10-K: Annual report pursuant to Section 13 and 15(d)
Published on April 1, 2002
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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, 2001 COMMISSION FILE NO. 34-0-26512
RENAISSANCERE HOLDINGS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 98-013-8020
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
RENAISSANCE HOUSE, 8-12 EAST BROADWAY, PEMBROKE HM 19 BERMUDA
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON SHARES,
PAR VALUE $1.00 PER SHARE
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 28, 2002 was $2,046,878,315 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 28, 2002 was 22,748,069.
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RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
Page
PART I
Item 1. Business..............................................................2
Item 2. Properties...........................................................32
Item 3. Legal Proceedings....................................................32
Item 4. Submission of Matters to a Vote of Security Holders..................32
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters..............................................................33
Item 6. Selected Consolidated Financial Data.................................35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................37
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...........54
Item 8. Financial Statements and Supplementary Data..........................54
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................54
PART III
Item 10. Directors and Executive Officers of RenaissanceRe...................55
Item 11. Executive Compensation..............................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management......55
Item 13. Certain Relationships and Related Transactions......................55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....55
SIGNATURES....................................................................59
(i)
PART I
Unless the context otherwise requires, references herein to
"RenaissanceRe" means RenaissanceRe Holdings Ltd. and its subsidiaries, which
principally include Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"),
Glencoe Insurance Ltd. ("Glencoe"), Renaissance Underwriting Managers Ltd.
("Renaissance Managers"), DeSoto Insurance Company ("DeSoto"), DeSoto Prime
Insurance Company ("DeSoto Prime"), Stonington Insurance Company ("Stonington"),
Renaissance Services Ltd. ("Services"), Renaissance Reinsurance of Europe
("Renaissance Europe"), Renaissance U.S. Holdings, Inc. ("Renaissance U.S."),
and Paget Insurance Agency, LLC ("Paget"). We also write property catastrophe
reinsurance on behalf of joint ventures, including Top Layer Reinsurance Ltd.
("Top Layer Re") and DaVinci Reinsurance Ltd. ("DaVinci"). Unless the context
otherwise requires, references to RenaissanceRe do not include any of the joint
ventures for which we provide underwriting services. Certain terms used below
are defined in the "Glossary of Selected Insurance Terms" appearing on pages
29-31 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 words such as "may," "should,"
"estimate," "expect," "anticipate," "intend," "believe," "predict," "potential,"
or words of similar import generally involve forward-looking statements. For
example, we have included certain forward looking statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" with
regard to trends in results, prices, volumes, operations, investment results,
margins, overall market trends, risk management and exchange rates. This Form
10-K also contains forward looking statements with respect to our business and
industry, such as those relating to our strategy and management objectives,
trends in market conditions, prices, market standing and product volumes,
investment results and pricing conditions in the reinsurance and insurance
industries.
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 natural or man-made 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
and our initiatives for organic growth, including risks
relating to managing that growth;
(5) acts of terrorism or acts of war;
(6) slower than anticipated growth in our fee-based operations;
(7) changes in economic conditions, including interest and
currency rate and other conditions which could affect our
investment portfolio;
(8) uncertainties in our reserving process;
(9) failure of our reinsurers to honor their obligations;
(10) extraordinary events affecting our clients, such as
bankruptcies and liquidations;
(11) loss of services of any one of our key executive officers;
(12) 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;
(13) challenges by insurance regulators in the United States to
Renaissance Reinsurance's claim of exemption from insurance
regulation under the current laws;
(14) a contention by the United States Internal Revenue Service
that our Bermuda subsidiaries, including Renaissance
Reinsurance, are subject to U.S. taxation; and
(15) actions of competitors, including industry consolidation the
launch, of new entrants and the development of competing
financial products.
The factors listed above should not be construed as exhaustive. Certain of these
factors are described in more detail in "Risk Factors" below. 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
RenaissanceRe provides reinsurance and insurance coverage that is
subject to the risk of natural and man-made catastrophes. We are a leader in
using sophisticated computer models to construct a superior portfolio of these
coverages.
Our principal business is property catastrophe reinsurance. Our
subsidiary, Renaissance Reinsurance, is one of the leading providers of this
coverage in the world. We provide reinsurance to insurance companies and other
reinsurers primarily on an excess of loss basis. This means that we begin paying
when our customers' claims from a catastrophe exceed a certain retained amount.
Through these coverages we are subject to claims arising from large natural
catastrophes, such as earthquakes and hurricanes, and we are also exposed to
claims arising from other natural and man-made catastrophes such as winter
storms, freezes, floods, tornadoes, fires and explosions.
We also write property catastrophe reinsurance on behalf of joint
ventures, including Top Layer Re and DaVinci. DaVinci was formed in October 2001
with other equity investors; we own a minority of DaVinci's outstanding equity
and control a majority of its voting power. DaVinci's financial results are
included in our consolidated financial statements. We formed Top Layer Re in
1999 with State Farm to provide high layer coverage for non-U.S. risks.
RenaissanceRe acts as the exclusive underwriting manager for these joint
ventures in return for management fees and a profit participation. In February
2001, we entered into reinsurance arrangements to assume the catastrophe
reinsurance we had previously written for a third joint venture, Overseas
Partners Cat Ltd. ("OP Cat"), which is a subsidiary of Overseas Partners Ltd.
In addition to catastrophe reinsurance, we also write certain specialty
lines of reinsurance including accident and health, property per risk, aviation,
catastrophe-exposed workers compensation coverages, finite and satellite. We
currently expect these lines of business to grow due in part to prevailing
attractive market conditions. We also expect to increase our primary insurance
business where we plan to focus on writing commercial property insurance on an
excess and surplus lines basis. To a lesser extent we also provide homeowners
insurance in various areas of the United States, concentrating on business
exposed to natural catastrophes.
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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, which assists us in better measuring property
catastrophe risk, pricing treaties and managing our aggregate exposure. We
believe that REMS(C) is among the most sophisticated exposure management systems
in use today in the reinsurance industry. Accordingly, we believe the
combination of our REMS(C) system and the extensive experience of our
underwriters provides us with a significant competitive advantage.
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. However, there can be no
assurance that our pursuit of such opportunities will materially impact our
financial condition and results of operations.
RECENT DEVELOPMENT
On February 15, 2002, we announced that we had entered into agreements
with Overseas Partners Ltd. to assume the catastrophe reinsurance business that
we had previously written on behalf of OP Cat, a subsidiary of Overseas Partners
Ltd., which has announced that it plans to discontinue operations. During 2001,
OP Cat wrote approximately $60 million of catastrophe reinsurance premiums.
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. Renaissance Reinsurance
has been assigned an "A+" (Superior) rating from A.M. Best, an "A+" (Strong)
rating from Standard & Poor's and an A1 rating from Moody's Investors Service.
In December 2001, A.M Best upgraded Glencoe from an "A-" (Excellent) rating to
an "A" (Excellent) rating. Top Layer Re has received claims-paying ratings of
"AAA" (Extremely Strong) from Standard & Poor's and "A++" (Superior) from A.M.
Best. DaVinci has been assigned an "A" rating from both A.M. Best and Standard &
Poor's. These ratings represent independent opinions of an insurer's financial
strength and ability to meet policyholder obligations.
A.M. Best. "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++" rating, which has been assigned by
A. M. Best to Top Layer Re, is A.M Best's highest rating designation and is
assigned to companies, which A. M. Best believes to have, on balance, superior
balance sheet strength, operating performance and business profile, and a very
strong ability to meet their ongoing obligations to policyholders.
Standard & Poor's. 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 Standard & Poor's to have strong financial
security characteristics, but to be somewhat more likely to be affected by
business conditions than are insurers with higher ratings. The "AAA" rating,
which has been assigned by Standard & Poor's to Top Layer Re, is the highest
rating assigned by Standard & Poor's, and indicates that Standard & Poor's
believes the insurer's capacity to meet its financial commitment on the
obligation is extremely strong.
Moody's Investors Service. Moody's Insurance Financial Strength Ratings
represent its opinions of the ability of insurance companies to repay punctually
senior policyholder claims and obligations. Moody's believes that insurance
companies rate A1, such as Renaissance Reinsurance, offer good financial
security. However, Moody's believes that elements may be present which suggest a
susceptibility to impairment sometime in the future.
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:
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-- 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. Our managed catastrophe joint ventures, including
Top Layer Re and DaVinci, 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 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 finite, satellite, catastrophe exposed
workers compensation coverage 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 five 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
The reinsurance and insurance industries historically have been
markedly cyclical, characterized by periods of price competition due to
excessive underwriting capacity as well as periods when shortages of
underwriting capacity have permitted favorable premium levels. In particular,
the catastrophe-exposed lines in which we specialize are affected significantly
by volatile and unpredictable developments, including natural and man made
disasters, such as hurricanes, windstorms, earthquakes, floods, fires and
explosions, and acts of terrorism, such as the September 11th tragedy. The
occurrence, or nonoccurrence, of catastrophic events, the frequency and severity
of which are inherently unpredictable, affects both industry results and
subsequent prevailing market prices of our products.
Prior to 1999, excess capacity placed competitive pressures on the
reinsurance industry. However, market participants 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. Moreover, following the significant insured losses arising from
the September 11th tragedy, which are estimated to be at least $30 billion,
coupled with the poor performance of equity markets in 2001 and other factors,
we have experienced generally improved terms and pricing for both our
reinsurance and insurance products. We also expect demand for reinsurance to
increase as primary insurers buy reinsurance to protect weakened capital
positions, react to rating agency pressures and reflect revised estimates of the
frequency and severity of man-made catastrophic events.
At the same time, however, we expect both pricing and terms to become
more severe in the retrocessional reinsurance market, which we utilized in the
past. Accordingly, the September 11th tragedy may limit the availability of
desired amounts of retrocessional reinsurance at pricing we believe to be
acceptable. We may also be affected by the formation of a number of new
companies in the reinsurance markets following the September 11th tragedy,
several of which were formed in Bermuda. In addition, a number of existing
market participants raised new capital,
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thereby strengthening their ability to compete. At this time, the effect of
these new entrants and of the additional capital placed into the market is not
precisely known.
During 1999, insured losses from natural catastrophes and man-made
disasters amounted to approximately $33 billion, reflecting nine significant
worldwide catastrophic events, including the Australian hail storms, the
Oklahoma tornados, Hurricane Floyd, Typhoon Bart, the Turkish earthquakes and
the European winter windstorms Anatol, Lothar and Martin. Six of these events
each resulted in over $1 billion of insured damages. In particular, the
increased demand for catastrophe reinsurance following the French windstorms in
1999 indicated that many insurers were inadequately reinsured prior to the
events in 1999.
Although 2000 produced significantly fewer catastrophe events than
1999, market participants reported significant price increases in catastrophe
reinsurance during 2000 and into the 2001 renewal season, which we believe was
due in large measure to the continuing effects of industry losses in 1999 and
the subsequent contraction of capacity in the market. Prior to the September
11th tragedy, the reinsurance industry had already experienced a number of large
catastrophe events in 2001, including the 6.1 magnitude earthquake in El
Salvador in February, and tropical storm Alison in the Southeast United States
in June.
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. Industry data indicates that consolidation in the
worldwide insurance industry has created a smaller group of large ceding
companies that are retaining an increasing proportion of their business.
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. Over time, these numerous
initiatives could significantly affect supply, pricing and competition in our
industry.
REINSURANCE
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.
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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,
explosions 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.
Recently, a variety of forms of terrorism exclusions have entered market
practice.
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 reinsurance protection
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.
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.
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SPECIALTY REINSURANCE
We also write other reinsurance relating to accident and health,
property per risk, satellite and finite risk coverages. In selected cases, we
also write customized financial reinsurance contracts when the expected returns
are particularly attractive. In 2001, we had approximately $77 million of
specialty reinsurance gross premium written.
We believe that our underwriting and analytic strength positions us
well to manage and grow this business. Our inception-to-date loss ratio in this
class of business is 68%, which we believe is among the best levels of
performance in our industry. Moreover, our specialty lines did not produce
significant losses from the September 11th tragedy. We pursue specialty
reinsurance on a disciplined and opportunistic basis; much of the business that
we have seen since our 1993 inception was inadequately priced, and accordingly,
we have written only $219 million of premium since that time and had not
aggressively grown this business prior to the September 11th tragedy.
In the aftermath of the September 11th tragedy, however, we believe the
reinsurance market is hardening across many lines, presenting significant
opportunities for Renaissance to move into new lines of specialty reinsurance.
We currently plan to target short tail lines, often with a low frequency, high
severity profile similar to catastrophe business, where we can rigorously
analyze the risk profile of the deal to arrive at a reasonable assessment of
expected returns and capital at risk. We plan to orient our efforts towards
complex risks, where we believe our sophisticated modeling techniques will be a
critical advantage. Specifically, we are targeting aviation, specialty property
lines, and workers compensation and personal accident business exposed to
catastrophe risks. We also seek to manage the correlations of this business with
our property catastrophe reinsurance portfolio. Our profile in personal accident
reinsurance has already grown significantly. As a result of these factors and
what we currently anticipate to be an improving pricing environment, we expect
strong growth in our specialty reinsurance operations in 2002.
STRUCTURED PRODUCTS AND JOINT VENTURES
We pursue a number of opportunities through our Structured Products
Group, which has responsibility for managing our joint venture relationships and
executing highly structured reinsurance transactions to assume or cede risk. Our
Structured Products professionals have experience across a range of disciplines,
including accounting, investment banking and law, as well as insurance and
reinsurance.
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
2001, we continued to increase our market penetration in catastrophe reinsurance
through our joint venture relationships. The amount of total managed premiums we
underwrote for our joint ventures grew to $99 million in 2001, an increase of
23% compared to 2000.
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. Currently, our principal
joint ventures are Top Layer Re and DaVinci.
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 $4.0 billion of aggregate limit. For the
year ended December 31, 2001, Top Layer Re had gross written premiums of $38.8
million.
DaVinci was established in October 2001. We are the exclusive
underwriting manager for DaVinci. DaVinci, which has approximately $500 million
in capital, was formed with other equity investors and is included in our
consolidated financial statements. We have contributed $100 million in equity
capital to DaVinci and provided DaVinci with $100 million in bridge debt
financing. We expect to replace this bridge debt with bank financing in the
second quarter of 2001. DaVinci writes global reinsurance with a focus on
property catastrophe reinsurance. DaVinci provides us with access to additional
capital to extend our market penetration. In general, we seek to
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construct for DaVinci a property catastrophe reinsurance portfolio with risk
characteristics similar to those of Renaissance Reinsurance's property
catastrophe reinsurance portfolio.
OP Cat was established by Overseas Partners Ltd. in 1999 as a
wholly-owned subsidiary to write companion lines on reinsurance contracts to
Renaissance Reinsurance. We served as the exclusive underwriting manager for OP
Cat. On February 15, 2002 we announced that we have entered into agreements with
Overseas Partners Ltd. to assume the catastrophe reinsurance premiums that we
had previously written on behalf of OP Cat. During 2001, OP Cat wrote
approximately $60 million of catastrophe reinsurance premiums.
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 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.
In addition to managing joint venture relationships, our Structured
Products Group works on a range of other highly structured transactions. For
example, we have been an active participant in the market for catastrophe-linked
securities, which are generally issued by insurers as an alternative to
purchasing reinsurance coverage against certain risks in the insurer's
underlying portfolio. With our proprietary REMS(C) system, we can more
accurately model these risks and identify which bonds have favorable expected
economic risk/return profiles. We have also created proprietary products through
which we cede participations in the performance of our catastrophe reinsurance
portfolio. While the basics of a proportionate participation in another
company's portfolio (known as a "quota share") have been a long-standing feature
of the reinsurance market, our proprietary products contain a number of
customized features designed to better fit the needs of our partners, as well as
our risk management goals.
