10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 31, 2003
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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, 2002
COMMISSION FILE NO. 34-0-26512
RENAISSANCERE HOLDINGS LTD.
(Exact Name Of Registrant As Specified In Its Charter)
BERMUDA 98-014-1974
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:
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Title of each Class Name of each exchange on which registered
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Common Shares, Par Value $1.00
per share New York Stock Exchange, Inc.
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Series A 8.10% Preference Shares,
Par Value $1.00 per share New York Stock Exchange, Inc.
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Series B 7.30% Preference Share,
Par Value $1.00 per share New York Stock Exchange, Inc.
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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 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. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes (X) No ( ).
The aggregate market value of Common Shares held by nonaffiliates of the
registrant as of June 28, 2002 was $2,518,386,562 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 26, 2003 was 69,839,702.
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RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
PART I.
Unless the context otherwise requires, references in this Annual Report 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"), Lantana Insurance Ltd. ("Lantana"), Stonington
Insurance Company ("Stonington"), Renaissance Reinsurance of Europe
("Renaissance Europe"), Renaissance U.S. Holdings, Inc. ("Renaissance U.S."),
Renaissance Services Ltd. ("Services"), and Paget Insurance Agency, LLC
("Paget"). We also write property catastrophe reinsurance on behalf of joint
ventures, principally including Top Layer Reinsurance Ltd. ("Top Layer Re") and
DaVinci Reinsurance Ltd. ("DaVinci"). DaVinci's financial results are
consolidated in our financial statements. 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 33-36 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 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, including risks
associated with retaining our existing partners and attracting potential
new partners;
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(7) changes in economic conditions, including interest and currency rate
conditions which could affect our investment portfolio;
(8) uncertainties in our reserving process;
(9) failures of our reinsurers, brokers or program managers to honor their
obligations;
(10) extraordinary events affecting our clients, such as bankruptcies and
liquidations, and the risk that we may not retain or replace our large
clients in all future periods;
(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) changes in insurance regulations in the United States, including potential
challenges 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 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
Founded in Bermuda in 1993, RenaissanceRe Holdings Ltd. was originally formed to
provide reinsurance to cover the risk of natural and man-made catastrophes. We
use sophisticated computer models to construct a superior portfolio of these
coverages. Our disciplined underwriting approach, sophisticated risk models and
management expertise have established us as a leader in the property catastrophe
reinsurance business and led to consistent strong performance.
Our principal business is property catastrophe reinsurance. Our subsidiary,
Renaissance Reinsurance, a Bermuda domiciled company, is one of the world's
premier providers of this coverage. Our coverage protects against large natural
catastrophes, such as earthquakes and hurricanes, as well as claims arising from
other natural and man-made catastrophes such as winter storms, freezes, floods,
fires, tornadoes and explosions. We offer this coverage 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. We use our advanced proprietary modeling and management systems
to maximize our return on equity, subject to prudent risk constraints.
Recently, we have experienced substantial growth in premiums from specialty
lines of reinsurance written by Renaissance Reinsurance, including such lines as
catastrophe-exposed workers' compensation, surety, terrorism, property per risk,
aviation and finite reinsurance. We refer to these specialty lines as "specialty
reinsurance".
We have also experienced substantial growth in our individual risk business
written on an excess and surplus lines basis by Glencoe. We define our
individual risk segment to include underwriting that involves understanding the
characteristics of the original underlying insurance policy. Our individual risk
segment currently provides insurance for commercial and homeowners catastrophe-
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exposed property business, and also provides reinsurance to other insurers on a
quota share basis.
In addition, we also manage property catastrophe reinsurance on behalf of two
joint ventures. In 1999 Top Layer was formed to provide high layer coverage for
non-U.S. risks. DaVinci was formed in 2001 to write property catastrophe
reinsurance side-by-side with Renaissance Reinsurance. We own a minority of
DaVinci's outstanding equity but control a majority of its outstanding voting
power, and accordingly, DaVinci's financial results are consolidated in our
financial statements. We act as the exclusive underwriting manager for these
joint ventures in return for management fees and a profit participation.
Our principal underwriting objective is to construct a portfolio of insurance
and 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 and comparing treaties and managing our
aggregate exposure. We believe that REMS(C) is the most sophisticated exposure
management system 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 and 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.
RATINGS
Over the last five years, we have consistently received high claims-paying and
financial strength ratings from Standard & Poor's Insurance Ratings Services and
A.M. Best Company, Inc. Renaissance Reinsurance is rated "A+" by A.M. Best, "A+"
by Standard & Poor's and "A1" by Moody's Investors Services. Top Layer is rated
"AA" 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
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. "A" is the third highest designation assigned by
A.M. Best, representing A.M. Best's opinion that the insurer has an excellent
ability to meet its 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 "AA" rating, which has
been assigned by Standard & Poor's to Top Layer Re, is the second 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 very
strong, differing only slightly from those higher rated.
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 rated 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 will seek to generate growth in book value per share and earnings growth for
our shareholders by pursuing the following strategic objectives:
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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 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 seek to enhance our leadership position by:
o Constructing a superior portfolio of property catastrophe reinsurance
using proprietary underwriting models. We seek to effectively deploy
our capital while maintaining prudent risk levels in our property
catastrophe 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
o Constructing superior portfolios of property 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 IMPROVE OUR POSITION IN THE SPECIALTY REINSURANCE AND INDIVIDUAL RISK
MARKETS. During 2002, we successfully leveraged our corporate skills and
culture and more than tripled our specialty reinsurance premiums and
significantly increased our individual risk premiums. During 2003 we will
look to improve upon our 2002 performance and continue to expand in these
markets. We plan to utilize the same core competencies that enabled us to
become a leader in the property catastrophe reinsurance market to help us
expand in these markets, notably, our superior service, our proprietary
modeling technology, and our extensive business relationships.
o PURSUE NEW BUSINESS OPPORTUNITIES IN ATTRACTIVE MARKETS WHERE WE CAN
LEVERAGE OUR CORPORATE SKILLS AND CULTURE. Our management's experience and
underwriting expertise, combined with our significant financial strength,
have fostered our growth into the specialty reinsurance and individual risk
markets. We will seek to utilize those skills as we pursue additional
opportunities in the insurance and reinsurance markets that meet our return
on equity criteria.
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.
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 are a market leader are affected significantly by volatile and
unpredictable developments, including natural and man-made disasters, such as
hurricanes, windstorms, earthquakes, floods, fires, explosions, and acts of
terrorism, such as the World Trade Center disaster. The occurrence, or
nonoccurrence, of catastrophic events, the frequency and severity of which are
inherently unpredictable, affects both industry results and consequently
prevailing market prices of our products.
We believe that there has been a significant dislocation in the insurance and
reinsurance markets, due primarily to:
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o the increase in demand for insurance and reinsurance protection, and the
withdrawal in supply as a result of the substantial losses stemming from
the World Trade Center disaster;
o substantial increases in prior years loss reserves stemming from asbestos
related claims and an increase in losses from other casualty coverages
written in the late 1990's and 2000; and
o significant reductions in shareholders' equity of many insurance and
reinsurance companies due to the decline in the global equity markets.
Based on the factors above, the financial strength ratings of various insurance
and reinsurance companies were reduced during late 2001 and during 2002. Because
of these and other factors, we believe that the property catastrophe reinsurance
market, the specialty reinsurance market, and the individual risk markets in
which we participate will continue to display strong fundamentals and will
provide us with growth opportunities during 2003. Also, because we experienced
relatively limited net losses from the World Trade Center disaster and the other
events noted above, we believe that we are well positioned to take advantage of
these and other potential opportunities during 2003.
Subsequent to the World Trade Center disaster, 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 offset the widespread underwriting and
investment losses sufficiently to cause significant adverse changes to the
prevailing pricing structure in the property catastrophe reinsurance market.
However, it is possible that the new capital in the market, and an environment
with continued light catastrophe losses, could cause a reduction in prices of
our products. To the extent that industry pricing of our products does not meet
our hurdle rate, we would plan to reduce our future underwriting activities thus
resulting in reduced premiums and a reduction in expected earnings from this
portion of our business.
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. Many of the coverages offered in the
industry, including a majority of our own products, renew on an annual basis,
and the ability of large clients to move or retain their cessions contributes to
the volatility of pricing in the reinsurance industry.
