10-K: Annual report pursuant to Section 13 and 15(d)
Published on April 2, 2001
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NO. 34-0-26512
RENAISSANCERE HOLDINGS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 98-013-8020
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
RENAISSANCE HOUSE, 8-12 EAST BROADWAY, PEMBROKE HM 19 BERMUDA
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant's telephone number)
NAME OF EACH EXCHANGE ON WHICH REGISTERED: NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of Common Shares held by nonaffiliates of the
Registrant as of March 29, 2001 was $1,107,031,754 based on the closing sale
price of the Common Shares on the New York Stock Exchange on that date.
The number of Common Shares outstanding as of March 29, 2001 was
19,759,670.
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RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
(i)
PART I
Unless the context otherwise requires, references herein to the "Company"
include RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its subsidiaries,
which principally include Renaissance Reinsurance Ltd. ("Renaissance
Reinsurance"), DeSoto Insurance Company ("DeSoto"), DeSoto Prime Insurance
Company ("DeSoto Prime"), Nobel Insurance Company ("Nobel"), Glencoe Insurance
Ltd. ("Glencoe"), Renaissance Services Ltd. ("Services"), Renaissance
Reinsurance of Europe ("Renaissance Europe"), Renaissance U.S. Holdings, Inc.
("Renaissance U.S."), Renaissance Underwriting Managers Ltd. ("Renaissance
Managers"), Pembroke Managing Agents, Inc. ("Pembroke") and Paget Insurance
Agency, LLC ("Paget"). Certain terms used below are defined in the "Glossary of
Selected Insurance Terms" appearing on pages 20-22 of this Report.
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934. Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which, with respect to
future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, us.
In particular, statements using verbs such as "expect", "anticipate",
"intends", "believe" or words of similar import generally involve
forward-looking statements. In light of the risks and uncertainties inherent in
all future projections, the inclusion of forward-looking statements in this
report should not be considered as a representation by us or any other person
that our objectives or plans will be achieved. Numerous factors could cause our
actual results to differ materially from those in the forward-looking
statements, including the following:
(1) the occurrence of catastrophic events with a frequency or
severity exceeding our estimates;
(2) a decrease in the level of demand for our reinsurance or
insurance business, or increased competition in the industry;
(3) the lowering or loss of one of the financial or claims-paying
ratings of ours or one or more of our subsidiaries;
(4) risks associated with implementing our business strategies;
(5) slower than anticipated growth in our fee-based operations;
(6) changes in economic conditions, including currency rate
conditions which could affect our investment portfolio;
(7) uncertainties in our reserving process;
(8) failure of our reinsurers to honor their obligations;
(9) loss of services of any one of our key executive officers;
(10) the passage of federal or state legislation subjecting
Renaissance Reinsurance to supervision or regulation, including
additional tax regulation, in the United States or other
jurisdictions in which we operate;
(11) challenges by insurance regulators in the United States to
Renaissance Reinsurance's claim of exemption from insurance
regulation under the current laws;
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(12) a contention by the United States Internal Revenue Service that
our Bermuda subsidiaries, including Renaissance Reinsurance, are
subject to U.S. taxation; and
(13) actions of competitors, including industry consolidation and the
development of competing financial products.
The factors listed above should not be construed as exhaustive. We undertake no
obligation to release publicly the results of any future revisions we may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
GENERAL
Founded in 1993, RenaissanceRe is one of the leading providers of property
catastrophe reinsurance coverage in the world. We believe that we are a provider
of first choice for many insurers and reinsurers, due in large part to our
modeling and technical expertise and our industry leading performance. We
principally provide property catastrophe reinsurance to insurers and reinsurers,
with exposures worldwide, on an excess of loss basis. This means that we begin
paying when our customers' claims from a particular catastrophe exceed a
specified amount. Property catastrophe reinsurance generally provides protection
from claims arising from large catastrophes, such as earthquakes, hurricanes,
winter storms, freezes, floods, fires, tornados and other man-made or natural
disasters.
To leverage our underwriting skills, we have recently begun to write
property catastrophe reinsurance on behalf of our two joint ventures, Top Layer
Reinsurance Ltd. with State Farm Mutual Automobile Insurance Company and
Overseas Partners Cat Ltd. with Overseas Partners Ltd. Together, these joint
ventures have access to approximately $3.4 billion of capital. We receive profit
participation and fee-based income from these ventures.
In addition to property catastrophe reinsurance, we write certain specialty
lines of reinsurance, including accident and health, finite, satellite and
aviation. We also write primary insurance that is exposed to catastrophe risk
and have recently expanded our management team for that business. We may seek to
expand our presence in these markets, depending on our assessment of business
opportunities.
We conduct our operations through wholly owned subsidiaries and joint
ventures in Bermuda, the United States and Europe. We provide property
catastrophe reinsurance coverage primarily though Renaissance Reinsurance, our
principal operating subsidiary. We also provide reinsurance coverage through
Renaissance Reinsurance of Europe, a wholly owned subsidiary of Renaissance
Reinsurance.
We write primary insurance and provide certain related services through
wholly owned subsidiaries organized in the U.S. and Bermuda. Glencoe provides
primary catastrophe exposed property coverage on an excess and surplus lines
basis, and is eligible to write business in 29 states. DeSoto, DeSoto Prime,
Paget and Pembroke focus on the Florida homeowners market.
Our principal underwriting objective is to construct a portfolio of
reinsurance contracts that maximizes return on equity subject to prudent risk
constraints. To help us achieve this objective, we have developed REMS(C), a
proprietary computer-based pricing and exposure modeling and management system.
REMS(C) is a unique platform
Our management expertise and financial strength have enabled us to pursue
opportunities outside of the property catastrophe reinsurance markets, including
the catastrophe exposed primary insurance market. We plan to continue to pursue
other opportunities in the upcoming year. There can be no assurance that our
pursuit of such opportunities will materially impact our financial condition and
results of operations.
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RECENT DEVELOPMENTS
On March 13, 2001, The St. Paul Companies, Inc., one of our founding
institutional shareholders, completed the sale of 1,726,137 common shares in an
underwritten secondary public offering which priced at $72.20 per share. All of
the shares sold were owned by St. Paul. We did not receive any of the proceeds
from the offering.
On February 28, 2001, an earthquake measuring approximately 6.8 on the
Richter Scale and centered about 10 miles northeast of Olympia, Washington
impacted the Pacific Northwest, including the Seattle, Washington area. Based on
our estimates of our losses from the Seattle event, we do not expect to be
materially adversely affected by this earthquake. However, our assessment of our
losses from the Seattle earthquake is preliminary, and assumes that industry
insured losses are less than $3.5 billion.
RATINGS
Over the last five years, we have consistently received among the highest
claims-paying and financial strength ratings from Standard & Poor's Insurance
Ratings Services and A.M. Best Company, Inc. In January 2001, A.M. Best upgraded
Renaissance Reinsurance from "A" (Excellent) to "A+" (Superior). Standard &
Poor's has given Renaissance Reinsurance an "A" (Strong) rating with a positive
outlook. Glencoe has been assigned an "A-" (Excellent) rating from A.M. Best.
Top Layer Re has received claims-paying ratings of "AAA" (Extremely Strong) from
Standard & Poor's and "A++" (Superior) from A.M. Best. These ratings represent
independent opinions of an insurer's financial strength and ability to meet
policyholder obligations.
"A+" is the second highest designation of A.M. Best's sixteen rating
levels. "A+" rated insurance companies are defined as Superior companies and are
considered by A.M. Best to have a very strong ability to meet their obligations
to policyholders.
The "A" range ("A+", "A" and "A-") is the third highest of four ratings
ranges within what S&P considers the "secure" category. An insurer rated "A" is
believed by S&P to have strong financial security characteristics, but to be
somewhat more likely to be affected by business conditions than are insurers
with higher ratings
CORPORATE STRATEGY
We seek to generate earnings growth for our shareholders by pursuing the
following strategic objectives:
o ENHANCE OUR POSITION AS A LEADER IN THE PROPERTY CATASTROPHE
REINSURANCE BUSINESS. Based on gross premiums written, we are among the
largest property catastrophe reinsurers in the world. Property
catastrophe reinsurance accounts for a substantial majority of our
business, and has historically generated among the most attractive
returns in our industry. We believe that our proprietary modeling
technology and underwriting expertise provide us with significant
competitive advantages in managing catastrophe risk. We will continue
to enhance our leadership position by:
-- Constructing a superior portfolio of reinsurance using proprietary
underwriting models. We seek to effectively deploy our capital
base while maintaining prudent risk levels in our reinsurance
portfolio. We use our proprietary catastrophe exposure management
system, REMS(C), to evaluate the risk and return characteristics
of individual contracts relative to our portfolio, and, as a
result, to determine appropriate underwriting opportunities; and
-- Constructing superior portfolios of catastrophe reinsurance for
third parties, in exchange for fee income and profit
participation. Top Layer Re and OPCat provide us with additional
presence in the market, by allowing us to leverage our access to
business and our underwriting capabilities on a larger capital
base.
o PURSUE NEW BUSINESS OPPORTUNITIES IN ATTRACTIVE MARKETS WHERE WE CAN
LEVERAGE OUR CORPORATE SKILLS AND CULTURE. Our management's experience
and underwriting expertise position us to enter into new
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business areas which we believe will meet our return on equity
criteria. Currently, we believe our best opportunities include:
-- Certain specialty lines of reinsurance which have begun to show
improved pricing, such as accident and health, finite, satellite
and aviation; and
-- Primary insurance exposed to natural catastrophe risk, which
allows us to leverage our catastrophe risk management skills.
We believe we are positioned to fulfill these objectives by virtue of the
experience and skill of our management and our strong relationships with brokers
and clients. Our senior management team has extensive experience in the
reinsurance and/or insurance industries, with an average of approximately 20
years of experience for each of our four senior executives. We market our
reinsurance products worldwide exclusively through reinsurance brokers and have
established a reputation with our brokers and clients for prompt response on
underwriting submissions, fast claims payments and the development of customized
reinsurance programs. The modeling demonstrations and seminars that we provide
to our brokers and clients further enhance our position as a provider of first
choice.
INDUSTRY TRENDS
Prior to 1999, excess capacity placed competitive pressures on the
reinsurance industry. However, market participants have reported significant
price increases in catastrophe reinsurance during 2000 and into the 2001 renewal
season due to industry losses in 1999 and the subsequent contraction of capacity
in the market. According to publicly available industry information, U.S.
pricing of year-end renewals generally increased up to 15-20%. International
pricing of renewals generally increased 20-300%, the top end of the range
largely related to European risks, particularly in France.
Industry observers expect demand for property catastrophe reinsurance to
continue to grow on a worldwide basis as many regions are currently
underinsured. Current catastrophe insurance levels in developing countries lag
significantly behind the levels seen in Western economies, as demonstrated by
the difference between total losses (approximately $20 billion) and total
insured losses ($2 billion) in the 1999 Turkish earthquake. Furthermore, as the
concentration and value of insured property continues to grow in high
catastrophe-exposed regions, such as Southern California, Florida, Coastal
Carolina and Texas, demand for catastrophe coverage is expected to grow. The
increased demand for catastrophe reinsurance following the French windstorms in
1999 indicates that many insurers were inadequately insured prior to the events.
During 1999, insured losses from natural catastrophes and man-made
disasters amounted to approximately $31 billion, the second-highest claims total
ever for insurers behind 1992, the year of Hurricane Andrew. During 1999 nine
significant worldwide catastrophic events occurred: the hail storms in Sydney,
Australia, in April; the Oklahoma tornados in May; Hurricane Floyd in September;
Typhoon Bart which struck Japan in September; Turkish and Taiwanese earthquakes
in August and September, respectively; and the Danish windstorm, Anatol, and the
French windstorms, Lothar and Martin, in December. Seven of these events each
resulted in over $1 billion of insured damages.
During recent fiscal years there has been considerable consolidation among
leading brokerage firms and also among insurance and reinsurance companies,
which could affect the distribution of catastrophe-related reinsurance products.
A number of new, proposed or potential legislative or industry changes may
impact the worldwide demand for property catastrophe reinsurance and other
catastrophe related products. There are also many potential initiatives by
capital market participants to produce alternative products that may compete
with the existing catastrophe reinsurance markets.
REINSURANCE
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Our principal product is property catastrophe reinsurance, primarily
written through Renaissance Reinsurance. We also write reinsurance with respect
to various other lines, including accident and health, aviation, satellite and
finite reinsurance. We continuously review opportunities to provide additional
coverages where we can utilize our modeling and other expertise and where we
believe we can identify attractive potential returns and apply prudent risk
constraints.
The following table sets forth our gross premiums written and number of
programs written by type of reinsurance.
CATASTROPHE REINSURANCE
Our property catastrophe reinsurance contracts are generally "all risk" in
nature. Our most significant exposure is to losses from earthquakes and
hurricanes, although we are also exposed to claims arising from other natural
and man-made catastrophes, such as winter storms, freezes, floods, fires and
tornados, in connection with the coverages we provide. Our predominant exposure
under such coverage is to property damage. However, other risks, including
business interruption and other non-property losses, may also be covered under
the property reinsurance contract when arising from a covered peril. In
accordance with market practice, our property reinsurance contracts generally
exclude certain risks such as war, nuclear contamination or radiation.
Because of the wide range of possible catastrophic events to which we are
exposed, and because of the potential for multiple events to occur in the same
time period, our business is volatile, and results of operations may reflect
such volatility. Further, our financial condition may be impacted by this
volatility over time or at any point in time. The effects of claims from one or
a number of severe catastrophic events could have a material adverse effect on
us. We expect that increases in the values and concentrations of insured
property and the effects of inflation will increase the severity of such
occurrences per year in the future.
We seek to moderate the volatility described in the preceding paragraph
through the use of contract terms, portfolio selection methodology,
diversification criteria and probability analyses. Also, consistent with risk
management practices, we purchase property catastrophe coverage for our own
account to seek to further reduce the potential volatility of results.
Catastrophe Excess of Loss Reinsurance. We write catastrophe excess of loss
reinsurance, which provides coverage to primary insurers when aggregate claims
and claim expenses from a single occurrence of a covered peril exceed the
attachment point specified in a particular contract. Under these contracts we
indemnify an insurer for a portion of the losses on insurance policies in excess
of a specified loss amount, and up to an amount per loss specified in the
contract.
A portion of our property catastrophe excess of loss contracts limit
coverage to one occurrence in a contract year, but most such contracts provide
for coverage of a second occurrence after the payment of a reinstatement
premium. The coverage provided under excess of loss reinsurance contracts may be
on a worldwide basis or limited in scope to selected geographic areas. Coverage
can also vary from "all property" perils to limited coverage on selected perils,
such as "earthquake only" coverage.
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Excess of Loss Retrocessional Reinsurance. We also enter into
retrocessional contracts that provide property catastrophe coverage to other
reinsurers or retrocedents. In providing retrocessional reinsurance, we focus on
property catastrophe retrocessional reinsurance which covers the retrocedent on
an excess of loss basis when aggregate claims and claim expenses from a single
occurrence of a covered peril and from a multiple number of reinsureds exceed a
specified attachment point. The coverage provided under excess of loss
retrocessional contracts may be on a worldwide basis or limited in scope to
selected geographic areas. Coverage can also vary from "all property" perils to
limited coverage on selected perils, such as "earthquake only" coverage.
Retrocessional coverage is characterized by high volatility, principally because
retrocessional contracts expose a reinsurer to an aggregation of losses from a
single catastrophic event. In addition, the information available to
retrocessional underwriters concerning the original primary risk can be less
precise than the information received from primary companies directly. Moreover,
exposures from retrocessional business can change within a contract term as the
underwriters of a retrocedent alter their book of business after retrocessional
coverage has been bound.
Proportional Retrocessional Reinsurance. We write proportional
retrocessions of catastrophe excess of loss reinsurance treaties when we believe
that premium rates and volume are attractive. In such proportional
retrocessional reinsurance, we assume a specified proportion of the risk on a
specified coverage and receive an equal proportion of the premium. The ceding
insurer receives a commission, based upon the premiums ceded to the reinsurer,
and may also be entitled to receive a profit commission based on the ratio of
losses, loss adjustment expense and the reinsurer's expenses to premiums ceded.
A proportional retrocessional catastrophe reinsurer is dependent upon the ceding
insurer's underwriting, pricing and claims administration to yield an
underwriting profit. Although we generally obtain detailed underwriting
information concerning the underlying exposures, it is more difficult to assess
the exposures in retrocessional contracts.
NONCATASTROPHE REINSURANCE
We also write other reinsurance relating to accident and health, finite,
satellite and aviation risk coverages. In 2000, we began to write accident and
health reinsurance coverage, usually on a stop-loss basis subject to specified
caps on our ultimate exposure. In selected cases, we also write customized
financial reinsurance contracts when the expected returns are particularly
attractive.
PRIMARY INSURANCE
We currently write primary insurance where natural catastrophe exposures
represent a significant component of the overall exposure. We believe that our
industry knowledge of the catastrophe business and our proprietary risk
management software provide us with a competitive advantage in terms of
appropriately underwriting and pricing such policies.
Renaissance U.S. Holdings, Inc. In 1998, we formed a U.S. holding company,
Renaissance U.S., whose principal subsidiary was Nobel, a Texas-domiciled
insurance company. Following a 1998 fourth quarter after-tax charge of $40.1
million, Nobel disposed of its principal business lines in 1999. Nobel continues
to be a licensed insurer in all 50 states, although there can be no assurance
such licenses can be retained. Our U.S.- based insurance subsidiaries are
currently writing, in a limited capacity, catastrophe-exposed primary insurance.
Glencoe Insurance Ltd. Glencoe was incorporated in January 1996 and is
domiciled in Bermuda. Glencoe is an excess and surplus lines insurance company,
which pursues opportunities in the catastrophe-exposed primary insurance
business in the United States by writing policies that are primarily exposed to
earthquake and wind perils. Glencoe is eligible to do business in the United
States on an excess and surplus lines basis in 29 states.
DeSoto and Related Entities. In September 1997, Glencoe organized DeSoto as
a wholly owned subsidiary in Florida to pursue the assumption of policies from
the Florida JUA. We also participate in the Florida homeowners market through
DeSoto Prime, Paget and Pembroke.
JOINT VENTURES
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We believe that many reinsurers, insurers and other providers of capital
have concluded that offering catastrophe reinsurance coverage can yield
attractive returns and provide financial and risk diversification when
underwritten by experienced and knowledgeable parties. We believe that our
underwriting and risk modeling expertise, track record and market leadership
position will enable us to become a leading provider of outsourced underwriting
of property catastrophe reinsurance.
In 2000, we continued to increase our market penetration in catastrophe
reinsurance through our two joint venture relationships. The amount of total
managed catastrophe premiums we underwrote grew by approximately 40% to $397.0
million in 2000 compared to $284.0 million for 1999.
These ventures provide us with additional presence in the market as well as
fee income. They allow us to leverage our access to business and our
underwriting capabilities on a larger capital base while still actively managing
our equity base to maximize value to our shareholders. We currently have two
significant joint ventures, Top Layer Re, which we own together with State Farm,
and OPCat, which was formed by Overseas Partners.
Top Layer Re was established in 1999 to write high excess non-U.S. property
catastrophe reinsurance. Top Layer Re is owned 50% by State Farm and 50% by
Renaissance Reinsurance and has received claims-paying ratings of "AAA"
(Extremely Strong) from Standard & Poor's and "A++" (Superior) from A.M. Best.
State Farm also provides stop loss reinsurance coverage that gives Top Layer Re
sufficient capital resources to write $3.0 billion of aggregate limit. For the
year ended December 31, 2000, Top Layer Re had gross written premiums of $24.9
million, and at December 31, 2000, Top Layer Re had deployed approximately
one-third of its capacity.
OPCat was established by Overseas Partners in 1999 as a wholly owned
subsidiary to write companion lines on reinsurance contracts to Renaissance
Reinsurance. We are the exclusive underwriting manager for OPCat. OPCat has
approximately $400 million of capital. For the year ended December 31, 2000,
OPCat's gross written premiums were approximately $55.3 million. OPCat provides
us with access to additional capital to extend our market penetration and
generates fee income. In general, we seek to construct for OPCat a portfolio
with risk characteristics similar to those of Renaissance Reinsurance's
portfolio.
In our joint ventures, we typically provide our partners with underwriting,
claims management, risk modeling, capital and investment management services,
marketing, reporting, remittances and payments processing and other services.
Essentially, we serve as the catastrophe reinsurance underwriting department for
our partners, representing our partners in the catastrophe reinsurance
marketplace. We work within agreed-upon underwriting guidelines, tailored to our
partners' requirements. We seek to provide our partners with an attractive
return while creating fee for services and profit sharing income for Renaissance
Reinsurance.
The following table shows our committed capacity at December 31, 2000 and
the growth in our total managed catastrophe premiums written:
We apply the same disciplined approach to the underwriting we conduct on
behalf of our joint ventures as we apply to our own portfolio.
