10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 14, 2002
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 34-0-26512
RENAISSANCERE HOLDINGS LTD.
---------------------------
(Exact name of registrant as specified in its charter)
BERMUDA 98-013-8020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RENAISSANCE HOUSE
8-12 EAST BROADWAY
PEMBROKE, BERMUDA HM 19
(Address of principal executive offices) (Zip Code)
(441) 295-4513
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 [ ]
The number of outstanding shares of RenaissanceRe Holding Ltd.'s common
stock, par value US $1.00 per share, as of June 30, 2002 was 68,808,376
Total number of pages in this report: 31
1
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial statements
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of United States Dollars, except per share amounts)
The accompanying notes are an integral part of these financial statements.
3
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands of United States Dollars, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
4
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands of United States Dollars)
(Unaudited)
(1) Comprehensive income for the quarters ended June 30, 2002 and 2001 were
$101.5 million and 31.7 million, respectively.
The accompanying notes are an integral part of these financial statements.
5
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands of United States Dollars)
(Unaudited)
(1) Of the $389.1 million of operating cash flows, $40.7 million is from
DaVinci.
The accompanying notes are an integral part of these financial statements.
6
RenaissanceRe Holdings Ltd. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
1. The consolidated financial statements have been prepared on the basis
of U.S. generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. The consolidated financial statements include the accounts
of RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its wholly-owned
subsidiaries, including Renaissance Reinsurance Ltd. ("Renaissance
Reinsurance"), Glencoe Insurance Ltd. ("Glencoe"), Renaissance U.S.
Holdings, Inc. ("Renaissance U.S."), RenaissanceRe Capital Trust (the
"Trust") and Renaissance Underwriting Managers, Ltd. ("Renaissance
Managers"). The consolidated statements also include the accounts of
the Company's partially-owned subsidiary, DaVinciRe Holdings Ltd.
("DaVinciRe").
Also included in the consolidated financial statements is Overseas
Partners Cat Ltd. ("OP Cat"), formerly a subsidiary of Overseas
Partners Ltd. ("OPL"). The Company purchased OP Cat at book value,
which equated to $25 million on May 10, 2002, the date of the purchase.
RenaissanceRe and its subsidiaries are collectively referred to herein
as the "Company," and references herein to "our", "we", or "us" refer
to the Company. All intercompany transactions and balances have been
eliminated on consolidation.
The Company's principal product is property catastrophe reinsurance,
principally provided through Renaissance Reinsurance. The Company acts
as underwriting manager and underwrites worldwide property catastrophe
reinsurance programs on behalf of joint ventures, including Top Layer
Reinsurance Ltd. ("Top Layer Re") and DaVinci Reinsurance Ltd.
("DaVinci"). DaVinciRe and DaVinci were formed in October 2001 with
other equity investors. The Company owns a minority equity interest in,
but controls a majority of the outstanding voting shares of, DaVinciRe.
Minority interests represent the interests of external parties with
respect to net income and shareholders' equity of the Trust and
DaVinci. The Company has also established a wholly-owned subsidiary,
RenaissanceRe Capital Trust II ("Capital Trust II"), which is a
financing subsidiary available to issue certain types of securities on
behalf of the Company. As of June 30, 2002, no such securities have
been issued by Capital Trust II. The Trust is the issuer of $84.6
million of outstanding mandatorily redeemable preferred capital
securities and holds a like amount of junior subordinated debentures
issued by RenaissanceRe. RenaissanceRe's guarantee of the distributions
on the preferred securities issued by the Trust (and, if issued, those
of Capital Trust II), when taken together with RenaissanceRe's
obligations under the expense reimbursement agreement with the Trust,
provides a full and unconditional guarantee of amounts due on the
preferred capital securities issued by the Trust.
Certain comparative information has been reclassified to conform to the
current presentation. Because of the seasonality of the Company's
business, the results of operations and cash flows for any interim
period will not necessarily be indicative of results of operations and
cash flows for the full fiscal year or subsequent quarters.
7
2. The Company purchases reinsurance to reduce its exposure to large
losses. The Company currently has in place contracts that provide for
recovery of a portion of certain claims and claims expenses from
reinsurers in excess of various retentions and loss warranties. The
Company would remain liable to the extent that any third party
reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $97.9 million and $71.2 million for the
six month periods ended June 30, 2002 and 2001, respectively. Other
than loss recoveries, certain of the Company's ceded reinsurance
contracts provide for recoveries of additional premiums, reinstatement
premiums and for unrecovered no claims bonuses which are unrecoverable
when losses are ceded to those reinsurance contracts.
Total recoveries netted against premiums and claims and claim expenses
incurred for the six months ended June 30, 2002 were $31.5 million
compared to $52.7 million for the six months ended June 30, 2001.
3. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). As a result, the Company's
goodwill existing at December 31, 2001 is no longer being amortized and
is subject to an annual impairment review. In the second quarter of
2002, the Company completed its initial impairment review in compliance
with the transition provisions of FAS 142 and, as a result, the Company
decided to reflect goodwill at zero value, the low end of an estimated
range of values. Accordingly, during the second quarter of 2002, the
Company wrote-off the balance of its goodwill, or $9.2 million. As
required by SFAS 142, this charge has been reflected as a cumulative
effect of a change in accounting principle, and is excluded from the
net income of the quarter and included in the Company's net income for
the six months ended June 30, 2002. The following tables set forth the
effects of adopting SFAS No. 142 on the comparative period income:
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars except share and per share data)
Three months ended
June 30, 2001
------------------
Net income available to common shareholders, as reported $ 40,339
Add back: goodwill amortization expense 139
-----------
Adjusted net income available to common shareholders $ 40,478
===========
Average common shares outstanding - basic 57,838,470
Average common shares outstanding - diluted 60,454,491
Adjusted per common share data
Earnings per common share - basic $ 0.70
Earnings per common share - diluted $ 0.67
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars except share and per share data)
Six months ended
June 30, 2001
----------------
Net income available to common shareholders, as reported $ 85,244
Add back: goodwill amortization expense 278
-----------
Adjusted net income available to common shareholders $ 85,522
===========
Average common shares outstanding - basic 57,759,573
Average common shares outstanding - diluted 60,574,797
Adjusted per common share data
Earnings per common share - basic $ 1.48
Earnings per common share - diluted $ 1.41
- --------------------------------------------------------------------------------
4. During the quarter, the Company changed its policy regarding the
classification of certain investments previously reflected as cash and
cash equivalents. These investments were reclassified to short-term
investments to more appropriately reflect the Company's investment
strategy regarding those assets. Prior period comparatives have been
reclassified to reflect this change in policy.
5. On April 19, 2002, DaVinci entered into a credit agreement with a
syndicate of commercial banks providing for a $100.0 million revolving
credit facility. On May 10, 2002, DaVinci borrowed the full $100.0
million available under this facility to repay $100 million bridge
financing provided by RenaissanceRe. Interest rates on the facility are
based on a spread above LIBOR. Neither RenaissanceRe nor Renaissance
Reinsurance is a guarantor of this facility and the lenders have no
recourse against our affiliates other than DaVinci under this facility.
Pursuant to the terms of the $310.0 million facility maintained by
RenaissanceRe a default by DaVinci in its obligations will not result
in a default under the RenaissanceRe facility. Although the Company
only owns a minority of the economic interests of DaVinci, the Company
controls a majority of its outstanding voting power and, accordingly,
DaVinci is included in the Company's consolidated financial statements;
as a result, the replacement of $100 million debt from RenaissanceRe
with $100 million of debt from a third party has caused the Company's
reported consolidated debt to increase by $100 million.
6. For the six month period ended June 30, 2002, the Company paid interest
of $6.1 million on its outstanding loans and 7% Senior Notes. For the
same period in the previous year the Company paid interest $1.5 million
on its outstanding loans. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Capital Resources and
Shareholders' Equity" for further discussion.
7. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options
and restricted stock grants. The following tables set forth the
computation of basic and diluted earnings per share (see Note 8 below):
9
8. The Board of Directors of RenaissanceRe declared, and RenaissanceRe
paid, a dividend of $0.142 per share to shareholders of record on each
of February 19, 2002 and May 16, 2002. On August 8, 2002 the Board of
Directors declared a dividend of $0.142 per share payable on September
16, 2002 to shareholders of record on September 2, 2002. During the
second quarter of 2002, RenaissanceRe effected a three for one stock
split through a stock dividend of two additional common shares for each
common share owned. All of the share and per share information provided
in this 10-Q is presented as if the stock dividend had occurred for all
periods presented.
9. The Company has two reportable segments: reinsurance operations and
primary operations. The reinsurance segment primarily provides property
catastrophe reinsurance as well as other lines of 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
10
homeowners catastrophe-exposed property business and also provides this
protection to other insureds on a quota share basis. Data for the three
and six month periods ended June 30, 2002 and 2001 are as follows:
11
RenaissanceRe is the primary contributor to the results reflected in
the "Other" category. The pre-tax loss of RenaissanceRe primarily
consisted of interest expense on bank loans, the minority interest on
the Trust's 8.54 percent junior subordinated debentures due March 1,
2027 ("Capital Securities") and corporate expenses, partially offset by
realized investment gains on sales of investments, other income and
investment income.
10. The provision for income taxes is based on income recognized for
financial statement purposes and includes the effects of temporary
differences between financial and tax reporting. Deferred tax assets
and liabilities are determined based on the difference between the
financial statement bases and tax bases of assets and liabilities using
enacted tax rates.