REINSURANCE
Historically, our principal product has been property catastrophe reinsurance,
primarily written through Renaissance Reinsurance. We have expanded our
reinsurance operations to include various other lines of business, including
catastrophe-exposed workers' compensation coverage, surety, terrorism, property
per risk, aviation 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. These amounts include premium and programs from
DaVinci.
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Our portfolio of business has become increasingly characterized by a number of
large ceding companies with whom we do business. Accordingly, our written
premiums are subject to significant fluctuations depending on our success in
maintaining or expanding our relationships with these large customers.
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
and in 2002, a variety of forms of terrorism exclusions also became market
practice, some of which are incorporated in our contracts.
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 our 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 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 seek to purchase reinsurance protection for our own account and to
effect other risk spreading transactions 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.
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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 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. 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.
SPECIALTY REINSURANCE
We also write other lines of reinsurance including catastrophe-exposed workers'
compensation, surety, terrorism, property per risk, aviation and finite
reinsurance, which we collectively refer to as specialty reinsurance. In 2002,
we had approximately $247 million of specialty reinsurance gross premiums
written compared to $78 million in 2001. This premium was generated from 82
programs.
We believe that our underwriting and analytic capabilities have positioned us
well to manage and grow this business. Potential losses from many of these
coverages could be characterized as low frequency and high severity, similar to
our catastrophe reinsurance coverages. Also, many of the coverages we provide
enable us to rigorously analyze the risk profile of the coverage to arrive at a
reasonable assessment of expected returns and capital at risk. We have oriented
our efforts towards risks where we believe our sophisticated modeling systems
and skills will be a critical advantage. We also seek to manage the correlations
of this business with our property catastrophe reinsurance portfolio.
In 2002, prices increased in virtually all classes of specialty reinsurance. At
the same time, for some classes, and even for certain business within profitable
classes, pricing remains below that required for an acceptable return. We remain
focused on identifying and writing business that will enable us to achieve
better-than-market-average results. As a result of these factors and what we
currently anticipate to be an improving pricing environment, we expect continued
growth in our specialty reinsurance premiums in 2003.
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.
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We believe that our underwriting and risk modeling expertise, track record and
market leadership position will enable us to be the leading provider of
outsourced underwriting of property catastrophe reinsurance. In 2002, 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 $261 million in 2002, an increase of
164% compared to 2001.
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. We are the exclusive underwriting manager
for each of 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 Insurance
Companies ("State Farm") and 50% by Renaissance Reinsurance. State Farm 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, 2002, Top Layer Re had gross written premiums of $73.1 million.
DaVinci was established in October 2001 to write 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
construct for DaVinci a property catastrophe reinsurance portfolio with risk
characteristics similar to those of Renaissance Reinsurance's property
catastrophe reinsurance portfolio. We own 25% of DaVinci's outstanding equity,
but control a majority of its outstanding voting power, and accordingly
DaVinci's financial results are consolidated in our financial statements. For
the year ended December 31, 2002, DaVinci had gross written premiums of $187.9
million.
We also previously acted as underwriting manager for OPCat. However, in February
2002 OPCat's parent company, Overseas Partners Limited, decided to exit the
reinsurance business, and we subsequently assumed the in-force book of business
of OPCat.
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 utilize the same techniques and systems for the underwriting we conduct on
behalf of our joint ventures as we apply to our own portfolio.
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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.
INDIVIDUAL RISK
We define our individual risk segment to include underwriting that involves
understanding the characteristics of the original underlying insurance policy.
Our individual risk segment currently provides insurance for commercial and
homeowners catastrophe-exposed property business, and also provides reinsurance
to other insurers on a quota share basis. We believe that our industry knowledge
of the catastrophe business, our proprietary risk management software and
management strength provide us with a competitive advantage in terms of
appropriately underwriting and pricing such policies.
Glencoe Insurance Ltd. We principally provide individual risk 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 also provides reinsurance to other insurers on a quota
share basis. Glencoe is currently eligible to do business on an excess and
surplus lines basis in 51 U.S. jurisdictions.
Glencoe's core risk exposure is catastrophe, but Glencoe is also exposed to
other classes of risk, including fire risk in "all peril" policies, terrorism
and other risks. In accordance with recently passed legislation in the United
States, Glencoe is currently required to offer terrorism coverage to the
majority of its customers. Glencoe's customer take-up rate for these coverages
is approximately 2%, but this may increase in the future.
Following the World Trade Center disaster, Glencoe has experienced a sharp
increase in demand for its commercial insurance, coupled with a more attractive
pricing environment. As a result, premiums written by Glencoe grew substantially
in 2002. Glencoe's gross written premiums in 2002 were $237.1 million, net of
intercompany cessions to RenRe and DaVinci, compared to $12.9 million in 2001.
In part to pursue the market opportunities we perceive, we increased Glencoe's
capital to $325 million in 2002.
The individual risk business which Glencoe writes is primarily produced through
three distribution channels:
1) Brokers - Glencoe writes primary insurance through brokers on a
risk-by-risk basis; all underwriting and back office functions for this
business is based in our offices in Bermuda while claims handling is
outsourced;
2) Program Managers - Glencoe also writes primary insurance through a small
number of high quality, specialized program managers, who produce
business under well defined underwriting guidelines, and provide related
back-office functions; and
3) Quata Share Reinsurance - Glencoe writes quota share reinsurance with
primary insurers who, similar to our program managers, provide most of
the back-office functions. The underwriting responsibility is divided
between us, focusing on catastrophe risk, and the primary insurer,
focusing on other classes of risk.
9
Stonington and Lantana. We also own Stonington Insurance Company, a Texas
domiciled insurance company, which we hold through our U.S. holding company,
Renaissance U.S. In 1999, Stonington disposed of its prior business lines and
currently writes business on a limited basis. Stonington continues to be a
licensed insurer in all 50 states, although there can be no assurance such
licenses can be retained. Also, in 2002 we formed Lantana Insurance Ltd., a
Bermuda domiciled insurance company. To date, we have not written any premium
through Lantana. All of Lantana's voting equity is owned by Stonington. Lantana
is currently licensed as an excess and surplus lines insurer in 41 U.S.
jurisdictions. As premium rates increase and the market environment of the U.S.
insurance market continue to improve, we plan in 2003 to begin writing
additional coverages through Stonington and Lantana (See - "Potential New
Opportunities").
POTENTIAL NEW OPPORTUNITIES
From time to time, we may consider opportunistic diversification into new
ventures, through organic growth, joint ventures 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. Some of these opportunities could be in
lines of insurance or reinsurance business in which we have limited history or
no history, such as casualty or liability coverages. If these opportunities come
to fruition, they will present us with additional management and operational
risks. To manage these challenges successfully, we plan to further develop our
operational and managerial resources.
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 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 a significant
amount of new industry data. REMS(C) has analytic and modeling capabilities that
help us to assess the catastrophe exposure risk and return of each incremental
reinsurance contract in relation to our overall portfolio of reinsurance
contracts. We combine the analyses generated by REMS(C) with other information
available to us, including our own knowledge of the client submitting the
proposed program, to assess the premium offered against the risk of loss which
such a program presents. We have licensed and integrated into REMS(C) a number
of third party catastrophe computer models in addition to our base model, which
we use to validate and stress test our base REMS(C) results.
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. Our models employ simulation techniques to generate 40,000
years of activity, including events causing in excess of $300 billion in insured
industry losses. From this 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. REMS(C) allows us to score
the contracts that we write by comparing a) the expected profit of a contract
with b) the amount of capital that we allocate to the contract based on its
marginal impact to the risk of our portfolio.
All of our reinsurance underwriters utilize REMS(C) in their pricing decisions,
which we believe provides them with several competitive advantages. These
include the ability:
10
o to simulate a greater number of 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. To the extent
that appropriately priced coverage is available, we anticipate continued
purchase of reinsurance to reduce the potential volatility of our results.
We have developed underwriting guidelines, to be used in conjunction with
REMS(C), that limit the exposure to claims from any single catastrophic event
and the exposure to losses from a series of catastrophic events. As part of our
pricing and underwriting process, we also assess a variety of other factors,
including;
o the reputation of the proposed cedent and the likelihood of
establishing a long-term relationship with the cedent;
o the geographic area in which the cedent does business and its market
share;
o historical loss data for the cedent and, where available, for the
industry as a whole in the relevant regions, in order to compare the
cedent's historical catastrophe loss experience to industry averages;
o the cedent's pricing strategies; and
o the perceived financial strength of the cedent.