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.
Glencoe Insurance Ltd. We principally provide primary insurance through
Glencoe, which 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
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United States on an excess and surplus lines basis in 30 states. We are in the
process of establishing Glencoe's eligibility in additional states.
Glencoe's core product is catastrophe exposed commercial insurance.
Glencoe also provides coverage for specialty risks, such as aviation insurance.
Following the September 11th tragedy, Glencoe has experienced a sharp increase
in demand of its products, coupled with a more attractive pricing environment.
As a result, we currently expect premiums written by Glencoe to grow
substantially in 2002. In part to pursue the market opportunities we perceive,
in 2001 we increased Glencoe's capital by $135 million, increased its
professional staff and received an upgraded "A" rating from A.M. Best.
Homeowners Insurance. Our focus in the homeowners insurance market
continues to be on catastrophe-exposed business, where our catastrophe risk
management skills can be leveraged. Our growth in this market has been
constrained by prevailing pricing levels that we believe to be generally below
that necessary to adequately compensate the capital put at risk. Accordingly, we
wrote only $11 million of premium in 2001, and believe premium levels will
remain modest in 2002. However, we continue to develop our infrastructure, in
part since we believe that our homeowners insurance business helps us to better
understand the needs of reinsurance clients. The homeowners unit has been
instrumental in develop a primary insurance portfolio tool, which is being used
by several reinsurance clients to optimize their portfolios.
DeSoto, Stonington and Related Entities. In September 1997, we 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 and Paget Managing Agents, Inc. ("Paget").
We also hold, through our U.S. holding company, Renaissance U.S.,
Stonington Insurance Company, a Texas-domiciled insurance company formerly known
as Nobel Insurance Company. In 1999, Stonington disposed of its principal
business lines. Stonington 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.
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.
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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
100,000 years of catastrophic event activity, including events causing in excess
of $300 billion in insured industry losses. From this 100,000 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 of 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 100,000 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 to identify contracts
that are not performing consistently with modeled expectations;
o to capture various classes of risk, including catastrophe and other
insurance risks, counterparty credit risks and investment risks;
o to assess risk across multiple entities (including our various joint
ventures) and across different components of our capital structure; 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
2001 and 2000, we increased our purchases of reinsurance because we received a
number of new opportunities to purchase reinsurance at economical rates of
return. Ceded premiums written in our reinsurance operations during 2001 were
$124.7 million, compared to $94.8 million in 2000. Additionally, in 2001 our
primary operations had ceded premiums of $37.1 million, compared to $44.8
million in 2000. 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
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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.
- ----------
(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 "Specialty reinsurance" includes coverages related to
noncatastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, property per risk,
satellite, and finite risks assumed by us.
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
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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. As our mix of business is
anticipated to change, we would expect that our reserve process and practices
would correspondingly change to a degree in the future.
We incurred claims of $149.9 million, $108.6 million, and $77.1 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Our claim
reserves were $572.9 million, $403.6 million and $478.6 million at December 31,
2001, 2000 and 1999, respectively.
INVESTMENTS
At December 31, 2001, we held cash and investments totaling $2,194.4
million, compared to $1,074.9 million in 2000, with net unrealized appreciation
of $16.3 million, compared to $6.8 million in 2000. 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.
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, 2001 resulted primarily from net cash provided by operating
activities of $326.5 million, $232 million raised from the issuance of 2.5
million common shares, $145 million raised from the issuance of 6 million Series
A preference shares, $149 million raised from the issuance of 7% senior notes
and $275 million of third party investment in our most recent joint venture,
DaVinci. At year end we had an unusually large allocation to cash, which
resulted from our decision to delay investing the proceeds of these capital
transactions until we perceived more favorable market conditions; in
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the short term we expect this large cash allocation to depress our investment
returns. Over time, we expect our cash position to return to historical levels.
Our current investment guidelines call for our 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, 2001, our invested
asset portfolio had a dollar weighted average rating of AA, an average duration
of 1.9 years and an average yield to maturity of 3.8% 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. Issued letters of credit are secured by a lien on a portion
of our investment portfolio. At December 31, 2001, we had outstanding letters of
credit aggregating $125.8 million. Also, in connection with our Top Layer Re
joint venture, 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 like portion of our
investments.
Catastrophe Linked Instruments. We have assumed risk through
catastrophe and derivative instruments under which losses could be triggered by
the occurrence of losses above an industry loss index or the occurrence of
various geological or physical variables. To date we have not experienced any
losses from such securities or derivatives. We cannot provide any assurances
that this positive performance will continue.
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 1.9%, which equates to a
decrease in market value of approximately $41.0 million on a portfolio valued at
$2,156.1 million at December 31, 2001. 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.
The following table summarizes the fair value of our investments and
cash and cash equivalents at the dates indicated.
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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 2.75 to 3.0 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. 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.
Alternative Assets. Subsequent to December 31, 2001, we determined to
modestly expand our allocation to alternative assets. To assist us in this
regard, we have engaged Cambridge Associates LLC to advise us in structuring our
investments in hedge funds and private equity funds. To the extent we complete
these investments, we would expect our investment results to differ in the
future, although we do not anticipate that this expanded allocation to
alternative assets will materially impact our financial results.
COMPETITION
With total managed catastrophe premiums written of $441.8 million for
the year ended December 31, 2001, we are one of the largest providers of
property catastrophe reinsurance in the world. We have an estimated market share
of approximately 10% of the property catastrophe reinsurance business, based on
managed gross premiums written.
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Our principal competition in the industry comes from major U.S. and
non-U.S. insurers and property catastrophe reinsurers, including other
Bermuda-based property catastrophe reinsurers. 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 us. Primary
insurers compete on the basis of factors including selling effort, product,
price, service, financial strength and reputation.
Following the September 11th tragedy, a number of new companies were
formed to compete in the reinsurance markets. A number of these new companies
were formed in Bermuda. In addition, a number of existing market participants
raised new capital, thereby strengthening their ability to compete. At this
time, the effect of these new entrants and of the additional capital placed into
the market is not precisely known.
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 and affiliates of the Benfield Group PLC,
Marsh Inc., Willis Faber and AON Re Group accounted for approximately 28.0%,
23.0%, 14.0%, and 11.9%, respectively, of our gross premiums written in 2001.
15
During 2001, Renaissance Reinsurance issued authorization for coverage
on programs submitted by 30 brokers worldwide. We received approximately 1,812
program submissions during 2001. Of these submissions, we issued authorizations
for coverage in 2001 for only 403 programs, or 22.2% 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, 2001, we and our subsidiaries employed 113 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 March 28, 2002 our directors
and executive officers beneficially owned 7.3% of our outstanding common shares.
Many Bermuda-based employees of RenaissanceRe, Renaissance Reinsurance
and Glencoe, 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,
DaVinci 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 DaVinci are registered as
Class 4 insurers, and Glencoe is registered as a Class 3 insurer under the
Insurance Act. 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.
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
16
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
17
certificate; the 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,
DaVinci 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.
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United States and Other. Neither Renaissance Reinsurance nor DaVinci is
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 or DaVinci, 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. Neither Renaissance Reinsurance nor
DaVinci 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 each company be so admitted.
Glencoe is eligible to write excess and surplus lines primary insurance
in 30 states and is subject to the regulation and reporting requirements of
these states. We are currently seeking to obtain this eligibility for Glencoe in
additional 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 Stonington 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 2002 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, Stonington'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.
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In addition, as a result of our ownership of DeSoto and Stonington,
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.
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
Renaissance Reinsurance and DaVinci, 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 and DaVinci generally post
letters of credit or provide other forms of security after a claim is reported
to comply with U.S. reinsurance credit requirements.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999
("GLBA"), which implements fundamental changes in the regulation of the
financial services industry in the United States, was enacted on November 12,
1999. The GLBA permits the transformation of the already converging banking,
insurance and securities industries by permitting 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 financial holding companies may engage in
activities, and acquire companies engaged in activities that are "financial" in
nature or "incidental" or "complementary" to such financial activities. Such
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.
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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
affect our U.S. subsidiaries' product lines by substantially increasing the
number, size and financial strength of potential competitors.
The tightening in supply of certain coverages arising out of the
September 11th tragedy may result in government intervention in the insurance
and reinsurance markets, both in the U.S. and worldwide. Federal and state
legislators have considered possible government initiatives affecting coverage
for acts of terrorism. While we cannot predict the exact nature, timing, or
scope of such proposals, if adopted they could adversely affect our business
by:
o providing government supported insurance and reinsurance
capacity in markets and to consumers that we target;
o requiring our participation in pools and guaranty
associations;
o regulating the terms of insurance and reinsurance
policies; or
o disproportionately benefiting the companies of one
country over those of another.
In addition, 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 we, Renaissance Reinsurance or Glencoe will become subject to
U.S. regulation.
SEGMENT INFORMATION
Certain information regarding our segments of operations are contained
in Note 14 to our Consolidated Financial Statements provided in Item 14(a) of
this Form 10-K.
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.
RISK FACTORS
Factors that could cause our actual results to differ materially from
those in the forward looking statements contained in this Form 10-K and other
documents we file with the Securities and Exchange Commission include the
following:
Because of our exposure to catastrophic events, our financial results
may vary significantly from one period to the next.
Our principal product is property catastrophe reinsurance. We also sell
primary insurance that is exposed to catastrophe risk. We therefore have a large
overall exposure to natural and man-made disasters. Our property catastrophe
reinsurance contracts cover unpredictable events such as earthquakes,
hurricanes, winter storms, freezes,
21
floods, fires, tornados and other man-made or natural disasters. As a result,
our operating results have historically been, and we expect will continue to be,
largely affected by relatively few events of high magnitude. Under the
reinsurance policies that we write, we generally do not experience significant
claims until insured industry losses reach or exceed at least several hundred
million dollars.
Claims from catastrophic events could cause substantial volatility in
our financial results for any fiscal quarter or year and adversely affect our
financial condition or results of operations. Our ability to write new business
could also be impacted. We believe that increases in the value and geographic
concentration of insured property and the effects of inflation will increase the
severity of claims from catastrophic events in the future.
If actual claims exceed our claim reserves, our financial results could
be adversely affected.
Claim reserves are estimates made using actuarial and statistical
projections at a given point in time of our expectations of the ultimate
settlement and administration costs of claims incurred. We utilize actuarial and
computer models as well as historical reinsurance and insurance industry loss
statistics to assist in the establishment of appropriate claim reserves.
Nevertheless, actual claims and claim expenses paid might exceed the reserve
estimates reflected in our financial statements. If this were to occur, we would
be required to increase claim reserves. This would reduce our net income by a
corresponding amount in the period in which the deficiency is identified.
Terrorist attacks and national security threats could result in the
payment of material reinsurance or insurance claims and may have an enduring
negative impact on our business.
We believe that the September 11th tragedy represents the largest loss
event in the insurance industry's history. We cannot assess the long-term
effects of terrorist attacks and continuing threats to national security on our
businesses at this time. The September 11th tragedy, threats of further
terrorist attacks and the military initiatives and political unrest in
Afghanistan and the surrounding region have significantly adversely affected
general economic, market and political conditions, increasing many of the risks
in our businesses. This may have an enduring or increasingly adverse effect on
our businesses, financial condition and results of operations. Over time the
rating agencies could reexamine the ratings affecting our industry generally,
including us.
Reinsurance prices may decline, which could affect our profitability.
Demand for reinsurance depends on numerous factors, including the
frequency and severity of catastrophic events, levels of capacity, general
economic conditions and underwriting results of primary property insurers. The
supply of reinsurance is related to prevailing prices, recent loss experience
and levels of surplus capacity. All of these factors fluctuate and may
contribute to price declines generally in the reinsurance industry. Our recent,
and anticipated, growth relates in part to improved industry pricing. Premium
rates or other terms and conditions of trade may vary in the future. If any of
these factors were to cause the demand for reinsurance to fall or the supply to
rise, our profitability could be adversely affected.
We operate in a highly competitive environment.
The property catastrophe reinsurance industry is highly competitive. We
compete, and will continue to compete, with major U.S. and non-U.S. insurers and
property catastrophe reinsurers, including other Bermuda-based property
catastrophe reinsurers. Following the September 11th tragedy, a number of new
companies were formed to compete in the reinsurance markets. A number of these
new companies were formed in Bermuda. In addition, a number of existing market
participants raised new capital, thereby strengthening their ability to compete.
At this time, the effect of these new entrants and of the additional capital
placed into the market is not precisely known.
We believe that our principal competitors in the property catastrophe
reinsurance market include other companies active in the Bermuda Market,
including Ace Ltd., Partner Re and XL Capital Ltd. We also compete with certain
Lloyd's syndicates active in the London Market. We also compete with a number of
other industry participants, such as Berkshire Hathaway, Munich Re and Swiss Re.
As our business evolves over time we expect our competitors to change as well.
22
Many of our competitors have greater financial, marketing and
management resources than we do. In addition, we may not be aware of other
companies that may be planning to enter the property catastrophe reinsurance
market or of existing companies which may be planning to raise additional
capital. We also have recently seen the creation of alternative products from
capital market participants that are intended to compete with reinsurance
products and which could impact the demand for traditional catastrophe
reinsurance. We cannot predict what effect any of these developments may have on
our businesses.
Competition in the types of reinsurance that we underwrite is based on
many factors, including premium rates and other terms and conditions offered,
services provided, speed of claims payment, ratings assigned by independent
rating agencies, the perceived financial strength and the experience of the
reinsurer in the line of reinsurance to be written. Ultimately, increasing
competition could affect our ability to attract business on terms having the
potential to yield an attractive return on equity.
The primary insurance business is also highly competitive. Primary
insurers compete on the basis of factors including selling effort, product,
price, service and financial strength. We seek primary insurance pricing that
will result in adequate returns on the capital allocated to our primary
insurance business. We may lose primary insurance business to competitors
offering competitive insurance products at lower prices.
A decline in the ratings assigned to our claims-paying ability may
impact our potential to write new business.
Third party rating agencies assess and rate the claims-paying ability
of reinsurers and insurers, such as Renaissance Reinsurance, Glencoe, Top Layer
Reinsurance Ltd. and DaVinci Reinsurance Ltd. These ratings are based upon
criteria established by the rating agencies. Periodically the rating agencies
evaluate us to confirm that we continue to meet the criteria of the ratings
previously assigned to us. The claims-paying ability ratings assigned by rating
agencies to reinsurance or insurance companies are based upon factors relevant
to policyholders and are not directed toward the protection of investors.
Ratings by rating agencies are not ratings of securities or recommendations to
buy, hold, or sell any security.
Renaissance Reinsurance is rated "A+" by A.M. Best, "A+" by Standard &
Poor's and "A1" by Moody's Investors Services. Top Layer Re is rated "AAA" by
Standard & Poor's and "A++" by A.M. Best. Glencoe is rated "A" by A.M. Best.
DaVinci is rated "A" by each of A.M. Best and Standard & Poor's. These rating
agencies may downgrade or withdraw their claims-paying ability ratings in the
future if we do not continue to meet the criteria of the ratings previously
assigned to us. The ability of Renaissance Reinsurance, Top Layer Re, Glencoe,
DaVinci and our other rated insurance subsidiaries to compete with other
reinsurers and insurers, and our results of operations, could be materially
adversely affected by any such ratings downgrade.
Recent events may result in political, regulatory and industry
initiatives which could adversely affect our business.