Our joint ventures have increased the capital we can commit to the
catastrophe reinsurance market and have deepened our market penetration. This
flexible capital also broadens the capacity and capital we can offer our
customers. We believe that joint venture opportunities may increasingly
contribute to our capital base and managed catastrophe premiums growth.
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POTENTIAL NEW OPPORTUNITIES
From time to time, we may consider opportunistic diversification into new
ventures, either through organic growth or the acquisition of other companies or
books of business. Accordingly, we regularly review strategic opportunities and
periodically engage in discussions regarding possible transactions. However,
there can be no assurance that we will enter into any such agreement in the
future, or that any consummated transaction would contribute materially to our
results.
UNDERWRITING
Our primary underwriting goal is to construct a portfolio of reinsurance
and insurance contracts that maximizes our return on shareholders' equity
subject to prudent risk constraints. We assess underwriting decisions on the
basis of the expected incremental return on equity of each new reinsurance
contract in relation to our overall portfolio of reinsurance contracts.
We have developed a proprietary, computer-based pricing and exposure
management system, Renaissance Exposure Management System (REMS(C)), which we
utilize to assess property catastrophe risks, price treaties and limit aggregate
exposure. REMS(C) was initially developed with consulting assistance from
Tillinghast, an actuarial consulting unit of Towers, Perrin, Forster & Crosby,
Inc., and Applied Insurance Research, Inc., the developer of the CATMAP(TM)
system. Since inception, we have continued to invest in and improve REMS(C),
incorporating Our underwriting experience, additional proprietary software and
new data. REMS(C) has analytic and modeling capabilities that help us to assess
the catastrophe exposure risk and return of each incremental reinsurance
contract in relation to our overall portfolio of reinsurance contracts. We
combine the analyses generated by REMS(C) with other information available to
us, including our own knowledge of the client submitting the proposed program,
to assess the premium offered against the risk of loss which such a program
presents.
We have licensed and integrated into REMS(C) a number of third party
catastrophe computer models in addition to our base model, which we use to
validate and stress test our base REMS(C) results. In our stress tests we
increase the frequency and severity of catastrophic events above the levels
embedded in the models purchased from third parties to further test our
exposures and potential impact on our future results.
We believe that REMS(C) is a more robust underwriting and risk management
system than is currently available in the reinsurance industry. REMS(C) combines
computer-generated statistical simulations that estimate catastrophic event
probabilities with exposure and coverage information on each client's
reinsurance contract to produce expected claims for reinsurance programs
submitted to us. REMS(C) employs simulation techniques to generate 40,000 years
of catastrophic event activity, including events causing in excess of $300
billion in insured industry losses. From this 40,000 year simulation, we
generate estimates of expected claims, expected profits and a probability
distribution of potential outcomes for each program in our portfolio and for our
total portfolio.
All our underwriters utilize REMS(C) in their pricing decisions, which we
believe provides them with several competitive advantages. These include the
ability:
o to simulate 40,000 years of catastrophic event activity compared to a
much smaller sample in generally available models, allowing us to
analyze exposure to a greater number and combination of potential
events;
o to analyze the incremental impact of an individual reinsurance contract
on our overall portfolio;
o to better assess the underlying exposures associated with assumed
retrocessional business;
o to price contracts within a short time frame; and
o to provide consistent and accurate pricing information.
As part of our risk management process, we also utilize REMS(C) to assist
us with the purchase of reinsurance coverage for our own account. During 2000,
we increased the amount of premiums ceded through property
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catastrophe reinsurance coverage purchased for our own account. Although the
amount of ceded premium increased in 2000, the magnitude of our net exposures
grew in 2000 because of increases in our gross portfolio and changes in the
terms of our ceded reinsurance. Ceded premiums written in our reinsurance
operations during 2000 were $95.1 million, compared to $77.2 million in 1999.
Additionally, in 2000 our primary operations had ceded premiums of $44.8
million, compared to $60.6 million in 1999. To the extent that appropriately
priced coverage is available, we anticipate continued purchase of reinsurance to
reduce the potential volatility of our results.
We have developed underwriting guidelines, to be used in conjunction with
REMS(C), that limit the exposure to claims from any single catastrophic event
and the exposure to losses from a series of catastrophic events. As part of our
pricing and underwriting process, we also assess a variety of other factors,
including:
o the reputation of the proposed cedent and the likelihood of
establishing a long-term relationship with the cedent;
o the geographic area in which the cedent does business and its market
share;
o historical loss data for the cedent and, where available, for the
industry as a whole in the relevant regions, in order to compare the
cedent's historical catastrophe loss experience to industry averages;
o the cedent's pricing strategies; and
o the perceived financial strength of the cedent.
We have developed underwriting guidelines with respect to our
noncatastrophe book of business which are designed to limit the amount of
exposure we will accept for any one risk. These guidelines include, but are not
limited to, utilizing contract terms to cap our losses from any one exposure or
any one contract, employing analytical tools to assess risks where practical and
accessing the knowledge of experienced professionals in assisting with unique
and complex terms and coverages.
GEOGRAPHIC BREAKDOWN
Our exposures are generally diversified across geographic zones, but are
also a function of market conditions and opportunities. The following table sets
forth the percentage of our gross insurance and reinsurance premiums written
allocated to the territory of coverage exposure.
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(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe and
Japan.
(2) The category "Noncatastrophe reinsurance" includes coverages related to
noncatastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, finite, satellite, and
aviation risks assumed by us.
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RESERVES
For both our reinsurance and primary operations, we use statistical and
actuarial methods to estimate ultimate expected claims and claim expenses. The
reserve for claims and claim expenses includes estimates for unpaid claims and
claim expenses on reported losses as well as an estimate of IBNR losses.
Our loss reserves are based on individual claims, case reserves and other
reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in our consolidated statement
of income in the period in which they become known and are accounted for as
changes in estimates.
For our reinsurance operations, estimates of claims and claim expenses and
losses recoverable are based in part upon the estimation of claims resulting
from catastrophic events. Our estimates of claims resulting from catastrophic
events based upon our own historical claim experience is inherently difficult
because of the variability and uncertainty associated with property catastrophe
claims. Therefore, we utilize 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.
Given the nature of the catastrophe reinsurance business, the period of
time from the reporting of a loss to us to the settlement of our liability may
be significant. During this period, additional facts and trends will be
revealed. As these factors become apparent, case reserves will be adjusted,
sometimes requiring an increase in our overall reserves, 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
our consolidated statement of income in the period in which they become known
and are accounted for as changes in estimates.
Claim reserves and losses recoverable represent estimates, including
actuarial and statistical projections at a given point in time, of an insurer's
or reinsurer's expectations of the ultimate settlement and administration costs
of claims incurred, and it is possible that the ultimate liability may exceed or
be less than such estimates. Such estimates are not precise in that, among other
things, they are based on predictions of future developments and estimates of
future trends in claim severity and frequency and other variable factors such as
inflation. During the claim settlement period, it often becomes necessary to
refine and adjust the estimates of liability or recovery on a claim either
upward or downward. Even after such adjustments, ultimate liability or recovery
may exceed or be less than the revised estimates.
We incurred claims of $108.6 million, $77.1 million, and $112.8 million for
the years ended December 31, 2000, 1999 and 1998, respectively. Our claim
reserves were $403.6 million, $478.6 million and $298.8 million at December 31,
2000, 1999 and 1998, respectively.
INVESTMENTS
At December 31, 2000, we held cash and investments totaling $1,082.0
million with net unrealized appreciation of $6.8 million. Our strategy is to
maximize our underwriting profitability and fully deploy our capital through our
underwriting activities. Consequently, we have established an investment policy,
which we consider to be conservative.
Our investment guidelines, which are approved by our Board, stress
preservation of capital, market liquidity, and diversification of risk. To
achieve this objective, our current fixed income investment guidelines call for
an average credit quality of "AA" as measured by Standard & Poor's Ratings
Group. Notwithstanding the foregoing, our investments are subject to market-wide
risks and fluctuations, as well as to risks inherent in particular securities.
10
Primarily because of the potential for large claims payments, our
investment portfolio is structured to provide a high level of liquidity. The
table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising our portfolio of
invested assets:
The growth in our portfolio of invested assets for the year ended December
31, 2000 resulted primarily from net cash provided by operating activities of
$250.8 million, compared with $130.3 million in 1999. The 2000 cash flows from
operations were primarily utilized to repay $192.0 million of the amounts
outstanding under our revolving credit facility, to purchase $25.1 million of
our common shares and to pay aggregate dividends of $29.2 million. Also during
2000, our U.S. holding company repaid approximately $8.0 million under its
revolving credit facility.
At December 31, 2000, our invested asset portfolio had a dollar weighted
average rating of AA, an average duration of 2.7 years and an average yield to
maturity of 6.7% before investment expenses.
Under the terms of certain reinsurance contracts, we may be required to
provide letters of credit to reinsureds in respect of reported claims and/or
unearned premiums. We have obtained capacity from one of our primary lenders for
the issuance of letters of credit. Issued letters of credit are secured by a
lien on a portion of our investment portfolio. At December 31, 2000, we had
outstanding letters of credit aggregating $44.9 million. Also, in connection
with our January 6, 1999 investment in Top Layer Re, we have committed $37.5
million of collateral in the form of a letter of credit. This letter of credit
is also secured by a portion of our investments.
Catastrophe Linked Instruments. We have 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. To date we
have not experienced any losses from such securities or derivatives although
there can be no assurance this performance will continue. We recorded recoveries
on non-indemnity catastrophe index transactions in each of the last quarters of
2000 and 1999. These recoveries are included in other income. In the future, we
may also utilize other derivative instruments.
Market Sensitive Instruments. Our investment portfolio includes investments
which are subject to changes in market values with changes in interest rates.
The aggregate hypothetical loss generated from an immediate adverse parallel
shift in the treasury yield curve of 100 basis points would cause a decrease in
total return of approximately 2.7%, which equates to a decrease in market value
of approximately $28.4 million on a portfolio valued at $1,052.4 million at
December 31, 2000. The foregoing reflects the use of an immediate time horizon,
since this presents the worst-case scenario. Credit spreads are assumed to
remain constant in these hypothetical examples.
11
The following table summarizes the fair value of our investments and cash
and cash equivalents at the dates indicated.
The following table summarizes the fair value by contractual maturities of
our fixed maturity investment portfolio at the dates indicated.
Maturity and Duration of Fixed Maturity Portfolio. Currently, we maintain a
target duration of approximately three years on a weighted average basis,
reflecting our belief that it is important to maintain a liquid,
shorter-duration portfolio to better assure our ability to pay claims on a
timely basis. The actual portfolio duration may not exceed the target duration
by more than two years. From time to time, we expect to reevaluate the target
duration in light of estimates of the duration of our liabilities and market
conditions, including the levels of then prevailing interest rates.
Quality of Debt Securities in Portfolio. Our guidelines for our various
investment classes have strict restrictions on credit quality, duration and
benchmark relative exposures.
The following table summarizes the composition of the fair value of the
fixed maturity portfolio at the dates indicated by rating as assigned by S&P or,
with respect to non-rated issues, as estimated by our investment managers.
AT DECEMBER 31,
RATING 2000 1999 1998
------ --------- ---------- ----------
AAA............................... 69.1% 72.9% 70.9%
AA................................ 9.4 5.0 4.3
A................................. 5.5 5.9 9.2
BBB............................... 5.1 4.8 3.7
BB................................ 2.9 3.7 5.2
B................................. 5.5 5.3 2.2
CCC............................... 0.3 -- --
CC................................ 0.1 -- --
NR................................ 2.1 2.4 4.5
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
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COMPETITION
With total managed gross premiums written of $397.0 million for the year
ended December 31, 2000, we are one of the largest providers of property
catastrophe reinsurance in the world. We have an estimated market share of
approximately 7-9% of the property catastrophe reinsurance business, based on
managed gross premiums written.
Our principal competition in the industry comes from multi-line insurance
and reinsurance providers that write catastrophe-based products as part of a
larger portfolio. The major players include companies based in the United
States, Europe and Bermuda. Though all of these companies offer property
catastrophe reinsurance, in many cases it accounts for a small percentage of
their total portfolio. Further, the reinsurance industry is undergoing a marked
trend toward greater consolidation.
In our primary business, we face competition from independent insurance
companies, subsidiaries or affiliates of major worldwide companies and others,
some of which have greater financial and other resources than RenaissanceRe.
Primary insurers compete on the basis of factors including selling effort,
product, price, service, financial strength and reputation.
We are also aware of many potential initiatives by capital market
participants to produce alternative products that may compete with the existing
catastrophe reinsurance markets. Among other things, over the last several years
capital markets participants, including exchanges and financial intermediaries,
have developed financial products intended to compete with traditional
reinsurance. In addition, the tax policies of the countries where our clients
operate can affect demand for reinsurance. We are unable to predict the extent
to which the foregoing new, proposed or potential initiatives may affect the
demand for our products or the risks which may be available for us to consider
underwriting.
MARKETING
REINSURANCE
We believe that our modeling and technical expertise, combined with our
leading industry performance, has enabled us to become a provider of first
choice to our insurers and reinsurers worldwide. We market our reinsurance
products worldwide exclusively through reinsurance brokers. We focus our
marketing efforts on targeted brokers and insurance and reinsurance companies.
We believe that our existing portfolio of business is a valuable asset given the
renewal nature of the reinsurance industry and, therefore, we attempt to
continually strengthen relationships with our existing brokers and clients. We
target prospects that are capable of supplying detailed and accurate
underwriting data and that potentially add further diversification to our book
of business.
We believe that primary insurers' and brokers' willingness to use a
particular reinsurer is based not just on pricing terms, but on the financial
security of the reinsurer, its claim paying ability ratings, perceptions of the
quality of a reinsurer's service, the reinsurer's willingness to design
customized programs, its long-term stability and its commitment to provide
reinsurance capacity. We believe that we have established a reputation with our
brokers and clients for prompt response on underwriting submissions and for fast
claims payments. The modeling demonstrations and seminars that we provide to our
brokers and clients further enhance our position as a provider of first choice.
Since we selectively write large lines on a limited number of property
catastrophe reinsurance contracts, we can establish reinsurance terms and
conditions on those contracts that are attractive in our judgment, make large
commitments to the most attractive programs and provide superior client
responsiveness.
We believe that our ability to design customized programs and to provide
advice on catastrophe risk management has helped us to develop long-term
relationships with brokers and clients.
Our reinsurance brokers perform data collection, contract preparation and
other administrative tasks, enabling us to market our reinsurance products cost
effectively by maintaining a smaller staff. We believe that by maintaining close
relationships with brokers, we are able to obtain access to a broad range of
potential reinsureds. Subsidiaries
13
and affiliates of Marsh Inc., Greig Fester, E.W. Blanch & Co., AON Re Group, and
Willis Faber accounted for approximately 26.5%, 15.7%, 15.7%, 14.9% and 5.5%,
respectively, of our gross premiums written in 2000.
During 2000, Renaissance Reinsurance issued authorization for coverage on
programs submitted by 26 brokers worldwide. We received approximately 1,400
program submissions during 2000. Of these submissions, we issued authorizations
for coverage in 2000 for only 410 programs, or 29.3% of the program submissions
received.
PRIMARY INSURANCE
Glencoe markets its products through a diverse group of surplus lines
brokers operating primarily in catastrophe exposed states. Our homeowners
insurance operations primarily market their products utilizing direct marketing
techniques. We also employ point of sale distribution relationships such as
mortgage companies, title companies and realtors. Our primary operations strive
to retain the renewal rights to the customer and to create and maintain a
comprehensive database of catastrophe-exposed property risks.
EMPLOYEES
At December 31, 2000, we and our subsidiaries employed approximately 100
people. We believe that our strong employee relations are among our most
significant strengths. None of our employees are subject to collective
bargaining agreements. We are not aware of any current efforts to implement such
agreements at any of our subsidiaries.
A majority of our employees receive some form of equity-based incentive
compensation as part of their overall package. At December 31, 2000, our
directors and officers beneficially owned 6.8% of our outstanding shares.
Many Bermuda-based employees of RenaissanceRe and Renaissance Reinsurance,
including all of our senior executives, are employed pursuant to work permits
granted by the Bermuda authorities. These permits expire at various times over
the next few years. We have no reason to believe that these permits would not be
extended at expiration upon request, although no assurance can be given in this
regard.
REGULATION
Bermuda. The Insurance Act 1978, as amended, and Related Regulations (the
"Insurance Act"), which regulates the business of Renaissance Reinsurance and
Glencoe, provides that no person may carry on an insurance business (including
the business of reinsurance) in or from within Bermuda unless registered as an
insurer under the Insurance Act by the Bermuda Minister of Finance (the
"Minister"). Renaissance Reinsurance and Glencoe are registered as a Class 4 and
a Class 3 insurer under the Insurance Act, respectively. The Minister, in
deciding whether to grant registration, has broad discretion to act as he thinks
fit in the public interest. The Minister is required by the Insurance Act to
determine whether the applicant is a fit and proper body to be engaged in the
insurance business and, in particular, whether it has, or has available to it,
adequate knowledge and expertise. In connection with the applicant's
registration, the Minister may impose conditions relating to the writing of
certain types of insurance. Further, the Insurance Act stipulates that no person
shall, in or from within Bermuda, act as an insurance manager, broker, agent or
salesman unless registered for the purpose by the Minister. Renaissance Managers
is registered as an insurance manager under the Insurance Act.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions, and sub-committees
thereof supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Certain significant aspects of the Bermuda insurance
regulatory framework are set forth below.
14
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with a requirement made of it under
the Insurance Act or, if in the opinion of the Minister, after consultation with
the Insurance Advisory Committee, the insurer has not been carrying on business
in accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, both of
which, in the case of each of a Class 3 insurer and a Class 4 insurer, are
required to be filed annually with the Registrar of Companies (the "Registrar"),
who is the chief administrative officer under the Insurance Act. The auditor
must be approved by the Minister as the independent auditor of the insurer. The
approved auditor may be the same person or firm which audits the insurer's
financial statements and reports for presentation to its shareholders.
Loss Reserve Specialist. Each Class 3 and Class 4 insurer is required to
submit an annual loss reserve opinion when filing the Annual Statutory Financial
Return. This opinion must be issued by the insurer's approved Loss Reserve
Specialist. The Loss Reserve Specialist, who will normally be a qualified
casualty actuary, must be approved by the Minister.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and surplus,
and detailed notes thereto). The insurer is required to give detailed
information and analyses regarding premiums, claims, reinsurance and
investments. The Statutory Financial Statements are not prepared in accordance
with GAAP and are distinct from the financial statements prepared for
presentation to the insurer's shareholders under the Companies Act 1981 of
Bermuda, which financial statements may be prepared in accordance with GAAP. The
insurer is required to submit the Annual Statutory Financial Statements as part
of the Annual Statutory Financial Return. The Statutory Financial Statements and
the Statutory Financial Return do not form part of the public records maintained
by the Registrar.
Minimum Solvency Margin and Restrictions on Dividends and Distributions.
The Insurance Act provides that the statutory assets of an insurer must exceed
its statutory liabilities by an amount greater than the prescribed minimum
solvency margin which varies with the type of registration of the insurer under
the Insurance Act and the insurer's net premiums written and loss reserve level.
The minimum solvency margin for a Class 4 insurer is the greatest of $100.0
million, 50% of net premiums written (with a credit for reinsurance ceded not
exceeding 25% of gross premiums) and 15% of loss and loss expense provisions and
other insurance reserves. The minimum solvency margin for a Class 3 insurer is
the greatest of $1.0 million, 20% of the first $6.0 million of net premiums
written plus 15% of net premiums written in excess of $6.0 million, and 15% of
loss and loss expense provisions and other insurance reserves.
The Insurance Act mandates certain actions and filings with the Minister
and the Registrar if a Class 3 insurer or a Class 4 insurer fails to meet and or
maintain the required minimum solvency margin. Both Class 3 insurers and Class 4
insurers are prohibited from declaring or paying any dividends if in breach of
the required minimum solvency margin or minimum liquidity ratio (the relevant
margins) or if the declaration or payment of such dividend would cause the
insurer to fail to meet the relevant margins. Where an insurer fails to meet its
relevant margins on the last day of any financial year, it is prohibited from
declaring or paying any dividends during the next financial year without the
approval of the Minister. Further, a Class 4 insurer is prohibited from
declaring or paying in any financial year dividends of more than 25% of its
total statutory capital and surplus (as shown on its previous financial year's
statutory balance sheet) unless it files (at least seven days before payment of
such dividends) with the Registrar an affidavit stating that it will continue to
meet its relevant margins. Class 3 insurers and Class 4 insurers must obtain the
Minister's prior approval for a reduction by 15% or more of the total statutory
capital as set forth in its previous year's financial statements. These
restrictions on declaring or paying dividends and distributions under the
Insurance Act are in addition to those under the Companies Act 1981 which apply
to all Bermuda companies.