RenaissanceRe's U.S. subsidiaries are subject to U.S. tax. The net
deferred tax asset of $4.1 million is net of a $25.8 million valuation
allowance. Net operating loss carryforwards and future tax deductions
will be available to offset regular taxable U.S. income during the
carryforward period (which expires during the period ranging from 2018
through 2020), subject to certain limitations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is a discussion and analysis of our results of operations for the
three and six month periods ended June 30, 2002 and 2001 and financial condition
as of June 30, 2002. This discussion and analysis should be read in conjunction
with the attached unaudited consolidated financial statements and notes thereto
and the audited consolidated financial statements and notes thereto contained in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
General
We provide reinsurance that is subject to the risk of natural and man-made
catastrophes. Our results depend to a large extent on the frequency and severity
of catastrophic events, and the concentration and coverage offered to clients
impacted thereby. Our catastrophe reinsurance business includes 1) writing
reinsurance on our own behalf and 2) writing reinsurance on behalf of our joint
ventures, principally Top Layer Re and DaVinci. We receive fee income based on
the performance of these joint ventures, however, as the results of operations
of DaVinci are consolidated in our financial statements, no fee income from
DaVinci is recognized in the consolidated financial statements. Our primary
operations principally provide coverage with respect to risks that are also
exposed to natural catastrophes.
Recently, we have increased our premiums from specialty lines of reinsurance,
including such lines as catastrophe-exposed workers compensation coverage,
property per risk, aviation, finite and satellite reinsurance. We have also
increased our premiums written by Glencoe, which provides catastrophe exposed
primary property coverage on an excess and surplus lines basis and also writes
quota share reinsurance of catastrophe exposed primary property insurance.
We may write other lines of business in the future although there can be no
assurance that any such premiums will be material to us. 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.
Critical Accounting Policies
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 any loss event will vary from
our ultimate loss results, 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 may be revealed and as
these factors become apparent, reserves will be adjusted. Therefore, adjustments
to our loss reserves can impact our current net income by 1) increasing our net
income if our estimated reserves prove to be redundant or 2) reducing our net
income if our estimated reserves prove to be insufficient. The impact from
changes in prior years loss reserves was an increase to net income of $6.6
million during the first six months of 2002, compared to an increase to net
income of $5.7 million for the same period in 2001.
Unlike the loss reserves of U.S. insurers, the loss reserves established by
Bermuda companies are not regularly examined by insurance regulators. However,
we subject the loss reserves of our Bermuda
13
insurance companies to an annual review by an independent third party who we
have identified as our loss reserve specialist under Bermuda law.
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.
Other material judgments made by us are the estimates of potential impairments
in asset valuations, particularly:
1) potential uncollectible reinsurance recoverables
2) impairments in our deferred tax asset
To estimate reinsurance recoverables which might be uncollectible, 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 recoverables. As of June 30, 2002 and December 31, 2001, we recorded
a valuation allowance of $8 million relating to reinsurance recoverables, based
on specific facts and circumstances evaluated by management.
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, for the six months ended June 30, 2002 we recorded a
valuation allowance of $25.8 million compared to $8.2 million for the six months
ended June 30, 2001. As of June 30, 2002 and December 31, 2001, the net balance
of the deferred tax asset was $4.1 million and $4.2 million, respectively.
14
RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2002 COMPARED TO THE QUARTER ENDED JUNE 30, 2001
A summary of the significant components of our revenues and expenses are as
follows:
The $55.8 million increase in operating income in the quarter ended June 30,
2002 compared to the quarter ended June 30, 2001 was primarily the result of the
following items:
o A $57.7 million increase in underwriting income from our reinsurance
operations (offset in part by minority interests), which was primarily
due to the significant growth in written premium, as noted below, and a
corresponding growth in earned premium. Also, during the quarter ended
June 30, 2002, the relatively low level of property catastrophe losses
increased our underwriting income from the reinsurance operations; plus
o A $4.2 million increase in other income caused primarily by an increase
in our equity participation in our joint venture, Top Layer Re; plus
o A $2.4 million increase in net investment income (net of interest and
fixed charges) which was primarily due to our capital raising
activities during the second half of 2001 and strong cash flows from
operations; less
o A $4.1 million decrease in corporate expenses, taxes and other charges
which primarily relates to a $3.4 million increase in foreign exchange
gains.
For the quarter ended June 30, 2002, net operating income available to common
shareholders, excluding realized investment gains and losses, was $93.3 million
or $1.33 per common share, compared to $37.5 million or $0.62 per common share
for the same quarter in 2001. Net income available to common shareholders rose
138% to $96.2 million, or $1.37 per common share, in the quarter, compared to
$40.3 million, or $0.67 per share, for the same quarter of 2001.