Changes in the marketplace, including the tightening in supply of
certain coverages arising out of the September 11th tragedy, may result in
government intervention in the insurance and reinsurance markets, both in the
United States and worldwide. Recently, the insurance and reinsurance regulatory
framework has been subject to increased scrutiny by the United States and
individual state governments. Government regulators are generally concerned with
the protection of policyholders to the exclusion of other constituencies,
including shareholders. While we cannot predict the exact nature, timing or
scope of possible governmental initiatives, such proposals could adversely
affect our business by:
o providing insurance and reinsurance capacity in markets and
to consumers that we target;
o requiring our participation in industry pools and guaranty
associations;
o regulating the terms of insurance and reinsurance policies;
or
o disproportionately benefiting the companies of one country
over those of another.
23
The insurance industry is also affected by political, judicial and
legal developments that may create new and expanded theories of liability. Such
changes may result in delays or cancellations of products and services by
insurers and reinsurers which could adversely affect our business. The
Gramm-Leach-Bliley Act of 1999 permits the transformation of the
already converging banking, insurance and securities industries by permitting
mergers that combine commercial banks, insurers and securities firms under one
holding company, a "financial holding company." The ability of banks to
affiliate with insurers may affect our U.S. subsidiaries' product lines by
substantially increasing the number, size and financial strength of potential
competitors.
We may be adversely affected by interest rate changes.
Our operating results depend in part on the performance of our
investment portfolio. Our investment portfolio contains interest sensitive
instruments, such as bonds and mortgage-backed securities, which may be
adversely affected by changes in interest rates.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. Any measures we take
that are intended to manage the risks of operating in a changing interest rate
environment may not effectively mitigate such interest rate sensitivity.
U.S. taxing authorities could contend that our Bermuda subsidiaries are
subject to U.S. corporate income tax.
If the United States Internal Revenue Service were to contend
successfully that Renaissance Reinsurance, DaVinci or Glencoe, is engaged in a
trade or business in the United States, Renaissance Reinsurance, DaVinci or
Glencoe would, to the extent not exempted from tax by the United States-Bermuda
income tax treaty, be subject to U.S. corporate income tax on that portion of
its net income treated as effectively connected with a U.S. trade or business,
as well as the U.S. corporate branch profits tax. Such tax could materially
adversely affect our results of operations.
In addition, benefits of the United States-Bermuda income tax treaty
which may limit any such tax to income attributable to a permanent establishment
maintained by Renaissance Reinsurance, DaVinci or Glencoe in the United States
are only available to Renaissance Reinsurance, DaVinci and Glencoe if more than
50% of their shares are beneficially owned, directly or indirectly, by
individuals who are Bermuda residents or U.S. citizens or residents. Renaissance
Reinsurance, DaVinci or Glencoe may not be able to continually satisfy such
beneficial ownership test or be able to establish its satisfaction to the IRS.
Finally, it should be noted that it is unclear whether the income tax treaty
(assuming satisfaction of the beneficial ownership test) applies to income other
than premium income, such as investment income.
Because we depend on a few reinsurance brokers for a large portion of
revenue, loss of business provided by them could adversely affect us.
We market our reinsurance products worldwide exclusively through
reinsurance brokers. Four (in prior years five) brokerage firms accounted for
79.9%, 78.3%, and 78.8% of our net premiums written for the years ended December
31, 2001, 2000, and 1999, respectively. Subsidiaries and affiliates of the
Benfield Group PLC, Marsh Inc., Willis Faber and AON Re Group accounted for
approximately 28.0%, 23.0%, 14.0%, and 11.9%, respectively, of our premiums
written in 2001. Loss of all or a substantial portion of the business provided
by these brokers could have a material adverse effect on us.
Our reliance on reinsurance brokers exposes us to their credit risk.
In accordance with industry practice, we frequently pay amounts owed on
claims under our policies to reinsurance brokers, and these brokers, in turn,
pay these amounts over to the insurers that have reinsured a portion of their
liabilities with us (we refer to these insurers as ceding insurers). In some
jurisdictions, if a broker failed to make such a payment, we might remain liable
to the ceding insurer for the deficiency. Conversely, in certain jurisdictions,
when the ceding insurer pays premiums for these policies to reinsurance brokers
for payment over to
24
us, these premiums are considered to have been paid and the ceding insurer will
no longer be liable to us for those amounts, whether or not we have actually
received the premiums. Consequently, in connection with the settlement of
reinsurance balances, we assume a degree of credit risk associated with brokers
around the world.
The covenants in our debt agreements limit our financial and
operational flexibility, which could have an adverse effect on our financial
condition.
We have incurred indebtedness, and may incur additional indebtedness in
the future. At March 29, 2002, we had $33.5 million of bank loans outstanding.
In addition, we also had $84.6 million of outstanding junior subordinated
debentures relating to an issuance of trust preferred securities by our
subsidiary RenaissanceRe Capital Trust I. Our insurance and reinsurance
subsidiaries also maintain uncommitted letter of credit facilities.
The agreements covering our indebtedness, and particularly our bank
loans, contain numerous covenants that limit our ability, among other things, to
borrow money, make particular types of investments or other restricted payments,
sell assets, merge or consolidate. These agreements also require us to maintain
specified financial ratios. If we fail to comply with these covenants or meet
these financial ratios, the lenders under our credit facility could declare a
default and demand immediate repayment of all amounts owed to them.
In addition, if we are in default under our indebtedness or if we have
given notice of our intention to defer our related payment obligations, the
terms of our indebtedness would restrict our ability to:
o declare or pay any dividends on our capital shares,
o redeem, purchase or acquire any capital shares, or
o make a liquidation payment with respect to our capital shares.
Because we are a holding company, we are dependent on dividends and
payments from our subsidiaries.
As a holding company with no direct operations, we rely on investment
income, cash dividends and other permitted payments from our subsidiaries to
make principal and interest payments on our debt and to pay dividends to our
shareholders. If our subsidiaries are restricted from paying dividends to us, we
may be unable to pay dividends or to repay our indebtedness.
Bermuda law and regulations require our subsidiaries which are
registered in Bermuda as insurers to maintain a minimum solvency margin and
minimum liquidity ratio, and prohibit dividends that would result in a breach of
these requirements. Further, Renaissance Reinsurance and DaVinci, as Class 4
insurers in Bermuda, may not pay dividends which would exceed 25% of their
respective capital and surplus, unless they first make filings confirming that
they meet the required margins.
Generally, our U.S. insurance subsidiaries may only pay dividends out
of earned surplus. Further, 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.
We may be adversely affected if we do not manage our growth
effectively.
Our business has expanded rapidly in the past several years[, and we
project that we will grow rapidly in 2002]. Expansion places increased stress on
our financial, managerial and human resources. Further our growth in new or
expanded lines, such as specialty reinsurance and primary insurance, could
detract from our core property catastrophe reinsurance business and may divert
management attention away from our core operations. Our future profitability
will depend in part upon our ability to further develop our resources and
effectively manage this expansion. We may need to attract additional
professionals to, or expand our facilities in, Bermuda, a small jurisdiction
with limited resources. To the extent we are unable to so attract additional
professionals, our financial, managerial and human resources will be further
strained.
25
Historically, our principal product has been property catastrophe
reinsurance. The anticipated growth of our specialty reinsurance and primary
insurance businesses will present us with new, or expanded, challenges and
risks. We may not manage these challenges and risks successfully. Even if we
operate these new or expanded businesses successfully, our loss results in these
businesses may differ from our historical results in property catastrophe
reinsurance, which is generally characterized by loss events of high severity
but low frequency. As a result our financial results may be affected, perhaps
adversely.
The loss of one or more key executive officers could adversely affect
us.
Our success has depended, and will continue to depend, in substantial
part upon our ability to attract and retain our executive officers. If we were
to lose the services of members of our senior management team, our business
could be adversely affected.
Our ability to execute our business strategy is dependent on our
ability to attract and retain a staff of qualified underwriters and service
personnel. We do not currently maintain key man life insurance policies with
respect to any of our employees.
If we are unable to obtain extensions of work permits for our
employees, our business will be adversely affected.
Under Bermuda law, non-Bermudians may not engage in any gainful
occupation in Bermuda without the specific permission of the appropriate
government authority. The Bermuda government will issue a work permit for a
specific period of time, which may be extended upon showing that, after proper
public advertisement, no Bermudian (or spouse of a Bermudian) is available who
meets the minimum standards for the advertised position. Substantially all of
our officers are working in Bermuda under work permits that will expire over the
next three years. The Bermuda government could refuse to extend these work
permits. If any of our senior executive officers were not permitted to remain in
Bermuda, our operations could be disrupted and our financial performance could
be adversely affected as a result.
Regulatory challenges in the United States or elsewhere could result in
restrictions on our ability to operate.
Neither Renaissance Reinsurance nor DaVinci is licensed or admitted to
do business in any jurisdiction except Bermuda. Renaissance Reinsurance and
DaVinci conduct business from their principal offices in Bermuda and do not
maintain an office in the United States. Recently, the insurance and reinsurance
regulatory framework has been subject to increased scrutiny in many
jurisdictions, including the United States and various states in the United
States. If Renaissance Reinsurance or DaVinci become subject to the insurance
laws of any state in the United States, we could face inquiries or challenges to
the future operations of these companies.
Glencoe is an eligible, non-admitted excess and surplus lines insurer
in 30 states of the United States and is subject to certain regulatory and
reporting requirements of these states. We are in the process of applying for
licenses in additional states. Any failure by Glencoe to obtain these licenses
could impede its anticipated growth.
Our growth plans could cause one or more of our subsidiaries to become
subject to additional regulation in more numerous jurisdictions. If Renaissance
Reinsurance, DaVinci or Glencoe or any of our subsidiaries were to become
subject to the laws of a new jurisdiction where that subsidiary is not presently
admitted, they may not be in compliance with the laws of the new jurisdiction.
Any failure to comply with applicable laws could result in the imposition of
significant restrictions on our ability to do business, and could also result in
fines and other sanctions, any or all of which could adversely affect our
financial results and operations.
We also own four subsidiaries which write insurance in the United
States. These subsidiaries are subject to extensive regulation under state
statutes which delegate regulatory, supervisory and administrative powers to
state insurance commissioners. Such regulation generally is designed to protect
policyholders rather than investors, and relates to such matters as rate
setting; limitations on dividends and transactions with affiliates; solvency
standards which must be met and maintained; the licensing of insurers and their
agents; the examination of the affairs of
26
insurance companies, which includes periodic market conduct examinations by the
regulatory authorities; annual and other reports, prepared on a statutory
accounting basis; establishment and maintenance of reserves for unearned
premiums and losses; and requirements regarding numerous other matters. We could
be required to allocate considerable time and resources to comply with these
requirements, and could be adversely affected if a regulatory authority believed
we had failed to comply with applicable law or regulation.
Renaissance Reinsurance and DaVinci are not licensed or admitted in the
United States.
Renaissance Reinsurance and DaVinci are registered Bermuda insurance
companies and are not licensed or admitted as insurers in any jurisdiction in
the United States. Because jurisdictions in the United States do not permit
insurance companies to take credit for reinsurance obtained from unlicensed or
non-admitted insurers on their statutory financial statements unless security is
posted, Renaissance Reinsurance's and DaVinci's contracts generally require that
they post a letter of credit or provide other security after a reinsured reports
a claim. In order to post these letters of credit, issuing banks generally
require collateral. The non-admitted status of Renaissance Reinsurance and
DaVinci could put us at a competitive disadvantage in the future with respect to
other reinsurers that are licensed and admitted in U.S. jurisdictions.
Retrocessional reinsurance may become unavailable on acceptable terms.
In order to limit the effect of large and multiple losses upon our
financial condition, we buy reinsurance for our own account. This type of
insurance is known as "retrocessional reinsurance." Our primary insurance
companies also buy reinsurance from third parties. A reinsurer's insolvency or
inability to make payments under the terms of its reinsurance treaty with us
could have a material adverse effect on us.
From time to time, market conditions have limited, and in some cases
have prevented, insurers and reinsurers from obtaining the types and amounts of
reinsurance, which they consider adequate for their business needs. Following
the September 11th tragedy, terms and conditions in the retrocessional market
generally became less attractive. Accordingly, we may not be able to obtain our
desired amounts of retrocessional reinsurance. In addition, even if we are able
to obtain such retrocessional reinsurance, we may not be able to negotiate terms
as favorable to us as in prior years.
We may be adversely affected by foreign currency fluctuations.
Our functional currency is the U.S. dollar. A portion of our premium is
written in currencies other than the U.S. dollar and a portion of our loss
reserves are also in non-dollar currencies. Moreover, we maintain a portion of
our cash equivalent investments in currencies other than the U.S. dollar. We
may, from time to time, experience losses resulting from fluctuations in the
values of these foreign currencies, which could adversely affect our operating
results.
Some aspects of our corporate structure may discourage third party
takeovers and other transactions and may make it more difficult to remove
members of our senior management team.
Some provisions of our Memorandum of Association and of our Amended and
Restated Bye-Laws have the effect of making more difficult or discouraging
unsolicited takeover bids from third parties. In particular, our Bye-Laws
prohibit transfers of our capital shares if the transfer would result in a
person owning or controlling shares that constitute 9.9% or more of any class or
series of our shares. The primary purpose of this restriction is to reduce the
likelihood that we will be deemed a "controlled foreign corporation" within the
meaning of the Internal Revenue Code for U.S. federal tax purposes. However,
this limit may also have the effect of deterring purchases of large blocks of
common shares or proposals to acquire us, even if some or a majority of our
shareholders might deem these purchases or acquisition proposals to be in their
best interests.
In addition, our Bye-Laws provide for:
o a classified Board, whose size is fixed and whose members may be
removed by the shareholders only for cause upon a 66 2/3% vote;
27
o restrictions on the ability of shareholders to nominate persons to
serve as directors, submit resolutions to a shareholder vote and requisition
special general meetings;
o a large number of authorized but unissued shares which may be issued
by the Board without further shareholder action; and
o a 66 2/3% shareholder vote to amend, repeal or adopt any provision
inconsistent with several provisions of the Bye-Laws.
These Bye-Law provisions make it more difficult to acquire control of
us by means of a tender offer, open market purchase, a proxy fight or otherwise.
These provisions are designed to encourage persons seeking to acquire control of
us to negotiate with our directors, which we believe would generally best serve
the interests of our shareholders. However, these provisions could have the
effect of discouraging a prospective acquirer from making a tender offer or
otherwise attempting to obtain control of us. To the extent these provisions
discourage takeover attempts, they could deprive shareholders of opportunities
to realize takeover premiums for their shares or could depress the market price
of the shares.
In addition, the removal of members of our senior management team
typically requires the approval of the Board. Accordingly, to the extent these
Bye-Law provisions make it more difficult to replace directors, these provisions
also make it more difficult to remove members of our senior management teams
without the support of the current Board. This could result in management
becoming entrenched despite a lack of support from the shareholders.
We indirectly own DeSoto, DeSoto Prime, and Stonington. Our ownership
of U.S. insurance companies such as these can, under applicable state insurance
company laws and regulations, delay or impede a change of control of
RenaissanceRe. Under applicable Florida and Texas insurance regulations, any
proposed purchase of 10% or more of our voting securities would require the
prior approval of the Florida and Texas insurance regulatory authorities.
Investors may have difficulties in serving process or enforcing
judgments against us in the United States.
We are a Bermuda company. In addition, certain of our officers and
directors reside in countries outside the United States. All or a substantial
portion of our assets and the assets of these officers and directors are or may
be located outside the United States. Investors may have difficulty effecting
service of process within the United States on our directors and officers who
reside outside the United States or to recover against us or these directors and
officers on judgments of United States courts based on civil liabilities
provisions of the United States federal securities laws whether or not we
appoint an agent in the United States to receive service of process.
