2000 problem include,
but are not limited to, the magnitude of the amount of costs and expenses
directly attributable to Year 2000 failures, the portion of such amount, if any,
that constitutes insurable losses, and the extent of governmental intervention.
Moreover, many standard insurance and reinsurance contracts neither explicitly
include nor explicitly exclude coverage for Year 2000 failures. The Company
does not believe that Year 2000 losses should be covered under the standard
forms of contracts that it provides. However, some Year 2000 related losses may
or may not be determined to be covered under standard insurance and reinsurance
contracts, depending upon the specific contract language, the applicable case
law, and the facts and circumstances of each loss. The Company's Year 2000
initiative seeks to minimize its potential Year 2000 underwriting exposure by
(1) performing an underwriting evaluation of potential Year 2000 exposures; (2)
declining to renew certain contracts where the Company believes the potential
risk from Year 2000 losses is too great, and (3) structuring reinsurance and
insurance contractual language to mitigate potential exposure. The Company
cannot be certain that these steps will adequately minimize its Year 2000
underwriting exposures, and given the possible magnitude of the Year 2000
problem, the Company may incur Year 2000 insurance coverage related losses. The
Company believes it is taking reasonable and appropriate measures in the course
of its business operations and client relationships to avoid or mitigate such
Year 2000 related exposures.
Current Outlook
The competitive pressures that have existed since 1995 have continued in the
property catastrophe market during 1999. However, due to recent industry
losses, and the related contraction of capacity in the market, the Company has
seen price increases in certain pockets of the property catastrophe market, and
has accordingly increased it's gross written premiums during the year.
Because of continued catastrophic loss activity, the Company anticipates that
additional price increases may occur in other pockets of the property
catastrophe market. At this time, the Company does not believe that there will
be a large upswing in pricing across all market segments, and believes that
there continues to be numerous transactions in the market that are under priced.
Identifying and avoiding such transactions requires significant underwriting
skill, which the Company believes it possesses.
The Company believes that because of its competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, that it will continue to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
The Company believes that its aggregate cost for reinsurance protection may
level off during the upcoming year. It is possible that a portion of the
Company's reinsurance protection may become uneconomical to justify continued
purchases by the Company. Further, because of
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recent loss activity, the cost of the Company's "core" reinsurance protection
may increase slightly during the upcoming year.
The Company announced an additional $25 million share buyback in November 1999.
Although any share repurchase activity is subject to market conditions, if the
Company were to complete these repurchases, such repurchases could reduce the
Company's interest income in the future.
The Company has entered into agreements which provide for the sale and
reinsurance of Nobel's principal operating units. Accordingly, the Company
believes that its future consolidated results will reflect a reduced impact from
Nobel and its affiliates. During the first nine months of 1999, the Company
recorded $39.2 million of gross written premiums, $15.2 million of net premiums
written and net income of $2.4 million related to Nobel and its affiliates. The
Company expects that Nobel and its affiliates will continue to conduct certain
functions on a transitional basis and that the Company will continue to maintain
ownership of Nobel along with its licenses in the 50 U.S states although there
can be no assurance that such licenses can be successfully maintained.
The Company's financial strength has enabled it to pursue opportunities outside
of the property catastrophe reinsurance market into the catastrophe exposed
primary insurance market. The Company believes that its financial strength will
enable it to continue to pursue other opportunities in the future. There can be
no assurance that the Company's pursuit of such opportunities will materially
impact the Company's financial condition and results of operations.
During recent fiscal years there has been considerable consolidation among
leading brokerage firms and also among the Company's customers. Although
consolidations may continue to occur, the Company believes that its financial
strength, its position as one of the market leaders in the property catastrophe
reinsurance industry and its ability to provide innovative products to the
industry will minimize any effect on the Company's business.
Note on Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. Forward-looking statements are statements other than historical
information or statements of current condition. Some forward-looking statements
may be identified by use of terms such as "believes," "anticipates," "intends,"
or "expects." These forward-looking statements relate, among other things, to
the plans and objectives of the Company for future operations. In light of the
risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be considered as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. Numerous factors could cause the Company's
actual results to differ materially from those in the forward-looking
statements, including the following: (i) the occurrence of catastrophic events
with a frequency or severity exceeding the Company's estimates; (ii) a decrease
in the level of demand for property catastrophe reinsurance, or increased
competition in the industry; (iii) the lowering or loss of one of the financial
or claims-paying ratings of the Company or one or more of its subsidiaries; (iv)
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risks associated with implementing business strategies of the Company; (v)
uncertainties in the Company's reserving process; (vi) failure of the Company's
reinsurers to honor their obligations; (vii) actions of competitors including
industry consolidation; (viii) loss of services of any one of the Company's key
executive officers; (ix) the passage of federal or state legislation subjecting
Renaissance Reinsurance to supervision or regulation including additional tax
regulation, in the United States or other jurisdictions in which the Company
operates; (x) challenges by insurance regulators in the United States to
Renaissance Reinsurance's claim of exemption from insurance regulation under the
current laws; (xi) changes in economic conditions, including currency rate
conditions which could affect the Company's investment portfolio; (xii) risks
relating to the Year 2000 issue; or (xiii) a contention by the United States
Internal Revenue Service that the Company or Renaissance Reinsurance is engaged
in the conduct of a trade or business within the U.S. The foregoing review of
important factors should not be construed as exhaustive; the Company undertakes
no obligation to release publicly the results of any future revisions it may
make to forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Sensitive Instruments
The Company's investment portfolio includes investments which are available for
trading purposes and which are subject to changes in market values with changes
in interest rates. The aggregate hypothetical loss generated from an immediate
adverse parallel shift in the treasury yield curve of 100 basis points would
cause a decrease in total return of 2.75 percent, which equates to a decrease in
market value of approximately $30.0 million on a portfolio valued at $825.0
million at September 30, 1999. An immediate time horizon was used, as this
presents the worst-case scenario.
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Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
None
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 10.1 - Credit Agreement, dated as of October 5, 1999 among
RenaissanceRe Holdings Ltd., as Borrower, Various Financial
Institutions, as Lenders, Deutsche Bank AG, as LC issuer and
Syndication Agent, Fleet National Bank, as Co-Agent, Bank of
America National Trust and Savings Association, as Administrative
Agent for the Lenders, and Bank of America Securities LLC, as Lead
Arranger and Book Manager.
Exhibit 27 - Financial Data Schedule.
b. Current Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the period
beginning July 1, 1999 and ending September 30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
RenaissanceRe Holdings Ltd.
By: /s/ John M. Lummis
------------------
John M. Lummis
Senior Vice President and
Chief Financial Officer
Date: November 12, 1999
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