15
Gross premiums written for the second quarter of 2002 and 2001 were as follows:
- ---------------------------------------------------------------------
Quarter ended June 30, 2002 2001
--------------------------------
Cat Premium
Renaissance $87,854 $91,226
DaVinci 34,794 --
--------------------------------
Total Cat Premium 122,648 91,226
Specialty Reinsurance 71,632 15,488
--------------------------------
Total Reinsurance 194,280 106,714
--------------------------------
Insurance Premiums Glencoe 71,370 2,037
Insurance Premiums other 4,644 13,261
--------------------------------
Total Insurance premiums 76,014 15,298
--------------------------------
Total gross written premiums $270,294 $122,012
================================
- ---------------------------------------------------------------------
The increase in gross premiums written during the quarter ended June 30, 2002,
as compared to the quarter ended June 30, 2001, was primarily the result of the
hardening market environment which arose following the large losses incurred by
many insurance and reinsurance companies from the World Trade Center tragedy. We
believe that as a result of this event many insurers and reinsurers have 1)
withdrawn from certain segments of the insurance or reinsurance market and/or 2)
increased prices for coverages offered to insureds. Both of these factors,
withdrawal of capacity and increasing prices, have provided opportunities for us
to substantially grow our written premiums.
Our property catastrophe premiums have increased primarily due to increased
prices across our markets which has resulted in 1) an increase in our unit
volume due to an increased number of contracts which are being marketed on terms
which meet our exposure criteria and return hurdles and 2) higher prices on our
renewing business.
The market conditions described above have also contributed to our expansion in
1) the specialty reinsurance market, which includes coverages such as
catastrophe exposed workers compensation, aviation risks and 2) the primary
insurance market, where we provide catastrophe exposed property coverage on an
excess and surplus lines basis, primarily through our subsidiary Glencoe
Insurance.
Following the World Trade Center tragedy, we have increased our penetration into
the property catastrophe reinsurance market, which we measure based on the
amount of managed catastrophe premiums we write. For the quarter ended June 30,
2002, our total managed catastrophe premiums, which are catastrophe premiums we
write on behalf of Renaissance Reinsurance and our joint ventures, were $144.8
million, $56.9 million of which were derived from DaVinci and Top Layer Re. For
the quarter ended June 30, 2001, total managed catastrophe premiums were $92.6
million, $23.3 million of which were derived from our joint ventures.
The increase in other income to $8.1 million for the quarter ended June 30, 2002
compared to $3.9 million for the quarter ended June 30, 2001, was primarily due
to an increase in our equity participation from our joint venture, Top Layer Re.
The underwriting results of an insurance or reinsurance company are often
measured 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
16
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 combined ratio and components thereof, by
segment, for the quarters ended June 30, 2002 and 2001:
We have benefited from the relatively low level of catastrophe losses in the
second quarter of 2002 and, accordingly, the loss ratio of our reinsurance
business decreased to 38.0% for the quarter ended June 30, 2002, compared to
44.7% for the same quarter in 2001. We have also benefited from a decline in our
expense ratio for our reinsurance business to 15.0% for the quarter ended June
30, 2002 from 24.7% for the same quarter in 2001. Although acquisition and
operational costs in the aggregate are increasing, the substantial increase in
our net earned premium has caused the expense ratio to decrease accordingly. We
expect similar trends in the future.
Based on the decreased level of net earned premiums for our Primary operations
of $1.9 million in the second quarter of 2001, relatively modest adjustments to
claims and claim expenses incurred and operating expenses caused unusual
fluctuations in the claims and claim expense ratio and the underwriting expense
ratio of our primary operations.
Net investment income, excluding realized investment gains and losses, for the
second quarter of 2002 was $26.4 million, compared to $18.3 million for the same
period in 2001. The increase in investment income primarily relates to the
increase of our investment assets as a result of our capital raising activities
during the second half of 2001 and strong cash flows from operations, offset
partially by decreases in investment yields during the second quarter of 2002,
as compared to the second quarter of 2001.
Interest expense (including interest expense on the Capital Securities which is
reflected as minority interest) for the quarter ended June 30, 2002 increased to
$5.3 million from $2.6 million for the same period in 2001. The increase in
interest expense was primarily due to interest paid on the 7% Senior Notes
(which were issued in July 2001) and interest paid on the DaVinci $100 million
bank credit facility during the second quarter of 2002.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2001
A summary of the significant components of our revenues and expenses are as
follows:
17
(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 realized gains and losses on investments and
the cumulative effect of a change in accounting principle
The $105.1 million increase in operating income in the six months ended June 30,
2002, compared to the six months ended June 30, 2001, was primarily the result
of the following items:
o A $115.5 million increase in underwriting income from our reinsurance
operations (offset in part by minority interests), which was primarily
due to the significant growth in written premium, as noted below, and a
corresponding growth in earned premium. Also, during the six months
ended June 30, 2002, the relatively low level of property catastrophe
losses increased our underwriting income from the reinsurance
operations; plus
o An $8.5 million increase in other income caused primarily by an
increase in our equity participation in our joint venture, Top Layer
Re; plus
o A $2.4 million increase in net investment income (net of interest and
fixed charges) which was primarily due to the Company's capital raising
activities during the second half of 2001 and strong cash flows from
operations.