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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 A form of excess of loss reinsurance that, subject to a
of loss reinsurance 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; When a party reinsures its liability with another, it
ceding company "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 and surplus Any type of coverage that cannot be placed with an
lines reinsurance insurer admitted to do business in a certain
jurisdiction. Risks placed in excess and surplus lines
markets are often substandard as respects adverse loss
experience, unusual, or unable to be placed in
conventional markets due to a shortage of capacity.
Excess of loss A generic term describing reinsurance that indemnifies
reinsurance 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 as set forth in opinions of the
accounting principles Accounting Principles Board of the American Institute of
Certified Public Accountants and/or statements of the
Financial Accounting Standards
29
Board and/or their respective successors and which are
applicable in the circumstances as of the date in
question.
Incurred but not Reserves for estimated losses that have been incurred by
reported ("IBNR") insureds and reinsureds but not yet reported to the
insurer or reinsurer including unknown future
developments on losses which are known to the insurer or
reinsurer.
Layer The interval between the retention or attachment point
and the maximum limit of indemnity for which a reinsurer
is responsible.
Net premiums written Gross premiums written for a given period less premiums
ceded to reinsurers and retrocessionaires during such
period.
Proportional A generic term describing all forms of reinsurance in
reinsurance 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 A transaction whereby a reinsurer cedes to another
reinsurance; reinsurer, the retrocessionaire, all or part of the
retrocessionaire 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
30
catastrophic losses, to stabilize financial ratios and
to obtain additional underwriting capacity.
Risk excess of loss
reinsurance A form of excess of loss reinsurance that covers a loss
of the reinsured on a single "risk" in excess of its
retention level of the type reinsured, rather than to
aggregate losses for all covered risks, as does
catastrophe excess of loss reinsurance. A "risk" in this
context might mean the insurance coverage on one
building or a group of buildings or the insurance
coverage under a single policy, which the reinsured
treats as a single risk.
Statutory accounting Recording transactions and preparing financial
principles ("SAP") 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 The total catastrophe reinsurance premiums written on a
Premium gross basis by our managed catastrophe 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.
31
ITEM 2. PROPERTIES
We lease office space in Bermuda, where our executive offices are
located. In addition, Stonington leases office space in Dallas, Texas, and our
other U.S. based subsidiaries lease space in Richmond, Virginia and in Tampa Bay
and Tallahassee, Florida. We believe our facilities are adequate for our current
and anticipated needs.
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 we are 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 RenaissanceRe's shareholders
during the fourth quarter of 2001.
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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.
On March 28, 2002 the last reported sale price for our common shares
was $103.00 per share. At March 28, 2002 there were approximately 110 holders of
record of our common shares and approximately 12,000 beneficial holders.
DIVIDEND POLICY
Historically, we have paid quarterly dividends on our common shares
every quarter, and have increased our dividend during each of the seven years
since our initial public offering. The Board of Directors of RenaissanceRe
declared regular quarterly dividends of $0.40 per share on May 4, 2001, July 31,
2001 and November 8, 2001. Most recently, our Board declared a dividend of
$0.425 per share payable on March 5, 2002 to shareholders of record at February
19, 2002. 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 and
DaVinci, as Class 4 insurers in Bermuda, may not pay dividends which would
exceed 25% of their respective capital and surplus, unless they first make
filings confirming that they meet the required margins.
33
Generally, our U.S. insurance 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.
34
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, 2001. 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, 2001, 2000, 1999, 1998 and 1997 and
the balance sheet data at December 31, 2001, 2000, 1999, 1998 and 1997 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
35
- ----------
(1) Operating income excludes net realized gains or losses on investments.
(2) For 1998, operating income, the claims/claim expense ratio, the underwriting
ratio, the combined ratio and the operating return on average shareholders'
equity, as presented, also exclude the impact of an after-tax charge of
$40.1 million taken in the fourth quarter of 1998 related to our subsidiary,
Stonington. Including the charge related to Stonington, operating income,
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, 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 Stonington charge. Including
the charge relating to Stonington, 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%.
(3) 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.
(4) 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.
(5) Book value per common share was computed by dividing total shareholders'
equity by the number of outstanding common shares at year end.
36
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, 2001 compared with the years ended December 31, 2000,
and for the year ended December 31, 1999. The following also includes a
discussion of our financial condition at December 31, 2001. 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. See "Note on Forward Looking Statements" and "Risk
Factors."
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, tornadoes, fires,
explosions and other man-made or natural disasters. Accordingly, 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.
We are a leader in utilizing sophisticated computer models to construct a
superior portfolio of these property catastrophe coverages. We believe that a
combination of several factors - our disciplined underwriting approach, the
experience of our underwriters, as well as our sophisticated risk models - have
enabled us to significantly outperform the majority of our competitors. This was
especially evident during 2001 when we achieved an 18% operating return on
equity even though industry insurance losses were at an all time high.
For the years ended December 31, 2001 and December 31, 2000, our gross premiums
written were $501.3 million and $433.0 million, respectively, our net premiums
written were $339.5 million and $293.3 million, respectively, our operating
income available to common shareholders, which excludes realised gains and
losses on investments, was $146.3 million (or $7.03 per common share) and $134.4
million (or $6.86 per common share), respectively, and our net income available
to common shareholders was $164.4 million (or $7.90 per common share) and $127.2
million (or $6.50 per common share), respectively. At December 31, 2001, we had
total assets of $2.6 billion and total shareholders' equity of $1.2 billion. At
December 31, 2001, total shareholders'equity attributable to common
shareholders was $1.075 billion and our book value per common share was $47.50,
compared with $700.8 million and $35.72 per share at December 31, 2000.
Our principal subsidiary is Renaissance Reinsurance, a Bermuda domiciled
company. In 2001, Renaissance Reinsurance wrote $451.4 million of gross written
premiums, compared to $382.8 million in 2000. Of these premiums, $373.9 million
were derived from property catastrophe reinsurance coverage, compared to $345.0
million in 2000.
In recent years, we have formed certain joint ventures whereby we write property
catastrophe reinsurance for the joint ventures in return for management fees and
a profit participation.
o In January 1999, we 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.
o In October 2001, we formed DaVinci Reinsurance Ltd. with State Farm and
other private investors. DaVinci writes property catastrophe reinsurance
side-by-side with Renaissance Reinsurance and is consolidated in our
financial statements.
o In 1999, we were also appointed underwriting managers of OP Cat, a wholly
owned subsidiary of Overseas Partners Limited ("Overseas Partners"). OPCat,
like DaVinci, was formed to write property catastrophe reinsurance
side-by-side with Renaissance Reinsurance. In February 2002, Overseas
Partners decided to exit the reinsurance business. In conjunction with this
decision, Renaissance Reinsurance has agreed to assume OP Cat's business.
In November 1999, RenaissanceRe incorporated Renaissance Underwriting Managers
to act as underwriting manager to these joint ventures. Together, these joint
ventures wrote $98.9 million of premium in 2001, compared to $80.2 million in
2000. In total, Top Layer Re and DaVinci had access to approximately $4.3
billion of capital as of December 31, 2001.
We believe that our position as a leading property catastrophe reinsurance
underwriter is reflected by the continued growth in the property catastrophe
premiums written by Renaissance Reinsurance and these joint ventures (which,
when combined, we refer to as "managed catastrophe premiums"). The total managed
catastrophe premiums written on behalf of Renaissance Reinsurance and the joint
ventures increased to $441.8 million on a gross basis for the year ended
December 31, 2001 (2000 - $397.0 million), including $98.9 million written on
behalf of our joint ventures (2000 - $80.2 million). Subsequent to the World
Trade Center tragedy, demand and prices of property catastrophe reinsurance have
increased and we currently expect total managed catastrophe premiums to grow
substantially in 2002.
37
In addition to catastrophe reinsurance, we also write certain other lines of
reinsurance through Renaissance Reinsurance including aviation, finite,
satellite and catastrophe exposed workers compensation coverages. We refer to
this business as our "Specialty Reinsurance" business. In 2001, we wrote gross
written premiums of $77.5 million of specialty reinsurance, compared with $37.7
million written in 2000.
We also write primary insurance through our four subsidiaries Glencoe Insurance
Ltd., DeSoto Insurance Company, DeSoto Prime Insurance Company and Stonington
Insurance Company, formerly known as Nobel Insurance Company.
Glencoe, the largest of these subsidiaries, primarily provides catastrophe
exposed primary property coverage on an excess and surplus lines basis. During
2001, Glencoe's gross written premiums were $12.9 million, compared to $5.3
million in 2000.
DeSoto and DeSoto Prime are active in the Florida homeowners market. During
2001, DeSoto and DeSoto Prime wrote $11.2 million of primary homeowners
insurance coverage, compared to $12.7 million in 2000.
Stonington, a Texas-domiciled insurance company, is licensed to operate in all
50 states of the U.S.
Because we focus on writing reinsurance and insurance which provides protection
from damages relating to natural and man-made catastrophes, our results depend
to a large extent on the frequency and severity of such catastrophic events, and
the coverage we offer to clients impacted by these events.
In addition to the reinsurance and insurance coverages discussed above, 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.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For most insurance and reinsurance companies, the most significant judgment made
by management is the estimation of the claims and claim expense reserves.
Because of the variability and uncertainty associated with loss estimation, it
is possible that our individual case reserves for each catastrophic event are
incorrect, possibly materially. The period of time from the reporting of a loss
to us through the settlement of our liability may be several years. During this
period, additional facts and trends will be revealed and as these factors become
apparent, reserves will be adjusted. Therefore, changes to our prior year loss
reserves can impact our current underwriting results by 1) improving our results
if the prior year reserves prove to be redundant, or 2) reducing our results if
the prior year reserves prove to be insufficient. The impact on net income from
changes in prior years loss reserves was an increase of $16.0 million during
2001, a decrease of $8.4 million during 2000 and an increase of $34.6 million in
1999.
To reduce the potential impact from prior period reserve adjustments, we
estimate our claims and claim expense reserves based on 1) claims reports from
insureds, 2) our underwriters' experience in setting claims reserves, 3) the use
of computer models where applicable and 4) historical industry claims
experience. Where necessary we will also use statistical and actuarial methods
to estimate ultimate expected claims and claim expenses. We review our reserves
on a regular basis.
Other material judgments made by us are the estimates of potential impairments
in asset valuations, particularly:
1) Potential uncollectable reinsurance recoverables; and
2) Impairments in our deferred tax asset.
To estimate reinsurance recoverables which might be uncollectable, our senior
managers evaluate the financial condition of our reinsurers, on a reinsurer by
reinsurer basis, both before purchasing the reinsurance protection from them and
after the occurrence of a significant catastrophic event. We believe that our
process is effective, and to date we have not written off any significant
reinsurance recoveries. As of December 31, 2001, we have recorded a valuation
allowance of $8 million relating to reinsurance recoverables, based on specific
facts and circumstances evaluated by management.
38
In estimating impairments to our deferred tax asset, we analyze the businesses
which generated the deferred tax asset, and the businesses that will potentially
utilize the deferred tax asset. Our deferred tax asset relates primarily to net
operating loss carryforwards that are available to offset future taxes payable
of our U.S. operating subsidiaries. However, due to the limited opportunities in
the U.S. primary insurance market, the U.S. insurance operations have not
generated taxable income in the last few years. This calls into question the
recoverability of the deferred tax asset. Although we retain the benefit of this
asset through 2020, during 2001 and 2000 we recorded valuation allowances of
$14.0 million and $8.2 million, respectively. As of December 31, 2001, the net
balance of the deferred tax asset was $4.2 million.
SUMMARY OF RESULTS OF OPERATIONS FOR 2001 AND 2000
A summary of the significant components of our revenues and expenses are as
follows:
(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses.
(2) Net operating income excludes realised gains and losses on investments.
The $11.9 million increase in operating income in 2001, compared to 2000, was
primarily the result of the following items:
o a $15.1 million increase in underwriting income from our reinsurance
operations due primarily to an increase in net premiums earned of $64.1
million, in part offset by a $ 46.8 million increase in claims, plus
o an increase in fee income from our joint ventures of $8.2 million, primarily
as a result of fees earned in 2001 on premiums written on behalf of our
joint ventures in 2000, plus
o a reduction in interest and fixed charges of $8.6 million resulting
primarily from the repayment of $200 million of outstanding bank loans in
the fourth quarter of 2000, less
o an increase in tax expense during 2001 as a result of a $14.0 million
increase to our valuation allowance on our deferred tax asset as a result of
further reductions of our U.S. based insurance operations (after this
adjustment the net deferred tax asset on our balance sheet is $4.2 million),
less
o an increase in corporate expenses of $3.5 million primarily due to costs
related to research and development initiatives conducted by us in 2001,
less
o a decrease in investment income of $2.7 million primarily as a result of
declining interest rates.
The $14.4 million increase in operating income in 2000, compared to 1999, was
primarily the result of the following items:
o a $17.5 million increase in investment income primarily due to an increase
in interest rates and an increase in the level of assets held during the
majority of 2000, plus
o an increase in fee income from our joint ventures of $7.9 million as a
result of an increase in premiums written on behalf of our joint ventures to
$80.2 million in 2000 compared with $4.3 million in 1999, less
o an increase of $7.2 million in interest expense as a result of an increase
in outstanding bank loans during the majority of 2000, less
o a $6.2 million increase in tax expense during the year, primarily as a
result of an $8.2 million increase to our valuation allowance on our
deferred tax asset, as a result of a decrease in our U.S. based insurance
operations.
39
RESULTS OF OPERATIONS FOR 2001 AND 2000
The following is a discussion and analysis of our results of operations for the
year ended December 31, 2001, compared to each of the years ended December 31,
2000, and 1999, and a discussion of our financial condition at December 31,
2001.
PREMIUMS
- --------------------------------------------------------------------------------
Gross Written Premiums
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Property Catastrophe Reinsurance $ 373,896 $ 345,086 $ 279,605
Specialty Reinsurance 77,468 37,730 2,740
- --------------------------------------------------------------------------------
Total Reinsurance $ 451,364 $ 382,816 $ 282,345
- --------------------------------------------------------------------------------
Insurance premiums Glencoe 12,858 5,273 4,986
Insurance premiums other 37,099 44,913 63,974
- --------------------------------------------------------------------------------
Total Insurance premiums 49,957 50,186 68,960
- --------------------------------------------------------------------------------
Total gross written premiums $ 501,321 $ 433,002 $ 351,305
- --------------------------------------------------------------------------------
The increase in our property catastrophe premiums over the past two years is
primarily due to an improving market following the worldwide level of losses
occurring in 1999. During 1999, insured losses from natural catastrophes and
man-made disasters are estimated to be over $33 billion which, before the World
Trade Center disaster in 2001, was the second-highest claims total ever for
insurers. During 1999, nine significant worldwide catastrophic events occurred:
the hail storms in Sydney, Australia in April; the Oklahoma tornados in May;
Hurricane Floyd which struck 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. Six of these events each resulted in over $1
billion of insured damages.
Because of these events, as with many large losses, two things occurred 1) many
reinsurers recorded significant losses and were forced to, or chose to, withdraw
their underwriting capacity from these regions, and 2) these losses raised the
awareness of the severity of the losses which could impact these geographic
locations. As a result of these factors, prices for reinsurance coverages in
these and other geographic locations increased, in some cases significantly.
Accordingly, our reinsurance premiums also increased, first from the increased
prices on renewing policies and secondly by enabling us to write new business
which was previously priced at an uneconomical rate of return.