In order to define the risk profile of each line of specialty reinsurance, we
establish probability distributions and assess the correlations with the rest of
our portfolio. In lines with catastrophe risk, such as workers' compensation, we
are leveraging directly off our skill in modeling for our property catastrophe
reinsurance risks, and it is important to understand the correlations between
these specialty lines and our catastrophe reinsurance portfolio. For other
classes of business, which have little or no natural catastrophe exposure, and
hence have significantly less correlation with our property catastrophe
reinsurance coverages, probability distributions are derived from a variety of
underlying information, including recent historical experience, but with the
application of judgment as appropriate. The nature of some of these businesses
lends itself less to the scientific analysis that we use on our property
catastrophe reinsurance coverages, reflecting both the nature of available
exposure information, and the impact of human factors such as tort exposure. We
believe that we benefit from having probability distributions to represent the
underlying risks so that we can make consistent underwriting decisions, and
manage our total risk portfolio. Overall we seek conservative representations of
the risks.
11
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.
RESERVES
Claim reserves 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 likely that the ultimate liability will materially exceed or
be materially 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.
For our property catastrophe reinsurance operations, we initially set our claims
reserves based on case reserves and other reserve estimates reported by insureds
and ceding companies. We then add to these claims reserves, our estimates for
additional case reserves, and an estimate for incurred but not reported ("IBNR")
reserves. These estimates are normally based upon our experience with similar
claims, our knowledge of potential industry loss levels for each loss, and
industry information which we gather and retain in our REMS(C) modeling system.
Our estimates of claims resulting from catastrophic events is inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims.
In reserving for our individual risk and specialty reinsurance coverages we
currently do not have the benefit of a significant amount of our own historical
experience in these lines. Currently we estimate our IBNR reserves for our
specialty reinsurance and individual risk coverages by utilizing an actuarial
method known as the Bornhuetter-Ferguson technique, a widely used method for
lines of business in which a company may have limited historical loss
experience. The utilization of the Bornhuetter-Ferguson technique requires a
company to estimate an ultimate
12
claims and claim expense ratio for each line of business. We select our
estimates of the ultimate claims and claim expense ratios by reviewing industry
standards and adjusting these standards based upon the coverages we offer and
the terms of the coverages we offer.
Because any reserve estimate is simply an insurer's or reinsurer's best estimate
of its ultimate liability, and because there are numerous factors which affect
reserves but can not be determined with certainty in advance, our ultimate
payments will vary, perhaps materially, from our initial estimate of reserves.
Therefore, because of these inherent uncertainties, we have developed a
reserving philosophy which attempts to incorporate prudent assumptions and
estimates. In recent years, we have experienced favorable adjustments to our
reserves, which we believe is partly attributable to this philosophy.
Accordingly, it is possible that this philosophy will continue to produce
favorable adjustments to our reserves in future years. However we can not be
certain that this will occur, as conditions and trends that have affected our
reserve development in the past may not necessarily occur in the future.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that an adjustment to an earlier estimate is appropriate, such
adjustments are recorded in the quarter in which they are identified.
Adjustments to our claims reserves can impact current year net income by either
increasing net income if the estimates of prior year claims reserves prove to be
overstated or by decreasing net income if the estimates of prior year claims
reserves prove to be insufficient. As of December 31, 2002, our estimated IBNR
reserves were $462.9 million, and a 5% adjustment to our IBNR reserves, would
equate to a $23.1 million adjustment to claims and claim expenses incurred,
which would represent 6.3% of our 2002 net income, and 1.4% of shareholders'
equity as at December 31, 2002.
We incurred claims of $289.5 million, $149.9 million and $108.6 million for the
years ended December 31, 2002, 2001 and 2000, respectively. Our claim reserves
were $804.8 million, $572.9 million and $403.6 million at December 31, 2002,
2001 and 2000, respectively.
The following table represents the development of generally accepted accounting
principles ("GAAP") balance sheet reserves for 1993 through December 31, 2002.
This table does not present accident or policy year development data. The top
line of the table shows the reserves, net of reinsurance recoverables, at the
balance sheet date for each of the indicated years. This represents the
estimated amounts of net claims and claim expenses arising in the current year
and all prior years that are unpaid at the balance sheet date, including IBNR
reserves. The table also shows the reestimated amount of the previously recorded
reserve based on experience as of the end of each succeeding year. The estimate
changes as more information becomes known about the frequency and severity of
claims for individual years. The "cumulative redundancy (deficiency)" represents
the aggregate change to date from the original estimate on the top line of the
table. The table also shows the cumulative net paid amounts as of successive
years with respect to the net reserve liability.
With respect to the information in the table below, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. For
additional information on our reserves, including a reconciliation of claims and
claim expense reserves for the years ended December 31, 2002, 2001 and 2000,
please refer to Note 5 of the notes accompanying our consolidated financial
statements.
13
INVESTMENTS
At December 31, 2002, we held cash and investments totaling $3,128.9 million,
compared to $2,194.4 million in 2001, with net unrealized appreciation of $95.2
million, compared to $16.3 million in 2001. 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.
We currently have a target duration of approximately 2.75 - 3.00 years on a
weighted average basis. Our actual duration currently is 2.25, reflecting our
view that the current level of rates affords inadequate compensation for the
assumption of additional interest rate risk. From time to time, we may
reevaluate the target duration in light of our liabilities and market
conditions.
The table below shows our portfolio of invested assets:
14
At December 31, 2002, our invested asset portfolio had a dollar weighted average
rating of AA, an average duration of 2.25 years and an average yield to maturity
of 3.09% before investment expenses.
As with other fixed income investments, the value of our fixed maturity
investments will fluctuate with changes in the interest rate environment and
when changes occur in the overall investment market and in overall economic
conditions. Additionally, our differing asset classes expose us to other risks
which could cause a reduction in the value of our investments. Examples of some
of these risks are:
o Changes in the overall interest rate environment can expose us to
"prepayment risk" on our mortgage-backed investments. When interest rates
decline, consumers will generally make prepayments on their mortgages and,
as a result, our investments in mortgage-backed securities will be repaid
to us more quickly than we might have originally anticipated. When we
receive these prepayments, our opportunities to reinvest these proceeds
back into the investment markets will normally be at reduced interest
rates.
o Our investments in debt securities of other corporations are exposed to
losses from insolvencies of these corporations, and our investment
portfolio can also deteriorate based on reduced credit quality of these
corporations.
o Our investments in asset-backed securities are subject to prepayment risks,
as noted above, and to the structural risks of these securities. The
structural risks primarily emanate from the priority of each security in
the issuer's overall capital structure.
The following table summarizes the fair value by contractual maturities of our
fixed maturity investment portfolio at the dates indicated. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
15
- -------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
- -----------------------
(in millions)
Due in less than one year $ 23.2 $ 10.8 $ 29.0
Due after one through five years 1,107.9 494.3 519.8
Due after five through ten years 350.3 185.5 201.4
Due after ten years 119.0 93.4 75.2
U.S. mortgage-backed securities 301.6 203.7 102.7
U.S. asset-backed securities 319.1 294.8 -
------------ -------------- ------------
Total $2,221.1 $ 1,282.5 $ 928.1
============ ============== ============
- --------------------------------------------------------------------------------
The following table summarizes the composition of the fair value of the fixed
maturity portfolio at the dates indicated by ratings as assigned by S&P or, with
respect to non-rated issues, as estimated by our investment managers.
- --------------------------------------------------------------------------------
At December 31, 2002 2001 2000
AAA 71.7% 69.9% 69.1%
AA 9.9 7.6 9.4
A 4.4 6.3 5.5
BBB 5.2 7.3 5.1
BB 2.6 2.7 2.9
B 4.7 4.4 5.5
CCC 0.9 0.6 0.3
CC 0.1 0.2 0.1
D - 0.1 -
NR 0.5 0.9 2.1
------------ -------------- ------------
100% 100% 100%
============ ============== ============
- --------------------------------------------------------------------------------
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, 2002, we had outstanding letters of credit
aggregating $223.1 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 amount of our
investments.