For the six months ended June 30, 2002, net operating income available to common
shareholders, excluding realized investment gains and losses, was $179.9 million
or $2.57 per common share, compared to $74.7 million or $1.23 per common share
for the same period in 2001. Net income available to common shareholders rose
105% to $174.3 million, or $2.49 per common share, in the six month period,
compared to $85.2 million, or $1.41 per share, for the same period of 2001.
Gross premiums written for the six months ending June 30, 2002 and 2001 were as
follows:
18
- ---------------------------------------------------------
Six months ended June 30, 2002 2001
-------------------------
Cat Premium
Renaissance $289,774 $257,273
DaVinci 130,063 --
Assumed from OP Cat 34,873 --
-------------------------
Total Cat Premium 454,710 257,273
Specialty Reinsurance 172,655 37,754
-------------------------
Total Reinsurance 627,365 295,027
-------------------------
Insurance Premiums Glencoe 94,047 3,793
Insurance Premiums other 9,716 21,400
-------------------------
Total Insurance premiums 103,763 25,193
-------------------------
Total gross written premiums $731,128 $320,220
=========================
- ---------------------------------------------------------
Consistent with the increase in gross premiums written for the quarter ended
June 30, 2002 as compared to the quarter ended June 30, 2001, the increase in
gross premiums written during the six months ended June 30, 2002 as compared to
the six months ended June 30, 2001 was primarily due to the hardening market
environment as discussed previously.
For the six months ended June 30, 2002, our total managed catastrophe premiums,
which are catastrophe premiums we write on behalf of Renaissance Reinsurance and
our joint ventures, were $515.2 million, $190.5 million of which were derived
from DaVinci and Top Layer Re. For the six months ended June 30, 2001, total
managed catastrophe premiums were $307.2 million, $71.9 million of which were
derived from our joint ventures.
The increase in other income to $16.3 million for the six months ended June 30,
2002 compared to $7.8 million for the six months ended June 30, 2001, was
primarily due to an increase in our equity participation from our joint venture,
Top Layer Re.
The table below sets forth our combined ratio and components thereof, by
segment, for the six months ended June 30, 2002 and 2001:
We have benefited from the relatively low level of catastrophe losses in the
first six months of 2002 and, accordingly, the loss ratio of our reinsurance
business decreased to 33.7% for the six months ended June 30, 2002, compared to
49.4% for the same period in 2001. We have also benefited from a decline in our
expense ratio for our reinsurance business to 16.0% for the six months ended
June 30, 2002 from 23.8% for the same period in 2001. Although acquisition and
operational costs in the aggregate are increasing, the substantial increase in
our net earned premium has caused the expense ratio to decrease accordingly. We
expect similar trends in the future.
19
Based on the decreased level of net earned premiums for the Primary operations
of $3.6 million in the first six months of 2001, relatively modest adjustments
to claims and claim expenses incurred and operating expenses caused unusual
fluctuations in the claims and claim expense ratio and the underwriting expense
ratio of the primary operations.
Net investment income, excluding realized investment gains and losses, for the
first six months of 2002 was $49.1 million, compared to $36.2 million for the
same period in 2001. The increase in investment income primarily relates to the
increase of our investment assets as a result of our capital raising activities
during the second half of 2001 and strong cash flows from operations, offset
partially by decreases in investment yields during the first six months of 2002
as compared to the same period of 2001.
Interest expense (including interest expense on the Capital Securities which is
reflected as minority interest) for the six months ended June 30, 2002 increased
to $9.8 million from $5.3 million for the same period in 2001. The increase in
interest expense was primarily due to interest paid on the 7% Senior Notes
(which were issued in July 2001) during the first six months of 2002 and
interest paid on the DaVinci $100 million bank credit facility during the second
quarter of 2002.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL REQUIREMENTS
RenaissanceRe relies on investment income, cash dividends and permitted payments
from our subsidiaries to make principal payments, interest payments, cash
distributions on outstanding obligations and quarterly dividend payments, if
any, to its shareholders. The payment of dividends by our Bermuda subsidiaries
to RenaissanceRe is, under certain circumstances, limited under Bermuda
insurance law. The Bermuda Insurance Act of 1978, as amended (the "Act") and
related regulations of Bermuda require our Bermuda subsidiaries to maintain
certain measures of solvency and liquidity. As at June 30, 2002 the statutory
capital and surplus of our Bermuda subsidiaries was $1,733.4 million, which
includes $527.9 million related to DaVinci prior to minority interests. The
amount required to be maintained was $307.2 million. Our U.S. insurance
subsidiaries are also required to maintain certain measures of solvency and
liquidity. As at June 30, 2002 the statutory capital and surplus of our U.S.
subsidiaries was $29.7 million, and the amount required to be maintained was
$24.3 million. Through June 30, 2002, our subsidiary, Renaissance Reinsurance,
declared dividends of $136.4 million compared to $52.5 million for the same
period in 2001.