Our property catastrophe premiums also increased as a result of reinstatement
premiums we received relating to these large losses. Per contractual terms, we
record reinstatement premiums after an insured notifies us of a claim.
Reinstatement premiums allow an insured to purchase, or reinstate, the limit of
their reinsurance policy for the remainder of the policy period. Because of the
increased level of claims from the 1999 events, and more recently from the 2001
World Trade Center disaster, our reinstatement and adjustment premiums for the
years ended December 31, 2001, 2000 and 1999 were $35.3 million, $20.3 million
and $6.8 million, respectively.
Because of improving market conditions, we have increased our premiums in the
Specialty Reinsurance market, which we define as reinsurance coverages that are
not specifically property catastrophe coverages. In evaluating specialty
reinsurance opportunities, we focus on those coverages which, like property
catastrophe reinsurance, produce losses that are infrequent in nature, but could
be severe if they occur. Examples include aviation, satellite, finite and
catastrophe exposed workers compensation coverages.
Over the past couple of years, we have reduced the amount of insurance premiums
written by our other primary insurance companies because of the limited
profitable opportunities in the U.S. primary insurance markets. During 2001,
Stonington accounted for the majority of the premiums written, $25.9 million,
the substantial majority of which was reinsured.
40
CEDED REINSURANCE PREMIUMS
- --------------------------------------------------------------------------------
Ceded Premiums
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
Reinsurance $ 124,684 $ 94,875 $ 77,153
Primary 37,090 44,824 60,639
- --------------------------------------------------------------------------------
Total $ 161,774 $ 139,699 $ 137,792
- --------------------------------------------------------------------------------
Because of the potential volatility of the property catastrophe reinsurance
business, we purchase reinsurance to reduce our exposure to large losses. We
utilize our REMS(C) modeling system to evaluate how each purchase interacts with
our portfolio of reinsurance contracts we write, and with the other ceded
reinsurance contracts we purchase. During 2001 and 2000, we increased our
purchases of reinsurance because we received a number of new opportunities to
purchase reinsurance at economical rates of return.
Although we would remain liable to the extent that any of our reinsurers fails
to pay our claims, before placing reinsurance we evaluate the financial
condition of our reinsurers. We believe that our process is effective and, to
date, we have not written off any significant reinsurance recoveries. As of
December 31, 2001, the majority of the $217.6 million of losses recoverable
relates to outstanding claims reserves on our books, and accordingly they cannot
be collected by us until we first pay our losses. We expect to fully collect on
all of this recorded reinsurance balance recoverable.
Also, we have recently begun buying quota share protection of our property
catastrophe reinsurance business. These policies are similar to our joint
venture activities, where we receive an override and a profit commission on
these cessions.
Approximately 50% of the limits under our reinsurance coverage have been
purchased on a multi-year basis, which will result in relatively stable costs on
those policies for fiscal years 2002 and 2003. To the extent that appropriately
priced coverage is available, we anticipate continued use of reinsurance to
reduce the potential volatility of our results.
(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 "Specialty Reinsurance" includes coverages related to
non-catastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, aviation, finite and
satellite risks assumed by us.
41
UNDERWRITING RESULTS
The underwriting results of an insurance or reinsurance company are discussed
frequently by reference to its loss ratio, expense ratio, and combined ratio.
The loss ratio is the result of dividing claims and claim expenses incurred by
net premiums earned. The expense ratio is the result of dividing underwriting
expenses (acquisition and operational expenses) by net premiums earned. The
combined ratio is the sum of the loss ratio and the expense ratio.
The table below sets forth our net premiums earned, claims and claim expenses
and underwriting expenses by segment and their corresponding loss, expense and
combined ratios:
Our claims and claim expenses, claims and claim expenses ratio, and our combined
ratio for the reinsurance operations have increased primarily as a result of an
increase in our specialty reinsurance premiums, which normally will produce a
higher claims and claim expense and combined ratio than our principal product,
property catastrophe reinsurance. Our claims and claim expenses for 2001 also
increased as a result of our claims and claim expenses from the World Trade
Center tragedy.
42
Although industry wide insurance losses were the highest in history during 2001
and were the third highest in history in 1999, we recorded increases in net
income, cash flows from operations, earnings per share and book value per share.
We attribute this outstanding performance to our disciplined underwriting
approach, the experience of our underwriters, as well as our sophisticated risk
models.
In the normal course of business, we also purchase reinsurance protection (see
discussion of Ceded Reinsurance Premiums above). Our underwriting results
benefited from our purchase of reinsurance protection as we recorded reinsurance
recoveries of $160.4 million, $52.0 million and $255.3 million during fiscal
years 2001, 2000 and 1999, respectively. Although there can be no assurance that
our underwriting results will continue to benefit from the purchase of
reinsurance, we will continue to purchase reinsurance protection to the extent
that appropriately priced coverage is available.
Our underwriting expenses consist of operational expenses and acquisition costs.
Operational expenses consist of salaries and other general and administrative
expenses. Acquisition costs consist of costs to acquire premiums and are
principally made up of broker commissions and excise taxes. Our reinsurance
business operates with a limited number of employees and we are able to grow our
book of business without substantially increasing our operating costs.
Acquisition costs are driven by contract terms and are normally a set percentage
of premiums. Therefore, as our premiums increase, we expect that our operating
costs will tend to remain relatively stable. Since our acquisition costs are
based on a percentage of the premiums written, these costs will fluctuate in
line with the fluctuation in premiums. Therefore, in total, as our premiums
increase, we would expect that our expense ratio would decrease, as was the case
in 2001. Other factors may also affect the expense ratios, including business
mix, the receipt of ceding commissions or similar payments that may offset
expenses.
Acquisition costs and operational expenses for the year ended December 31, 2001
were $84.0 million, or 25.2%, compared to $76.5 million, or 28.5% of net
premiums earned for the year ended December 31, 2000. As discussed above, the
primary reason for the decrease in the underwriting expense ratio was the
increase in net premiums earned and the limited growth in the operational
expenses of our reinsurance business.
Acquisition costs and operational expenses for the year ended December 31, 2000
were $76.5 million, or 28.5% of net premiums earned, compared to $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.
For our primary operations, the majority of the premiums written are currently
ceded to other reinsurers and as a result, net earned premiums from the primary
operations were relatively minor during 2001, 2000 and 1999. Based on this
reduced level of net earned premiums, relatively modest one-time adjustments to
net written premiums, claims and claim expenses incurred, acquisition expenses
or operating expenses can cause, and did cause, unusual fluctuations in the
claims and claim expense ratio and the underwriting expense ratio of the primary
operations. Because of its small scale, our primary insurance business does not
materially affect the ratios of our consolidated operations. As can be seen by
the net underwriting losses of the primary operations during 2001 and 2000, the
primary operations are not a significant contributor to our consolidated
operations. Subsequent to the September 11th tragedy, and the resulting
insurance market turmoil, we currently expect that Glencoe, our Bermuda primary
operation, will experience considerable growth in 2002. We also expect that the
U.S. primary operations of DeSoto, DeSoto Prime and Stonington will continue to
be limited, and therefore we do not expect these entities to contribute
significantly to our consolidated operations during 2002, although these
operations may grow if market conditions allow.
43
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands) $ 75,156 $ 77,868 $ 60,334
- --------------------------------------------------------------------------------
Because we primarily provide reinsurance coverage for damages resulting from
natural and man-made catastrophes, it is possible that we could become liable
for a significant amount of losses on a short-term notice. Accordingly we have
structured our investment portfolio to preserve capital and provide us with a
high level of liquidity, which means that the large majority of our investment
portfolio contains investments in fixed income securities, such as U.S.
Government bonds, corporate bonds and mortgage backed and asset backed
securities.
As a result of the declining interest rate environment during 2001, the average
yield on our portfolio fell from 6.8% as of December 31, 2000 to 4.2% as of
December 31, 2001. Accordingly, as yields on our portfolio decrease, our
interest income will also decrease, as was the case during 2001. Partially
offsetting this decrease was the significant growth in assets during the year,
which was primarily due to our capital raising activities of issuing $150
million of Senior Notes in July 2001, issuing 2.5 million Common Shares for $233
million in net proceeds in October 2001 and issuing, $150 million of Series A
Preference Shares in November 2001. At December 31, 2001, we had an unusually
large allocation to cash, which resulted from our decision to wait to invest the
proceeds of these capital transactions until we perceived more favorable market
conditions. In the short term this large cash allocation has depressed our
investment returns.
During 2000, the increase in investment income resulted primarily from an
increase in interest rates, together with an increase in the investment base
during the year. Although invested assets at December 31, 2000 only reflected an
increase of $22.3 million from the prior year end, we had an additional $200.0
million in bank loans during most of 2000, which was repaid during the fourth
quarter of 2000.
OTHER INCOME
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands) $ 16,244 $ 10,959 $ 4,915
- --------------------------------------------------------------------------------
As discussed previously, in 1999 we began to manage property catastrophe books
of business for the Top Layer Re and OP Cat joint ventures. We record our profit
and/or equity participation from these joint ventures as other income. During
2001, 2000 and 1999 other income included $18.0 million, $9.8 million and $1.9
million of profits, respectively, from these two ventures. The remainder of our
other income relates to net results from small non-underwriting portions of our
operations, as well as minor activities with catastrophe and derivative
instruments under which losses could be triggered by an industry loss index or
geological or physical variables. In 2001, other income included approximately
$2.4 million from our primary operations and $2.7 million from our investments
in non-indemnity catastrophe index contracts. In 2000, contributions to other
income from our primary operations and from trading in catastrophe linked index
transactions were immaterial. In 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 2001, we formed a third joint venture, DaVinci, in which we own 25% of
the equity. Due to the voting and governance structures of DaVinci, our income
from this joint venture is not reflected in other income, but is instead
consolidated in our financial statements. Our profit participation and equity
participation in DaVinci will therefore be reflected primarily through
underwriting income and investment income, partially offset by an increase in
minority interest for the 75% of DaVinci owned by third parties.
Also, as discussed previously, since OP Cat has decided to cease its operations,
and since we have decided to assume this book of business, our portion of the
earnings from this book of business will, in the future, be reflected in our
consolidated underwriting results and investment income instead of other income.
44
CORPORATE EXPENSES
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands) $ 11,485 $ 8,022 $ 9,888
- --------------------------------------------------------------------------------
Corporate expenses are incurred by us in running our non-underwriting operations
include expenses related to legal and certain consulting expenses, costs for
research and development, and other miscellaneous costs associated with
operating as a publicly traded company. The majority of the increase in
corporate expenses during 2001 primarily related to costs related to research
and development initiatives conducted by us in 2001.
FIXED CHARGES
Due to our financial strength, we have had the ability to access the capital
markets for various forms of capital. It is advantageous to have access to
various forms of capital, as we therefore do not become dependant on any one
source of capital. Furthermore, the cost and flexibility of each form of capital
can help us to improve our return to common shareholders and at the same time,
maintain a level of capital that allows us to grow our operations.
During 2001, our total fixed charges decreased as a result of our repayment of
$200 million of borrowings under our revolving credit and term loan agreement in
the fourth quarter of 2000. Since the majority of these funds were borrowed in
August 1999, and due to the rising interest rates during 1999 and 2000, this
caused interest expense on our debt to increase in 2000 over interest expense in
1999.
As a result of our issuance during 2001 of the Senior Notes and the Preference
Shares, we expect our fixed charges to increase in 2002 compared to 2001.
INCOME TAX EXPENSE (BENEFIT)
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands) $ 14,262 $ 4,648 ($1,525)
- --------------------------------------------------------------------------------
In 1998, in conjunction with charges we recorded relating to our purchase and
subsequent decision to significantly reduce the operations of Stonington, we
recorded a deferred tax asset of $22 million. This deferred tax asset relates
primarily to net operating loss carryforwards that are available to offset
future taxes payable of our U.S. operating subsidiaries. However, due to the
limited opportunities in the U.S. primary insurance market, the U.S. insurance
operations have not generated taxable income in the last few years. This calls
into question the recoverability of the deferred tax asset. Although we retain
the benefit of this asset through 2020, during 2001 and during 2000 we recorded
increases in our valuation allowances of $14.0 million and $8.2 million,
respectively. As of December 31, 2001, the net balance of the deferred tax asset
was $4.2 million.
Should our current U.S. operations begin to generate taxable income, or should
additional opportunities arise to conduct business in the U.S., the valuation
allowance could be eliminated as profits are recorded, and we could possibly
earn profits without a corresponding reduction for taxes.
45
REALIZED GAINS/(LOSSES)
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(in thousands) $ 18,096 ($ 7,151) ($ 15,720)
- --------------------------------------------------------------------------------
During 2001, net realized gains on sales of investments were $18.1 million,
compared to net realized losses of $7.2 million in 2000. As noted above, because
our portfolio is structured to preserve capital and provide us with a high level
of liquidity, our gains and losses on investments will be highly correlated to
fluctuations in interest rates. Accordingly as interest rates decline, we will
tend to have realized gains from the turnover of our portfolio, and as interest
rates increase, we will tend to have realized losses from the turnover of our
portfolio.
FINANCIAL CONDITION
As a holding company, we rely on dividends from our subsidiaries and investment
income to make principal and interest payments on our debt and capital
securities, and to make dividend payments to our preference shareholders and
common 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, 2001, the
statutory capital and surplus of our Bermuda insurance subsidiaries was $1,490.3
million, and the amount required to be maintained by the Act was $259.7 million.
Our U.S. subsidiaries are also required to maintain certain measures of solvency
and liquidity. At December 31, 2001, the statutory capital and surplus of our
U.S. subsidiaries was $32.6 million and the amount required to be maintained was
$24.3 million. During 2001, Renaissance Reinsurance declared aggregate cash
dividends of $147.1 million, compared with $95.6 million in 2000.
Our operating subsidiaries have historically produced sufficient cash flows to
meet their own 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
additional capital requirements, if necessary.
CASH FLOWS
Cash flows from operating activities for 2001 were $326.5 million, which
principally consisted of net income of $166 million, plus $119 million for
losses incurred but not paid as of December 31, 2001, plus $58 million of
collections on losses recoverable. The 2001 cash flows from operations were
primarily utilized to reinvest in fixed income securities.
We have generated cash flows from operations in 2001 and in 2000 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.
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.
RESERVES FOR CLAIMS AND CLAIMS EXPENSES
For most insurance and reinsurance companies, the most significant judgment made
by management is the estimation of the claims and claim expense reserves.
Because of the variability and uncertainty associated with loss estimation, it
is possible that our individual case reserves for each catastrophic event are
incorrect, possibly materially. The period of time from the reporting of a loss
to us through the settlement of our liability may be several years. During this
period, additional facts and trends will be revealed and as these factors become
apparent, reserves will be adjusted. Therefore, changes to our prior year loss
reserves can impact our current underwriting results by 1) improving our results
if the prior year reserves prove to be redundant, or 2) reducing our results if
the prior year reserves prove to be insufficient. The impact on net income from
changes in prior years loss reserves was an increase of $16.0 million during
2001, a decrease of $8.4 million during 2000 and an increase of $34.6 million in
1999.
Our principal business is property catastrophe reinsurance, which subjects us to
potential losses that are generally infrequent, but can be significant, such as
losses from hurricanes and earthquakes. Because the loss events to which we are
exposed are generally characterized by low frequency but high severity, our
claims and claim expense reserves will normally fluctuate, sometimes materially,
based upon the occurrence of a significant natural or man-made catastrophic loss
for which we provide reinsurance. Our reserves will also fluctuate based on the
payments we make for these large loss events. As we pay losses related to these
large events, if no other events have occurred, our loss reserves would normally
tend to decrease.