RIHL. In 2002, we commenced utilization of our subsidiary Renaissance Investment
Holdings Ltd., or "RIHL", a Bermuda company we organized for the primary purpose
of holding the investments in high quality marketable securities of
RenaissanceRe, our operating subsidiaries and certain of our joint venture
affiliates. We believe that RIHL permits us to consolidate and substantially
facilitate our investment management operations. RenaissanceRe and each of our
participating operating subsidiaries and affiliates has transferred to RIHL
marketable securities or other assets, in return for a subscription of RIHL
equity interests. Each RIHL share is redeemable for cash or in marketable
securities. Over time, the subsidiaries and joint ventures who participate in
RIHL are expected to both subscribe for additional shares and redeem outstanding
shares, as our and their respective liquidity needs change.
As a result of the high quality of the assets transferred to and maintained by
it, RIHL has been rated AAAf/S2 by Standards & Poor's Ratings Group. We have
exclusive responsibility for managing the day-to-day affairs of RIHL and have
sole management responsibility over its portfolio. Mellon Bank, N.A., provides
RIHL with certain custodial functions, including custody of its outstanding
shares and valuation of its assets.
As described below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition - Capital Resources,"
we have entered into a facility which provides for the availability of $385
million aggregate letter of credit facilities to our operating subsidiaries. To
support the facility, our participating operating subsidiaries and joint
ventures have pledged RIHL shares owned by them as collateral.
16
Derivatives Related to Physical Variables. We have assumed and ceded risk
through securities and derivative instruments under which losses or recoveries
are triggered by an industry loss index or by geological or physical variables.
During 2002, 2001 and 2000, we recognized gains (losses) on these contracts of
$7.2 million, $(4.6) million, and nil, respectively, which are included in other
income.
Alternative Assets. Included in other investments are investments in hedge funds
and a bank loan fund totaling $81.8 million (2001 - $28.4 million), and private
equity funds of $14.6 million (2001 - $4.9 million) (collectively "Investment
Funds"). Fair values for our investments in such Investment Funds are
established on the basis of the net valuation criteria established by the
managers of such Investment Funds. These net valuations are determined based
upon the valuation criteria established by the governing documents of such
Investment Funds. Such valuations may differ significantly from the values that
would have been used had ready markets existed for the shares of the Investment
Funds. Realized and unrealized gains and losses on Investment Funds are included
as a component of net investment income.
We have committed capital to private equity funds of $54.0 million, of which
$14.4 million has been contributed as at December 31, 2002.
COMPETITION
The insurance and reinsurance industry is highly competitive and, provided that
a company has sufficient capital and necessary management expertise, the
barriers to entry into the reinsurance markets are not significant.
With total managed catastrophe premiums written of $738.5 million for the year
ended December 31, 2002, we are one of the largest providers of property
catastrophe reinsurance in the world. Our principal competition in the industry
comes from major U.S. and non-U.S. insurers and reinsurers, including other
Bermuda-based reinsurers. Though these companies offer property catastrophe
reinsurance, in many cases it accounts for a relatively small percentage of
their total portfolio. Our competition with respect to our specialty reinsurance
business generally also comes from the same U.S. and non-U.S. insurers and
reinsurers.
In our individual risk 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 distribution channels,
product, price, service, financial strength and reputation.
Following the World Trade Center disaster, a number of new companies were formed
to compete in the reinsurance and specialty insurance 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.
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 matters, 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 offering
coverage.
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 and, therefore, we attempt to
continually strengthen relationships with our existing brokers and clients. We
target
17
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, but also on the financial security of
the reinsurer, its claim paying ability ratings, 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 have
established a reputation with our brokers and clients for prompt response on
underwriting submissions, fast claims payments and a reputation for providing
creative solutions to our customers' needs. 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 2002.
During 2002, Renaissance Reinsurance issued authorization for coverage on
programs submitted by 59 brokers worldwide. We received approximately 2,413
program submissions during 2002. Of these submissions, we issued authorizations
for coverage in 2002 for 446 programs, or 18.5% of the program submissions
received.
INDIVIDUAL RISK INSURANCE
Our individual risk products are marketed through a diverse group of surplus
lines brokers operating primarily in catastrophe-exposed states. Also, beginning
in 2002 our individual risk products have been offered through a select number
of leading third party program managers, and through brokered quota share
relationships with other insurance companies. Our financial security ratings,
combined with our reputation in the reinsurance market place, have enhanced our
presence in the individual risk markets. Our individual risk operations are
structured to create and maintain a comprehensive database of
catastrophe-exposed property risks.
EMPLOYEES
At December 31, 2002, we and our subsidiaries employed 112 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 compensation package. At March 28, 2003,
our directors and executive officers beneficially owned approximately 10.7% of
our outstanding common shares.
Many Bermuda-based employees of RenaissanceRe, Renaissance Reinsurance, Glencoe
and Lantana, including a majority 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
18
business (including the business of reinsurance) in or from within Bermuda
unless registered as an insurer under the Insurance Act by the Bermuda Monetary
Authority (the "BMA"). Renaissance Reinsurance and DaVinci are registered as
Class 4 insurers, and Glencoe is registered as a Class 3 insurer under the
Insurance Act. The BMA, in deciding whether to grant registration, has broad
discretion to act as it thinks fit in the public interest. The BMA 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 BMA 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 BMA. Renaissance
Managers is registered as an insurance manager under the Insurance Act.
An Insurance Advisory Committee appointed by the Bermuda Minister of Finance
("the Minister") advises the BMA on matters connected with the discharge of its
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 BMA 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 BMA on certain grounds specified in the Insurance Act, including
failure of the insurer to comply with a requirement made of it under the
Insurance Act or, if in the opinion of the BMA, 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 BMA. The auditor must be approved by the
BMA 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 BMA.
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 BMA.
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.
19
The Insurance Act mandates certain actions and filings with the BMA 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 BMA. 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 BMA an affidavit stating
that it will continue to meet its relevant margins. Class 3 insurers and Class 4
insurers must obtain the BMA'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 BMA a Statutory Financial Return no later than four months after
the insurer's financial year end (unless specifically extended). The Statutory
Financial Return includes, among other items, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the 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 BMA may appoint an inspector
with extensive powers to investigate the affairs of an insurer if the BMA
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 them, the BMA may direct an insurer
to produce documents or information relating to matters connected with the
insurer's business. Moreover, the BMA has the power to appoint professional
persons to prepare reports about registered insurers, such as RenaissanceRe,
Glencoe and Lantana. If it appears to the BMA to be desirable in the interests
of policyholders, the BMA may also exercise these powers in relation to
subsidiaries, parents and other affiliates of registered insurers.
If it appears to the BMA 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 BMA 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.
In addition to powers under the Insurance Act to investigate the affairs of an
insurer, the BMA may require certain information from an insurer (or certain
other persons) to be produced to them. The BMA has the power to assist other
regulatory authorities, including foreign insurance regulatory authorities, with
their investigations involving insurance and reinsurance companies in Bermuda if
BMA is satisfied that the assistance being requested is in connection with the
discharge of regulatory responsibilities and that such cooperation is in the
public interest.
Under the Companies Act, the Minister of Finance (the "Minister") has been given
powers to assist a foreign regulatory authority which has requested assistance
in connection with enquiries being carried out by it in the performance of its
regulatory functions. The Minister's powers include requiring a person to
furnish him with information, to produce documents to him, to attend and answer
questions and to give assistance in connection with enquiries. The Minister must
be satisfied that the assistance requested by the foreign regulatory authority
is for the purpose of its regulatory functions and that the request is in
relation to information in Bermuda which a person has
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in his possession or under his control. The Minister must consider, amongst
other things, whether it is in the public interest to give the information
sought.
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. Without a reason acceptable to the BMA, 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 BMA 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 BMA 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 BMA 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.
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 51
states and territories of the United States and is subject to the regulation and
reporting requirements of these states. In accordance with certain requirements
of the National Association of Insurance Commissioners, Glencoe has established,
and is required to maintain, a trust funded with a minimum of $20.0 million as a
condition of its status as an eligible, non-admitted insurer in the U.S.
Stonington is licensed and subject to regulation as a property/casualty insurer
in 50 U.S. states. Lantana is a Bermuda domiciled insurance company that has not
written any premium to date. Lantana is owned by Stonington and is currently
licensed as an excess and surplus lines insurer in 41 states and territories of
the United States.
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
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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
admitted market insurers such as Stonington 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.