Annual Statutory Financial Return. Class 3 and Class 4 insurers are
required to file with the Registrar a Statutory Financial Return no later than
four months after the insurer's financial year end (unless specifically
extended). The Statutory Financial Return includes, among other items, a report
of the approved independent auditor on the Statutory Financial Statements of the
insurer; a declaration of the statutory ratios; a solvency certificate; the
15
Statutory Financial Statements themselves; the opinion of the approved Loss
Reserve Specialist in respect of the loss and loss expense provisions and, only
in the case of Class 4 insurers, certain details concerning ceded reinsurance.
The solvency certificate and the declaration of the statutory ratios must be
signed by the principal representative and at least two directors of the
insurer, who are required to state whether the minimum solvency margin and, in
the case of the solvency certificate, the minimum liquidity ratio, have been
met, and the independent approved auditor is required to state whether in its
opinion it was reasonable for them to so state and whether the declaration of
the statutory ratios complies with the requirements of the Insurance Act. Where
an insurer's accounts have been audited for any purpose other than compliance
with the Insurance Act, a statement to that effect must be filed with the
Statutory Financial Return.
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that the insurer is in breach of the Insurance Act or any
conditions or its registration under the Insurance Act, the Minister may direct
the insurer not to take on any new insurance business; not to vary any insurance
contract if the effect would be to increase the insurer's liabilities; not to
make certain investments; to realize certain investments; to maintain in, or
transfer to the custody of a specified bank, certain assets; not to declare or
pay any dividends or other distributions or to restrict the making of such
payments and/or to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of each of Renaissance Reinsurance and
Glencoe is at our offices at Renaissance House, 8-12 East Broadway, Pembroke HM
19 Bermuda and Mr. John D. Nichols, our Senior Vice President, is the principal
representative of Renaissance Reinsurance and Glencoe. Without a reason
acceptable to the Minister, an insurer may not terminate the appointment of its
principal representative, and the principal representative may not cease to act
as such, unless thirty days' notice in writing to the Minister is given of the
intention to do so. It is the duty of the principal representative, within
thirty days of his reaching the view that there is a likelihood of the insurer
for which he acts becoming insolvent or its coming to his knowledge, or his
having reason to believe, that a reportable event has occurred, to make a report
in writing to the Minister setting out all the particulars of the case that are
available to him. Examples of such an event include failure by the insurer to
comply substantially with a condition imposed upon the insurer by the Minister
relating to a solvency margin or a liquidity or other ratio.
Certain Other Bermuda Law Considerations. As "exempted companies", we and
our Bermuda subsidiaries are exempt from certain Bermuda laws restricting the
percentage of share capital that may be held by non-Bermudians. However, as
exempted companies, we and our Bermuda subsidiaries may not participate in
certain business transactions, including (1) the acquisition or holding of land
in Bermuda (except that required for their business and held by way of lease or
tenancy for terms of not more than 50 years) without required authorization, (2)
the taking of mortgages on land in Bermuda to secure an amount in excess of
$50,000 without the consent of the Minister, (3) the acquisition of any bonds or
debentures secured by any land in Bermuda, other than certain types of Bermuda
government securities or securities issued by Bermuda public authorities or (4)
the carrying on of business of any kind in Bermuda, except in furtherance of our
business carried on outside Bermuda or under license granted by the Minister.
Generally it is not permitted without a special license granted by the Minister
to insure Bermuda domestic risks or risks of persons of, in or based in Bermuda.
We and our Bermuda subsidiaries must comply with the provisions of the
Companies Act regulating the payment of dividends and making distributions from
contributed surplus. A company may not declare or pay a dividend, or make a
distribution out of contributed surplus, if there are reasonable grounds for
believing that: (a) the company is, or would after the payment be, unable to pay
its liabilities as they become due; or (b) the realizable value of the company's
assets would thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts.
16
United States and Other. Renaissance Reinsurance is not admitted to
transact the business of insurance in any jurisdiction except Bermuda. However,
the insurance laws of each state of the United States and of many other
countries permit and regulate the sale of insurance and reinsurance to insureds
and ceding insurers located within their jurisdictions by non-admitted alien
insurers, such as Renaissance Reinsurance, from locations outside the state or
country. With some exceptions, such sale of insurance or reinsurance from within
a jurisdiction where the insurer is not admitted to do business is prohibited.
Renaissance Reinsurance does not intend to maintain an office or to solicit,
advertise, settle claims or conduct other insurance activities in any
jurisdiction other than Bermuda where the conduct of such activities would
require that Renaissance Reinsurance be so admitted.
Glencoe is eligible to write excess and surplus lines primary insurance in
29 states and is subject to the regulation and reporting requirements of these
states. In accordance with certain requirements of the National Association of
Insurance Commissioners, Glencoe has established, and is required to maintain, a
trust funded with a minimum of $15.0 million as a condition of its status as an
eligible, non-admitted insurer in the U.S. DeSoto is a licensed
property/casualty insurer in Florida and Nobel is licensed and subject to
regulation as a property/casualty insurer in all 50 U.S. states and the District
of Columbia.
Our U.S. operations are subject to extensive regulation under statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners. The extent of regulation varies from state to state but
generally has its source in statutes that delegate regulatory, supervisory and
administrative authority to a department of insurance in each state. Among other
things, state insurance commissioners regulate insurer solvency standards,
insurer licensing, authorized investments, premium rates, restrictions on the
size of risks that may be insured under a single policy, loss and expense
reserves and provisions for unearned premiums, deposits of securities for the
benefit of policyholders, policy form approval, and market conduct regulation
including the use of credit information in underwriting and other underwriting
and claims practices. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of companies and
other matters. In general, regulated insurers must file all rates for directly
underwritten insurance with the insurance department of each state in which they
operate on an admitted basis; however, reinsurance generally is not subject to
rate regulation.
Our U.S. insurance subsidiaries are subject to guaranty fund laws which can
result in assessments, up to prescribed limits, for losses incurred by
policyholders as a result of the impairment or insolvency of unaffiliated
insurance companies. Typically, an insurance company is subject to the guaranty
fund laws of the states in which it conducts insurance business; however,
companies such as Glencoe which conduct business on a surplus lines basis in a
particular state are generally exempt from that state's guaranty fund laws. We
do not expect the amount of any such guaranty fund assessments to be paid by us,
if any, in 2000 to be material.
Holding Company Regulation. We and our U.S. insurance subsidiaries are
subject to regulation under the insurance holding company laws of various
jurisdictions. The insurance holding company laws and regulations vary from
jurisdiction to jurisdiction, but generally require an insurance holding
company, and insurers that are subsidiaries of insurance holding companies, to
register with state regulatory authorities and to file with those authorities
certain reports, including information concerning their capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations.
Further, in order to protect insurance company solvency, state insurance
statutes typically place limitations on the amount of dividends or other
distributions payable by insurance companies. Florida, DeSoto's state of
domicile, requires that dividends be paid only out of earned surplus and limits
the annual amount payable without the prior approval of the Florida Insurance
Department to the greater of 10% of policyholders' surplus adjusted for
unrealized gains or 100% of prior year statutory net income. Texas, Nobel's
state of domicile, currently requires that dividends be paid only out of earned
statutory surplus and limits the annual amount of dividends payable without the
prior approval of the Texas Insurance Department to the greater of 10% of
statutory capital and surplus at the end of the previous calendar year or 100%
of statutory net income from operations for the previous calendar year. These
insurance holding company laws also impose prior approval requirements for
certain transactions with affiliates.
In addition, as a result of our ownership of DeSoto and Nobel, under the
terms of applicable state statutes, any person or entity desiring to purchase
more than 10% of our outstanding voting securities is required to obtain prior
regulatory approval for the purchase.
17
NAIC Ratios. The NAIC has established eleven financial ratios to assist
state insurance departments in their oversight of the financial condition of
insurance companies operating in their respective states. The NAIC's Insurance
Regulatory Information System ("IRIS") calculates these ratios based on
information submitted by insurers on an annual basis and shares the information
with the applicable state insurance departments. Generally, an insurance company
will be subject to regulatory scrutiny if it falls outside the usual ranges with
respect to four or more of the ratios.
Codification of Statutory Accounting Principles. In their ongoing effort to
improve solvency regulations, the NAIC and individual states have enacted
certain laws and statutory financial statement reporting requirements. For
example, NAIC rules require audited statutory financial statements as well as
actuarial certification of loss and loss adjustment expense reserves therein.
Other activities are focused on greater disclosure of an insurer's reliance on
reinsurance and changes in its reinsurance programs and stricter rules on
accounting for certain overdue reinsurance. These regulatory initiatives, and
the overall focus on solvency, may intensify the restructuring and consolidation
of the insurance industry. We believe we will be adequately positioned to
compete in an environment of more stringent regulation.
Risk Based Capital. The NAIC has implemented a risk-based or RBC formula
and model law to be applied to all property/casualty insurance companies.
Reinsurance Regulation. The terms and conditions of reinsurance agreements
generally are not subject to regulation with respect to rates or policy terms.
This contrasts with primary insurance policies and agreements, the rates and
policy terms of which are generally closely regulated by state insurance
departments. As a practical matter, however, the rates charged by primary
insurers do have an effect on the rates reinsurers can charge.
The ability of a primary insurer to take credit for the reinsurance
purchased from reinsurance companies is a significant component of reinsurance
regulation. Typically, a primary insurer will only enter into a reinsurance
agreement if it can obtain credit on its statutory financial statements for the
reinsurance ceded to the reinsurer. With respect to U.S. domiciled reinsurers
that reinsure U.S. insurers, credit is usually granted when the reinsurer is
licensed or accredited in a state where the primary insurer is domiciled. In
addition, many states allow credit for reinsurance ceded to a reinsurer that is
licensed in another state and which meets certain financial requirements,
provided in some instances that the state has substantially similar reinsurance
credit law requirements or the primary insurer is provided with collateral to
secure the reinsurer's obligations.
In order for primary U.S. insurers to obtain financial statement credit for
the reinsurance obligations of non-U.S. reinsurers, those reinsurers must
satisfy specific reinsurance credit requirements. Non-U.S. reinsurers, such as
RenaissanceRe, that are not licensed in a state generally may become accredited
by filing certain financial information with the relevant state commissioner and
maintaining a U.S. trust fund for the payment of valid reinsurance claims in an
amount equal to the reinsurer's reinsurance liabilities covered by the trust
plus an additional $20 million. In addition, unlicensed and unaccredited
reinsurers may secure the U.S. primary insurer with funds equal to its
reinsurance obligations in the form of cash, securities, letters of credit or
reinsurance trusts. Renaissance Reinsurance generally posts a letter of credit
or provides other forms of security after a claim is reported to comply with
U.S. reinsurance credit requirements.
The Gramm-Leach-Bliley Act. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act of 1999 ("GLBA") implementing fundamental
changes in the regulation of the financial services industry in the United
States. The GLBA permits the transformation of the already converging banking,
insurance and securities industries by permitted mergers that combine commercial
banks, insurers and securities firms under one holding company, a "financial
holding company". Bank holding companies and other entities that qualify and
elect to be treated as a financial holding company may engage in activities, and
acquire companies engaged in activities that are "financial" in nature or
"incidental" or "complementary" to such financial activities. These financial
activities include acting as principal, agent or broker in the underwriting and
sale of life, property, casualty and other forms of insurance and annuities.
A financial holding company can own any kind of insurer or insurance broker
or agent but its bank subsidiary cannot own an insurance company. Under the
GLBA, national banks retain their existing ability to sell insurance products in
some circumstances.
18
Under state law, the financial holding company must apply to the insurance
commissioner in the insurer's state of domicile for prior approval of the
acquisition of the insurer. Under the GLBA, no state may prevent or interfere
with affiliations between banks and insurers, insurance agents or brokers or the
licensing of a bank or bank affiliate as an insurer, agent or broker as
permitted by the GLBA.
Until the passage of the GLBA, the Glass-Steagall Act of 1933, as amended,
had limited the ability of banks to engage in securities-related businesses, and
the Bank Holding Company Act of 1956, as amended, had restricted banks from
being affiliated with insurers. With the passage of the GLBA, among other
things, bank holding companies may acquire insurers, and insurance holding
companies may acquire banks. The ability of banks to affiliate with insurers may
materially affect our U.S. subsidiaries' product lines by substantially
increasing the number, size and financial strength of potential competitors.
The expansion of our primary insurance operations, together with the
potential of further expansion into additional insurance markets, could expose
us or our subsidiaries to increasing regulatory oversight. However, we intend to
continue to conduct our operations so as to minimize the likelihood that
RenaissanceRe or Renaissance Reinsurance will become subject to U.S. regulation.
SEGMENT INFORMATION
Certain information regarding our segments of operations are contained in
Note 15 to our Consolidated Financial Statements provided in Item 14(a) of this
Form 10-K.
PROGRAM LIMITS
The following table sets forth the number of the Company's reinsurance
programs in force at December 31, 2000 by aggregate program limits.
NUMBER OF
AGGREGATE PROGRAM LIMIT PROGRAMS
----------------------- -----------
$50-70 million................................................ 9
$40-50 million................................................ 9
$30-40 million................................................ 9
$20-30 million................................................ 22
$10-20 million................................................ 42
Less than $10 million......................................... 238
-----------
Total.................................................... 329
===========
FOREIGN CURRENCY EXPOSURES
Our functional currency is the United States ("U.S.") dollar. We write a
substantial portion of our business in currencies other than U.S. dollars and
may, from time to time, experience exchange gains and losses and incur
underwriting losses in currencies other than U.S. dollars, which will in turn
affect our financial statements.
Our foreign currency policy is to hold foreign currency assets, including
cash and receivables, that approximate the net monetary foreign currency
liabilities, including loss reserves and reinsurance balances payable. All
changes in the exchange rates are recognized currently in our statement of
income. We seek to hedge our exposure to foreign currency transactions.
19
GLOSSARY OF SELECTED INSURANCE TERMS
Attachment point The amount of loss (per occurrence or in the
aggregate, as the case may be) above which
excess of loss reinsurance becomes operative.
Broker One who negotiates contracts of insurance or
reinsurance, receiving a commission for
placement and other services rendered, between
(1) a policy holder and a primary insurer, on
behalf of the insured party, (2) a primary
insurer and reinsurer, on behalf of the
primary insurer, or (3) a reinsurer and a
retrocessionaire, on behalf of the reinsurer.
Catastrophe excess of loss
reinsurance A form of excess of loss reinsurance that,
subject to a specified limit, indemnifies the
ceding company for the amount of loss in
excess of a specified retention with respect
to an accumulation of losses resulting from a
"catastrophe cover."
Cede; cedent; ceding company When a party reinsures its liability with
another, it "cedes" business and is referred
to as the "cedent" or "ceding company."
Claim expenses The expenses of settling claims, including
legal and other fees and the portion of
general expenses allocated to claim settlement
costs.
Claim reserves Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims payments and the related expenses that
the insurer or reinsurer will ultimately be
required to pay in respect of insurance or
reinsurance it has written. Reserves are
established for losses and for claim
adjustment expenses.
Excess of loss reinsurance A generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying
insurance policies in excess of a specified
amount, which is called a "level" or
"retention." Also known as non-proportional
reinsurance. Excess of loss reinsurance is
written in layers. A reinsurer or group of
reinsurers accepts a band of coverage up to a
specified amount. The total coverage purchased
by the cedent is referred to as a "program"
and will typically be placed with
predetermined reinsurers in pre-negotiated
layers. Any liability exceeding the outer
limit of the program reverts to the ceding
company, which also bears the credit risk of a
reinsurer's insolvency.
Funded cover A form of insurance where the insured pays
premiums to a reinsurer to serve essentially
as a deposit in order to offset future losses.
On a funded cover, there is generally limited
or no transfer of risk for catastrophe losses
from the insured to the reinsurer.
Generally accepted accounting
principles Accounting principles as set forth in opinions
of the Accounting Principles Board of the
American Institute of Certified Public
Accountants and/or statements of the Financial
Accounting Standards Board and/or their
respective successors and which are applicable
in the circumstances as of the date in
question.
Incurred but not reported
("IBNR") Reserves for estimated losses that have been
incurred by insureds and reinsureds but not
yet reported to the insurer or reinsurer
including unknown future developments on
losses which are known to the insurer or
reinsurer.
20
Layer The interval between the retention or
attachment point and the maximum limit of
indemnity for which a reinsurer is
responsible.
Net premiums written Gross premiums written for a given period less
premiums ceded to reinsurers and
retrocessionaires during such period.
Proportional reinsurance A generic term describing all forms of
reinsurance in which the reinsurer shares a
proportional part of the original premiums and
losses of the reinsured. (Also known as pro
rata reinsurance, quota share reinsurance or
participating reinsurance.) In proportional
reinsurance the reinsurer generally pays the
ceding company a ceding commission. The ceding
commission generally is based on the ceding
company's cost of acquiring the business being
reinsured (including commissions, premium
taxes, assessments and miscellaneous
administrative expense) and also may include a
profit factor.
Reinstatement premium The premium charged for the restoration of the
reinsurance limit of a catastrophe contract to
its full amount after payment by the reinsurer
of losses as a result of an occurrence.
Reinsurance An arrangement in which an insurance company,
the reinsurer, agrees to indemnify another
insurance or reinsurance company, the ceding
company, against all or a portion of the
insurance or reinsurance risks underwritten by
the ceding company under one or more policies.
Reinsurance can provide a ceding company with
several benefits, including a reduction in net
liability on individual risks and catastrophe
protection from large or multiple losses.
Reinsurance also provides a ceding company
with additional underwriting capacity by
permitting it to accept larger risks and write
more business than would be possible without a
concomitant increase in capital and surplus,
and facilitates the maintenance of acceptable
financial ratios by the ceding company.
Reinsurance does not legally discharge the
primary insurer from its liability with
respect to its obligations to the insured.
Retention The amount or portion of risk that an insurer
retains for its own account. Losses in excess
of the retention level are paid by the
reinsurer. In proportional treaties, the
retention may be a percentage of the original
policy's limit. In excess of loss business,
the retention is a dollar amount of loss, a
loss ratio or a percentage.
Retrocessional reinsurance;
retrocessionaire A transaction whereby a reinsurer cedes to
another reinsurer, the retrocessionaire, all
or part of the reinsurance that the first
reinsurer has assumed. Retrocessional
reinsurance does not legally discharge the
ceding reinsurer from its liability with
respect to its obligations to the reinsured.
Reinsurance companies cede risks to
retrocessionaires for reasons similar to those
that cause primary insurers to purchase
reinsurance: to reduce net liability on
individual risks, to protect against
catastrophic losses, to stabilize financial
ratios and to obtain additional underwriting
capacity.
Risk excess of loss reinsurance A form of excess of loss reinsurance that
covers a loss of the reinsured on a single
"risk" in excess of its retention level of the
type reinsured, rather than to aggregate
losses for all covered risks, as does
catastrophe excess of loss reinsurance. A
"risk" in this context might mean the
insurance coverage on one building or a group
of buildings or the
21
insurance coverage under a single policy,
which the reinsured treats as a single risk.
Statutory accounting principles
("SAP") Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by Bermuda
and/or the United States state insurance
regulatory authorities including the NAIC,
which in general reflect a liquidating, rather
than going concern, concept of accounting.
Total Managed Cat Premium The total catastrophe reinsurance premiums
written on a gross basis by our Top Layer Re
and OPCat joint ventures as well as by our
wholly owned subsidiaries
Underwriting The insurer's or reinsurer's process of
reviewing applications submitted for insurance
coverage, deciding whether to accept all or
part of the coverage requested and determining
the applicable premiums.
Underwriting capacity The maximum amount that an insurance company
can underwrite. The limit is generally
determined by the company's retained earnings
and investment capital. Reinsurance serves to
increase a company's underwriting capacity by
reducing its exposure from particular risks.
Underwriting expenses The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
22
ITEM 2. PROPERTIES
We lease office space in Bermuda, where our executive offices are located.
In 2000, Nobel sold both of the real properties it formerly owned. These
transactions were not material to RenaissanceRe. Since the time of such sales,
Nobel has leased and occupied 8,366 square feet of space at 8001 LBJ Freeway,
Dallas, Texas from LBJ Commerce Center Inc. This lease commenced August 1, 2000
and provides for a term of 36 months. This space is used as the administrative
offices of both Nobel Insurance Company and Nobel Service Corporation.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, a party to litigation and arbitration that
arises in the normal course of its business operations. While any proceeding
contains an element of uncertainty, we believe that it is not presently a party
to any such litigation or arbitration that is likely to have a material adverse
effect on our business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 2000.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON SHARES
Our common shares began publicly trading on June 27, 1995. Our New York
Stock Exchange symbol is "RNR". The following table sets forth, for the periods
indicated, the high and low prices per share of our common shares as reported in
composite New York Stock Exchange trading.