46
The table below sets forth our gross and net claims and claim expense reserves
for the previous eight years, compared with the balance of our shareholders'
equity.
Percentage
Gross Net Shareholders' of Equity
At December 31, Reserves Reserves Equity Gross Net
- -------------- -------- -------- ------------- -------------
1994 $63.3 $63.3 $265.2 23.9% 23.9%
1995 100.4 100.4 486.3 20.6 20.6
1996 105.4 105.4 546.2 19.3 19.3
1997 110.0 110.0 598.7 18.4 18.4
1998 298.8 197.5 612.2 48.8 32.3
1999 478.6 174.9 600.3 79.7 29.1
2000 403.6 237.0 700.8 57.6 33.8
2001 572.9 355.3 1,225.0 46.8 29.0
The above information further reflects how our gross reserves, as a percentage
of equity, can fluctuate based on the occurrence of significant loss events. For
instance in 1999, our gross reserves, and our gross reserves as a percentage of
equity increased sharply, due to the nine significant loss events occurring in
1999, many of which occurred in the last four months of the year (see discussion
of Premiums above for a discussion of these events). However, as also can be
seen from the data above, because of our ability to purchase reasonably priced
reinsurance, historically our net reserves as a percentage of equity have shown
much less variation from year to year.
We generally expect that the majority of our losses from large catastrophic
events will be paid in a two to four year time frame. However, the event causing
the loss, the locations of the loss, and whether our losses are from policies
with insurers or reinsurers, can affect the time period in which our claims will
be paid. For instance, losses occurring in the U.S., tend to pay more quickly
than those losses occurring in other parts of the world. This trend is reflected
in the current balance of our reserves, whereby seven of the nine events
occurring in 1999, occurred outside of the U.S., and accordingly, our claim
payments on these losses have tended to pay slower than those on events
occurring in the U.S. Also, the 1999 events impacted claims payments in 2000 and
2001 to a greater extent than normal because most of the 1999 events occurred
late in the year, including the most severe events, which were the European
storms in December.
For illustrative purposes, the table below sets forth our claim payments and
claim developments for the 1999 Accident Year for our Reinsurance segment
through December 31, 2001:
Gross Ceded Net
1999 Accident Year Reserves Reserves Reserves
- ------------------ -------- -------- --------
Incurred reserves $282.7 $185.0 $97.7
Claim payments in 1999 (26.8) -- (26.8)
------ ------ -----
Reserve as of December 31, 1999 255.9 185.0 70.9
Claim payments in 2000 (110.5) (124.8) 14.3
Reserve additions in 2000 6.1 (0.6) 6.7
------ ------ -----
Reserves as of December 31, 2000 151.5 59.6 91.9
Claim payments in 2001 (37.8) (54.1) 16.3
Reserve additions in 2001 10.4 29.4 (19.0)
------ ------ -----
Reserves as of December 31, 2001 $124.1 $ 34.9 $89.2
====== ====== =====
At December 31, 2001, 2000 and 1999, the claims and claim expense reserves of
the Reinsurance segment were $500.1 million, $296.4 million and $361.9 million,
respectively, of the total reserves of the Company. Also, As of December 31,
2001, 2000 and 1999, of the total reserves of the Reinsurance segment, 86%, 88%
and 91% of the reserves, respectively, related to claims and claim expense
reserves of the three most recent accident years. As of December 31, 2001, 2000
and 1999, included in our claims and claim expense reserves were reserves for
incurred but not reported claims ("IBNR") of $286.7 million, $228.8 million, and
$293.2 million, respectively.
During 2001, our claims and claim expense reserves, our claims recoveries and
our net reserves all increased as a result of losses we incurred from the World
Trade Center tragedy. During 2002, as we pay losses related to the World Trade
Center tragedy and other currently known loss events, if no additional
significant loss events occur, we would expect the balance of our claims and
claim expense reserves to decrease.
For our insurance and reinsurance operations, our estimates of claims reserves
are based on 1) claims reports from insureds, 2) our underwriters' experience in
setting claims reserves, 3) the use of computer models where applicable and 4)
historical industry claims experience. Where necessary we will also use
statistical and actuarial methods to estimate ultimate expected claims and claim
expenses. We review our reserves on a regular basis.
47
CAPITAL RESOURCES
Our total capital resources at December 31, 2001 and 2000 were as follows:
- --------------------------------------------------------------------------------
At December 31, 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Common shareholders' equity $ 1,075,024 $ 700,818
Series A preference shares 150,000
- --------------------------------------------------------------------------------
Total shareholders' equity 1,225,024 700,818
7.00% senior notes 150,000 -
8.54% capital securities 87,630 87,630
Revolving credit facility - unborrowed 310,000 302,000
Revolving credit facility - borrowed - 8,000
Term and revolving loan facility 33,500 42,000
- --------------------------------------------------------------------------------
Total capital resources $ 1,806,154 $1,140,448
- --------------------------------------------------------------------------------
48
As is customary in our industry, a portion of our reinsurance policies provide
our clients with the right to cancel or not renew our policies in the event our
claims paying ratings are downgraded. In some instances the downgrade must be to
a rating several levels below our current rating; in others, the trigger level
is somewhat higher; and in others it is only one or two levels below our current
rating. Many of our policies do not contain a provision of this type. Moreover,
we cannot precisely estimate the amount of premium that is at risk, as this
amount depends on the particular facts and circumstances at the time, including
the degree of the downgrade, the time elapsed on the impacted in-force policies,
and the effects of any related catastrophic event on the industry generally. In
the event any of these provisions are triggered, we will vigorously seek to
retain our clients and do not anticipate that a material amount of premium would
be cancelled or nonrenewed. However, we can not assure you that our premiums
would not decline, perhaps materially, following a ratings downgrade.
During 2001, as a result of the World Trade Center disaster, two results
occurred in the reinsurance market. First, reinsurers recorded significant
losses and were forced to, or chose to, withdraw their underwriting capacity for
certain lines of reinsurance. Second, these losses raised the awareness of the
severity of the losses which could occur. These factors caused an imbalance in
the supply of and demand for reinsurance and, as a result, prices escalated for
many segments of the reinsurance market. These imbalances provided us with an
opportunity to increase our penetration of the property catastrophe reinsurance
market, as well as provided us with opportunities to grow other areas of our
operations, specifically our Specialty Reinsurance operations and our commercial
property insurance operations written through Glencoe Insurance.
With these increased opportunities to grow our businesses, we also decided to
materially increase our capital resources through the following activities:
1. In October 2001, we issued 2.5 million of Common Shares for net proceeds of
$233 million.
2. In November 2001, we raised $145 million in net proceeds through the
issuance of 6,000,000 $1.00 par value Series A Preference Shares at $25.00
per share. The shares are non-convertible and may be redeemed at $25.00 per
share on or after November 19, 2006. Dividends are cumulative from the date
of original issuance and are payable quarterly in arrears at 8.10% when, if,
and as, declared by our Board of Directors. Under certain circumstances,
such as amalgamations and changes to Bermuda law requiring approval of the
holders of our preference shares to vote as a single class, we may redeem
the shares prior to November 19, 2006 at $26.00 per share. The preference
shares have no stated maturity and are not convertible into any of our other
securities.
3. In July we issued $150 million of 7% Senior Notes due July 2008. We used a
portion of the proceeds to repay $16.5 million of outstanding amounts under
our $310 million revolving credit and term loan agreement. We can redeem the
notes prior to maturity subject to payment of a "make-whole" premium;
however, we currently have no intentions of calling the notes. The notes,
which are senior obligations, pay interest semi-annually and contain various
covenants, including limitations on mergers and consolidations, restriction
as to the disposition of stock of designated subsidiaries and limitations on
liens on the stock of designated subsidiaries.
49
We also formed DaVinci, our third joint venture, in October 2001. To form
DaVinci, we raised $300 million of outside capital ($275 million as of December
31, 2001) and we utilized $200 million of our capital when we contributed $100
million as equity and provided $100 million as bridge financing. In the first
half of 2002, we expect DaVinci to replace our $100 million of bridge financing
with bank debt which, because we are consolidating DaVinci, will increase the
outstanding debt on our consolidated balance sheet.
Also, in conjunction with market opportunities following the September 11th
tragedy, we contributed an additional $135 million of capital to Glencoe,
thereby increasing its total capital to greater than $200 million.
We continue to maintain a revolving credit and term loan agreement with a
syndicate of commercial banks. During the third quarter of 2001, we repaid
borrowings of $16.5 million on this facility and as of December 31, 2001 no
amounts were outstanding. In the fourth quarter of 2000 we repaid $200.0 million
of the then outstanding balance. Interest rates on the facility are based on a
spread above LIBOR and averaged 5.45% during 2001, compared to 7.03% in 2000.
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.
We were in compliance with all the covenants of this revolving credit and term
loan agreement at December 31, 2001.
Renaissance U.S. has a $18.5 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 4.71% during 2001, compared to 6.98% in 2000. 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 2002 and 2003. The loan facility of $15
million is repayable in 2003. During 2001, Renaissance U.S. repaid approximately
$8.5 million of this facility. We were in compliance with all the covenants of
this term loan and revolving loan facility at December 31, 2001.
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 capital
securities recognizing a gain of $0.5 million which has been reflected in
shareholders' equity. No securities were purchased during 2001. 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, 2001. The capital trust securities mature on March 1, 2027.
Generally Accepted Accounting Principles do not allow these securities to be
classified as a component of shareholders equity, therefore, they are reflected
as minority interest.
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. Our letters of credit are secured by a lien on a portion of our
investment portfolio. At December 31, 2001, we had outstanding letters of credit
aggregating $125.8 million, compared to $44.9 million in 2000. This increase is
primarily related to the losses emanating from the September 11th tragedy. 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 ("BofA"). 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, 2001 was $24.1
million, compared to $24.8 million in 2000. 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, failing which BofA can
accelerate the loan and liquidate the remaining collateral. 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.
50
SHAREHOLDERS' EQUITY
During 2001, shareholders' equity increased by $524.2 million, from $700.8
million at December 31, 2000 to $1.2 billion at December 31, 2001. The
significant components of the change in shareholders' equity included net income
from continuing operations of $164.4 million, $145 million received from the
issuance of 6 million Series A Preference Shares, and $233 million received from
the issuance of 2.5 million common shares, offset by the payment of dividends of
$32.8 million. At December 31, 2001, shareholders' equity attributable to common
shareholders was $1.075 billion.
From time to time, we have returned capital to our shareholders through share
repurchase programs. At December 31, 2001, we had $27.1 million remaining under
our existing program. 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. No shares were repurchased
during 2001.
INVESTMENTS
At December 31, 2001, we held cash and investments totaling $2.2 billion,
compared to $1.1 billion in 2000, with net unrealized appreciation of $16.3
million, compared to unrealized appreciation of $6.8 million in 2000.
Because we primarily provide coverage for damages resulting from natural and
man-made catastrophes, we may become liable for substantial claim payments on
short-term notice. Accordingly, our investment portfolio is structured to
preserve capital and provide a high level of liquidity which means that the
large majority of our investment portfolio contains investments in fixed income
securities, such as U.S. Government bonds, corporate bonds and mortgage backed
and asset backed securities.
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,
2001 resulted primarily from net cash provided by operating activities of $326
million, $233 million raised from the issuance of 2.5 million common shares,
$145 million received from the issuance of 6 million Series A Preference Shares,
$150 million raised from the issuance of 7% senior notes and $275 million of
third party investment in our most recent joint venture, DaVinci Reinsurance. At
year end, we had an unusually large allocation to cash, which resulted from our
decision to wait to invest the proceeds of these capital transactions until we
perceived more favorable market conditions; in the short term, this large cash
allocation has depressed our investment returns. Over time, we expect our cash
position to return to historical levels.
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, 2001, our invested
asset portfolio had a dollar weighted average rating of AA, an average duration
of 1.9 years and an average yield to maturity of 3.8%.
51
CATASTROPHE LINKED INSTRUMENTS
We have assumed risk through catastrophe and derivative instruments under which
losses could be triggered by an industry loss index or geological or physical
variables. During 2001, 2000 and 1999 we recorded recoveries on non-indemnity
catastrophe index transactions of $2.7 million, nil, and $2.5 million,
respectively. We report these recoveries in other income. We cannot provide any
assurances that this performance will continue.
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 1.9%, which
equated to a decrease in market value of approximately $41.0 million on a
portfolio valued at $2,156.1 million at December 31, 2001. At December 31, 2000,
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 $1,052.4
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 consolidated 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 claims and claim expense reserves and
reinsurance balances payable. All changes in the exchange rates are recognized
currently in our statement of income. When necessary we will seek to hedge our
exposure to foreign currency transactions through the use of options, swaps
and/or forward contracts. As of December 31, 2001, we did not have any
outstanding options, swaps or forward contracts related to foreign currency
exposure.
EFFECTS OF INFLATION
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 cannot be accurately
known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
As of December 31, 2001, we have not entered into any guarantees, or guaranteed
the liabilities of any non-consolidated affiliates or subsidiaries or other
non-related parties.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 2002 we implemented SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS 133, goodwill and other intangible
assets are no longer being amortized but are reviewed periodically for
impairment. The adoption of SFAS 142 had no significant impact on our
consolidated financial statements.
52
CURRENT OUTLOOK
The September 11th tragedy has caused significant changes to the market
environment. Many insurance and reinsurance companies are seeking and receiving
higher prices for the risks that they assume and have substantially reduced
their exposures, including various exclusions for acts of terrorism and acts of
war. These actions are being taken as a result of an increased perception of
risk for the industry in general, as well as an improved understanding of the
correlation between, and within, various classes of business that were
previously believed to be independent by other companies. In addition, there is
a heightened sensitivity to credit quality as a number of other insurance
companies have experienced downgrades in their credit ratings.
Because RenaissanceRe experienced relatively limited losses from the World Trade
Center tragedy, and continues to have stable, high credit ratings, we believe we
are well positioned to significantly increase our managed catastrophe premiums.
In addition, we are anticipating that we will expand our presence in the
specialty reinsurance coverages, which by our definition are coverages that are
not specifically property catastrophe reinsurance coverages. In evaluating
opportunities in the specialty reinsurance market, we focus on those coverages
which, like property catastrophe reinsurance, produce losses that are infrequent
in nature, but could be severe if they occur. Examples include aviation,
satellite, finite and catastrophe exposed workers compensation coverages.
We also anticipate that we will increase the premiums written by our Bermuda
based primary insurance company, Glencoe. Glencoe, which primarily provides
catastrophe exposed primary property coverage on an excess and surplus lines
basis, wrote $12.9 million of gross written premiums in 2001.
As a result of the World Trade Center tragedy, we expect the cost of reinsurance
protection to increase during 2002. If prices rise to levels whereby we believe
the purchase of reinsurance protection would become uneconomical, we may retain
a greater level of net risk in certain geographic regions. In order to obtain
longer-term retrocessional capacity, we have entered into multi-year contracts
with respect to a portion of our portfolio.
The World Trade Center tragedy has caused insurers and reinsurers to seek to
limit their potential exposures to losses from terrorism attacks. We often
exlcude terrorism in the reinsurance and insurance that we write, but do have
potential exposures to this risk. We are monitoring our aggregate exposures to
terrorist attacks.
Subsequent to the World Trade Center tragedy, a substantial amount of capital
has entered the insurance and reinsurance markets both through investments in
established companies and through start-up ventures. The addition of new capital
in the marketplace may cause a reduction in prices of reinsurance contracts, or
could shorten the time horizon of the price increases for reinsurance contracts.