Glencoe and Lantana are eligible to offer coverage in the United States
exclusively in the excess and surplus lines market, the regulation of which
differs significantly from the so-called "admitted" market in which Stonington
operates. The regulations governing the excess and surplus lines markets have
been designed to facilitate coverage for hard-to-place risks that do not fit the
underwriting criteria products or are otherwise overlooked by admitted carriers.
Most particularly, excess and surplus lines regulation generally provides for
more flexible rules rating to insurance rates and forms. However, state
insurance regulations generally require that before a risk may be insured in the
excess and surplus lines market it must be declined by three admitted carriers.
Initial eligibility requirements and annual requalification standards and filing
obligations must also be met.
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 and Lantana 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 2003 to be material.
Terrorism. On November 26, 2002, the President of the United States signed into
law the Terrorism Risk Insurance Act of 2002, or TRIA, under which the federal
government will share the risk of loss from future terrorist attacks with the
insurance industry, though 2005. Each participating insurance company must pay a
deductible before federal government assistance becomes available. This
deductible is based on a percentage of direct earned premiums for commercial
insurance lines from the previous calendar year, and rises from 1.0% from date
of enactment to December 31, 2002 to 7.0% during the first subsequent calendar
year, 10.0% in year two and 15.0% in year three. For losses in excess of a
company's deductible, the federal government will cover 90.0% of the excess
losses, while companies retain the remaining 10.0%. Losses covered by the
program will be capped annually at $100.0 billion; above this amount, insurers
are not liable for covered losses and Congress is to determine the procedures
for and the source of any payments. Amounts paid by the federal government under
the program over certain phased limits are to be recouped by the Department of
the Treasury through policy surcharges, of up to 3.0% of annual premium.
Primary insurance companies providing commercial property and casualty insurance
in the United States, such as Stonington, Glencoe and Lantana, are required to
participate in the TRIA program. TRIA also requires that subject insurers comply
with mandatory offer requirements for terrorism coverage. These offers may be
rejected by insureds. The Secretary of the Department of the Treasury has
discretion to extend this offer requirement until December 31, 2005. TRIA
generally does not purport to govern the obligations of reinsurers, such as
Renaissance Reinsurance and DaVinci, under reinsurance contracts. However, TRIA
is expected to effect the property and casualty industry broadly and we are
monitoring developments to determine their expected impact on us.
Holding Company Regulation. Our U.S. insurance subsidiaries and we 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. 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. In addition, as a result of our ownership
of 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
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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.
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.
Government intervention in the insurance and reinsurance markets, both in the
U.S. and worldwide, continues to evolve. Federal and state legislators have
considered numerous government initiatives such as the one recently issued with
respect to coverage for acts of terrorism. While we cannot predict the exact
nature, timing, or scope of other 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
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intend to continue to conduct our operations so as to minimize the likelihood
that Renaissance Reinsurance, DaVinci or Glencoe will become subject to U.S.
regulation.
SEGMENT INFORMATION
Certain information regarding our segments of operations are contained in Note
15 to our Consolidated Financial Statements provided in Item 14(a) of this Form
10-K.
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.
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, floods, fires, tornados and other man-made or natural
disasters, such as terrorism. As a result, our operating results have
historically been, and we expect will continue to be, significantly 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.
Our claims and loss reserves are based on probabilities and modeled losses,
which are subject to inherent uncertainties.
Our financial results depend in part on our ability to accurately price and
manage the risks we reinsure and insure. Our claim and loss reserves reflect our
estimates using actuarial and statistical projections at a given point in time,
and our expectations of the ultimate settlement and administration costs of
claims incurred. Although we utilize actuarial and computer models as well as
historical reinsurance and insurance industry loss statistics we also rely
heavily on management's experience and management's judgement to assist in the
establishment of appropriate claim reserves. However, because of the many
assumptions and estimates involved in establishing reserves, the reserving
process is inherently uncertain. As a result, we believe our ultimate payments
will vary, perhaps materially, from our initial estimate of reserves.
Accordingly, it is possible that our actual claims and claim expenses paid might
exceed, perhaps substantially, 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. In addition, in reserving for our
individual risk and
24
specialty reinsurance coverages we currently do not have the benefit of a
significant amount of our own historical experience in these lines.
Unlike the loss reserves of U.S. insurers, the loss reserves established by our
Bermuda companies are not regularly examined by insurance regulators.
We could face unanticipated losses from war, terrorism and political unrest, and
these or other unanticipated losses could have a material adverse effect on our
financial condition and results of operations.
We may have substantial exposure to unexpected, large losses resulting from
future man-made catastrophic events, such as acts of war, acts of terrorism and
political instability. Although we may attempt to exclude losses from terrorism
and certain other similar risks from some coverages written by us, we may not be
successful in doing so as a result of regulatory or commercial considertions.
These risks are inherently unpredictable, although recent events may lead to
increased frequency and severity of losses. It is difficult to predict the
timing of such events with statistical certainty or estimate the amount of loss
any given occurrence will generate. We believe it is impossible to eliminate
completely our exposure to unforeseen or unpredictable events.
Accordingly, our reserves may not be adequate to cover losses when they
materialize. As described above, if we were required to increase our reserves
our reported income would decrease in the affected period. In particular,
unforeseen large losses could materially adversely affect our financial
condition and results of operations. Over time, if the severity and frequency of
these events remains higher than in the past, our results of operations could
become more volatile, which could cause the value of investment in our
securities to fluctuate more widely. Conditions and trends that have affected
our reserve development in the past may not occur in the future.
Reinsurance pricing and terms may decline, which could affect our profitability.
Supply and demand for reinsurance depends on numerous factors, including the
frequency and severity of catastrophic events, perceptions of risk, levels of
capacity, general economic conditions and underwriting results of primary
property insurers. All of these factors fluctuate and may contribute to price
declines generally in the reinsurance industry. Our recent growth in 2002
related 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. In particular, we might lose existing
customers, decline new business or experience a drop in prices.
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.
We believe that our principal competitors in the property catastrophe
reinsurance market include other companies active in the Bermuda market,
including Ace Ltd., IPCRe Limited, 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 American
International Group, Inc., Berkshire Hathaway, Munich Re and Swiss Re. In
addition, there are other new Bermuda reinsurers with whom we compete, such as
Allied World Assurance Company, Arch Capital Group, Axis Capital Holdings,
Endurance Specialty Holdings, Montpelier Re Holdings and Platinum Underwriters
Holdings, Ltd. As our business evolves over time we expect our competitors to
change as well.
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
25
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.
Our individual risk business is also highly competitive. Primary insurers
compete on the basis of factors including distribution channels, product, price,
service and financial strength. Many of our primary insurance competitors are
larger and more established than we are and have greater financial resources and
consumer recognition. 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.
Our portfolio of business has become increasingly characterized by a number of
large ceding companies with whom we do business. Accordingly, our written
premiums are subject to significant fluctuations depending on our success in
maintaining or expanding our relationships with these large customers. The loss
of our large customers would affect us adversely, perhaps materially so.
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 and
DaVinci. 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. Financial strength 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 is rated "AA" 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. The 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, 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. For example, following a ratings downgrade we might lose
clients to more highly rated competitors or retain a lower share of the business
of our clients. The rating of Top Layer is dependent upon the rating of State
Farm Insurance Companies, who provides Top Layer with $3.9 billion of stop loss
reinsurance.
A decline in the ratings assigned to our claims-paying ability may cause our
clients to cancel or not renew our policies.
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 ability ratings are downgraded. 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
non-renewed. However, we cannot assure you that our premiums would not decline,
perhaps materially, following a ratings downgrade.
We may fail to meet our financial and operating goals if we do not mange our
growth effectively.
Our business has expanded rapidly in the past several years, including 2002, and
we currently project continued growth in 2003. Expansion places increased stress
on our financial, managerial and human resources. Further, our growth in new or
expanded lines, such as specialty reinsurance and individual risk, could divert
management attention away from our property catastrophe reinsurance coverages
offered. Our future profitability will depend in
26
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.
Historically, our principal product has been property catastrophe reinsurance.
The growth in our specialty reinsurance and individual risk premiums will
present us with new, and expanded, challenges and risks. We may not manage these
challenges and risks successfully. Our loss results from these new coverages 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 future financial results may be affected, perhaps adversely.
Political, regulatory and industry initiatives could adversely affect our
business.