PRICE RANGE OF
COMMON SHARES
-------------------
PERIOD HIGH LOW
- ------ ------ -------
1998
First Quarter......................................... $50.75 $39.63
Second Quarter........................................ 50.69 43.00
Third Quarter......................................... 48.31 41.44
Fourth Quarter........................................ 45.38 34.50
1999
First Quarter......................................... $37.00 $31.50
Second Quarter........................................ 38.13 30.00
Third Quarter......................................... 37.44 34.31
Fourth Quarter........................................ 43.19 33.19
2000
First Quarter......................................... $41.13 $35.88
Second Quarter........................................ 44.13 36.13
Third Quarter......................................... 64.88 42.50
Fourth Quarter........................................ 81.50 58.13
2001
First Quarter (through March 29, 2001)................ $84.18 $62.10
On March 29, 2001 the last reported sale price for our common shares was
$67.00 per share. At March 29, 2001 there were approximately 110 holders of
record of our common shares and approximately 3,400 beneficial holders. As a
result of the sale by St. Paul of all of its shares on March 13, 2001, we expect
that the number of our shareholders may increase.
DIVIDEND POLICY
Historically, we have paid quarterly dividends on our common shares, and
have increased our dividend during each of the six years since our initial
public offering. Most recently, our Board declared a dividend of $0.40 per share
payable on March 6, 2001 to shareholders of record at February 20, 2001. We
expect to continue the payment of dividends in the future, but we cannot assure
that they will continue. The declaration and payment of dividends are subject to
the discretion of the Board and depend on, among other things, our financial
condition, general business conditions, legal, contractual and regulatory
restrictions regarding the payment of dividends by us and our subsidiaries and
other factors which the Board may in the future consider to be relevant.
As a holding company with no direct operations, we rely on investment
income, cash dividends and other permitted payments from our subsidiaries to pay
dividends to our shareholders. Our Bermuda insurance subsidiaries are required
by applicable law and regulations to maintain a minimum solvency margin and
minimum liquidity ratio, and are prohibited from paying dividends that would
result in a breach of these requirements. Further, Renaissance Reinsurance, as a
Class 4 insurer in Bermuda, may not pay dividends which would exceed 25% of its
capital and surplus, unless it first makes filings confirming that it meets the
required margins. Generally, our U.S. insurance
24
subsidiaries may only pay dividends out of earned surplus. Moreover, the amount
payable without the prior approval of the applicable state insurance department
is generally limited to the greater of 10% of policyholders' surplus or
statutory capital, or 100% of the subsidiary's prior year statutory net income.
If our subsidiaries are restricted from paying dividends to us, we may be unable
to pay dividends to shareholders.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected financial data and other
financial information at and for each of the years in the five year period ended
December 31, 2000. The historical financial information was prepared in
accordance with U.S. generally accepted accounting principles. The statement of
income data for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 and
the balance sheet data at December 31, 2000, 1999, 1998, 1997 and 1996 were
derived from our audited consolidated financial statements, which have been
audited by Ernst & Young, our independent auditors. You should read the selected
financial data in conjunction with our consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this filing and all other
information appearing elsewhere or incorporated into this filing by reference.
footnotes appear on following page
25
- ----------
(1) Operating income excludes net realized gains or losses on investments. For
1998, operating income, operating earnings per common share -- diluted, the
claims/claim expense ratio, the underwriting ratio, the combined ratio and
the operating return on average shareholders' equity also exclude the impact
of an after-tax charge of $40.1 million taken in the fourth quarter of 1998
related to our subsidiary, Nobel. Including the charge related to Nobel,
operating income, operating earnings per common share -- diluted, the
claims/claim expense ratio, the underwriting ratio, the combined ratio and
the operating return on average shareholders' equity would have been $81.5
million, $3.63, 55.0%, 29.8%, 84.8% and 12.9%, respectively. Also for 1998,
the primary segment information of pre-tax income and the claims/claim
expense ratio also excludes the impact of the Nobel charge. Including the
charge relating to Nobel, primary segment pre-tax income would have been a
loss of $51.4 million and the claims/claim expense ratio would have been
200.0%.
(2) Earnings per common share -- diluted was calculated by dividing net income
available to common shareholders by the number of weighted average common
shares and common share equivalents outstanding. Common share equivalents
are calculated on the basis of the treasury stock method.
(3) The item "Company obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinated debentures of
RenaissanceRe" reflects $87.6 million aggregate liquidation amount of the
capital securities issued by a subsidiary trust. The sole assets of the
trust are $87.6 million aggregate principal amount of 8.54% junior
subordinated debentures due March 1, 2027 issued by RenaissanceRe.
(4) Book value per common share was computed by dividing total shareholders'
equity by the number of outstanding common shares.
(5) The ratios are not meaningful for 1996 as this was the initial year of
operations and earned premiums were $0.2 million.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of our results of operations for
the year ended December 31, 2000 compared with the year ended December 31, 1999,
and for the year ended December 31, 1999 compared with the year ended December
31, 1998 and also a discussion of our financial condition at December 31, 2000.
This discussion and analysis should be read in conjunction with the audited
consolidated financial statements and related notes included in this filing.
This filing contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from the results described
or implied by these forward-looking statements.
OVERVIEW
Founded in 1993, RenaissanceRe is one of the leading providers of property
catastrophe reinsurance coverage in the world. We believe that we are a provider
of first choice for many insurers and reinsurers, due to our modeling and
technical expertise and our industry leading performance. We principally provide
property catastrophe reinsurance to insurers and reinsurers, with exposures
worldwide, on an excess of loss basis. Property catastrophe reinsurance
generally provides protection from claims arising from large catastrophes, such
as earthquakes, hurricanes, winter storms, freezes, floods, fires, tornados and
other man-made or natural disasters.
For the years ended December 31, 2000 and December 31, 1999, our gross
premiums written were approximately $433.0 million and $351.3 million,
respectively, our net premiums written were $293.3 million and $213.5 million,
respectively, our operating income was $134.4 million (or $6.86 per share) and
$120.0 million (or $5.82 per share), respectively, and our net income was $127.2
million (or $6.50 per share) and $104.2 million (or $5.05 per share),
respectively. At December 31, 2000, we had total assets of $1.5 billion and
total shareholders' equity of $700.8 million.
Our principal subsidiary is Renaissance Reinsurance, a Bermuda domiciled
company. In 2000, Renaissance Reinsurance wrote $382.8 million of gross written
premiums, compared to $282.3 million in 1999. Of these premiums, $345.0 million
were derived from property catastrophe reinsurance coverage, compared to $279.7
million in 1999. Renaissance Reinsurance is one of the largest providers of this
coverage in the world. In addition to property catastrophe reinsurance, we write
certain specialty lines of reinsurance, including accident and health, finite,
satellite and aviation.
In January 1999, Renaissance Reinsurance formed Top Layer Re with State
Farm to provide high layer coverage for non-U.S. risks. Renaissance Reinsurance
and State Farm each own 50% of Top Layer Re. OPCat is a wholly owned subsidiary
of Overseas Partners. In November 1999, RenaissanceRe incorporated Renaissance
Underwriting Managers to act as underwriting manager to OPCat. Together, these
joint ventures have access to approximately $3.4 billion of capital. We receive
profit participation and fee-based income from these ventures.
We believe that our position as a leading property catastrophe reinsurance
underwriter has been strengthened by the 40% growth in total managed catastrophe
premiums we experienced in 2000. Our total managed catastrophe premiums, which
include premiums we write on behalf of our Top Layer Re and OPCat joint ventures
together with those written by our wholly owned subsidiaries, grew to $397.0
million on a gross basis for the year ended December 31, 2000, including $80.2
million written on behalf of our joint ventures.
We also provide reinsurance coverage through Renaissance Reinsurance of
Europe. Renaissance Europe was incorporated in 1998 under the laws of Ireland as
a wholly owned subsidiary of Renaissance Reinsurance.
We also write primary insurance and provide certain related services,
principally in lines that are exposed to catastrophe risk. Our subsidiaries
involved in primary insurance include Glencoe Insurance Ltd., Paget Insurance
Services, Pembroke Managing Agents, DeSoto Insurance Company, DeSoto Prime
Insurance Company and Nobel Insurance Company.
Glencoe was incorporated in 1996 as a wholly owned subsidiary of
RenaissanceRe. Glencoe provides primary catastrophe exposed property coverage on
an excess and surplus lines basis, and is eligible to write business in 29
states. During 2000, Glencoe wrote $5.3 million of primary insurance premium,
compared to $5.0 million in 1999.
27
DeSoto Insurance was incorporated in 1997 as a wholly owned subsidiary of
Glencoe, to assume and renew homeowner policies from the Florida Residential
Property and Casualty Joint Underwriting Association, a state sponsored
insurance company. During 2000, DeSoto wrote $12.7 million of primary homeowners
insurance coverage, compared to $14.3 million in 1999. Paget, Pembroke and
DeSoto Prime are all active in the Florida homeowners market.
We also own Nobel, a Texas-domiciled insurance company. Following a 1998
fourth quarter after-tax charge of $40.1 million, Nobel disposed of its business
lines in 1999. Nobel continues to be a licensed insurer in all 50 states,
although there can be no assurance that these licenses can be retained.
Our results depend to a large extent on the frequency and severity of
catastrophic events, and the coverage offered to clients impacted by these
events. In addition, from time to time, we 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, we seek an attractive return on equity, the ability to develop or
capitalize on a competitive advantage and opportunities that will not detract
from our core reinsurance operations. Accordingly, we regularly review strategic
opportunities and periodically engage in discussions regarding possible
transactions, although there can be no assurance that we will complete any such
transactions or that any such transaction would contribute materially to our
results of operations or financial condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our operating income, which excludes realized gains and losses on
investments, for the year ended December 31, 2000 was $134.4 million, compared
with $120.0 million for the year ended December 31, 1999. Our operating earnings
per common share for the year ended December 31, 2000 was $6.86, compared with
$5.82 for the year ended December 31, 1999. The increase in operating income was
primarily the result of increased fee income from our joint ventures, Top Layer
Re and OPCat, and also from an increase in investment income due to increased
yields and an increase in the size of the investment portfolio, slightly offset
by an increase in interest expense.
Our gross premiums written for the year ended December 31, 2000 increased
by $81.7 million, or 23.2%, to $433.0 million from $351.3 million for the year
ended December 31, 1999. Gross premiums written by segment were:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Reinsurance............................. $ 382,816 $ 282,345
Primary................................. 50,186 68,960
--------- ---------
Total................................... $ 433,002 $ 351,305
========= =========
Our increase in reinsurance premiums written in 2000 resulted primarily
from (1) an increase of $35.0 million in our premiums from noncatastrophe
reinsurance, from $2.7 million in 1999 to $37.7 million in 2000, (2) an increase
in reinstatement premiums to $20.3 million in 2000, compared with $6.8 million
in 1999, primarily related to the 1999 European windstorms and (3) increased
opportunities to provide reinsurance to reinsurers due to the large level of
catastrophes in 1999. Premiums written by our primary insurance companies
decreased due to the reduced premiums at Nobel, from $49.6 million in 1999 to
$32.2 million in 2000, due to the run-off of the Nobel businesses.
During 2000, we continued to purchase reinsurance to reduce our exposure to
certain losses. Our ceded premiums were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Reinsurance............................. $ 94,875 $ 77,152
Primary................................. 44,824 60,640
--------- ---------
Total................................... $ 139,699 $ 137,792
========= =========
28
The increase in ceded reinsurance was primarily the result of increased
costs of ceded reinsurance contracts renewed by Renaissance Reinsurance and
increased purchases of reinsurance by Renaissance Reinsurance. The reduction in
ceded reinsurance by our primary insurance companies primarily relates to the
reduction in gross written premiums from Nobel. Approximately 55% of the limits
under our reinsurance coverage has been purchased on a multi-year basis, which
we expect will result in relatively stable costs on the majority of those
policies for the fiscal years 2001 and 2002. To the extent that appropriately
priced coverage is available, we anticipate continued use of reinsurance to
reduce the potential volatility of our results.
Our gross premiums written by geographic region were as follows:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
United States and Caribbean..................... $ 145,871 $ 173,598
Worldwide....................................... 98,923 46,712
Worldwide (excluding U.S.)(1)................... 60,382 27,276
Europe.......................................... 22,071 26,437
Other........................................... 9,559 2,370
Australia and New Zealand....................... 8,280 3,212
Noncatastrophe reinsurance(2)................... 37,730 2,740
--------- ---------
Total reinsurance............................... 382,816 282,345
United States -- primary........................ 50,186 68,960
--------- ---------
Total gross premiums written.................... $ 433,002 $ 351,305
========= =========
- ----------
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe and
Japan.
(2) The category "Noncatastrophe reinsurance" includes coverages related to
noncatastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, finite, satellite and
aviation risks assumed by us.
The table below sets forth our claims, expense and combined ratios:
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
Claims and claim expenses ratio..................... 40.6% 34.9%
Underwriting expense ratio.......................... 28.5 28.1
------ ------
Combined ratio...................................... 69.1% 63.0%
====== ======
Our claims and claim expenses incurred for the year ended December 31, 2000
were $108.6 million, or 40.6% of net premiums earned. In comparison, our claims
and claim expenses incurred for the year ended December 31, 1999 were $77.1
million, or 34.9% of net premiums earned. The primary reason for the increase in
the claims and claim expenses ratio was the increase in gross premiums written
from noncatastrophe reinsurance products which typically produce a higher loss
ratio than our principal product, property catastrophe reinsurance. Due to the
potential high severity of claims related to the property catastrophe
reinsurance business, there can be no assurance that we will continue to
experience this level of claims in future years.
For our reinsurance operations, estimates of claims and claim expenses
incurred and losses recoverable are based in part upon the estimation of claims
resulting from catastrophic events. Our estimation of claims resulting from
catastrophic events based upon our own historical claim experience is inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims. Therefore, we utilize 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.
For both our reinsurance and primary operations, we use statistical and
actuarial methods to estimate ultimate expected claims and claim expenses. The
period of time from the reporting of a loss to us through the settlement of
29
our liability may be several years. During this period, additional facts and
trends will be revealed. As these factors become apparent, case reserves will be
adjusted, sometimes requiring an increase in our overall reserves, while at
other times we may reallocate incurred but not reported (IBNR) reserves to
specific case reserves. Reserve 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.
Acquisition costs and operational expenses, consisting of brokerage
commissions, excise taxes and other costs directly related to our underwriting
operations, for the year ended December 31, 2000 were $76.5 million, or 28.5% of
net premiums earned, compared with $62.3 million, or 28.1% of net premiums
earned, for the year ended December 31, 1999. The primary contributor to the
increase in the underwriting expense ratio was the increase in gross premiums
earned by Renaissance Reinsurance with respect to noncatastrophe reinsurance
products, which typically produce a higher underwriting expense ratio than our
principal product, property catastrophe reinsurance.
Net investment income (which excludes net realized investment losses) for
the year ended December 31, 2000 was $77.9 million, compared with $60.3 million
for the year ended December 31, 1999. The increase in investment income resulted
primarily from an increase in interest rates during 2000, together with an
increase in the investment base during the year. Although invested assets at the
end of the year only reflected an increase of $22.3 million from the prior year
end, we had an additional $200.0 million available during most of the year,
prior to repaying $200.0 million on our bank loans during the fourth quarter.
During 2000, we reported other income of $11.0 million, compared with $4.9
million for the year ended December 31, 1999. Substantially all of this income
related to our profit participation and performance-based fees received by us
from our joint ventures, Top Layer Re and OPCat. Also included in other income
is approximately $0.7 million from our primary operations, and $0.4 million from
our investments in non-indemnity catastrophe index transactions. For 1999, we
reported $2.5 million in other income relating to recoveries on catastrophe
linked index transactions and $1.4 million relating to other income from our
primary operations.
During 2000, net realized losses on sales of investments were $7.1 million,
compared with $15.7 million in 1999. The realized losses in 2000 and in 1999
were primarily the result of increased interest rates and the subsequent sales
of fixed income securities.
Corporate expenses were $7.0 million in 2000 compared with $3.1 million in
1999, excluding the write-off of goodwill attributable to Nobel of $1.0 million
in 2000 and $6.7 million in 1999. The primary cause of the increase was an
increase in developmental expenses for our primary operations and other business
development activities.
During the year ended December 31, 2000, we recorded interest expense of
$17.2 million on our outstanding debt compared with $9.9 million in 1999. The
increase in interest expense was primarily related to an increase in borrowing
rates during late 1999 and early 2000 and additional borrowings of $150.0
million which were outstanding for approximately five months during 1999 and for
approximately eleven months during 2000. In the fourth quarter of 2000, we
repaid $200.0 million of our outstanding debt.
Also during 2000, we recorded $4.6 million of tax expense compared with a
tax benefit of $1.5 million in 1999. The increase in our tax expense primarily
relates to a $8.2 million deferred tax valuation allowance we recorded during
2000. Primarily as a result of the losses from Nobel, Renaissance U.S. Holdings,
Inc. has recorded a net deferred tax asset, the balance of which is $18.5
million at December 31, 2000. We believe the future operations of Nobel,
combined with other operating subsidiaries of Renaissance U.S., will enable us
to utilize the remainder of this net operating loss carry-forward. However, it
is not certain that we will realize the full benefit of this asset.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Our operating income for the year ended December 31, 1999 was $120.0
million, compared with $121.5 million for the year ended December 31, 1998. Our
operating earnings per common share for the year ended December 31, 1999 was
$5.82, compared with $5.42 for the year ended December 31, 1998. Our
consolidated net operating income excludes the impact of net realized investment
gains and losses on investments, as well as, in the case of 1998, the fourth
quarter charge of $40.1 million related to Nobel.
30
Our gross premiums written for the year ended December 31, 1999 increased
by $80.8 million, or 29.9%, to $351.3 million from $270.5 million for the year
ended December 31, 1998. Our gross premiums written by segment were:
YEAR ENDED DECEMBER 31,
1999 1998
----------- -----------
(IN THOUSANDS)
Reinsurance............................. $ 282,345 $ 207,189
Primary................................. 68,960 63,271
--------- ---------
Total................................... $ 351,305 $ 270,460
========= =========
Our increased reinsurance premiums in 1999 resulted primarily from the
numerous industry losses which occurred late in 1998 and during 1999 and the
related contraction in capacity in the property catastrophe reinsurance market,
which resulted in increased prices in certain pockets of the property
catastrophe reinsurance market during 1999. The $75.2 million, or 36.3%,
increase in premiums from our reinsurance operations was primarily the result of
a 26.8% increase in premiums related to new business and a 25.3% increase
related to changes in pricing, participation levels and coverage on renewed
business, partially offset by a 15.8% decrease in premiums because either we or
the cedent did not renew coverage.
Premiums written by our primary insurance companies increased in 1999,
largely because such results reflect a full year of premiums written for Nobel,
compared with only six months of Nobel premiums during 1998. This increase was
partially offset by reduced premiums written for DeSoto Insurance in 1999. The
reduction in DeSoto Insurance premiums was due to the one-time initial premiums
assumed from the Florida JUA during 1998 of approximately $10.0 million. During
1999 Nobel sold its principal operating units and, as a result, we expect a
decrease in future premium volume from our primary insurance businesses.
During 1999, we continued to purchase reinsurance to reduce our exposure to
certain losses. Our ceded premiums were as follows:
YEAR ENDED DECEMBER 31,
1999 1998
----------- ----------
(IN THOUSANDS)
Reinsurance.................................. $ 77,152 $ 40,036
Primary...................................... 60,640 35,405
--------- --------
Total........................................ $ 137,792 $ 75,441
========= ========
The increase in ceded reinsurance was primarily the result of increased
costs of ceded reinsurance contracts renewed by Renaissance Reinsurance,
increased purchases of reinsurance by Renaissance Reinsurance and Nobel ceding
the large majority of its 1999 gross premiums written as part of the planned
reduction of its operations. Nobel's ceded reinsurance was $41.5 million in
1999, compared with $21.8 million during 1998. To the extent that appropriately
priced coverage is available, we anticipate continued use of reinsurance to
reduce the potential volatility of our results.
Our gross premiums written by geographic region were as follows:
YEAR ENDED DECEMBER 31,
1999 1998
----------- ----------
(IN THOUSANDS)
United States and Caribbean...................... $ 173,598 $ 132,776
Worldwide........................................ 46,712 17,033
Worldwide (excluding U.S.)(1).................... 27,276 26,326
Europe........................................... 26,437 18,522
Other............................................ 2,370 4,495
Australia and New Zealand........................ 3,212 3,932
Noncatastrophe reinsurance(2).................... 2,740 4,105
--------- ---------
Total reinsurance................................ 282,345 207,189
United States -- primary......................... 68,960 63,271
--------- ---------
Total gross premiums written..................... $ 351,305 $ 270,460
========= =========
- ------------
31
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe and
Japan.
(2) The category "Noncatastrophe reinsurance" includes coverages related to
noncatastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, finite, satellite and
aviation risks assumed by us.