CASH FLOWS
Our operating subsidiaries have historically produced sufficient cash flows to
meet expected claims payments and operational expenses and to provide dividend
payments to our holding company, RenaissanceRe. Our subsidiaries also maintain a
concentration of investments in high quality liquid securities, which we believe
will provide sufficient liquidity to meet extraordinary claims payments should
the need arise. Additionally, we maintain a $310.0 million credit facility which
is available to meet the liquidity needs of our subsidiaries should the need
arise. No amount was outstanding under this credit facility as of June 30, 2002.
Cash flows from operations in the first six months of 2002 were $342.9 million,
compared to $186.4 million for the same period in 2001. Cash flows substantially
exceeded operating income in this period largely because we recorded loss
reserves well in excess of paid losses. We have produced cash flows from
operations for the first six months of 2002 and the full year of 2001 in excess
of our
20
commitments. To the extent that capital is not utilized in our reinsurance
business, we will consider using such capital to invest in new opportunities or
will consider returning such capital to our shareholders.
Because of the nature of the coverages we provide, which typically can produce
infrequent losses of high severity, it is not possible to predict our future
cash flows from operating activities with precision. As a consequence, cash
flows from operating activities may fluctuate, perhaps significantly, between
individual quarters and years.
RESERVES
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.
The table below sets out our gross and net claims and claim expense reserves as
at June 30, 2002 and December 31, 2001, compared to the balance of our
shareholders' equity:
- --------------------------------------------------------------------
As at June 30, As at December 31,
2002 2001
------------------------------------
Gross reserves $ 684,164 $ 572,877
Recoverables 204,980 217,556
------------------------------------
Net reserves $ 479,184 $ 355,321
====================================
Shareholders' equity 1,390,324 1,225,024
Gross reserves as a % of equity 49.2% 46.8%
Net reserves as a % of equity 34.5% 29.0%
- --------------------------------------------------------------------
During the six months ended June 30, 2002 we incurred net claims of $116.3
million and paid net losses of $26.0 million. Due to the high severity and low
frequency of losses related to the property catastrophe insurance and
reinsurance business, there can be no assurance that we will continue to
experience this level of losses and/or recoveries. Incurred but not reported
("IBNR") reserves at June 30, 2002 were $361.4 million compared with $286.7
million at December 31, 2001. As we continue to write additional premiums in our
specialty reinsurance business and in our Glencoe insurance business, both of
which normally have higher loss ratios and longer delays in reporting losses and
in the development of losses, we expect that our claims reserves and our IBNR
reserves will continue to increase.
See also discussion of reserves under Critical Accounting Policies.
21
CAPITAL RESOURCES AND SHAREHOLDERS' EQUITY
Our total capital resources as at June 30, 2002 and December 31, 2001 were as
follows:
We have a $310.0 million committed revolving credit and term loan agreement with
a syndicate of commercial banks. As of June 30, 2002, we had no borrowings
outstanding against this facility.
Our subsidiary, Renaissance U.S., has a $10 million term loan and a $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 2.5 percent
during the first six months of 2002 (compared to 5.9 percent for the first six
months of 2001). The related agreements contain certain financial covenants, the
primary one being that RenaissanceRe, being the principal guarantor, maintain a
ratio of Liquid Assets to debt service of 4:1. In accordance with the repayment
provisions, $8.5 million was repaid on the loan in the second quarter of 2002.
The term loan and revolving loan facility have mandatory repayment provisions of
$25.0 million in 2003. We were in compliance with all the covenants of this term
loan and revolving loan facility as at June 30, 2002.
Our minority owned subsidiary, DaVinciRe Holdings Ltd. entered into a $100
million bank credit facility during the second quarter of 2002. As of June 30,
2002, the full amount was outstanding under this facility. Interest rates on the
facility are based on a spread above LIBOR, and averaged approximately 2.8
percent during the first six months of 2002.
Our subsidiary, RenaissanceRe Capital Trust, has issued Capital Securities which
pay cumulative cash distributions at an annual rate of 8.54 percent, payable
semi-annually. The Indenture relating to the Capital Securities contains certain
covenants, including a covenant prohibiting the payment of dividends by us if we
are in default under the Indenture. We were in compliance with all of the
covenants of the Indenture at June 30, 2002. From time to time, we may
opportunistically repurchase
22
outstanding Capital Securities. RenaissanceRe's guarantee of the distributions
on the preferred securities issued by the Trust, when taken together with
RenaissanceRe's obligations under the expense reimbursement agreement with the
Trust, provides a full and unconditional guarantee of amounts due on the Trust
preferred securities.
We are party to other arrangements including retrocessional reinsurance
arrangements which provide us with the right to obtain additional funds, which
would supplement our capital resources, following certain losses or other
events.