Changes in the marketplace, including the tightening in supply of certain
coverages in 2002, 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 as well as
international authorities. 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.
For example, in response to the tightening of supply in certain insurance and
reinsurance markets resulting from, among other things, the September 11th
tragedy, the Terrorism Risk Insurance Act of 2002 was enacted to ensure the
availability of insurance coverage for terrorist acts in the United States. This
law establishes a federal assistance program through the end of 2005 to help the
commercial property and casualty insurance industry cover claims related to
future terrorism related losses and regulates the terms of insurance relating to
terrorism coverage. This law could adversely affect our business by, among other
things, increasing underwriting capacity for our competitors as well as by
requiring that coverage for terrorist acts be offered by insurers. We are in the
process of evaluating the likely impact of this law on our future operations. We
are currently unable to determine with certainty the extent to which TRIA may
affect the demand for our products or the risks which may be available for us to
consider underwriting.
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 growth of
our primary insurance business, which is regulated more comprehensively than
reinsurance, increases our exposure to adverse political, judicial and legal
developments.
A decline in our investment performance could reduce or profitability.
We derive a significant portion of our income from our invested assets. As a
result, our financial results depend in part on the performance of our
investment portfolio, which contains fixed maturity securities, such as bonds
and mortgage-backed securities. Our operating results are subject to a variety
of investment risks, including risks relating to general economic conditions,
market volatility, interest rate fluctuations, liquidity risk and credit and
default risk. Additionally, with respect to certain of our investments, we are
subject to pre-payment or reinvestment risk. Fixed income and other markets have
generally performed poorly over the last several financial periods and have
become increasingly volatile.
27
The market value of our fixed maturity investments will be subject to
fluctuation depending on changes in various factors, including prevailing
interest rates. To the extent that we are unsuccessful in correlating our
investment portfolio with our expected liabilities, we may be forced to
liquidate our investments at times and prices that are not optimal, which could
have a material adverse effect on the performance of our investment portfolio.
Changes in interest rates could cause the market value and yield on our
investment portfolio to decrease, perhaps substantially. A decline of our
investment yield would likely reduce our capital and overall profitability.
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, Glencoe, DaVinci or Top Layer is engaged in a trade or
business in the United States, Renaissance Reinsurance, Glencoe, DaVinci or Top
Layer 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. Although we would intend
vigorously to resist the imposition of any such tax, if we were ultimately held
to be subject to this taxation our earnings would correspondingly decline.
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, Glencoe, DaVinci or Top Layer in the
United States are only available to Renaissance Reinsurance, Glencoe, DaVinci
and Top Layer 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, Glencoe, DaVinci or Top Layer 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 71.1%, 76.9%,
78.3%, and 78.8% of our net premiums written for the years ended December 31,
2002, 2001, 2000 and 1999, respectively. Subsidiaries and affiliates of the
Marsh Inc., Benfield Group PLC, Willis Faber and AON Re Group accounted for
approximately 27.5%, 19.0%, 13.1% and 11.5%, respectively, of our gross written
premiums in 2002. Loss of all or a substantial portion of the business provided
by these brokers could have a material adverse effect on us. Our ability to
market our products could decline and it is possible that our premiums written
would decrease.
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 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.
28
We have incurred indebtedness, and may incur additional indebtedness in the
future. At December 31, 2002, we had an aggregate of approximately $275 million
of indebtedness outstanding, including $125 million of bank loans, and in
January 2003 we issued $100 million of 5.875% Senior Notes due 2013.
RenaissanceRe is party to a $310 million revolving credit and term loan
agreement, none of which was drawn at December 31, 2002. Renaissance U.S.
Holdings, Inc. is party to a $25 million revolving credit and term loan
agreement which was fully drawn at December 31, 2002. Each of these facilities
is with a syndicate of commercial banks. Our consolidated subsidiary DaVinciRe
Holdings Ltd. is party to $100 million revolving credit agreement with Citibank,
N.A., which was fully drawn at December 31, 2002. We control a majority of
DaVinciRe Holdings Ltd.'s voting power but own a minority of its outstanding
equity interests.
In addition, we also had at December 31, 2002, $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 letters of
credit facilities. In particular, in December 2002, certain of our subsidiaries
and affiliates entered into a $385 million secured letter of credit facility for
use in their insurance and reinsurance business. The letters of credit will
expire on November 15, 2003, but the expiration date may be extended if certain
conditions are met. The obligations of each of our subsidiaries and affiliates
party to the facility are fully collateralized by a perfected first priority
security interest in certain collateral, including cash, eligible high-quality
marketable securities and redeemable preference shares of Renaissance Investment
Holdings, Ltd.
The agreements covering our indebtedness, 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 specific 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. RenaissanceRe does not have any operations and has no significant
assets other than its ownership of its direct and indirect subsidiaries. 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. As Class 3 insurers, Glencoe and Lantana may not declare
or pay dividends during any financial year that would cause Glencoe or Lantana
(as the case may be) to fail to meet its minimum solvency margin and minimum
liquidity ratio.
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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.
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. For example, we might lose clients whose relationship
depends in part on the service of a departing executive. In addition, the loss
of services of members of our management team would strain our ability to
execute our growth initiatives, as described above.
Our ability to execute our business strategy is dependent on our ability to
attract and retain a staff of qualified underwriters and service personnel. Our
location in Bermuda may impede our ability to recruit and retain highly skilled
employees. We do not currently maintain key man life insurance policies with
respect to any of our employees.
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. In
addition, the Bermuda government recently announced a new policy that limits the
duration of work permits to a total of six years, which is subject to certain
exemptions for only key employees. 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.
None of Renaissance Reinsurance, DaVinci or Top Layer is licensed or admitted to
do business in any jurisdiction except Bermuda. Renaissance Reinsurance,
Glencoe, DaVinci and Top Layer each conduct business only 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 and Lantana are currently eligible, non-admitted excess and surplus
lines insurers in, respectively, 51 and 41 states and territories of the United
States and are each subject to certain regulatory and reporting requirements of
these states. However, Glencoe is not admitted or licensed in any United States
jurisdiction and only conducts business from its principal office in Bermuda.
Accordingly, the scope of Glencoe's activities in the United States is limited,
which could adversely affect its ability to compete.
Our growth plans could cause one or more of our subsidiaries to become subject
to additional regulation in more numerous jurisdictions. 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.
In addition, Stonington, which writes insurance in all 50 states on an admitted
basis, is 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 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
30
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. We plan to grow
Stonington's business and, accordingly, expect our regulatory burden to
increase.
Renaissance Reinsurance, Glencoe and DaVinci are not licensed or admitted in the
United States.
Our principal subsidiaries and joint venture affiliates, Renaissance
Reinsurance, DaVinci, and Top Layer, are registered Bermuda insurance companies
and are not licensed or admitted as insurers in any jurisdiction in the United
States. Although Glencoe writes insurance in the United States, it is also not
licensed or admitted in any jurisdiction in the United States. Among other
things, 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. Our contracts
generally require us to 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, Glencoe, DaVinci and Top
Layer could put us at a competitive disadvantage in the future with respect to
competitors 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. 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 the past. This could
limit the amount of business we are willing to write, or decrease the protection
available to us as a result of large loss events.
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 solely from fluctuations in the values
of these foreign currencies, which could cause our consolidated earnings to
decrease. In addition, failure to manage our foreign currency exposures could
cause our results to be more volatile.
Some aspects of our corporate structure may discourage third party takeovers and
other transactions or prevent the removal of our current board of directors and
management.
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 or preventing the removal of our current board
of directors and management. 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.
31
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;
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. In addition, these Bye-Law provisions could
prevent the removal of our current board of directors and management. 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.
We indirectly own Stonington. Our ownership of a U.S. insurance company such as
Stonington can, under applicable state insurance company laws and regulations,
delay or impede a change of control of RenaissanceRe. Under applicable Texas
insurance regulations, any proposed purchase of 10% or more of our voting
securities would require the prior approval of the 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.
32
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.
Capacity The percentage of surplus, or the dollar
amount of exposure, that an insurer or
reinsurer is willing or able to place at
risk. Capacity may apply to a single risk, a
program, a line of business or an entire
book of business. Capacity may be
constrained by legal restrictions, corporate
restrictions or indirect restrictions.