The table below sets forth our combined ratio and components thereof,
excluding, in the case of 1998, the Nobel charge:
YEAR ENDED
DECEMBER 31,
1999 1998
Claims and claim expenses ratio..................... 34.9% 33.1%
Underwriting expense ratio.......................... 28.1 29.3
---- ----
Combined ratio...................................... 63.0% 62.4%
==== ====
Our claims and claim expenses incurred for the year ended December 31, 1999
were $77.1 million, or 34.9%, of net premiums earned. In comparison, claims and
claim expenses incurred for the year ended December 31, 1998 were $67.8 million,
or 33.1%, of net premiums earned. The primary reason for the increase in the net
incurred losses was the significant catastrophe losses that occurred during
1999. During 1999 nine significant worldwide catastrophic events occurred: the
hail storms in Sydney, Australia, in April; the Oklahoma tornados in May;
Hurricane Floyd in September; Typhoon Bart which struck Japan in September;
Turkish and Taiwanese earthquakes in August and September, respectively; and the
Danish windstorm, Anatol, and the French windstorms, Lothar and Martin, in
December. Seven of these events each resulted in over $1 billion of insured
damages. These events caused net incurred losses for Renaissance Reinsurance to
increase to $64.4 million for 1999, or a loss ratio of 32.7%, compared with
$42.4 million for 1998, or a loss ratio of 25.0%. Due to the potential high
severity of claims related to the property catastrophe reinsurance business,
there can be no assurance that we will continue to experience this level of
claims in future years.
Renaissance Reinsurance's incurred losses in 1998 included claims on a
number of aggregate stop loss and excess of loss contracts, as well as claims
related to Hurricane Georges, the January Canadian freeze, Hurricane Bonnie and
additional claims from various U.S. wind, hail, tornado and flood events.
The claims and claim expenses incurred from our primary operations for the
year ended December 31, 1999 were $12.7 million, or a loss ratio of 52.2% of net
premiums earned. In comparison, claims and claim expenses incurred from our
primary operations for the year ended December 31, 1998 were $25.4 million, or a
loss ratio of 72.1%. During 1999, DeSoto and Glencoe continued to perform within
targeted loss ratios. The primary factor contributing to the reduction in net
losses from our primary operations was the recognition of a portion of a
deferred gain related to a retroactive reinsurance contract entered into by
Nobel during 1998. Our 1998 combined ratio and components thereof exclude the
1998 Nobel charge.
Acquisition costs and operational expenses, consisting of brokerage
commissions, excise taxes and other costs directly related to our underwriting
operations, for the year ended December 31, 1999 were $62.3 million, or 28.1%,
of net premiums earned, compared with $60.1 million, or 29.3%, of net premiums
earned for the year ended December 31, 1998, excluding the 1998 Nobel charge.
The primary contributor to the decrease in the underwriting expense ratio was
the increase in premiums earned by Renaissance Reinsurance with no corresponding
increase in the costs to operate the reinsurance operations. This was slightly
offset by increased costs at Nobel, primarily related to severance costs, and
increased costs at DeSoto Insurance for additional hires.
Net investment income (which excludes net realized investment losses) for
the year ended December 31, 1999 was $60.3 million, compared with $52.8 million
for the year ended December 31, 1998. The increase in investment income resulted
primarily from an increase in interest rates during 1999 plus the $132.5 million
increase in the amount of invested assets during the year, which was primarily
the result of cash flows provided by operations of $130.3 million and an
increase in the borrowings under our line of credit of $150.0 million, partially
offset by dividends paid and share repurchases of $28.9 million and $80.1
million, respectively.
32
During 1999, we reported other income of $4.9 million, compared with $9.8
million for the year ended December 31, 1998. The majority of other income in
1999 relates to recoveries on non-indemnity catastrophe index transactions.
During 1999, our net realized losses on sales of investments were $15.7
million, compared with $6.9 million in 1998. The 1999 losses were primarily the
result of increased interest rates during 1999 and the subsequent sales of fixed
income securities.
Excluding a write-off of goodwill attributable to Nobel, corporate expenses
were $3.1 million in 1999, compared with $4.2 million in 1998. During 1999, in
conjunction with the sale and reinsurance of the primary business units of
Nobel, we wrote off $6.7 million of goodwill. The 1998 amount excludes charges
related to Nobel.
During the year ended December 31, 1999, we recorded interest expense of
$9.9 million on our outstanding debt and $8.3 million on our capital trust
securities, compared with $4.5 million and $8.5 million in 1998, respectively.
The increase in interest expense on our outstanding debt was primarily related
to an increase in borrowing rates and the additional borrowings of $150.0
million during 1999, $125.0 million of which was drawn on August 17, 1999.
On June 25, 1998, we completed our acquisition of the U.S. operating
subsidiaries (including Nobel) of Nobel Insurance Limited, a Bermuda company,
for $56.1 million. We accounted for this acquisition using the purchase method
of accounting. We did not issue shares as part of the purchase.
During the fourth quarter of 1998, we recorded an after-tax charge of $40.1
million, consisting of $29.6 million of adverse development on Nobel's casualty
and surety books of business, a goodwill write-down of $6.6 million, and other
related costs of $3.9 million. Consequently, we adopted a plan to exit each of
Nobel's business units. Subsequently, Nobel completed the reinsurance of the
casualty and surety books of business and its bail and low-value dwelling books
of business have been assumed by third parties. Also, Nobel completed the sale
of its IAS/Cat Crew subsidiary to its management team in an earn-out
transaction.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, we rely on investment income, cash dividends and
other permitted payments from our subsidiaries to make principal and interest
payments on our debt, cash distributions on outstanding obligations and to pay
quarterly dividends to our shareholders. The payment of dividends by our
subsidiaries is, under certain circumstances, limited under U.S. statutory
regulations and Bermuda insurance law. U.S. statutory regulations and The
Bermuda Insurance Act 1978, amendments thereto and related regulations of
Bermuda require our Bermuda insurance subsidiaries to maintain certain measures
of solvency and liquidity. At December 31, 2000, the statutory capital and
surplus of our Bermuda insurance subsidiaries was $738.5 million, and the amount
required to be maintained by the Act was $135.0 million. During 2000,
Renaissance Reinsurance paid aggregate cash dividends of $95.6 million to our
parent company, compared with $95.1 million in 1999.
Our operating subsidiaries have historically produced sufficient cash flows
to meet expected claims payments and operational expenses and to provide
dividend payments to us. Our subsidiaries also maintain a concentration of
investments in high quality liquid securities, which management believes will
provide sufficient liquidity to meet extraordinary claims payments should the
need arise. Additionally, we maintain a $310.0 million credit facility to meet
the liquidity needs of our subsidiaries. We had drawn down $8.0 million of this
facility at December 31, 2000.
In connection with the Nobel acquisition, Renaissance U.S. borrowed $35.0
million from a syndicate of banks. In addition, the banks provided a $15.0
million revolving loan facility. At December 31, 2000, $42.0 million was
outstanding under these lines. RenaissanceRe has guaranteed these borrowings.
33
CASH FLOWS
Cash flows from operating activities resulted principally from premiums,
collections on losses recoverable and investment income, net of paid losses,
acquisition costs and underwriting expenses. Cash flows from operations in 2000
were $250.8 million, compared with $130.3 million in 1999. The 2000 cash flows
from operations were primarily utilized to purchase $25.1 million of our common
shares, pay aggregate quarterly dividends of $29.2 million and repay $200.0
million of our bank loans. Our 1999 cash flows from operations were primarily
utilized to purchase $80.1 million of our common shares and pay aggregate
quarterly dividends of $28.9 million. Also during 1999, we borrowed an
additional $150.0 million under our revolving credit facility, which was
primarily used to purchase additional fixed income securities for the holding
company's portfolio of investments.
We have generated cash flows from operations in 2000 and in 1999
significantly in excess of our operating commitments. To the extent that capital
is not utilized in our reinsurance business, we will consider using such capital
to invest in new opportunities or will consider returning such capital to our
shareholders.
Because of the nature of the coverages we provide, which typically can
produce losses of high severity and low frequency, it is not possible to
accurately predict our future cash flows from operating activities. As a
consequence, cash flows from operating activities may fluctuate, perhaps
significantly, between individual quarters and years.
CAPITAL RESOURCES
Our total capital resources at December 31, 2000 and 1999 were as follows:
AT DECEMBER 31,
------------------------------
2000 1999
-------------- --------------
(IN THOUSANDS)
Shareholders' equity......................... $ 700,818 $ 600,329
Revolving credit facility -- unborrowed...... 302,000 100,000
Revolving credit facility -- borrowed........ 8,000 200,000
Term and revolving loan facility............. 42,000 50,000
Minority interest -- capital securities...... 87,630 89,630
----------- -----------
Total capital resources............ $ 1,140,448 $ 1,039,959
=========== ===========
We have a revolving credit and term loan agreement with a syndicate of
commercial banks. During 1999 we increased our borrowings under the facility to
$200.0 million from $50.0 million at December 31, 1998. The additional funds
drawn during 1999 increased the liquidity at the holding company, RenaissanceRe,
and were available, if necessary, to be contributed to the operating
subsidiaries following a large catastrophic event. During 2000, we renegotiated
our revolving credit facility and repaid $200.0 million of the then outstanding
balance. Interest rates on the facility are based on a spread above LIBOR and
averaged 7.03% during 2000, compared to 5.76% in 1999. Our revolving credit
agreement contains certain financial covenants including requirements that
consolidated debt to capital does not exceed a ratio of 0.35:1; consolidated net
worth must exceed the greater of $100.0 million or 125% of consolidated debt;
and 80% of invested assets must be rated BBB-- or better. Under the terms of the
agreement, and if we are in compliance with the covenants thereunder, we have
access to the $302.0 million. We were in compliance with all the covenants of
this revolving credit and term loan agreement at December 31, 2000.
Renaissance U.S. has a $27.0 million term loan and $15.0 million revolving
loan facility with a syndicate of commercial banks, each of which is guaranteed
by RenaissanceRe. Interest rates on the facility are based upon a spread above
LIBOR, and averaged 6.98% during 2000, compared to 5.91% in 1999. The related
agreements contain certain financial covenants, including a covenant that
RenaissanceRe, as principal guarantor, maintain a ratio of liquid assets to debt
service of 4:1. The term loan has mandatory repayment provisions approximating
$9 million per year in each of years 2001 through 2003. During 2000, Renaissance
U.S. repaid approximately $8 million of this facility. We were in compliance
with all the covenants of this term loan and revolving loan facility at December
31, 2000.
Our subsidiary RenaissanceRe Capital Trust has issued capital securities
which pay cumulative cash distributions at an annual rate of 8.54%, payable
semi-annually. During 2000 we purchased $2.0 million of these
34
capital securities recognizing a gain of $0.5 million which has been reflected
in shareholders' equity. During 1999 we purchased $10.4 million of these capital
securities recognizing a gain of $1.8 million which was also reflected in
shareholders' equity. The sole asset of the Trust consists of our junior
subordinated debentures in an amount equal to the outstanding capital
securities. The Indenture relating to these junior subordinated debentures
contains certain covenants, including a covenant prohibiting us from the payment
of dividends if we are in default under the Indenture. We were in compliance
with all of the covenants of the Indenture at December 31, 2000. The capital
trust securities mature on March 1, 2027. These securities are required by
accounting principles to be classified as minority interest, rather than as a
component of our shareholders' equity.
Under the terms of certain reinsurance contracts, we may be required to
provide letters of credit to reinsureds in respect of reported claims and/or
unearned premiums. We have obtained a facility providing for the issuance of
letters of credit. This facility is secured by a lien on a portion of our
investment portfolio. At December 31, 2000, we had outstanding letters of credit
aggregating $44.9 million, compared to $73.2 million in 1999. Also, in
connection with our Top Layer Re joint venture we have committed $37.5 million
of collateral to support a letter of credit.
In order to encourage employee ownership of common shares, we have
guaranteed certain loan and pledge agreements between certain employees and Bank
of America Illinois. Pursuant to the terms of this employee credit facility,
BofA has agreed to loan the participating employees up to an aggregate of $25.0
million. The balance outstanding at December 31, 2000 was $24.8 million,
compared to $24.1 million in 1999. Each loan under this employee credit facility
is required to be initially collateralized by the respective participating
employee with common shares or other collateral acceptable to BofA. If the value
of the collateral provided by a participating employee subsequently decreases,
the participating employee is required to contribute additional collateral in
the amount of such deficiency. Loans under this employee credit facility are
otherwise non-recourse to the participating employees. Given the level of
collateral, we do not presently anticipate that we will be required to honor any
guarantees under the employee credit facility, although there can be no
assurance that we will not be so required in the future.
SHAREHOLDERS' EQUITY
During 2000, shareholders' equity increased by $100.5 million, from $600.3
million at December 31, 1999, to $700.8 million at December 31, 2000. The
significant components of the change in shareholders' equity included net income
from continuing operations of $127.2 million, plus an increase in unrealized
appreciation on investments of $25.3 million, offset by the payment of dividends
of $29.2 million and the purchase of common shares for $25.0 million.
From time to time, we have sought to return capital to our shareholders
through share repurchase programs. We currently have $27.1 million remaining
under our existing programs. During 2000, we purchased 671,900 common shares for
an aggregate value of $25.1 million. During 1999, we repurchased 2,226,700
common shares for an aggregate value of $80.1 million. During 1998, we purchased
1,020,670 common shares for an aggregate value of $42.7 million.
INVESTMENTS
At December 31, 2000, we held cash and investments totaling $1,082.0
million, compared to $1,059.8 million in 1999, with net unrealized appreciation
of $6.8 million, compared to unrealized loss of $18.5 million in 1999.
Because we primarily provide coverage for damages resulting from natural
and man-made catastrophes, we may become liable for substantial claim payments.
Accordingly, our investment portfolio is structured to preserve capital and
provide a high level of liquidity.
35
The table below shows the aggregate amounts of investments available for
sale, other investments and cash and cash equivalents comprising our portfolio
of invested assets:
The growth in our portfolio of invested assets for the year ended December
31, 2000 resulted primarily from net cash provided by operating activities of
$250.8 million, partially offset by payments of $200.0 million under our
revolving credit facility, $29.2 million of dividends paid and $25.1 million of
common share repurchases. Our investment income also increased during this
period, largely as a result of the increased size of the fixed income portfolio
and an increase in interest rates.
Our 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 December 31, 2000, our invested
asset portfolio had a dollar weighted average rating of AA, an average duration
of 2.7 years and an average yield to maturity of 6.7%.
Catastrophe Linked Instruments. We have 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. To date we
have not experienced any losses from such securities or derivatives. We can not
assure you that this performance will continue. During 1999 and 1998, we
recorded recoveries on non-indemnity catastrophe index transactions of $2.5
million and $7.5 million, respectively. We report these recoveries in other
income.
Derivative Securities. In order to reduce our exposure to currency
fluctuations, we have entered into forward window contracts to hedge our foreign
currency outstanding loss reserves. At December 31, 2000, based on market
information and information provided by independent brokers, the estimated fair
value of these contracts is $0.8 million. The aggregate notional amount of the
contracts at December 31, 2000 is $32.0 million.
MARKET SENSITIVE INSTRUMENTS
Our investment portfolio includes investments which are subject to changes
in market values with changes in interest rates. The aggregate hypothetical loss
generated from an immediate adverse parallel shift in the treasury yield curve
of 100 basis points would cause a decrease in total return of 2.7%, which
equated to a decrease in market value of approximately $28.4 million on a
portfolio valued at $1,052.4 million at December 31, 2000. At December 31, 1999,
the decrease in total return would have been 2.7%, which equated to a decrease
in market value of approximately $28.4 million on a portfolio valued at $1,052.6
million. The foregoing reflects the use of an immediate time horizon, since this
presents the worst-case scenario. Credit spreads are assumed to remain constant
in these hypothetical examples.
CURRENCY
Our functional currency is the U.S. dollar. We write a substantial portion
of our business in currencies other than U.S. dollars and may, from time to
time, experience exchange gains and losses and incur underwriting losses in
currencies other than U.S. dollars, which will in turn affect our financial
statements.
Our current foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including loss reserves and reinsurance balances payable.
All changes in the exchange rates are recognized currently in our statement of
income. We seek to hedge our exposure to foreign currency transactions.
EFFECTS OF INFLATION
36
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on us are
considered in our catastrophe loss models. The effects of inflation are also
considered in pricing and in estimating reserves for unpaid claims and claim
expenses. The actual effects of inflation on our results can not be accurately
known until claims are ultimately settled.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 2001 we implemented 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. The adoption of SFAS No. 133 had no significant impact on our
consolidated financial statements.
CURRENT OUTLOOK
Due to industry losses in 1999, and the related contraction of capacity in
the market, we received price increases on a substantial majority of our
reinsurance policies sold or renewed during the recent renewal season. However,
even after these price increases, we believe that there continues to be numerous
transactions in the market that are underpriced relative to expected losses. We
believe that because of our competitive advantages, including our technological
capabilities and our relationships with leading brokers and ceding companies, we
are able to identify contracts that are adequately priced and will continue to
find opportunities in the property catastrophe reinsurance markets.
Primarily because of higher than average loss activity in 1999, our
aggregate cost for reinsurance protection increased during 2000 and could
continue to increase during 2001. If prices rise to levels whereby we believe
the purchase of reinsurance protection would become uneconomical, then in
certain geographic regions we would retain a greater level of net risk. In order
to give us longer term retrocessional capacity, we have entered into multi-year
contracts with respect to a portion of our portfolio. As of January 1, 2001,
approximately 55% of the limits under our retrocessional coverage were purchased
on a multi-year basis.
Our financial strength and underwriting expertise have enabled us to pursue
opportunities outside the property catastrophe reinsurance market, including
various lines of reinsurance and the catastrophe exposed primary insurance
market. We believe that our financial strength will enable us to continue to
pursue other opportunities in the future. There can be no assurance that our
pursuit of such opportunities will materially impact our financial condition and
results of operations.
During recent fiscal years there has been considerable consolidation among
leading brokerage firms and also among our customers. Although consolidation may
continue to occur, we believe that our financial strength, our position as one
of the market leaders in the property catastrophe reinsurance industry and our
ability to provide innovative products to the industry will minimize any adverse
effect of such consolidation on our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information with regard to Quantitative and Qualitative Disclosures
About Market Risk is contained on page 36 of this Form 10-K under the caption
"Investments -- Market Sensitive Instruments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 14(a) of this Report for the Consolidated
Financial Statements of the Company and the Notes thereto, as well as the
Schedules to the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons
who were directors and executive officers of the Company as of March 15, 2001.
NAME AGE POSITION
- ---- --- --------
James N. Stanard 52 Chairman of the Board, President and Chief
Executive Officer
William I. Riker 41 Director, Executive Vice President of
RenaissanceRe and President and Chief Operating
Officer of Renaissance Reinsurance
David A. Eklund 41 Executive Vice President of RenaissanceRe and
Chief Underwriting Officer of Renaissance
Reinsurance
John M. Lummis 43 Executive Vice President and Chief Financial
Officer
Arthur S. Bahr 69 Director
Thomas A. Cooper 64 Director
Edmund B. Greene 62 Director
Brian R. Hall 59 Director
Gerald L. Igou 66 Director
Kewsong Lee 35 Director
Paul J. Liska 44 Director
W. James MacGinnitie 62 Director
Scott E. Pardee 64 Director
James N. Stanard has served as our Chairman of the Board, President and
Chief Executive Officer since our formation in June 1993. Mr. Stanard is a Class
II Director. From 1991 through June 1993, Mr. Stanard served as Executive Vice
President of USF&G and was a member of a three-person Office of the President.
As Executive Vice President of USF&G, he was responsible for USF&G's
underwriting, claims and ceded reinsurance. From October 1983 to 1991, Mr.
Stanard was an Executive Vice President of F&G Re, Inc., USF&G's start-up
reinsurance subsidiary. Mr. Stanard was one of two senior officers primarily
responsible for the formation of F&G Re, where he was responsible for
underwriting, pricing and marketing activities of F&G Re during its first seven
years of operations. As Executive Vice President of F&G Re, Mr. Stanard was
personally involved in the design of pricing procedures, contract terms and
analytical underwriting tools for all types of treaty reinsurance, including
both U.S. and international property catastrophe reinsurance.
William I. Riker was appointed as one of our Directors in August 1998.
Mr. Riker is a Class I Director. Mr. Riker was appointed as our Executive Vice
President in December 1997 and previously served as our Senior Vice President
from March 1995 and as our Vice President -- Underwriting from November 1993.
Mr. Riker has served as President and Chief Operating Officer of Renaissance
since February 1998. From March 1993 through October 1993, Mr. Riker served as
Vice President of Applied Insurance Research, Inc. Prior to that, Mr. Riker held
the position of Senior Vice President, Director of Underwriting at American
Royal Reinsurance Company. He was responsible for developing various analytical
underwriting tools while holding various positions at American Royal from 1984
through 1993.