During the first six months of 2002, shareholders' equity increased by $165.3
million, from $1,225.0 million at December 31, 2001 to $1,390.3 million at June
30, 2002. Shareholders' equity attributable to common shareholders was $1,240.3
at June 30, 2002 and $1,075.0 at December 31, 2001. The significant components
of the change in shareholders' equity were net income from continuing operations
of $180.4 million, partially offset by dividends to common shareholders and
Series A Preference shareholders of $25.4 million.
INVESTMENTS
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:
At June 30, 2002, our invested asset portfolio, excluding cash and cash
equivalents, other investments and the 75% minority interest in DaVinciRe's
fixed maturity and short term investments, had a weighted average rating of AA,
an average duration of 2.35 years and an average yield to maturity of 4.32
percent, net of investment expenses.
At June 30, 2002, we held investments and cash totaling $2.7 billion with a net
unrealized appreciation balance of $17.4 million. Our investment portfolio is
subject to the risks of declines in realizable value. We attempt to mitigate
this risk through diversification and active management of our portfolio.
At June 30, 2002, $17.8 million of cash and cash equivalents were invested in
currencies other than the U.S. dollar, which represented less than 1% percent of
our invested assets.
CATASTROPHE LINKED AND DERIVATIVE INSTRUMENTS
23
We have assumed risk through catastrophe linked and derivative instruments under
which losses could be triggered by an industry loss index or geological or
physical variables. During the first six months of 2002 and 2001, we recorded
profits on these contracts of $2.1 million and zero, respectively. We report
these profits in other income.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on 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 this post-event inflation on our results
cannot be accurately known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
As of June 30, 2002, we have not entered into any guarantees, or guaranteed the
liabilities of any non-consolidated affiliates or subsidiaries or other
non-related parties.
CURRENT OUTLOOK
The changes to the market environment caused by the World Trade Center tragedy
are expected to continue to be a factor during 2002. We believe that prices for
risks assumed by insurance and reinsurance companies are continuing to increase,
and that there is generally an improved understanding of the correlation between
the various lines of business, which some participants may previously have seen
to be independent. In addition, the sensitivity to credit quality of insurers
and reinsurers continues to be a factor in the industry.
Because RenaissanceRe experienced relatively limited losses from the World Trade
Center tragedy and continues to have stable, high credit ratings, we believe
that we are well positioned to continue to significantly increase our managed
catastrophe premiums.
Also, during the six months ended June 30, 2002, we wrote $172.7 million of
premium related to specialty reinsurance coverages, as compared to $37.8 million
for the first six months of 2001. We anticipate that we will continue to expand
our presence in specialty reinsurance, which we define as coverages which are
not specifically property catastrophe reinsurance.
We also anticipate that we will continue to increase the premiums written by our
Bermuda-based primary insurance company, Glencoe. Glencoe, which primarily
provides catastrophe exposed primary property coverage, wrote $94.0 million of
gross written premiums for the first six months of 2002, as compared to $12.9
million for the full year ended December 31, 2001.
We are expanding and enhancing our underwriting, risk management and operational
capabilities in specialty reinsurance and Glencoe. We can not assure you that we
will succeed in the execution of our growth plans for Glencoe or our specialty
reinsurance business, or that these business will sustain their current premium
levels if market conditions change.
As a result of the World Trade Center tragedy, we expect the cost of our
reinsurance protection may increase during 2003. If prices rise to levels at
which we believe the purchase of reinsurance protection would become
uneconomical, we may retain a greater level of net risk in certain geographic
regions or for certain classes of risk. In order to obtain longer-term
retrocessional
24
capacity, we have entered into multi-year contracts with respect to a portion of
our portfolio. We have also begun to enter into quota share type reinsurance
relationships from which we receive fees and profit commissions.
The World Trade Center tragedy has caused insurers and reinsurers to seek to
limit their potential exposures to losses from terrorism attacks. We often
exclude losses from terrorism in the reinsurance and insurance that we write,
but do have potential exposures to this risk. We continue to monitor our
aggregate exposure to terrorist attacks.
Subsequent to the World Trade Center tragedy, a substantial amount of capital
entered the insurance and reinsurance markets both through investments in
established companies and through start-up ventures. Currently, we do not
believe that the new capital has resulted in significant adverse changes to the
prevailing pricing structure in the property catastrophe reinsurance market.
However, it is possible that the combination of the addition of new capital in
the marketplace, and an environment with continued light catastrophe losses,
could cause a reduction in prices of our products and may shorten the time
horizon of the current price increases. To the extent that industry pricing of
our products does not meet our hurdle rate, then we would reduce our future
underwriting activities (thus resulting in reduced premiums).