Casualty insurance Insurance that is primarily concerned with
the losses caused by injuries to third
persons and their property (in other words,
persons other than the policyholder) and the
legal liability imposed on the insured
resulting therefrom. Also referred to as
liability insurance.
Catastrophe A severe loss, typically involving multiple
claimants. Common perils include
earthquakes, hurricanes, hailstorms, severe
winter weather, floods, fires, tornadoes,
explosions and other natural or man-made
disasters. Catastrophe losses may also arise
from acts of war, acts of terrorism and
political instability.
Catastrophe excess
of loss reinsurance A form of excess of loss reinsurance that,
subject to a specified limit, indemnifies
the ceding company for the amount of loss in
excess of a specified retention with respect
to an accumulation of losses resulting from
a "catastrophe".
Cede; cedent;
ceding company When a party reinsures its liability
with another, it "cedes" business and is
referred to as the "cedent" or "ceding
company."
Claim expenses The expenses of settling claims, including
legal and other fees and the portion of
general expenses allocated to claim
settlement costs.
Claims and claim expenses ratio The ratio of claims and claim expenses to
net premiums earned, determined in
accordance with either SAP or GAAP.
Claims and claim expenses The expenses of settling claims, including
legal and other fees and the portion of
general expenses allocated to claim
settlement costs (also known as claim
adjustment expenses) plus losses incurred
with respect to claims.
Claims reserves Liabilities established by insurers and
reinsurers to reflect the estimated costs of
claim payments and the related expenses that
the insurer or reinsurer will ultimately be
required to pay in respect of insurance or
reinsurance policies it has issued. Claims
reserves consist of reserves established
with respect to individual reported claims,
and "IBNR" reserves. For reinsurers, loss
expense reserves are generally not
significant because substantially all of the
loss expenses associated with particular
claims are incurred by the primary insurer
and reported to reinsurers as losses.
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Combined ratio The combined ratio is the sum of the loss
and loss expense ratio, the acquisition cost
ratio and the general and administrative
expense ratio, determined in accordance with
U.S. GAAP. A combined ratio below 100%
generally indicates profitable underwriting
prior to the consideration of investment
income. A combined ratio over 100% generally
indicates unprofitable underwriting prior to
the consideration of investment income.
Excess and surplus
lines reinsurance Any type of coverage that cannot be placed
with an 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 reinsurance A generic term describing reinsurance that
indemnifies the reinsured against all or a
specified portion of losses on underlying
insurance policies in excess of a specified
amount, which is called a "level" or
"retention." Also known as non-proportional
reinsurance. Excess of loss reinsurance is
written in layers. A reinsurer or group of
reinsurers accepts a layer 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.
Frequency The number of claims occurring during a
given coverage period.
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 ("GAAP") Accounting principles as set forth in
opinions of the Accounting Principles Board
of the American Institute of Certified
Public Accountants and/or statements of the
Financial Accounting Standards Board and/or
their respective successors and which are
applicable in the circumstances as of the
date in question. Also referred to as GAAP.
Gross premiums written Total premiums for insurance written and
assumed reinsurance during a given period.
Incurred but not
reported ("IBNR") Reserves for estimated losses that have been
incurred by insureds and reinsureds but not
yet reported to the insurer or reinsurer
including unknown future developments on
losses which are known to the insurer or
reinsurer.
Layer The interval between the retention or
attachment point and the maximum limit of
indemnity for which a reinsurer is
responsible.
Net premiums earned The portion of net premiums written during
or prior to a given period that was actually
recognized as income during such period.
Net premiums written Gross premiums written for a given period
less premiums ceded to reinsurers and
retrocessionaires during such period.
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Premiums The amount charged during the term on
policies and contracts issued, renewed or
reinsured by an insurance company or
reinsurance company.
Property insurance or reinsurance Insurance or reinsurance that provides
coverage to a person with an insurable
interest in tangible property for that
person's property loss, damage or loss of
use.
Property per risk treaty
reinsurance Reinsurance on a treaty basis of individual
property risks insured by a ceding company.
Proportional
reinsurance A generic term describing all forms of
reinsurance in which the reinsurer shares a
proportional part of the original premiums
and losses of the reinsured. (Also known as
pro rata reinsurance, quota share
reinsurance or participating reinsurance.)
In proportional reinsurance the reinsured
generally pays the ceding company a ceding
commission. The ceding commission generally
is based on the ceding company's cost of
acquiring the business being reinsured
(including commissions, premium taxes,
assessments and miscellaneous administrative
expense) and also may include a profit
factor.
Reinstatement premium The premium charged for the restoration of
the reinsurance limit of a catastrophe
contract to its full amount after payment by
the reinsurer of losses as a result of an
occurrence.
Reinsurance An arrangement in which an insurance
company, the reinsurer, agrees to indemnify
another insurance or reinsurance company,
the ceding company, against all or a portion
of the insurance or reinsurance risks
underwritten by the ceding company under one
or more policies. Reinsurance can provide a
ceding company with several benefits,
including a reduction in net liability on
individual risks and catastrophe protection
from large or multiple losses. Reinsurance
also provides a ceding company with
additional underwriting capacity by
permitting it to accept larger risks and
write more business than would be possible
without a concomitant increase in capital
and surplus, and facilitates the maintenance
of acceptable financial ratios by the ceding
company. Reinsurance does not legally
discharge the primary insurer from its
liability with respect to its obligations
to the insured.
Retention The amount or portion of risk that an
insurer retains for its own account. Losses
in excess of the retention level are paid by
the reinsurer. In proportional treaties, the
retention may be a percentage of the
original policy's limit. In excess of loss
business, the retention is a dollar amount
of loss, a loss ratio or a percentage.
Retrocessional reinsurance;
retrocessionaire A transaction whereby a reinsurer cedes to
another reinsurer, the retrocessionaire, all
or part of the reinsurance that the first
reinsurer has assumed. Retrocessional
reinsurance does not legally discharge the
ceding reinsurer from its liability with
respect to its obligations to the reinsured.
Reinsurance companies cede risks to
retrocessionaires for reasons similar to
those that cause primary insurers to
purchase reinsurance: to reduce net
liability on individual risks, to protect
against catastrophic losses, to stabilize
financial ratios and to obtain additional
underwriting capacity.
Risk excess of loss reinsurance A form of excess of loss reinsurance that
covers a loss of the reinsured on a single
"risk" in excess of its retention level of
the type reinsured, rather than to aggregate
losses for all covered risks, as does
catastrophe excess of loss
35
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.
Specialty lines Lines of insurance and reinsurance
that provide coverage for risks that are
often unusual or difficult to place and do
not fit the underwriting criteria of
standard commercial products carriers.
Submission An unprocessed application for (i) insurance
coverage forwarded to a primary insurer by a
prospective policyholder or by a broker on
behalf of such prospective policyholder,
(ii) reinsurance coverage forwarded to a
reinsurer by a prospective ceding insurer or
by a broker or intermediary on behalf of
such prospective ceding insurer or (iii)
retrocessional coverage forwarded to a
retrocessionaire by a prospective ceding
reinsurer or by a broker or intermediary on
behalf of such prospective ceding reinsurer.
Statutory accounting
principles ("SAP") Recording transactions and preparing
financial statements in accordance with the
rules and procedures prescribed or permitted
by Bermuda and/or the United States state
insurance regulatory authorities including
the NAIC, which in general reflect a
liquidating, rather than going concern,
concept of accounting.
Total Managed Cat Premium The total catastrophe reinsurance premiums
written on a gross basis by our 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.
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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 Raleigh, North
Carolina. We also lease office space in Dublin, Ireland. As we anticipate
additional growth in our businesses, it is likely that we will need to expand
into additional facilities to accommodate this growth.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, a party to litigation and arbitration that arises in
the normal course of business. 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 2002.
37
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
PRICE RANGE OF COMMON SHARES
Our common shares began publicly trading on June 27, 1995. Our New York Stock
Exchange symbol is "RNR". The following table sets forth, for the periods
indicated, the high and low prices per share of our common shares as reported in
composite New York Stock Exchange trading.