David A. Eklund has served as our Chief Underwriting Officer since
February 1999, and as Executive Vice President of Renaissance since December
1997, prior to which he served as our Senior Vice President and Senior Vice
President of Renaissance from February 1996. Mr. Eklund previously served as our
Vice President -- Underwriting and Renaissance Reinsurance from September 1993.
From November 1989 through September 1993, Mr. Eklund held various positions in
casualty underwriting at Old Republic International Reinsurance Group, Inc.,
where he was responsible for casualty treaty underwriting and marketing. From
March 1988 to November 1989, Mr.
38
Eklund held various positions in operations of the catastrophe reinsurance
business at Berkshire Hathaway Inc., where he was responsible for underwriting
and marketing finite risk and property catastrophe reinsurance.
John M. Lummis has served as our Executive Vice President since
February 2001 and Chief Financial Officer since September 1997. Mr. Lummis
served as Senior Vice President from September 1997 to February 2001. Mr. Lummis
served as one of our directors from July 1993 to December 1997, when he resigned
in connection with his appointment as an executive officer. Mr. Lummis served as
Vice President -- Business Development of USF&G Corporation from 1994 until
August 1997 and served as Vice President and Group General Counsel of USF&G
Corporation from 1991 until 1995. USF&G Corporation is the parent company of
USF&G and was acquired by The St. Paul Companies, Inc. in May 1998. From 1982
until 1991, Mr. Lummis was engaged in the private practice of law with Shearman
& Sterling.
Arthur S. Bahr has served as one of our directors since our formation
in June 1993. Mr. Bahr is a Class III Director. Mr. Bahr served as Director and
Executive Vice President -- Equities of General Electric Investment Corporation,
formerly a subsidiary of General Electric Company and registered investment
adviser, from 1987 until December 1993. Mr. Bahr served GEIC in various senior
investment positions since 1978 and was a Trustee of General Electric Pension
Trust from 1976 until December 1993. Mr. Bahr served as a Director and Executive
Vice President of GE Investment Management Incorporated, a subsidiary of General
Electric Company, and a registered investment adviser, from 1988 until his
retirement in December 1993. From December 1993 until December 1995, Mr. Bahr
served as a consultant to GEIC.
Thomas A. Cooper has served as one of our directors since August 7,
1996. Mr. Cooper is a Class II Director. Mr. Cooper has served as Chairman and
Chief Executive Officer of TAC Associates, a privately held investment company
since August 1993. Also from August 1993 until August 1996, Mr. Cooper served as
Chairman and Chief Executive Officer of Chase Federal Bank FSB. From June 1992
until July 1993, Mr. Cooper served as principal of TAC Associates. From April
1990 until May 1992, Mr. Cooper served as Chairman and Chief Executive Officer
of Goldome FSB. From 1986 to April 1990, Mr. Cooper served as Chairman and Chief
Executive Officer of Investment Services of America, one of the largest full
service securities brokerage and investment companies in the United States.
Edmund B. Greene has served as one of our directors since our formation
in June 1993. Mr. Greene currently serves as a consultant to Aon Corporation.
Mr. Greene retired as Deputy Treasurer-Insurance of General Electric Company in
October 1998, where he had served since March 1995. Prior to that, Mr. Greene
was Manager-Corporate Insurance Operation of General Electric Company since
1985, and previously served in various financial management assignments at
General Electric Company since 1962.
Brian Hall has served as one of our directors since August 1999. Mr.
Hall is a Class I Director. Mr. Hall, who is President of Inter-Ocean Management
Ltd., an independent company providing management and general consulting
services, retired as a Director of Johnson & Higgins, and Chairman of Johnson &
Higgins (Bermuda) Ltd. in July 1997. Mr. Hall started his career in the Bermuda
insurance industry when he joined American International Group in 1958. He moved
to International Risk Management Ltd. in 1964. In 1969 he founded Inter-Ocean
Management Ltd. which entered into an association with Johnson & Higgins in
1970. Inter-Ocean was acquired by Johnson & Higgins in 1979, and Mr. Hall was
appointed President of Johnson & Higgins (Bermuda) Ltd., and became a Director
of Johnson & Higgins in 1989. After his retirement in 1997, Mr. Hall
re-established Inter-Ocean Management Ltd.
Gerald L. Igou has served as one of our directors since our formation
in June 1993. Mr. Igou is a Class III Director. Mr. Igou has served as Vice
President -- Investment Analyst for GE Asset Management Incorporated, or GEAM,
and certain of its predecessors since September 1993. He is a Certified
Financial Analyst and has served GEAM and its predecessors in the capacities of
investment analyst and sector portfolio manager since 1968. Prior to joining
General Electric, Mr. Igou was an analyst with the Wall Street firms of Smith
Barney Inc. and Dean Witter & Co.
Kewsong Lee has served as one of our directors since December 1994. Mr.
Lee is a Class II Director. Mr. Lee has served as a Member and Managing Director
of E.M. Warburg, Pincus & Co. LLC and a general partner of Warburg, Pincus & Co.
since January 1, 1997. Mr. Lee served as a Vice President of Warburg, Pincus
Ventures, Inc.
39
from January 1995 to December 1996, and as an associate at E.M. Warburg, Pincus
& Co., Inc. from 1992 to until December 1994. Prior to joining E.M. Warburg, Mr.
Lee was a consultant at McKinsey & Company, Inc., a management consulting
company, from 1990 to 1992. Mr. Lee is a director of Knoll, Inc., Eagle Family
Foods, Inc. and several privately held companies.
Paul J. Liska has served as one of our directors since August 1998. Mr.
Liska is a Class III Director. Mr. Liska has served as Executive Vice President
and Chief Financial Officer of The St. Paul Companies, Inc. ("St. Paul") since
1997. From 1996 to 1997, Mr. Liska served as President and Chief Executive
Officer of Specialty Foods Corporation. From 1994 to 1996, Mr. Liska served as
Chief Operating Officer and Chief Financial Officer of Specialty Foods
Corporation. From 1988 to 1994, Mr. Liska held several positions with Kraft
General Foods, including Chief Financial Officer of Kraft U.S.A. Mr. Liska also
held a finance position with Quaker Oats Co., and positions in finance, sales
and sales management with American Hospital Supply Corp. A certified public
accountant, he began his career with Price Waterhouse & Co. On March 9, 2001,
Mr. Liska announced his resignation from St. Paul, effective April 1, 2001.
W. James MacGinnitie has served as one of our directors since February
2000. Mr. MacGinnitie is a Class II Director. Mr. MacGinnitie is an independent
actuary and consultant. He served as Senior Vice President and Chief Financial
Officer of CNA Financial from September 1997 to September 1999. From May 1994
until September 1997, Mr. MacGinnitie was a partner of Ernst & Young and
National Director of its actuarial services. From 1975 until 1994 he was a
principal in Tillinghast, primarily responsible for its property-casualty
actuarial consulting services. Prior thereto, Mr. MacGinnitie was a Professor of
Actuarial Science & Director of Actuarial Program at the University of Michigan,
Ann Arbor, Michigan, from 1973 to 1975.
Scott E. Pardee has served as one of our directors since February 1997.
Mr. Pardee is a Class I Director. Mr. Pardee serves as Alan R. Holmes Professor
of Economics at Middlebury College, where he has taught since January 1, 2000.
Previously he served as a Senior Lecturer at the MIT Sloan School of Management
and Executive Director of the Finance Research Center at the Sloan School from
November 1997. Mr. Pardee served as Chairman of Yamaichi International
(America), Inc., a financial services company, from 1989 to 1995. Mr. Pardee
previously served as Executive Vice President and a member of the Board of
Directors of Discount Corporation of New York, a primary dealer in U.S.
government securities, and Senior Vice President of the Federal Reserve Bank of
New York and Manager of Foreign Operations of the Open Market Committee of the
Federal Reserve System.
In part to accommodate the expected reduction in the size of our Board,
Mr. Liska and Mr. Igou, who have been Class III Directors, are not standing for
reelection at the Annual Meeting, and Mr. Lee, who has been a Class II Director,
intends to resign following the Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee Report on Executive Compensation
Executive Compensation Policy. Our compensation policy for all of our
executive officers is formulated and administered by the Compensation Committee
of the Board. The components of our compensation policy include salary, annual
bonus, and long-term incentives, consisting of stock options, restricted stock
and a long-term incentive bonus plan. The Compensation Committee also
administers the Incentive Plan, under which the Compensation Committee's
Sub-Committee periodically grants Options and Restricted Shares to the executive
officers and other employees of the Company. The Sub-Committee is comprised of
Messrs. Bahr and Cooper. Exercise prices and vesting terms of Options granted
under the Incentive Plan are in the sole discretion of the Sub-Committee.
The primary goals of our compensation policy are to continue to attract
and retain talented executives at our offshore location, to reward results
(i.e., contribution to shareholder value, financial performance and
accomplishment of agreed-upon projects) and to encourage teamwork. Financial
performance factors include return on equity and earnings per share growth The
Compensation Committee believes that the total compensation awarded should be
concentrated in equity-based incentives to link the interests of executives
closely with the interests of our shareholders. In determining the level of
executive compensation, the Compensation Committee evaluates whether the
compensation awarded to an executive is competitive with compensation awarded to
40
executives holding similar positions at selected peer companies, combined with
an evaluation of the executive's performance.
We have entered into employment agreements with each of our senior
executive officers, all other officers of the Company and certain officers of
our subsidiaries. These employment agreements were entered into to recognize the
significant contribution of the officers to our success and the enhancement of
shareholder value, to seek to ensure the continued retention of these key
employees into the future, and to incentivize these employees and further align
their interests with those of the shareholders by weighting significantly the
compensation of such officers with equity-based incentives. The Compensation
Committee reviews and approves the base salary component and cost of living
allowances awarded to such executives under their respective employment
agreements. The Sub-Committee may award discretionary annual cash bonuses.
In accordance with the goals and evaluations of the Compensation
Committee, the Compensation Committee has approved the Stock Bonus Plan and the
Long Term Incentive Bonus Plan. Under the Stock Bonus Plan eligible employees
may elect to receive a grant of Common Shares of up to 50 percent of their bonus
in lieu of cash, with an associated matching grant of an equal number of
Restricted Shares. The Long Term Incentive Bonus is available to each of our
executive officers and other officers and entitles those individuals to an
incentive bonus based on cumulative returns on equity, and earnings per share
over a multi-year period.
The Sub-Committee may also grant Options and/or Restricted Shares to
such executives. Generally, Options are granted at a price equal to the fair
market value of the Full Voting Common Shares on an average fair market value of
the five days prior to the date of the grant. The Compensation Committee
believes that such executives' beneficial ownership positions in the Company, as
a result of their respective personal investments and the Options and Restricted
Shares granted to them, causes their interests to be well aligned with ours and
our shareholders.
In May 2000, the Sub-Committee approved a grant of Options to each of
Messrs. Riker and Eklund to purchase 103,000 Common Shares and a grant to Mr.
Lummis to purchase 77,000 Common Shares. These grants were larger than the
customary annual grants approved by the Sub-Committee in recent years, but were
deemed appropriate as a means to incentivize our senior executive officers to
deliver attractive operating results and increase shareholder value. It is
intended that these grants will substitute for our customary annual option
grants for 2000, 2001 and 2002, although the Sub-Committee retains discretion to
make additional grants if it deems necessary or appropriate.
Currently, approximately 90,000 Common Shares remain available for
grants under the Incentive Plan. The Compensation Committee believes that this
number is not sufficient to satisfy the anticipated need for additional grants
to our employees. Therefore, the Compensation Committee and the Board are
proposing to adopt a new stock incentive plan and to reserve 950,000 Common
Shares for issuance under that plan. The new plan, the Renaissance Holdings Ltd.
2001 Stock Incentive Plan, was adopted by the Board on February 6, 2001, subject
to approval by our shareholders.
Chief Executive Officer's Compensation. The compensation of James N.
Stanard, President and Chief Executive Officer of the Company, is determined and
reviewed by the Compensation Committee. In determining Mr. Stanard's
compensation, the Compensation Committee evaluates Mr. Stanard's contributions
toward creation and enhancement of shareholder value, including the achievement
of agreed-upon objectives. The Compensation Committee considers subjective
factors, such as Mr. Stanard's dedication and leadership abilities, as well as
objective factors, such as his impact on the financial and operating performance
of the Company. The Compensation Committee believes that the continuing
development of the Company, the operating results of the Company, the execution
of the Company's capital plan, the success in motivating the employees of the
Company, the articulation of the strategic vision of the Company and the current
market position of the Company were significantly impacted by Mr. Stanard and
members of his management team.
In recognition of Mr. Stanard's long term contribution to the Company
and to the enhancement of shareholder value, the Committee resolved that it
would be in the best interests of the Company and its shareholders to retain Mr.
Stanard to ensure that his contribution to the Company and the shareholders
would continue.
41
Consistent with the Compensation Committee's general compensation
philosophy for our executives, Mr. Stanard's compensation has been weighted
significantly towards equity-based incentives. In May 2000, the Company granted
to Mr. Stanard, pursuant to the Incentive Plan, an Option to purchase 200,000
Common Shares. As with the grant to other Named Executive Officers, this grant
was larger than recent annual grants to Mr. Stanard but was deemed appropriate
as a means to incentivise Mr. Stanard to aggressively pursue strategies to
increase shareholder value. As noted, it is intended that this grant will
substitute for the Company's customary annual option grants to Mr. Stanard for
2000, 2001 and 2002, although the Sub-Committee retains discretion to make
additional grants if it deems necessary or appropriate. The Compensation
Committee believes that Mr. Stanard's beneficial ownership position in the
Company, as a result of his personal investment and the Options and Restricted
Shares granted to him, cause his interests to be well aligned with the long term
interests of the Company and our shareholders.
Mr. Stanard's cash bonus payments for 2000 were governed by the terms
of his Third Amended and Restated Employment Agreement. See "CEO Employment
Agreement."
The Company is not a United States taxpayer, therefore, Section 162(m)
of the Code (which generally disallows a tax deduction to public companies for
annual compensation over $1 million paid to the chief executive officer or any
of the four other most highly compensated executive officers) does not apply to
the Company's compensation payments.
Executive Compensation
The following Summary Compensation Table sets forth information concerning
the compensation for services paid to the Named Executive Officers during the
years ended December 31, 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
(1) The Annual Bonuses include grants of Common Shares that were issued in lieu
of a cash bonus under the Stock Bonus Plan described below: for 2000 for
Messrs. Riker, Eklund and Lummis of 5,378, 4,706, and 3,361, respectively;
for 1999 for Messrs. Riker, Eklund and Lummis of 3,497, 3,916, and 2,832,
respectively; and for 1998 for Messrs. Riker, Eklund and Lummis of 2,604,
2,604 and 1,458, respectively. The 2000, the 1999 and the 1998 amounts also
include $1,349,640, $162,288, and $101,844 in respect of an Additional
Bonus and related taxes for Messrs. Stanard, Riker, and Eklund,
respectively.
42
(2) The 2000 amounts include housing expense reimbursement in the amount of
$231,018, $180,000, $180,000 and $108,000 for Messrs. Stanard, Riker,
Eklund and Lummis, respectively. The 1999 amounts include housing expense
reimbursement in the amount of $252,024, $180,000, $180,000 and $108,000
for Messrs. Stanard, Riker, Eklund and Lummis, respectively. The 1998
amounts include housing expense reimbursements in the amount of $206,505,
$120,000, $138,000, and $108,000 for Messrs. Stanard, Riker, Eklund and
Lummis, respectively.
(3) In 2000, Messrs. Stanard, Riker, Eklund and Lummis were granted 11,111,
5,722, 5,722 and 4,278 Restricted Shares, respectively, which vest ratably
over four years. In addition during 2000, Messrs. Riker, Eklund and Lummis
were granted 5,378, 4,706, and 3,361 Restricted Shares, respectively, which
related to our Stock Bonus Plan whereby certain officers and employees are
allowed to receive up to 50% of their bonus in stock which is matched with
Restricted Shares which vests over four years. Also, in 2000, Mr. Lummis
was granted 24,000 Restricted Shares which vest over a four year period. In
1999, Messrs. Stanard, Riker, Eklund and Lummis were granted 11,111, 5,665,
5,665, and 4,235 Restricted Shares, respectively, which vest ratably over
four years. In addition during 1999, Messrs. Riker, Eklund and Lummis were
granted 3,497, 3,916 and 2,832 Restricted Shares, respectively, which
related to our Stock Bonus Plan whereby certain officers and employees are
allowed to receive up to 50% of their bonus in stock which is matched with
Restricted Shares which vests over four years. Also, in 1999, Mr. Eklund
was granted 75,000 Restricted Shares in connection with an employment
agreement he entered into in July 1999. In 1998, Mr. Riker was granted
75,000 Restricted Shares in connection with an employment agreement he
entered into in February 1998. Shares received by Mr. Eklund in 1999 and by
Mr. Riker in 1998, in connection with their employment agreements, vest
ratably over five years. In addition during 1998, Messrs. Riker, Eklund and
Lummis were granted 2,604, 2,604 and 1,458 Restricted Shares, respectively,
which related to our Stock Bonus Plan. Also, in 1998, Messrs. Riker and
Eklund each received a grant of 5,722 Restricted Shares. In 1998, Mr.
Stanard entered into an amended Employment Agreement wherein 111,111
Restricted Shares which were granted to him in 1997 received accelerated
vesting and are currently fully vested. Based on the price of the Full
Voting Common Shares on March 1, 2001 of $73.28 per share, the aggregate
value of unvested Restricted Shares held by Messrs. Stanard, Riker, Eklund
and Lummis on such date was $9,160,000, $5,023,930, $6,097,043, and
$2,742,504, respectively.
(4) Represents the aggregate number of Full Voting Common Shares subject to
Options granted to the Named Executive Officers during each of 1998, 1999,
and 2000, as applicable.
(5) Represents the amounts payable to Messrs. Stanard, Riker, Eklund and Lummis
as part of the Long Term Incentive Bonus Plan, as described below.
(6) Represents the amounts contributed to the account of each Named Executive
Officer under our profit sharing retirement plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 15, 2001 with
respect to the beneficial ownership of Common Shares and the applicable voting
rights attached to such share ownership in accordance with the Bye-laws by (i)
each person known by us to own beneficially 5% or more of the outstanding Common
Shares; (ii) each director of the Company; (iii) the Company's Chief Executive
Officer and each of the three remaining most highly compensated executive
officers (collectively, the "Named Executive Officers"); and (iv) all executive
officers and directors of the Company as a group.
NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER(1) COMMON SHARES(2) VOTING RIGHTS
- -------------------------------------------- ----------------- ---------------
FMR Corp.(3)
82 Devonshire Street
43
- ---------------
*Less than 1%
(1) Pursuant to the regulations promulgated by the Securities and Exchange
Commission (the "Commission"), shares are deemed to be "beneficially owned"
by a person if such person directly or indirectly has or shares the power
to vote or dispose of such shares whether or not such person has any
pecuniary interest in such shares or the right to acquire the power to vote
or dispose of such shares within 60 days, including any right to acquire
through the exercise of any option, warrant or right.
(2) Unless otherwise noted, consists solely of Full Voting Common Shares.
(3) According to a Statement on Schedule 13G filed with the Commission on
February 14, 2001, as an investment adviser registered under Section 203 of
the Investment Advisors Act of 1940, FMR Corp. may be deemed to be the
beneficial owner of 2,002,290 Common Shares by reason of advisory and other
relationships with the persons who own such Common Shares. According to
this Schedule 13G, Edward C. Johnson 3d, Chairman of FMR Corp., and FMR
Corp., through its control of Fidelity Management Trust Company, each have
sole dispositive power over and sole power to vote or to direct the voting
of 163,300 common shares, but neither FMR Corp. nor Edward C. Johnson 3d,
has the sole power to vote or direct the voting of the shares owned
directly by the various Fidelity funds, which power resides with the Boards
of Trustees of the various funds. According to this Schedule 13G, Fidelity
carries out the voting of the shares under written guidelines established
by its funds' Boards of Trustees. Further, according to Fidelity's Schedule
13G, no one person covered by the Schedule 13G has an interest in more than
5% of the total Common Shares outstanding. Based on the information
provided in this Schedule 13G, we do not believe that FMR Corp., Edward C.
Johnson or any Fidelity fund own an amount of Common Shares exceeding the
limitations set forth in our Bye-laws.
(4) Consists of 1,448,504 Diluted Voting Shares and 323,700 Full Voting Common
Shares owned directly by Kingsway PT Limited Partnership.
(5) Includes 372,617 Common Shares issuable upon the exercise of options under
the Second Amended and Restated 1993 Stock Incentive Plan of RenaissanceRe
Holdings Ltd. (the "Incentive Plan") that are vested and presently
exercisable, and 125,000 Restricted Shares which have not vested.
44
(6) Includes 151,683 Common Shares issuable upon the exercise of options under
the Incentive Plan that are vested and presently exercisable, and 68,558
Restricted Shares which have not vested, and 1,556 shares indirectly held.