Currently, however, we do not believe that the new capital has resulted in
adverse changes to the prevailing pricing structure in the property catastrophe
reinsurance market. To the extent that the newly-formed companies or established
companies were to reduce the pricing of their products, this could force us to
reduce our future underwriting premiums.
53
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 52 of this Form 10-K under
the caption "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 RenaissanceRe 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.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RENAISSANCERE
The information with respect to our directors and officers contained
under the captions "Directors and Executive Officers of the Company" and
"Proposal 1" in our Definitive Proxy Statement in respect of our 2002 Annual
General Meeting of Shareholders (the "Proxy Statement") is incorporated in this
Annual Report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to executive compensation contained under
the subcaption "Executive Officer and Director Compensation" in our Proxy
Statement is incorporated in this Annual Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership of certain
beneficial owners and management contained under the caption "Security Ownership
of Certain Beneficial Owners, Management and Directors" in our Proxy Statement
is incorporated in this Annual Report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions contained under the caption "Certain Relationships and Related
Transactions" in our Proxy Statement is incorporated in this Annual Report by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits.
1. The Consolidated Financial Statements of RenaissanceRe and related
Notes thereto are listed in the accompanying Index to Consolidated
Financial Statements and are filed as part of this Report.
2. The Schedules to the Consolidated Financial Statements of RenaissanceRe
are listed in the accompanying Index to Schedules to Consolidated
Financial Statements and are filed as part of this Report.
3.1 Memorandum of Association.*
3.2 Amended and Restated Bye-Laws.#
3.3 Memorandum of Increase in Share Capital of RenaissanceRe.##
4.1 Specimen Common Share certificate.*
10.1 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.2 Fourth Amended and Restated Employment Agreement, dated as of March 13,
2001, between Renaissance Reinsurance Ltd. and James N. Stanard.@@@
55
10.3 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.###
10.4 Employment Agreement, dated as of July 1, 1999, between Renaissance
Reinsurance Ltd. and David A. Eklund.@@
10.5 Employment Agreement, dated as of October 17, 1997, between Renaissance
Reinsurance Ltd. and John M. Lummis. @@
10.6 Employment Agreement, dated as of June 1, 2000, between Renaissance
Reinsurance Ltd. and John D. Nichols.
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 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.###
10.10 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.###
10.11 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.12 Amended and Restated Declaration of Trust of RenaissanceRe Capital
Trust, dated as of March 7, 1997, among RenaissanceRe, 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.^
10.13 Indenture, dated as of March 7, 1997, among RenaissanceRe, as Sponsor,
and The Bank of New York, as Debenture Trustee.^
10.14 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between RenaissanceRe and The Bank of New York, as Trustee.^
10.15 Registration Rights Agreement, dated March 7, 1997, among
RenaissanceRe, the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Salomon Brothers Inc.^
10.16 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.#
10.17 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.@
10.18 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings,
Ltd., as Guarantor, and Bank of America National Trust & Savings
Association.#
10.19 RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan.@@@
56
10.20 Amendment No. 1 to the 2001 RenaissanceRe Stock Incentive Plan, dated
May 4, 2001.
10.21 Amendment No. 3 to the RenaissanceRe Second Amended and Restated 1993
Stock Incentive Plan, dated May 4, 2001.
10.22 Amendment No. 1 to the RenaissanceRe Non-Employee Director Stock Plan,
dated February 5, 2002.
10.23 Amendment No. 2 to the 2001 Stock Incentive Plan of RenaissanceRe,
dated February 5, 2002.
10.24 Master Standby Letter of Credit Reimbursement Agreement, dated as of
November 2, 2001, between RenaissanceRe and Fleet National Bank.
10.25 Certificate of Designation, Preferences and Rights of 8.10% Series A
Preference Shares.@@@@
10.26 Senior Indenture, dated as of July 1, 2001, between RenaissanceRe, as
Issuer, and Bankers Trust Company, as Trustee.+++
10.27 First Supplemental Indenture, dated as of July 17, 2001, to the
Indenture, dated as of July 1, 2001, between RenaissanceRe, as Issuer,
and Bankers Trust Company, as Trustee.+++
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, 2001.
(b) Reports on Form 8-K.
On October 3, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 2, 2001, reporting RenaissanceRe's estimated earnings for the three
months ended September 30, 2001 and for the full year ended 2001 and reporting
the estimated impact on RenaissanceRe of the September 11th tragedy.
On October 10, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 9, 2001, announcing the formation of DaVinci.
On October 16, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 15, 2001, reporting RenaissanceRe's issuance of 2,500,000 shares of its
Common Shares in an underwritten public offering.
On October 24, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 22, 2001, reporting RenaissanceRe's operating income for the three
months ended September 30, 2001.
On November 16, 2001, RenaissanceRe filed a report on Form 8-K, dated
November 14, 2001, reporting that RenaissanceRe had entered into an underwriting
agreement covering the sale by RenaissanceRe of 6,000,000 of its 8.10% Series A
Preferred Shares.
- --------------------------------------------------------------------------------
* Incorporated by reference to the Registration Statement on Form S-1 of
RenaissanceRe (Registration No. 33-70008) which was declared effective
by the Commission on July 26, 1995.
^ Incorporated by reference to RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe's Quarterly Report on Form
10-Q for the period ended June 30, 1998, filed with the Commission on
August 4, 1998.
57
## Incorporated by reference to RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe's Annual Report on Form 10-K
for the year ended December 31, 1999, filed with the Commission on
March 30, 2000.
@@@ Incorporated by reference to RenaissanceRe `s Annual Report on Form
10-K for the year ended December 31, 2000 filed with the Commission on
April 2, 2001.
@@@@ Incorporated by reference to RenaissanceRe's Current Report on
Form 8-K, filed with the Commission on November 16, 2001, relating to
certain events which occurred on November 14, 2001.
+++ Incorporated by reference to RenaissanceRe's Current Report on
Form 8-K, filed with the Commission on July 17, 2001, relating to
certain events which occurred on July 12, 2001.
58
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 April 1, 2002.
RENAISSANCERE HOLDINGS LTD.
/s/ James N. Stanard
-----------------------------------
James N. Stanard
Chief Executive Officer and
Chairman of the Board of Directors
Signature Title Date
/s/ James N. Stanard Chief Executive Officer and April 1, 2002
- ------------------------ Chairman of the Board of
James N. Stanard Directors
/s/ William I. Riker President and Chief Operating April 1, 2002
- ------------------------ Officer, Director
William I. Riker
/s/ John M. Lummis Executive Vice President and April 1, 2002
- ------------------------ Chief Financial Officer
John M. Lummis (Principal Accounting Officer)
/s/ Arthur S. Bahr Director April 1, 2002
- ------------------------
Arthur S. Bahr
/s/ Thomas A. Cooper Director April 1, 2002
- ------------------------
Thomas A. Cooper
/s/ Edmund B. Greene Director April 1, 2002
- ------------------------
Edmund B. Greene
/s/ Brian R. Hall Director April 1, 2002
- ------------------------
Brian R. Hall
/s/ William F. Hecht Director April 1, 2002
- ------------------------
William F. Hecht
/s/ W. James MacGinnitie Director April 1, 2002
- ------------------------
W. James MacGinnitie
/s/ Scott E. Pardee Director April 1, 2002
- ------------------------
Scott E. Pardee
59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets at December 31, 2000 and 2001...................F-3
Condensed Statements of Income for the Years Ended December 31, 1999,
2000 and 2001.............................................................F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 2000 and 2001....................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 2000 and 2001.......................................................F-6
Notes to Consolidated Financial Statements..................................F-7
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young
Hamilton, Bermuda
January 23, 2002
F-2
CONSOLIDATED BALANCE SHEETS
See accompanying notes to the consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF INCOME
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 (amounts in tables expressed in thousands of United States
dollars, except per share amounts)
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe", or the "Company"), was formed
under the laws of Bermuda on June 7, 1993. Through its subsidiaries it provides
reinsurance and insurance coverage where the risk of natural and man-made
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 non-catastrophe reinsurance in certain
specialty lines.
o The Company also manages property catastrophe reinsurance written on behalf
of joint ventures, including Top Layer Reinsurance Ltd. ("Top Layer Re"),
Overseas Partners Cat Ltd. ("Opcat") and DaVinci Reinsurance Ltd.
("DaVinci"). DaVinci was formed in October 2001 with other equity investors
and is consolidated in the Company's financial statements. The Company acts
as exclusive underwriting manager for these joint ventures in 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 Stonington Insurance Company ("Stonington," formerly Nobel
Insurance Company). Glencoe provides catastrophe exposed property coverage on
an insurance and reinsurance basis and DeSoto and DeSoto Prime operate in the
U.S. homeowners market. Stonington is licensed 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 wholly-owned and majority-owned subsidiaries
and DaVinci, 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 RenaissanceRe Capital Trust (the "Trust") and
DaVinciRe Holdings Ltd. (Note 7). The Company has also established a
wholly-owned subsidiary, RenaissanceRe Capital Trust II, which is a financing
subsidiary available to issue certain types of securities on behalf of the
Company. As of December 31, 2001, no such securities had been issued. 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 materially 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.
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.
F-6
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. The
Financial Accounting Standards Board ("FASB") has recently issued Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." As a result, the Company's goodwill existing at December 31, 2001 will
cease to be amortized effective January 1, 2002, and will, thereafter, be
subject to an annual impairment review. The adoption of SFAS 142 will have no
significant impact on the Company's financial statements.
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.
F-7
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 SFAS No. 123, "Accounting for Stock
Based Compensation," 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.
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 the near term.
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
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.
F-8
- --------------------------------------------------------------------------------
At December 31, 2001
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Due within one year $ 10,589 $ 10,797
Due after one through five years 487,302 494,286
Due after five through ten years 184,747 185,473
Due after ten years 90,166 93,420
U.S. asset backed securities 292,175 294,791
U.S. mortgage backed securities 201,209 203,716
- --------------------------------------------------------------------------------
$ 1,266,188 $ 1,282,483
- --------------------------------------------------------------------------------
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by ratings assigned by rating agencies (e.g. Standard & Poors
Corporation) or, with respect to non-rated issues, as estimated by the Company's
investment managers.
- --------------------------------------------------------------------------------
At December 31,
2001 2000
- --------------------------------------------------------------------------------
AAA 69.9% 69.1%
AA 7.6 9.4
A 6.3 5.5
BBB 7.3 5.1
BB 2.7 2.9
B 4.4 5.5
CCC 0.6 0.3
CC 0.2 0.1
D 0.1 -
NR 0.9 2.1
- --------------------------------------------------------------------------------
100.0% 100.0%
- --------------------------------------------------------------------------------
INVESTMENT INCOME
The components of net investment income are as follows:
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
F-9
At December 31, 2001 approximately $12.1 million (2000 - $15.0 million) of cash
and investments at fair value were on deposit with various regulatory
authorities as required by law.
ALTERNATIVE INVESTMENTS
Included in other investments are investments in hedge funds and a fund holding
bank loans of $28.4 million (2000 - $15.5 million) and private equity
investments of $4.9 million (2000 - $1.7 million). The Company has committed
capital to its private equity partnerships of $25.0 million, of which $5.0
million has been contributed at December 31, 2001.
CATASTROPHE LINKED INSTRUMENTS
The Company has assumed and ceded risk through catastrophe linked securities and
derivative instruments under which losses or recoveries are triggered by an
industry loss index or geological or physical variables. During 2001, 2000 and
1999, the Company recognized gains on these contracts of $2.7 million, $nil, and
$2.5 million, respectively, which are included in other income. The fair value
of these contracts at December 31, 2001 is a loss of $1.0 million, which is
reflected in other income. Also included in other income are payments of $7.3
million for derivative type contracts to protect the Company's property
catastrophe reinsurance business.
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 $155.7 million, $149.8 million and $128.1
million for 2001, 2000 and 1999, 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 $160.4 million, $52.0 million and $255.3 million for
2001, 2000 and 1999, respectively. As of December 31, 2001, the Company has
recorded a $7.5 million valuation allowance against these recoveries.
Included in losses and premiums recoverable as of December 31, 2001, are
recoverables of $14.4 million (2000 - $23.2 million) which relate to a
retroactive reinsurance contract entered into by Stonington. 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 a reduction to claims
and claim expenses as payments are received from the reinsurer. The balance of
the deferred recovery as of December 31, 2001 and 2000 was $8.4 million and
$13.9 million, respectively.
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.
For both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to 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 incurred
but not reported ("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-10
Activity in the liability for unpaid claims and claim expenses is summarized as
follows:
The prior year development in 2001 was due primarily to net additional
recoveries on 1999 property catastrophe loss events. 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. The
Company's total gross reserve for incurred but not reported claims was $286.7
million as of December 31, 2001 (2000 - $228.8 million).
NOTE 6. DEBT
The Company has a $310 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. During the third quarter of
2001, the Company repaid its borrowings of $16.5 million on this facility. As of
December 31, 2001 there was no outstanding balance, compared to $8.0 million
outstanding at December 31, 2000. Interest rates on the facility are based on a
spread above LIBOR and averaged 5.45 percent during 2001 (7.03 percent in 2000).
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 Moodys Investor Service or better. The Company was in compliance with
all the covenants of this revolving credit and term loan agreement as at
December 31, 2001. The fair value of the borrowings approximate the carrying
value because such loans reprice frequently.
In July 2001, the Company issued $150 million of 7% Senior Notes due July 2008.
The Company used a portion of the proceeds to repay $16.5 million of outstanding
amounts under the $310 million revolving credit and term loan agreement.
Interest on the notes is payable on January 15 and July 15 of each year. The
notes can be redeemed by the Company prior to maturity subject to payment of a
"make-whole" premium; however, the Company has no current intentions of calling
the notes. The notes, which are senior obligations of the Company, contain
various covenants, including limitations on mergers and consolidations,
restriction as to the disposition of stock of designated subsidiaries and
limitations on liens on the stock of designated subsidiaries. As of December 31,
2001 the fair value of the notes is $151.1 million.
Renaissance U.S. has an $18.5 million term loan and $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
are based upon a spread above LIBOR, and averaged 4.71 percent during 2001 (6.98
percent in 2000). As of December 31, 2001 the balance outstanding was $33.5
million (2000 - $42 million). The credit agreement contains certain financial
covenants, the primary one being that, RenaissanceRe, be 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 2002 and 2003. The loan facility of $15 million is repayable in
2003. During 2001, the Company repaid the second installment of $8.5 million in
accordance with the terms of the loan. The Company was in compliance with all
the covenants of this term loan and revolving loan facility as at December 31,
2001. The fair value of the borrowings approximate the carrying values because
such loans reprice frequently.
Interest payments on the above debt totaled $7.3 million, $17.2 million and $8.3
million for the years ended December 31, 2001, 2000 and 1999, respectively.
F-11
NOTE 7. MINORITY INTERESTS
CAPITAL SECURITIES
On March 7, 1997 the Company issued $100 million of Company obligated,
mandatorily redeemable capital securities of a subsidiary trust holding solely
$103,092,783 of the Company's 8.54 percent junior subordinated debentures due
March 1, 2027 ("Capital Securities") issued by the Trust. 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 shareholder's equity.
No capital securities were repurchased in 2001.
DAVINCI
In October 2001, the Company formed DaVinci with other equity investors. The
company currently owns a minority economic interest but controls a majority of
the outstanding voting rights. The results of DaVinci are reflected in the
consolidated financial statements of the Company. The portion of DaVinci's
operations that relate to the minority shareholders is reflected in the
consolidated financial statements as minority interest.