SAFE HARBOR DISCLOSURE
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, we
caution readers regarding certain forward-looking statements contained in this
report.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange 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 "expect", "anticipate", "intends",
"believe" or words of similar import generally involve forward-looking
statements. In light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this report should
not be considered as a representation by us or any other person that its
objectives or plans will be achieved. Numerous factors could cause our actual
results to differ materially from those addressed by the forward-looking
statements, including the following:
(1) the occurrence of large natural or man-made catastrophic events;
(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 RenaissanceRe or one or more of our subsidiaries;
25
(4) risks associated with implementing our business strategies and
initiatives for organic growth, including operational 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 conditions which should 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 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 may be described in more detail from time to time in our filings with
the Securities and Exchange Commission. 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.
26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET SENSITIVE INSTRUMENTS
The Company's invested asset portfolio includes investments which are available
for trading purposes and which are subject to changes in market values with
changes in interest rates. The aggregate hypothetical loss generated from an
immediate adverse parallel shift in the treasury yield curve of 100 basis points
would cause a decrease in total return of 2.35 percent, which equates to a
decrease in market value of approximately $48.4 million on a portfolio valued at
$2,058.0 million at June 30, 2002. An immediate time horizon was used, as this
presents the worst-case scenario.
27
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
None
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
(a) Our 2002 Annual General Meeting of Shareholders was held on May
31, 2002.
(b) Proxies were solicited by our management pursuant to Regulation
14A under the Securities Exchange Act of 1934; there was no
solicitation of opposition to our nominees listed in the proxy
statement; the reelected directors were re-elected for three year
terms as described in item (c)(1) below.
The other directors, whose term of office as a director continued
after the meeting are:
James N. Stanard
Thomas A. Cooper
W. James MacGinnitie
William F. Hecht
William I. Riker
(c) The following matters were voted upon at the Annual General
Meeting with the voting results indicated (all share amounts
referenced herein are on a post-split basis; during the second
quarter of 2002, we effected a three for one stock split through a
stock dividend of two additional common shares for each common
share owned):
(1) The Board Nominees Proposal
Our Bye-laws provide for a classified Board, divided into three
classes of approximately equal size. At the 2002 Annual Meeting,
the shareholders elected three of our Directors as Class I
Directors, who shall serve until our 2005 Annual Meeting.
Nominee Votes For Votes Against Votes Withheld
------- --------- ------------- --------------
28
Edmund B. Greene 61,817,574 609,714 0
Brian Hall 61,817,574 609,714 0
Scott E. Pardee 61,817,574 609,714 0
(2) The Auditors Proposal
Our shareholders voted to approve the appointment of Ernst & Young
as our independent auditors for the 2002 fiscal year.
Votes For Votes Against Votes Withheld
--------- ------------- --------------
61,575,900 770,637 80,751
(3) The Bye-laws Proposal
Our bye-laws restricted all holders of our capital shares, other
than certain founding institutional investors, from obtaining or
exercising more than 9.9% of the voting rights attached to all of
our issued and outstanding capital shares. At the 2002 Annual
Meeting, our shareholders voted to amend the Bye-laws to remove an
exemption which exempted certain founding institutional investors
from the prohibition in our Bye-laws on obtaining or exercising
more than 9.9% of the voting rights attached to our issued and
outstanding capital shares.
Votes For Votes Against Votes Withheld
--------- ------------- --------------
61,306,122 1,007,085 114,081
(4) The 2001 Stock Incentive Plan Proposal
Our shareholders voted to approve an amendment to our 2001 Stock
Incentive Plan (the "2001 Plan") increasing the aggregate number
of Full Voting common shares reserved for issuance thereunder by
850,000 shares.
Votes For Votes Against Votes Withheld
--------- ------------- --------------
45,842,217 16,470,564 114,507
(5) The Directors Plan Proposal
Our shareholders voted to approve an amendment to our Amended and
Restated Directors Plan increasing the number of authorized Full
Voting common shares reserved for issuance thereunder by 150,000
shares.
Votes For Votes Against Votes Withheld
--------- ------------- --------------
43,071,723 19,242,663 112,902
Item 5 -- Other Information
29
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
3.1 Amended and Restated Bye-laws of RenaissanceRe Holdings Ltd.,
as adopted and approved by RenaisanceRe's shareholders on May 31,
2002.
b. Current Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
RENAISSANCERE HOLDINGS LTD.
By: /s/ John M. Lummis
------------------------------------
John M. Lummis
Executive Vice President and
Chief Financial Officer
Date: August 14, 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RENAISSANCERE HOLDINGS LTD. PURSUANT TO 18 U.S.C. SECTION 1350
--------------------------------------------------------------
We certify that, to the best of our knowledge and belief:
(1) the Quarterly Report on Form 10-Q of RenaissanceRe Holdings Ltd. for the
period ending June 30, 2002 (the "Report") complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
RenaissanceRe Holdings Ltd.
/s/ James N. Stanard
------------------------------------
James N. Stanard
Chief Executive Officer
Date: August 14, 2002
/s/ John M. Lummis
------------------------------------
John M. Lummis
Chief Financial Officer
Date: August 14, 2002
31