(7) Includes 135,056 Common Shares issuable upon the exercise of options under
the Incentive Plan that are vested and presently exercisable, and 83,202
Restricted Shares which have not vested.
(8) Includes 66,608 Common Shares issuable upon the exercise of options under
the Incentive Plan that are vested and presently exercisable, and 37,425
Restricted Shares which are not vested and 2,500 Common Shares indirectly
held.
(9) Includes 922 Common Shares granted in payment of directors' fees under the
Directors Plan which have not vested, and 15,333 Common Shares issuable
upon the exercise of options under the Directors Plan that are vested and
presently exercisable.
(10) Includes 922 Common Shares granted in payment of directors' fees under the
Directors Plan which have not vested, and 15,333 Common Shares issuable
upon the exercise of options under the Directors Plan that are vested and
presently exercisable.
(11) Includes 538 Common Shares granted in payment of directors' fees under the
Directors Plan which have not vested, and 4,000 Common Shares issuable upon
the exercise of options under the Directors Plan that are vested and
presently exercisable. Until October 1998, Mr. Greene served as the Deputy
Treasurer-Insurance of General Electric Company and Mr. Igou is a Vice
President-Investment Analyst for GEAM. Messrs. Greene and Igou disclaim
"beneficial ownership," within the meaning of Rule 13d-3 under the Exchange
Act, of the Common Shares owned by PT Investments.
(12) Includes 808 Common Shares granted in payment of directors' fees under the
Directors Plan which have not vested, and 6,000 Common Shares issuable upon
the exercise of options under the Directors Plan that are vested and
presently exercisable.
(13) Includes 604 Common Shares granted in payment of directors' fees under the
Directors Plan which have not vested, and 6,034 Common Shares issuable upon
the exercise of options under the Directors Plan that are vested and
presently exercisable.
(14) Includes 922 Common Shares granted in payment of directors' fees under the
Directors Plan which have not vested, and 6,333 Common Shares issuable upon
the exercise of options under the Directors Plan that are vested and
presently exercisable
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employee Credit Facility
In order to encourage employee ownership of Common Shares, we have
guaranteed certain loan and pledge agreements (collectively, the "Employee
Credit Facility") between certain employees of the Company (the "Participating
Employees") and Bank of America Illinois ("BofA"). Pursuant to the terms of the
Employee Credit Facility, BofA has agreed to loan the Participating Employees up
to an aggregate of $25 million. Each loan under the Employee Credit Facility is
required to be initially collateralized by the respective Participating Employee
with Common Shares or other collateral acceptable to BofA at a rate of 2.25
times the amount of each such loan. If the value of the collateral provided by a
Participating Employee subsequently decreases below 1.5 times the outstanding
loan amount, such Participating Employee is required to contribute additional
collateral in the amount of such deficiency. Loans under the Employee Credit
Facility are otherwise non-recourse to the Participating Employees.
45
Shareholders Agreement and Registration Rights Agreement
As of December 31, 2000, PT Investments and USF&G were parties to an
amended and restated shareholders agreement (the "Shareholders Agreement") among
themselves and us, pursuant to which we and the Investors have each agreed to
use their respective reasonable best efforts to nominate and to elect certain
designees of the Investors to the Board. This agreement automatically terminated
as to USF&G upon the completion of the sale by USF&G of all its Common Shares in
an underwritten public offering consummated on March 13, 2001.
In addition, PT Investments and USF&G were parties to an amended and
restated registration rights agreement (the "Registration Rights Agreement"),
pursuant to which they had the right to require registrations of our securities
held by them. USF&G no longer owns any common shares.
We and PT Investments intend to terminate the Shareholders Agreement
and the Registration Rights Agreement and enter into a new Investor's Rights
Agreement. Pursuant to this agreement, PT Investments would have certain
observation and information rights relating to our Board of Directors. In
addition, PT Investments would have the right to request registrations of the
Diluted Voting Common Shares held by it, subject to certain limitations. We
would be required to bear most costs of registering these securities. We do not
intend to list the Diluted Voting Shares on the NYSE. Although we and PT
Investments expect to terminate the Shareholders Agreement and the Registration
Rights Agreement and enter into this Investor's Rights Agreement, there is no
assurance that we will do so.
We have filed a Registration Statement on Form S-8 under the Securities
Act (File No. 333-06339) registering for sale an aggregate of 2,412,500 Full
Voting Common Shares issued pursuant to the Incentive Plan and the Director
Plan.
Lease Agreement
In September 1998, we entered into a twenty-one year lease (the
"Lease") with respect to a house in Paget Parish, Bermuda, occupied by William
I. Riker. The property which is subject to the Lease is owned by the Bellevue
Trust (the "Trust"). Mr. Riker is a Trustee of the Trust, and holds no direct
economic interest therein, however does hold an indirect economic interest
through a personal loan provided indirectly to the Trust. We have prepaid under
the Lease an aggregate amount of $2,063,874 to the Trust, representing the
present value of all of the twenty-one year Lease payments. If the Lease is
terminated for any reason, then we will be repaid all outstanding amounts due
under the remaining term of the Lease. We believe that the terms of the Lease,
which was determined in arm's length negotiations, represent market value terms
customary in the Bermuda residential property market.
Reinsurance Transactions with The St. Paul Companies, USF&G and GEC
We have in force several reinsurance treaties with St. Paul, USF&G,
subsidiaries of USF&G and affiliates of PT Investments covering property
catastrophe risks in several geographic zones. The terms of these treaties were
determined in arm's length negotiations and we believe that such terms are
comparable to terms we would expect to negotiate in similar transactions with
unrelated parties. For the year ended December 31, 2000, we received $14 million
in reinsurance premiums from treaties with affiliates of PT Investments, and
$0.4 million in reinsurance premiums from treaties with St. Paul, USF&G and
certain subsidiaries of USF&G.
During the year ended December 31, 2000, we received 2.4% of our premium
assumed from the reinsurance brokerage firm of Bates Turner Inc., a GE Capital
Services company and an affiliate of PT Investments ("Bates"). We paid
commissions to Bates in the aggregate amount of $0.9 million in 2000. The terms
of such commissions were determined in arm's length negotiations.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits.
46
- --------------------------------------------------------------------------------
* Incorporated by reference to the Registration Statement on Form S-1 of
the Company (Registration No. 33-70008) which was declared effective by
the Commission on July 26, 1995.
^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 16, 1996, relating to an event
which occurred on December 31, 1996.
48
^^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1997, relating to certain events
which occurred on March 7, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the
Commission on October 22, 1997.
++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, filed with the Commission on
March 21, 1997.
# Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998, filed with the Commission on
August 4, 1998.
## Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998, filed with the Commission on
May 14, 1998.
### Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on
March 31, 1999.
@ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the Commission on
March 31, 1999.
@@ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on
March 30, 2000.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Hamilton, Bermuda
on March 30, 2001.
RENAISSANCERE HOLDINGS LTD.
/s/ James N. Stanard
-------------------------------
James N. Stanard
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
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, 2000 and 1999
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young
Hamilton, Bermuda
January 26, 2001
F-2
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to the consolidated financial statements.
F-3
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to the consolidated financial statements.
F-4
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
F-5
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
F-6
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(AMOUNTS IN TABLES EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS)
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), was formed under the laws of
Bermuda on June 7, 1993 and through its subsidiaries it provides reinsurance and
insurance coverage where the risk of natural catastrophes represents a
significant component of the overall exposure.
o Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") is the
Company's principal subsidiary and provides property catastrophe
reinsurance coverage to insurers and reinsurers on a worldwide basis.
To a lesser extent, Renaissance Reinsurance also writes noncatastrophe
reinsurance in certain specialty lines.
o More recently the Company has begun to write property catastrophe
reinsurance on behalf of two joint ventures, Top Layer Reinsurance
Ltd. ("Top Layer Re") and Overseas Partners Cat Ltd. ("OPCat"). The
Company acts as exclusive underwriting manager for these joint
ventures in return for fee-based income and profit participation.
o The Company's primary operations include Glencoe Insurance Ltd.
("Glencoe"), DeSoto Insurance Company ("DeSoto"), DeSoto Prime
Insurance Company ("DeSoto Prime") and Nobel Insurance Company
("Nobel"). Glencoe provides catastrophe exposed property coverage on
an insurance and reinsurance basis and DeSoto and DeSoto Prime operate
in the U.S. homeowners market. Nobel is licensed to operate in 50
states in the U.S.
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, which 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. See Note 7. Certain comparative information has been reclassified
to conform with the current year presentation.
Use of estimates in financial statements
The preparation of financial statements in conformity with GAAP 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. The significant estimates reflected in the
Company's financial statements include, but are not limited to, the reserves for
claims and claim expenses and the related losses and premiums recoverable.
Premiums 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 based on policy and contract terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserve for unearned premiums represents 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.
F-7
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management. For retroactive reinsurance contracts, the amount by which
liabilities associated with the reinsured policies exceed the amount paid for
reinsurance coverage is deferred and amortized into income using the recovery
method.
Claims and claim expenses
The reserve for claims and claim expenses includes estimates for unpaid
claims and claim expenses on reported losses as well as an estimate of losses
incurred but not reported. The reserve is based on individual claims, case
reserves and other reserve estimates reported by insureds and ceding companies
as well as management estimates of ultimate losses. Inherent in the estimates of
ultimate losses are expected trends in claim severity and frequency and other
factors which could vary significantly as claims are settled. Accordingly,
ultimate losses may vary materially from the amounts provided in the
consolidated financial statements. These estimates are reviewed regularly and,
as experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in the
consolidated statement of income in the period in which they become known and
are accounted for as changes in estimates.
Investments and cash
Investments are considered available for sale and are reported at fair
value. The net unrealized appreciation or depreciation on investments is
included in accumulated other comprehensive income. Investment transactions are
recorded on the trade date with balances pending settlement reflected in the
balance sheet as a component of other assets or other liabilities.
Realized gains or losses on the sale of investments are determined on the
basis of the specific identification method and include adjustments to the net
realizable value of investments for declines in value that are considered to be
other-than-temporary. Net investment income includes interest and dividend
income together with amortization of market premiums and discounts and is net of
investment management and custody fees. 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 such prices are not available, by reference to broker or underwriter bid
indications.
Short term investments, which have a maturity of one year or less when
purchased, are carried at cost which approximates fair value. Cash equivalents
include money market instruments with a maturity of ninety days or less when
purchased.
Goodwill
The Company amortizes goodwill on a straight-line basis over the expected
recovery period, principally twenty years. Goodwill is periodically reviewed for
impairment and amounts deemed unrecoverable are adjusted accordingly. Goodwill
is included in other assets on the consolidated balance sheet and is expensed
through corporate expenses in the consolidated statement of income.
F-8
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per share
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.
Foreign exchange
The Company's functional currency is the United States dollar. Revenues and
expenses denominated in foreign currencies are translated at the prevailing
exchange rate at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates in effect at
the balance sheet date, which may result in the recognition of exchange gains or
losses which are included in the determination of net income.
Stock incentive compensation plans
The Company has elected to follow Accounting Principles Board ("APB")
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 Standard ("SFAS") No. 123 requires the use of option valuation models
that were not necessarily developed for use in valuing employee stock options.
It is the opinion of management that disclosure of the pro-forma impact of fair
values 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 measurement date.
Taxation
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance against the deferred tax asset is provided for if and when
the Company believes that a portion of the deferred tax asset may not be
realized in future years.
New Accounting Pronouncement
Effective January 1, 2001, the Company adopted 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. The adoption of SFAS No. 133 had no significant impact on the
Company's consolidated financial statements.
F-9
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on
fixed maturity investments are as follows:
Included in other investments are redeemable securities with a fair value
of $15.5 million and an unrealized gain of $0.5 million as of December 31, 2000.
Contractual maturities of fixed maturity securities are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
DECEMBER 31, 2000
-------------------------
AMORTIZED FAIR
COST VALUE
--------------------------
Due within one year............................. $ 28,908 $ 28,959
Due after one through five years................ 513,219 519,809
Due after five through ten years................ 204,382 201,431
Due after ten years............................. 74,590 75,189
U.S. mortgage backed securities................. 100,651 102,714
--------- ---------
$ 921,750 $ 928,102
========= =========
F-10
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
AT DECEMBER 31,
------------------------
2000 1999
------ ------
AAA............................... 69.1% 72.9%
AA................................ 9.4 5.0
A................................. 5.5 5.9
BBB............................... 5.1 4.8
BB................................ 2.9 3.7
B................................. 5.5 5.3
CCC............................... 0.3 --
CC................................ 0.1 --
NR................................ 2.1 2.4
------ ------
100.0% 100.0%
====== ======
Investment income
The components of net investment income are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- ----------- ---------
Fixed maturities................... $ 62,588 $ 52,470 $ 45,392
Short term investments............. 6,213 6,200 2,354
Cash and cash equivalents.......... 10,858 2,898 6,831
-------- -------- --------
79,659 61,568 54,577
Investment expenses................ 1,791 1,234 1,743
-------- -------- --------
Net investment income.............. $ 77,868 $ 60,334 $ 52,834
======== ======== ========
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
At December 31, 2000 and 1999 approximately $15.0 million of cash and
investments were on deposit with various regulatory authorities as required by
law.
Catastrophe linked instruments
The Company has assumed and ceded risk through catastrophe and weather
linked securities and derivative instruments under which losses or recoveries
are triggered by an industry loss index or geological or physical variables. Net
related fees and risk premiums assumed and ceded are not material to the
Company's operations. During 1999 and 1998, the Company recognized gains on
non-indemnity catastrophe index contracts of $2.5 million and $7.5 million,
respectively, which are included in other income.
F-11
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. CEDED REINSURANCE
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 claim expenses from reinsurers in excess of
various retentions and loss warranties. The Company would remain liable to the
extent that any reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $149.8 million, $128.1 million and $68.1 million
for 2000, 1999 and 1998, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance
contracts also provide for recoveries of additional premiums, reinstatement
premiums and lost no-claims bonuses which are incurred when losses are ceded to
reinsurance contracts. Total recoveries netted against premiums and claims and
claim expenses incurred were $52.0 million, $255.3 million and $110.1 million
for 2000, 1999 and 1998, respectively.
Included in losses and premiums recoverable as of December 31, 2000, are
recoverables of $23.2 million (1999 -- $37.8 million) which relate to a
retroactive reinsurance contract entered into by Nobel. This contract provides
Nobel with $38.0 million of protection from adverse development on its
pre-October 1, 1997 casualty book of business plus $40 million of capacity on
transferred reserves. SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", requires that adverse development
of the reserves covered by this contract be reflected in the Company's statement
of income when the adverse development becomes known. However, the offsetting
recovery under the contract is required to be deferred and recognized into
income as payments are received from the reinsurer. During 1998, the Company
recognized in its statement of income, $27.6 million of adverse development on
the business covered by this contract, however the offsetting recovery is
reflected on the balance sheet as a deferred gain. As payments are received from
the reinsurer, the gain is pro-rated and reflected in the statement of income as
a reduction to claims and claim expenses.
NOTE 5. RESERVE FOR CLAIMS AND CLAIM EXPENSES
For the Company's reinsurance operations, estimates of claims and claim
expenses are based in part upon the estimation of claims resulting from
catastrophic events. Estimation by the Company of claims resulting from
catastrophic events based upon its own historical claim experience is inherently
difficult because of the Company's short operating history and the potential
severity of property catastrophe claims. Therefore, the Company utilizes both
proprietary and commercially available models, as well as historical reinsurance
industry property catastrophe claims experience, for purposes of evaluating
future trends and providing an estimate of ultimate claims costs.
On both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to reasonably estimate ultimate expected
claims and claim expenses. The period of time from the reporting of a loss to
the Company and the settlement of the Company's liability may be several years.
During this period, additional facts and trends will be revealed. As these
factors become apparent, case reserves will be adjusted, sometimes requiring an
increase in the overall reserves of the Company, and at other times requiring a
reallocation of IBNR reserves to specific case reserves. These estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates.
F-12
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the liability for unpaid claims and claim expenses is
summarized as follows:
The prior year development in 2000 was due primarily to development on the
1999 losses related to the European storms. During 1999, the prior year
development was due primarily to favorable development on property catastrophe
reserves for 1998 and prior. During 1998, the prior year development was due
primarily to adverse development of Nobel's surety and casualty businesses,
partially offset by favorable development on property catastrophe reserves. The
Company's total gross reserve for incurred but not reported claims was $228.8
million as of December 31, 2000 (1999 -- $293.2 million).
NOTE 6. BANK LOANS
The Company has a revolving credit and term loan agreement with a syndicate
of commercial banks. The commitment under the revolving credit facility was
increased during the year from $300 million to $310 million. During 2000, the
Company made net repayments of $192 million on this facility and the balance
outstanding as of December 31, 2000 was $8 million (1999 - $200 million).
Interest rates on the facility are based on a spread above LIBOR and averaged
7.03 percent during 2000 (5.76 percent in 1999). The credit agreement contains
certain financial covenants including requirements that consolidated debt to
capital does not exceed a ratio of 0.35:1; consolidated net worth must exceed
the greater of $100 million or 125 percent of consolidated debt; and 80 percent
of invested assets must be rated BBB-- by S&P or Baa3 by Moody's Investor
Service or better. Under the terms of the agreement, and if the Company is in
compliance with the covenants thereunder, the Company has access to an
additional $302 million should the need arise. The Company was in compliance
with all the covenants of this revolving credit and term loan agreement as at
December 31, 2000.
Renaissance U.S. has a $27 million term loan and $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
are based on a spread above LIBOR, and averaged 6.98 percent during 2000 (5.91
percent in 1999). The credit agreement contains certain financial covenants, the
primary one being that, RenaissanceRe, being its principal guarantor, maintain a
ratio of liquid assets to debt service of 4:1. The term loan has mandatory
repayment provisions approximating $9 million per year in each of years 2001
through 2003.
During 2000, in accordance with the provisions of the term loan, the
Company repaid the first installment of $8.0 million. The Company was in
compliance with all the covenants of this term loan and revolving loan facility
as at December 31, 2000.
Interest payments on the above loans totaled $17.2 million, $8.3 million
and $4.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Fair value of bank loans approximate the carrying values, because
such loans reprice frequently.
F-13
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. CAPITAL SECURITIES
On March 7, 1997 RenaissanceRe Capital Trust (the "Trust") issued $100
million of "Company Obligated, Mandatorily Redeemable Capital Securities of a
Subsidiary Trust holding solely $103,092,783 of RenaissanceRe's 8.54 percent
Junior Subordinated Debentures due March 1, 2027" ("Capital Securities")
guaranteed by the Company. The Capital Securities pay cumulative cash
distributions at an annual rate of 8.54 percent, payable semi-annually. The
Trust is a wholly owned subsidiary of the Company and is consolidated into the
Company's consolidated financial statements. The Capital Securities and the
related dividends are reflected in the consolidated financial statements as a
minority interest.
During 2000 and 1999 the Company repurchased $2.0 million and $10.4 million
of the Capital Securities, respectively, recognizing gains of $0.5 million and
$1.8 million, respectively, which are reflected as a change in shareholders'
equity.
NOTE 8. ACQUISITION
In June 1998, the Company acquired the U.S. operating subsidiaries of Nobel
Insurance Limited, a Bermuda company ("Nobel Limited"), for $56.1 million. The
gross assets and gross liabilities purchased in the transaction were $188.1
million and $155.9 million, respectively, thereby resulting in the recognition
of $23.9 million of goodwill (subsequently written down to $14.0 million due to
the 1998 fourth quarter charge described below). The Company accounted for this
acquisition using the purchase method of accounting. The Company issued no
shares as part of the purchase.
During the fourth quarter of 1998, the Company recorded an after tax charge
of $40.1 million, consisting of $29.6 million of adverse development on Nobel's
casualty and surety books of business, a goodwill write-down of $6.6 million,
and other related costs of $3.9 million. At the end of 1998, RenaissanceRe
adopted a plan to exit each of Nobel's business units and accordingly, Nobel
completed the reinsurance of the casualty and surety books of business and its
bail and low-value dwelling books of business have been assumed by third
parties. Reflected in corporate expenses are write-offs of goodwill of $1.0
million and $6.7 million for the years ended December 31, 2000, and 1999,
respectively.
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 the disposition of the
business units.
In connection with the Nobel acquisition, Renaissance U.S. borrowed $35
million from a syndicate of banks. In addition, the banks provided a $15 million
revolving credit facility which is fully utilized. RenaissanceRe has guaranteed
these arrangements. See Note 6. Contemporaneously with the Nobel acquisition,
Nobel entered into a retroactive reinsurance contract. This contract provides
Nobel with $38 million of protection from adverse development on its pre October
1, 1997 casualty book of business. See Note 4.