NOTE 8. SHAREHOLDERS' EQUITY
The aggregate authorized capital of the Company is 325,000,000 shares consisting
of 225,000,000 common shares and 100,000,000 preference shares. The Company's
225,000,000 authorized $1.00 par value common shares consist of three separate
series with differing voting rights as follows:
On October 15, 2001, the Company issued 2.5 million common shares for proceeds,
net of fees, discounts and commissions, of approximately $232.5 million. Costs
associated with the sale of the shares, totaling approximately $3.2 million,
were deducted from the related proceeds. The net amount received in excess of
common share par value was recorded in additional paid-in capital.
In November 2001, the Company issued 6,000,000 $1.00 par value Series A
preference shares at $25.00 per share. The shares may be redeemed at $25.00 per
share at the Company's option on or after November 19, 2006. Dividends are
cumulative from the date of original issuance and are payable quarterly in
arrears at 8.10% when, if, and as declared by the Board of Directors. If the
Company submits a proposal to our shareholders concerning an amalgamation or
submits any proposal that, as a result of any changes to Bermuda law, requires
approval of the holders of our preference shares to vote as a single class, the
Company may redeem the shares prior to November 19, 2006 at $26.00 per share.
The preference shares have no stated maturity and are not convertible into any
other securities of the Company.
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. Subsequent to the authorization, affiliates
and other parties related to General Electric Investment Corporation ("GEI")
exchanged 5.7 million common shares for 4.2 million Diluted Voting I Shares and
1.5 million Diluted Voting II Shares, and as such are the sole holders of such
diluted voting securities.
F-12
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. The value of the remaining shares authorized under the
repurchase programs is $27.1 million. For the year ended December 31, 2000 the
Company repurchased 671,900 common shares at an aggregate price of $25.1
million. During 1999 the Company repurchased a total of 2,226,700 common shares
at an aggregate price of $80.1 million. No shares were repurchased during 2001.
Common shares repurchased by the Company are normally cancelled and retired.
During 2001 and 2000, GEI completed the sale of 0.3 million and 1.0 million
Diluted Voting I Shares, respectively, pursuant to shelf registrations on Form
S-3. The Diluted Voting I shares sold by GEI were subsequently converted into
common shares.
On November 17, 1999, the Company purchased and cancelled 700,000 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.
NOTE 9. 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):
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Weighted average shares - basic 19,830 19,034 20,444
Per share equivalents of employee
stock options and restricted shares 967 542 184
- --------------------------------------------------------------------------------
Weighted average shares - diluted 20,797 19,576 20,628
- --------------------------------------------------------------------------------
NOTE 10. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Other assets include the Company's investment in Top Layer Re of $23.4 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 totaled $18.0 million for the year ended
December 31, 2001 (2000 - $9.8 million) and are included in other income. During
2001 and 2000, the Company also received distributions from Top Layer Re of $7.5
million and $1.2 million, respectively.
During the years ended December 31, 2001, 2000 and 1999, the Company received
79.9%, 78.3%, and 78.8%, respectively, of its premium assumed from its four
largest reinsurance brokers. Subsidiaries and affiliates of the Benfield Group
PLC, Marsh Inc., Willis Faber and AON Re Group accounted for approximately
28.0%, 23.0%, 14.0% and 11.9%, respectively, of the Company's premiums written
in 2001.
F-13
NOTE 11. DIVIDENDS
During 2001, four regular quarterly dividends of $0.40 per share were paid to
shareholders of record as of February 20, May 18, August 14, and November 22.
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.
The total amount of dividends paid to holders of the Common Shares during 2001,
2000 and 1999 was $32.8 million, $29.2 million and $28.9 million, respectively.
NOTE 12. TAXATION
Under current Bermuda law, the Company is not required to pay taxes in Bermuda
on either income or capital gains. Income from the Company's U.S.-based
subsidiaries 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:
- --------------------------------------------------------------------------------
At December 31, 2001
Current Deferred Total
- --------------------------------------------------------------------------------
U.S. federal $ 2,369 $ 11,872 $ 14,241
U.S. state and local 21 - 21
- --------------------------------------------------------------------------------
$ 2,390 $ 11,872 $ 14,262
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred taxes assets and deferred tax liabilities are presented below:
The net deferred tax asset is included in other assets on the consolidated
balance sheet. The net operating loss carryforward of $58.5 million (2000 -
$49.9 million) is available to offset regular taxable U.S. income during the
carryforward period (through 2020).
During 2001, the Company recorded additions to the valuation allowance of $14.0
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, 2001 and 2000. Accordingly, under the
circumstances, and until the Company's U.S. operations begin to generate
significant taxable income, the Company believes that it is necessary to
establish and maintain a valuation allowance against a significant portion of
the net deferred tax asset.
F-14
NOTE 13. GEOGRAPHIC INFORMATION
Financial information relating to gross premiums by geographic region is as
follows:
- --------------------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
- --------------------------------------------------------------------------------
United States and Caribbean $ 180,305 $ 145,871 $ 173,598
Worldwide 93,474 98,923 46,712
Worldwide (excluding U.S.) (1) 45,111 60,382 27,276
Other 22,433 9,559 2,370
Europe 20,414 22,071 26,437
Australia and New Zealand 12,159 8,280 3,212
Specialty reinsurance premium (2) 77,468 37,730 2,740
- --------------------------------------------------------------------------------
Total reinsurance 451,364 382,816 282,345
United States-primary 49,957 50,186 68,960
- --------------------------------------------------------------------------------
Total gross written premium $ 501,321 $ 433,002 $ 351,305
- --------------------------------------------------------------------------------
(1) The category "Worldwide (excluding U.S.)" reflects contracts that cover more
than one geographic region (other than the U.S.). The Company's exposure in
this category for gross premiums written to date is predominantly from
Europe and Japan.
(2) The category "Specialty reinsurance" includes coverages related to
non-catastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, aviation, finite, and
satellite risks assumed by us.
NOTE 14. 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 auto and aviation coverages written by
Stonington, which have been substantially reinsured.
The activities of the Company's Bermuda and U.S. holding companies are the
primary contributors to the results reflected outside of the reinsurance and
primary segments. 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
and, for 2001, income related to the Company's index based contracts.
F-15
Data for the years ended December 31, 2001, 2000 and 1999 was as follows:
F-16
NOTE 15. 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, 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 2001, 2000 and 1999,
respectively; dividend yield of 1.7, 1.9 and 3.4 percent, expected option life
of five years for all years, and expected volatility of 30.99, 28.51 and 27.41
percent. The risk-free interest rate was assumed to be 4.8 percent in 2001, 5.0
percent in 2000 and 6.3 percent in 1999. 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 $153.2 million, $109.4 million and $100.9
million for each of 2001, 2000 and 1999, respectively, and the Company's
earnings per share on a diluted basis would have been $7.37, $5.59 and $4.89 for
each of 2001, 2000 and 1999, respectively.
The following is a table of the changes in options outstanding for 2001, 2000
and 1999, respectively:
F-17
Under the Company's 2001 Stock Incentive Plan the total number of shares
available for distribution as of December 31, 2001 was 906,229 shares. The Plan
also allows for the issuance of share-based awards, the issuance of restricted
common shares, the issuance of reload options for shares tendered in connection
with option exercises and a provision 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. Under the plan, the total
number of shares available for distribution as of December 31, 2001 was 73,944
shares. As of December 31, 2001, the number of options issued to directors and
unexercised was 114,000. In 2001, no options to purchase common shares were
granted and 1,872 restricted common shares were granted. 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. 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 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 2001, 2000 and 1999 the
Company issued 50,220, 77,342 and 56,430 shares under this plan, respectively,
with fair values of $3.2 million, $2.9 million and $2.0 million, respectively.
Additionally, in 2001, 2000 and 1999 the Board of Directors granted 188,696,
159,537 and 130,195 restricted shares with a value of $14.0 million, $6.3
million, and $4.6 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 $7.2
million, $5.5 million, and $3.4 million in 2001, 2000 and 1999, respectively.
In 2000, the Company granted a special option grant to all of its directors and
officers equal to three times the normal annual grant. As a result of this
special grant, annual option grants were not granted in 2001 and it is not
currently anticipated that annual option grants will be granted in 2002.
However, during 2001, the Board issued certain special option grants as it
deemed appropriate to attract or retain personnel and also retains the right to
issue other special grants in the future. The majority of the options granted in
2001 related to options granted to new employees and options issued with respect
to shares tendered in connection with option exercises, in accordance with the
reload provisions of the Company's Stock Incentive Plan.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 16. STATUTORY REQUIREMENTS
Under the Insurance Act 1978, amendments thereto and Related Regulations of
Bermuda ("the Act"), certain subsidiaries of the Company are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires these subsidiaries of the Company to maintain
certain measures of solvency and liquidity during the period. As at December 31,
2001, the statutory capital and surplus of the Bermuda subsidiaries was $1,490.3
million and the amount required to be maintained under Bermuda law was $259.7
million.
Under the Act, Renaissance Reinsurance and DaVinci are classified as Class 4
insurers, and are, 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 the company to fail to meet their relevant
margins. During 2001, Renaissance Reinsurance and DaVinci paid aggregate cash
dividends of $141.9 million and $0.7 million, respectively.
F-18
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. Glencoe, as DeSoto's parent company, is required to maintain a minimum
of $50 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, 2001 and the amount required to be maintained was $24.3 million.
Codification of statutory accounting in the U.S. was generally effective January
1, 2001. Codification did not have a significant impact on the statutory surplus
of the Company's U.S. insurance subsidiaries
NOTE 17. 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, 2001.
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. The Company
anticipates that any such investments would be limited to yield enhancement,
duration management, foreign currency exposure management or to obtain an
exposure to a particular financial market.
LETTERS OF CREDIT
As of December 31, 2001, the Company's bankers have issued letters of credit of
approximately $125.8 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 shares, and to facilitate purchases
of the Company's shares 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 shares purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. At December 31, 2001, the bank loans guaranteed by the
Company totaled $24.1 million. At December 31, 2001, the common shares that
collateralizes the loans had a fair value of $59.2 million.
LITIGATION The Company is party to various lawsuits arising in the normal course
of business. The Company does not believe that any of its pending litigation
will have a material impact on its consolidated financial statements.
F-19
NOTE 18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(amounts in tables expressed in thousands of United States dollars, except per
share amounts)
F-20
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, 2001..........................................S-3
II Condensed Financial Information of the Registrant.....................S-4
III Supplementary Insurance Information for the years ended
December 31, 2001, 2000 and 1999......................................S-7
IV Reinsurance for the years ended December 31, 2001, 2000 and 1999......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, 2001 and 2000, and for each of
the three years in the period ended December 31, 2001, and have issued our
report thereon dated January 23, 2002; 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, 2001. 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 23, 2002
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)
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, 2001
RenaissanceRe Holdings Ltd.
EXHIBITS
- --------
1. The Consolidated Financial Statements of RenaissanceRe and related
Notes thereto are listed in the accompanying Index to Consolidated
Financial Statements and are filed as part of this Report.
2. The Schedules to the Consolidated Financial Statements of RenaissanceRe
are listed in the accompanying Index to Schedules to Consolidated
Financial Statements and are filed as part of this Report.
3.1 Memorandum of Association.*
3.2 Amended and Restated Bye-Laws.#
3.3 Memorandum of Increase in Share Capital of RenaissanceRe.##
4.1 Specimen Common Share certificate.*
10.1 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.2 Fourth Amended and Restated Employment Agreement, dated as of March 13,
2001, between Renaissance Reinsurance Ltd. and James N. Stanard.@@@
10.3 Employment Agreement, dated as of February 4, 1998, between Renaissance
Reinsurance Ltd. and William I. Riker.###
10.4 Employment Agreement, dated as of July 1, 1999, between Renaissance
Reinsurance Ltd. and David A. Eklund.@@
10.5 Employment Agreement, dated as of October 17, 1997, between Renaissance
Reinsurance Ltd. and John M. Lummis. @@
10.6 Employment Agreement, dated as of June 1, 2000, between Renaissance
Reinsurance Ltd. and John D. Nichols.
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 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.###
10.10 RenaissanceRe Holdings Ltd. Amended and Restated Non-Employee Director
Stock Plan.###
10.11 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.12 Amended and Restated Declaration of Trust of RenaissanceRe Capital
Trust, dated as of March 7, 1997, among RenaissanceRe, 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.^
10.13 Indenture, dated as of March 7, 1997, among RenaissanceRe, as Sponsor,
and The Bank of New York, as Debenture Trustee.^
10.14 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between RenaissanceRe and The Bank of New York, as Trustee.^
10.15 Registration Rights Agreement, dated March 7, 1997, among
RenaissanceRe, the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Salomon Brothers Inc.^
10.16 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.#
10.17 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.@
10.18 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings,
Ltd., as Guarantor, and Bank of America National Trust & Savings
Association.#
10.19 RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan.@@@
10.20 Amendment No. 1 to the 2001 RenaissanceRe Stock Incentive Plan, dated
May 4, 2001.
10.21 Amendment No. 3 to the RenaissanceRe Second Amended and Restated 1993
Stock Incentive Plan, dated May 4, 2001.
10.22 Amendment No. 1 to the RenaissanceRe Non-Employee Director Stock Plan,
dated February 5, 2002.
10.23 Amendment No. 2 to the 2001 Stock Incentive Plan of RenaissanceRe,
dated February 5, 2002.
10.24 Master Standby Letter of Credit Reimbursement Agreement, dated as of
November 2, 2001, between RenaissanceRe and Fleet National Bank.
10.25 Certificate of Designation, Preferences and Rights of 8.10% Series A
Preference Shares.@@@@
10.26 Senior Indenture, dated as of July 1, 2001, between RenaissanceRe, as
Issuer, and Bankers Trust Company, as Trustee.+++
10.27 First Supplemental Indenture, dated as of July 17, 2001, to the
Indenture, dated as of July 1, 2001, between RenaissanceRe, as Issuer,
and Bankers Trust Company, as Trustee.+++
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, 2001.
(b) Reports on Form 8-K.
On October 3, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 2, 2001, reporting RenaissanceRe's estimated earnings for the three
months ended September 30, 2001 and for the full year ended 2001 and reporting
the estimated impact on RenaissanceRe of the September 11th tragedy.
On October 10, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 9, 2001, announcing the formation of DaVinci.
On October 16, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 15, 2001, reporting RenaissanceRe's issuance of 2,500,000 shares of its
Common Shares in an underwritten public offering.
On October 24, 2001, RenaissanceRe filed a report on Form 8-K, dated
October 22, 2001, reporting RenaissanceRe's operating income for the three
months ended September 30, 2001.
On November 16, 2001, RenaissanceRe filed a report on Form 8-K, dated
November 14, 2001, reporting that RenaissanceRe had entered into an underwriting
agreement covering the sale by RenaissanceRe of 6,000,000 of its 8.10% Series A
Preferred Shares.
- --------------------------------------------------------------------------------
* Incorporated by reference to the Registration Statement on Form S-1 of
RenaissanceRe (Registration No. 33-70008) which was declared effective
by the Commission on July 26, 1995.
^ Incorporated by reference to RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe'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 RenaissanceRe's Annual Report on Form
10-K for the year ended December 31, 1999, filed with the Commission on
March 30, 2000.
@@@ Incorporated by reference to RenaissanceRe`s Annual Report on Form
10-K for the year ended December 31, 2000 filed with the Commission on
April 2, 2001.
@@@@ Incorporated by reference to RenaissanceRe's Current Report on
Form 8-K, filed with the Commission on November 16, 2001, relating to
certain events which occurred on November 14, 2001.
+++ Incorporated by reference to RenaissanceRe's Current Report on
Form 8-K, filed with the Commission on July 17, 2001, relating to
certain events which occurred on July 12, 2001.