NOTE 9. SHAREHOLDERS' EQUITY
On May 5, 1998, the shareholders voted to increase the authorized capital
to an aggregate of 325,000,000 shares consisting of 225,000,000 Common Shares
and 100,000,000 Preference Shares. The Company's 225,000,000 authorized Common
Shares, $1.00 par value, consist of three separate series with differing voting
rights as follows:
F-14
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("GE") exchanged 5.7
million Full Voting 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 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.
In February and May of 2000, the Board authorized share repurchase programs
of $25.0 million each. For the year ended December 31, 2000, the Company
repurchased 671,900 Full Voting Common Shares at an aggregate price of $25.1
million. During 1999 the Company repurchased a total of 2,226,700 Full Voting
Common Shares at an aggregate price of $80.1 million. During 1998, the Company
repurchased a total of 1,020,670 Full Voting Common Shares at an aggregate price
of $42.7 million. Full Voting Common Shares repurchased by the Company are
normally cancelled and retired.
During 2000, GE completed the sale of 1.0 million Diluted Voting I Shares
pursuant to an S-3 registration which were subsequently converted into Full
Voting Common Shares.
On November 17, 1999, the Company purchased and cancelled 700,000 Full
Voting Common Shares at $38.00 per share for an aggregate purchase price of
$26.6 million from one of the Company's founding institutional shareholders.
On December 1, 1999, one of the Company's founding institutional
shareholders sold 318,213 Diluted Voting II Shares into the public market where
they were subsequently converted into Full Voting Common Shares.
NOTE 10. EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share" to account for its
weighted average shares. The numerator in both the Company's basic and diluted
earnings per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares
outstanding (in thousands of per share amounts):
F-15
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
The Company has in force several treaties with subsidiaries of two of its
founding shareholders (or their successors), The St. Paul Companies and
affiliates of GE, covering property catastrophe risks in several geographic
regions. 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, 2000, 1999 and 1998, the Company received $14.3
million, $11.1 million and $13.7 million in reinsurance premiums and deposits
related to these treaties, respectively.
Other assets include the Company's investment in Top Layer Re of $21.2
million. Top Layer Re, which is 50% owned by Renaissance Reinsurance, is carried
using the equity method. The Company's earnings from Top Layer Re and the
Company's performance-based fee from OPCat totalled $9.8 million for the year
ended December 31, 2000 (1999 -- $1.9 million) and are included in other income.
During 2000, the Company also received a $1.2 million distribution from Top
Layer Re.
During the years ended December 31, 2000, 1999 and 1998, the Company
received 78.3%, 78.8%, and 64.2%, respectively, of its premium assumed from its
five largest reinsurance brokers. Subsidiaries and affiliates of Marsh Inc.,
Greig Fester, E. W. Blanch & Co., AON Re Group and Willis Faber accounted for
approximately 26.5%, 15.7%, 15.7%, 14.9% and 5.5%, respectively, of the
Company's premiums written in 2000.
NOTE 12. DIVIDENDS
During 2000, four regular quarterly dividends of $0.375 per share were paid
to shareholders of record as of February 17, May 18, August 17, and November 16.
During 1999, four regular quarterly dividends of $0.35 per share were paid to
shareholders of record as of February 18, May 28, August 19, and November 18.
During 1998, four regular quarterly dividends of $0.30 per share were paid to
shareholders of record as of February 18, May 20, August 19, and November 19.
The total amount of dividends paid to Common Shareholders during 2000, 1999 and
1998 was $29.2 million, $28.9 million and $26.7 million, respectively.
NOTE 13. TAXATION
Under current Bermuda law, the Company is not required to pay taxes in
Bermuda on either income or capital gains. Income from U.S. company operations
is subject to taxes imposed by U.S. authorities. Renaissance Reinsurance of
Europe is subject to the taxation laws of Ireland.
Income tax expense consists of:
DECEMBER 31, 2000 CURRENT DEFERRED TOTAL
----------------- --------- ---------- -------
U.S. Federal...................... $ 28 $ 4,602 $ 4,630
U.S. state and local.............. 18 -- 18
------ ------- ---------
$ 46 $ 4,602 $ 4,648
====== ======= =========
F-16
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are presented below:
At December 31, 2000, the net deferred tax asset of $18.6 million (1999 --
$23.5 million) is included in other assets on the consolidated balance sheet.
The U.S. companies have a net operating loss carryforward of $49.9 million (1999
- -- $42.8 million) which will be available to offset regular taxable U.S. income
during the carryforward period (through 2020).
During 2000, the Company recorded a valuation allowance of $8.2 million
against the net deferred tax asset. Although the net operating losses which gave
rise to a deferred tax asset have a carryforward period through 2020, the
Company's U.S. operations did not generate significant taxable income during the
years ended December 31, 2000 and 1999. Accordingly, under the circumstances,
and until the Company's U.S. operations begin to generate significant taxable
income, the Company believes that it is prudent to establish and maintain a
valuation allowance against the net deferred tax asset.
NOTE 14. GEOGRAPHIC INFORMATION
- -------------
(1) The category "Worldwide (excluding U.S.)" consists of contracts that
cover more than one geographic region (other than the U.S.). The exposure in
this category for gross premiums written to date is predominantly from Europe
and Japan.
(2) The category "Noncatastrophe reinsurance" includes coverages related to
noncatastrophe reinsurance risks. These coverages primarily include exposure to
claims from accident and health, finite, satellite, and aviation risks.
F-17
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. SEGMENT REPORTING
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 coverages written by Nobel for
commercial auto and general liability as well as surety business which provides
coverage to small and mid-size contractors. The Nobel business has been
substantially reinsured.
The activities of the Company's Bermuda and U.S. holding companies are
reflected in the other column. The pre tax loss of the holding companies
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
companies. Data for the three years ended December 31, 2000, 1999 and 1998 was
as follows:
F-18
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. STOCK INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
The Company has a stock incentive plan under which all employees of the
Company and its subsidiaries may be granted stock options and restricted stock
awards. A stock option award under the Company's stock incentive plan allows for
the purchase of the Company's Common Shares at a price that is generally equal
to the five day average closing price of the Common Shares immediately prior to
the date of grant. Options to purchase Common Shares are granted periodically by
the Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The Company adopted the disclosure-only method under SFAS No. 123,
"Accounting for Stock Based Compensation", as of December 31, 1996, and
continues to account for stock-based compensation plans under Accounting
Principles Board Opinion No. 25. In accordance with SFAS No. 123, the fair value
of option grants is estimated on the date of grant using the Black-Scholes
option pricing model for pro-forma footnote purposes with the following weighted
average assumptions used for grants in 2000, 1999 and 1998, respectively;
dividend yield of 1.9, 3.4 and 2.7 percent, expected option life of five years
for all years, and expected volatility of 28.51, 27.41 and 25.09 percent. The
risk-free interest rate was assumed to be 5.0 percent in 2000, 6.3 percent in
1999 and 5.5 percent in 1998. If the compensation cost had been determined based
upon the fair value method recommended in SFAS No. 123, the Company's net income
would have been $109.4 million, $100.9 million and $71.8 million for each of
2000, 1999 and 1998, respectively, and the Company's earnings per share on a
diluted basis would have been $5.59, $4.89 and $3.20 for each of 2000, 1999 and
1998, respectively. The following is a table of the changes in options
outstanding for 2000, 1999 and 1998, respectively:
F-19
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Company's 1993 Amended Stock Incentive Plan the total number of
shares authorized under the plan is 4,000,000 shares. The Plan also allows for
the issuance of share-based awards, the issuance of restricted Common Shares and
an adjustment in the calculation of shares available for issuance thereunder by
deeming the number of shares tendered to or withheld by the Company in
connection with certain option exercises to be so available.
The Company has also established a Non-Employee Director Stock Incentive
Plan to issue stock options and shares of restricted stock. The authorized
shares available for issuance under the Plan is 200,000 Common Shares, with
79,816 awards available for grant at December 31, 2000. In 2000, 70,000 options
to purchase Common Shares and 3,328 restricted Common Shares were granted. In
1999, 12,000 options to purchase Common Shares and 1,665 restricted Common
Shares were granted. In 1998, 6,000 options to purchase Common Shares and 939
restricted Common Shares were granted. The options and restricted Common Shares
vest ratably over three years.
The Company has also established an employee stock bonus plan. Under the
plan, eligible employees may elect to receive a grant of Common Shares of up to
50 percent of their bonus in lieu of cash, with an associated grant from the
Company of an equal number of restricted shares. The restricted Common Shares
vest ratably over a three or four year period. During the restricted period, the
employee receives dividends and votes the restricted Common Shares, but the
restricted shares may not be sold, transferred or assigned. In 2000, 1999 and
1998 the Company issued 77,342, 56,430, and 33,036 shares under this plan,
respectively, with fair values of $2.9 million, $2.0 million and $1.5 million,
respectively. Additionally, in 2000, 1999 and 1998 the Board of Directors
granted 159,537, 130,195 and 103,277 restricted shares with a fair value of $6.3
million, $4.6 million, and $4.5 million to certain employees. The shares granted
to these employees vest ratably over a four to five year period. At the time of
grant, the market value of the shares awarded under these plans is recorded as
unearned stock grant compensation and is presented as a separate component of
shareholders' equity. The unearned compensation is charged to operations over
the vesting period. Compensation expense related to these plans was $5.5
million, $3.4 million, and $2.5 million in 2000, 1999 and 1998, respectively.
F-20
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2000, the Company granted a special option grant to all of its officers
equal to three times the normal annual grant. As a result of this special grant,
it is not anticipated that annual option grants will be granted in 2001 and
2002. However, the Company may grant options and/or restricted stock in upcoming
years if it is deemed appropriate to attract or retain personnel.
All of the Company's employees are eligible for defined contribution
pension plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 17. 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, 2000 the statutory capital and surplus of the Bermuda subsidiaries
was $738.5 million and the amount required to be maintained under Bermuda law
was $135.0 million.
Under the Act, Renaissance Reinsurance is classified as a Class 4 insurer,
and is therefore restricted as to the payment of dividends in the amount of 25
percent of the prior year's statutory capital and surplus, unless at least two
members of the board of directors attest that a dividend in excess of this
amount would not cause Renaissance Reinsurance to fail to meet its relevant
margins. During 2000, Renaissance Reinsurance paid aggregate cash dividends of
$95.6 million to RenaissanceRe.
Glencoe is also eligible as an excess and surplus lines insurer in a number
of states in America. There are various capital and surplus requirements in
these states, with the most onerous requiring the Company to maintain a minimum
of $15.0 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.
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 $32.6 million at
December 31, 2000 and the amount required to be maintained was $29.9 million.
Codification of statutory accounting in the U.S. is generally effective
January 1, 2001. Codification is not expected to have a significant impact on
the statutory surplus of the Company's U.S. insurance subsidiaries.
NOTE 18. COMMITMENTS AND CONTINGENCIES
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of investments, cash and
reinsurance balances. The Company limits the amount of credit exposure to any
one financial institution and except for U.S. Government bonds, none of the
Company's investments exceeded 10 percent of shareholders' equity at December
31, 2000.
Concentrations of credit risk with respect to reinsurance balances are
limited due to their dispersion across various companies and geographies.
Financial instruments with off-balance sheet risk
The Company's investment guidelines permit, subject to specific approval,
investments in derivative instruments such as futures, options and foreign
currency forward contracts for purposes other than trading. Their use is limited
to yield enhancement, duration management, foreign currency exposure management
or to obtain an exposure to a particular financial market.
F-21
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign currency exposure management
The Company uses foreign currency forward and option contracts to minimize
the effect of fluctuating foreign currencies on the value of non-U.S. dollar
claim reserves. Contract gains and losses, realized and unrealized, are reported
in the consolidated statements of income. At December 31, 2000, no foreign
currency forward contract has a maturity of more than nine months. The table
below summarizes the notional amounts, the current fair values and the
unrealized gain of the Company's foreign currency forward contracts at December
31, 2000.
NOTIONAL
AMOUNT FAIR VALUE
----------- ------------
(IN MILLIONS OF
U.S. DOLLARS)
Forward contracts................................. $ 32.0 $ 0.8
The credit risk associated with the above derivative financial instruments
relates to the potential for non-performance by counterparties. Non-performance
is not anticipated; however, in order to minimize the risk of loss, management
monitors the creditworthiness of its counterparties. For forward contracts, the
counterparties are principally banks, which must meet certain criteria according
to the Company's investment guidelines.
Letters of credit
As of December 31, 2000 the Company's bankers have issued letters of credit
of approximately $44.9 million in favor of certain ceding companies. Also, in
connection with the Top Layer Re joint venture, the Company has committed $37.5
million of collateral in the form of a letter of credit. The letters of credit
are secured by cash and investments of similar amounts.
Employment agreements
The Board of Directors has authorized the execution of employment
agreements between the Company and certain officers. These agreements provide
for severance payments under certain circumstances, as well as accelerated
vesting of options and restricted stock grants, under a change in control, as
defined therein and by the Company's stock option plan.
Employee Credit Facility
In June of 1997, the Company executed a credit facility in order to
encourage direct, long-term ownership of the Company's stock, and to facilitate
purchases of the Company's stock by officers of the Company. Under the terms of
the facility, the purchases are financed by personal loans to the officers from
the bank. Such loans are collateralized by the stock purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. At December 31, 2000, the bank loans guaranteed by the
Company totaled $24.8 million. At December 31, 2000, the common stock that
collateralizes the loans had a fair value of $67.4 million.
Litigation
The Company is party to various lawsuits arising in the normal course of
business. The Company does not believe that any of the litigation will have a
material impact on its consolidated financial statements.
F-22
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
F-23
RENAISSANCERE HOLDINGS LTD AND SUBSIDIARIES.
INDEX TO SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors on Schedules................................S-2
I Summary of Investments other than Investments in Related
Parties at December 31, 2000.........................................S-3
II Condensed Financial Information of the Registrant....................S-4
III Supplementary Insurance Information for the years ended
December 31, 2000, 1999 and 1998.....................................S-7
IV Reinsurance for the years ended December 31, 2000, 1999 and 1998.....S-8
VI Supplementary Information Concerning Property-Casualty
Insurance Operations.................................................S-9
Schedules other than those listed above are omitted for the reason that
they are not applicable.
S-1
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
To the Board of Directors and Shareholders of RenaissanceRe Holdings Ltd.
We have audited the consolidated financial statements of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 2000 and 1999, and for each of
the three years in the period ended December 31, 2000, and have issued our
report thereon dated January 26, 2001; such financial statements and our report
thereon are included elsewhere in this Annual Report on Form 10-K. Our audits
also included the financial statement schedules listed in Item 14(a)(2) of this
Annual Report on Form 10-K for the year ended December 31, 2000. These schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young
Hamilton, Bermuda
January 26, 2001
S-2
SCHEDULE I
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(MILLIONS OF UNITED STATES DOLLARS)
S-3
SCHEDULE II
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD. BALANCE SHEETS
(PARENT COMPANY)
(THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
S-4
SCHEDULE II (CONT'D.)
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF INCOME
(PARENT COMPANY)
(THOUSANDS OF UNITED STATES DOLLARS)
S-5
SCHEDULE II (CONT'D.)
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT-(CONTINUED)
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF CASH FLOWS
(PARENT COMPANY)
(THOUSANDS OF UNITED STATES DOLLARS)
S-6
SCHEDULE III
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(THOUSANDS OF UNITED STATES DOLLARS)
YEAR ENDED DECEMBER 31, 2000
----------------------------
OTHER NET
OPERATING PREMIUMS
EXPENSES WRITTEN
Property................ $ 37,954 $293,303
=========== ==========
YEAR ENDED DECEMBER 31, 1999
----------------------------
OTHER NET
OPERATING PREMIUMS
EXPENSES WRITTEN
Property............... $ 36,768 $213,513
=========== ==========
S-7
SCHEDULE IV
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
REINSURANCE
(THOUSANDS OF UNITED STATES DOLLARS)
S-8
SCHEDULE VI
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS)
(DOLLARS IN THOUSANDS)
S-9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
EXHIBITS
TO
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2000
RenaissanceRe Holdings Ltd.
1. The Consolidated Financial Statements of the Company and related Notes
thereto are listed in the accompanying Index to Schedules to
Consolidated Financial Statements and are filed as part of this Report.
2. The Schedules to the Consolidated Financial Statements of the Company
are listed in the accompanying Index to Schedules to Consolidated
Financial Statements and are filed as part of this Report.
3. The following exhibits are included in this Report:
3.1 Memorandum of Association.*
3.2 Amended and Restated Bye-Laws.#
3.3 Memorandum of Increase in Share Capital of Company.##
4.1 Specimen Common Share certificate.*
10.1 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.2 Agreement and Plan of Recapitalization, dated as of March 26, 1995,
by and among RenaissanceRe Holdings, Ltd., Renaissance Reinsurance
Ltd. and Investors named therein.*
10.3 Fourth Amended and Restated Employment Agreement, dated as of March 13,
2001, between Renaissance Reinsurance Ltd. and James N. Stanard.
10.4 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.###
10.5 Employment Agreement, dated as of July 1, 1999, between Renaissance
Reinsurance Ltd. and David A. Eklund. @@
10.6 Employment Agreement, dated as of October 17, 1997, between Renaissance
Reinsurance Ltd. and John M. Lummis. @@
10.7 Credit Agreement, dated as of October 5, 1999, among RenaissanceRe
Holdings Ltd., various financial institutions which are, or may become,
parties thereto (the "Lenders"), Deutsche Bank AG, as LC Issuer and
Syndication Agent, Fleet National Bank, as Co-Agents, and Bank of
America, National Association, as Administrative Agent for the
Lenders.++
10.8 Accession Agreement dated as of November 8, 1999, among RenaissanceRe
Holdings Ltd. (the "Borrower"), Bank of America, National Association,
as Administrative Agent (the "Administrative Agent"), Deutsche Bank AG,
New York Branch, as LC Issuer (the "LC Issuer") and Mellon Bank, N.A.,
relating to the Credit Agreement dated as of October 5, 1999, among the
Borrower, certain financial institutions which are signatories thereto,
the LC Issuer and the Administrative Agent. @@
10.9 Equity Purchase Agreement, dated as of December 13, 1996, by and among
RenaissanceRe Holdings Ltd., Warburg, Pincus Investors, L.P., Trustees
of General Electric Pension Trust, GE Private Placement Partners I,
Limited Partnership and United States Fidelity and Guaranty Company.^
10.10 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.###
10.11 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.###
10.12 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
-2-
10.13 Amended and Restated Shareholders Agreement, dated as of March 23,
1998, by and among Warburg, Pincus Investors, L.P., Trustees of General
Electric Pension Trust, GE Private Placement Partners I, Limited
Partnership and United States Fidelity and Guaranty Company.###
10.14 Amended and Restated Registration Rights Agreement, dated as of March
23, 1998, by and among Warburg, Pincus Investors, L.P., PT Investments
Inc., GE Private Placement Partners I-Insurance, Limited Partnership
and United States Fidelity and Guaranty Company.###
10.15 Amended and Restated Declaration of Trust of RenaissanceRe Capital
Trust, dated as of March 7, 1997, among the Company, as Sponsor, The
Bank of New York, as Property Trustee, The Bank of New York (Delaware),
as Delaware Trustee, and the Administrative Trustees named therein.^^
10.16 Indenture, dated as of March 7, 1997, among the Company, as Sponsor,
and The Bank of New York, as Debenture Trustee.^^
10.17 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between the Company and The Bank of New York, as Trustee.^^
10.18 Registration Rights Agreement, dated March 7, 1997, among the Company,
the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Brothers Inc.^^
10.19 Credit Agreement between Renaissance U.S. Holdings, Inc., the Lenders
named therein, and Bank of America National Trust and Savings
Association as Administrative Agent, dated as of June 24, 1998.#
10.20 First Amendment to Credit Agreement between Renaissance U.S. Holdings
Inc. the Lenders named therein, and Bank of America National Trust and
Savings Association as Administrative Agent, dated as of December 31,
1998.@
10.21 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings,
Ltd., as Guarantor, and Bank of America National Trust & Savings
Association.#
10.22 Share Purchase Agreement, dated as of November 17, 1999, between
RenaissanceRe Holdings Ltd. And The St. Paul Companies, Inc. @@
10.23 RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
27.1 Financial Data Schedule for the Year Ended December 31, 2000.
_______________________________________________________________________________
* Incorporated by reference to the Registration Statement on Form S-1 of
the Company (Registration No. 33-70008) which was declared effective by
the Commission on July 26, 1995.
^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on December 16, 1996, relating to an event
which occurred on December 31, 1996.
^^ Incorporated by reference to the Company's Current Report on Form 8-K,
filed with the Commission on March 19, 1997, relating to certain events
which occurred on March 7, 1997.
+ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed with the
Commission on October 22, 1997.
-3-
++ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, filed with the Commission on
March 21, 1997.
# Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998, filed with the Commission on
August 14, 1998.
## Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1998, filed with the Commission on
May 14, 1998.
### Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the Commission on
March 31, 1998.
@ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on
March 31, 1999.
@@ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on
March 30, 2000.
-4-