- --------------------------------------------------------------------
Price Range
of Common Shares
High Low
Period
- ------
2000
First Quarter $ 13.71 $ 11.96
Second Quarter 14.71 12.04
Third Quarter 21.63 14.17
Fourth Quarter 27.17 19.38
2001
First Quarter 27.95 21.18
Second Quarter 25.23 20.83
Third Quarter 29.64 22.87
Fourth Quarter 34.57 30.47
2002
First Quarter 36.35 28.90
Second Quarter 39.65 33.85
Third Quarter 39.40 31.30
Fourth Quarter 43.24 37.49
2003
First Quarter (through March 28, 2003) 40.78 34.40
- --------------------------------------------------------------------
On March 28, 2003 the last reported sale price for our common shares was $39.86
per share. At March 3, 2003 there were 113 holders of record of our common
shares and approximately 20,000 beneficial holders.
DIVIDEND POLICY
Historically, we have paid dividends on our common shares every quarter, and
have increased our dividend during each of the eight years since our initial
public offering. The Board of Directors of RenaissanceRe declared regular
quarterly dividends of $0.142 per share on May 2, 2002, August 8, 2002 and
November 7, 2002. Most recently, our Board declared a dividend of $0.15 per
share payable on March 17, 2003 to shareholders of record at March 3, 2003. 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.
38
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, 2002. 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, 2002, 2001, 2000, 1999 and 1998 and the balance
sheet data at December 31, 2002, 2001, 2000, 1999 and 1998 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.
(1) 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.
(2) The item "Company obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinated debentures of
RenaissanceRe" reflects $84.6 million aggregate liquidation amount of the
capital securities issued by a subsidiary trust. The sole assets of the
trust are $84.6 million aggregate principal amount of 8.54% junior
subordinated debentures due March 1, 2027 issued by RenaissanceRe.
- -------------------------------------------------------------------------------
39
The following table contains two non-GAAP measures, operating income, and
operating return on shareholders' equity. We currently use these measures to
evaluate the underlying fundamentals of our operations and believe them to be
useful measures of our corporate performance. We define operating income as net
income which excludes net realized gains and losses from the sale of investments
and certain one-time adjustments. Realized gains and losses from the sale of
investments are derived from the timing of the sale of investments and are not
derived from our operating performance. Operating return on equity is calculated
by dividing operating income by the average net book value of our common equity
for the year.
In calculating operating income, we have also excluded two one-time charges, one
occurring in 1998 and one occurring in 2002:
o In January of 1998, we purchased a subsidiary, Stonington Insurance (then
known as Nobel Insurance). During 1998, Stonington experienced poor
underwriting results and recorded an after tax charge of $40.1 million. In
conjunction with the write-off and resulting ratings downgrade, we adopted
a plan to exit each of Stonington's businesses. Therefore, because the
Stonington business was only operational for one year, we believe it is
appropriate to exclude the $40.1 million charge in our calculation of
operating income, to reflect what we believed to be a better comparison of
our prior and future years operations.
o In 2002, we adopted a new accounting pronouncement, SFAS 142 "Goodwill and
Other Intangible Assets." During 2002, after completing our initial
impairment review of our goodwill, we decided to reflect goodwill at zero
value and record a write-off of $9.2 million. Therefore, we felt it was
appropriate to exclude this charge from our calculation of operating
income, because 1) this was associated with a one time adoption of a new
accounting principle, and 2) we wrote off 100% of our balance of goodwill.
The following table also reflects the reconciliation of net income to operating
income for each of the five years ended December 31, 2002.
(1) For 2002, operating income and the operating return on average
shareholders' equity, as presented, exclude the impact of the $9.2 million
cumulative effect of a change in an accounting principle. Including the
cumulative effect of a change in accounting principle, operating income
would have been $356.0 million, and operating return on average
shareholders' equity would have been 28.3%.
(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.
(3) Operating income and operating return on average shareholders' equity
exclude net realized gains (losses) on investments for 2002 of $8.8
million, 2001 - $18.1 million, 2000 - $(7.2) million, 1999 - $(15.7)
million and 1998 - $(6.9) million. (Also see (1) and (2)).
(4) Book value per common share was computed by dividing total shareholders'
equity by the number of outstanding common shares at year end.
- --------------------------------------------------------------------------------
40
(1) Income (loss) for the Reinsurance and Individual Risk segments represents
net underwriting income. Net underwriting income consists of net premiums
earned less claims and claims expenses, acquisition costs and operational
expenses.
(2) Excludes $22.2 million of premium ceded to the Reinsurance segment.
(3) For 1998, the individual risk segment information of income and the claims/
claim expense ratio excludes the impact of the Stonington charge. Including
the charge relating to Stonington, individual risk segment pre-tax income
would have been a loss of $51.4 million and the claims and claim expense
ratio would have been 200.0%.
---------------------------------------------------------------------------
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, 2002 compared with the years ended December 31, 2001 and
December 31, 2000. The following also includes a discussion of our financial
condition at December 31, 2002. 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".
We utilize two non-GAAP measures, operating income and operating return on
equity to measure our performance. We currently use these measures to evaluate
the underlying fundamentals of our operations and believe them to be useful
measures of our corporate performance. We define operating income as net income
which excludes net realized gains and losses from the sale of investments and
certain one-time adjustments. Realized gains and losses from the sale of
investments are derived from the timing of the sale of investments and are not
derived from our operating performance. Operating return on equity is calculated
by dividing operating income by the average net book value of our common equity
for the year.
In calculating operating income, we have also excluded a one-time charge
occurring in 2002:
o In 2002, we adopted a new accounting pronouncement, SFAS 142 "Goodwill and
Other Intangible Assets." During 2002, after completing our initial
impairment review of our goodwill, we decided to reflect goodwill at zero
value and record a write-off of $9.2 million. Therefore, we felt it was
appropriate to exclude this charge from our calculation of operating
income, because 1) this was associated with a one time adoption of a new
accounting principle, and 2) we wrote off 100% of our balance of goodwill.
OVERVIEW
RenaissanceRe Holdings Ltd. was originally formed to provide reinsurance to
cover the risk of natural and man-made catastrophes. We use sophisticated
computer models to construct a superior portfolio of these coverages. Our
disciplined underwriting approach, sophisticated risk models and management
expertise have established us as a leader in the property catastrophe
reinsurance business and led to consistent strong performance and growth for our
Company.
Our principal business is property catastrophe reinsurance. Our subsidiary
Renaissance Reinsurance is one of the world's premier providers of this
coverage. Our coverages protect against large natural catastrophes, such as
earthquakes and hurricanes, as well as claims arising from other natural and
man-made catastrophes such as winter storms, freezes, floods, fires, tornadoes
and explosions. We offer this coverage 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.
We use our advanced proprietary modeling and management systems to maximize our
return on equity, subject to prudent risk constraints.
41
Recently, we have experienced substantial growth in premiums from specialty
lines of reinsurance written by Renaissance Reinsurance, including such lines as
catastrophe-exposed workers' compensation, surety, terrorism, property per risk,
aviation and finite reinsurance. We refer to these premiums as "specialty
reinsurance". During 2002 we more than tripled our gross written premiums from
specialty reinsurance to $247.0 million from $77.5 million written in 2001.
We have also experienced substantial growth in our individual risk business
written on an excess and surplus lines basis by Glencoe. We define our
individual risk segment to include underwriting that involves understanding the
characteristics of the original underlying insurance policy. Our individual risk
segment currently provides insurance for commercial and homeowners
catastrophe-exposed property business, and also provides reinsurance to other
insureds on a quota share basis. We significantly increased the gross written
premiums of our individual risk operations to $260.4 million, compared to $50.0
million in 2001.
In addition, we also manage property catastrophe reinsurance on behalf of two
joint ventures. In 1999 we formed Top Layer Reinsurance Ltd. ("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. We formed DaVinci
Reinsurance Ltd. ("DaVinci") in 2001 with State Farm and other private investors
to write property catastrophe reinsurance side-by-side with Renaissance
Reinsurance. We own a minority of DaVinci's outstanding equity but control a
majority of its outstanding voting power, and accordingly, DaVinci's financial
results are consolidated in our financial statements. We also previously acted
as underwriting manager for OPCat, however in February 2002, OPCat's parent
company, Overseas Partners Limited, decided to exit the reinsurance business,
and we subsequently assumed the in-force book of business of OPCat. We act as
the exclusive underwriting manager for these joint ventures in return for
management fees and a profit participation (such fees earned from DaVinci are
eliminated in consolidation). Together, these joint ventures wrote $261.0
million of premium in 2002, compared to $98.9 million in 2001. In total, as of
December 31, 2002, Top Layer Re and DaVinci had access to approximately $4.6
billion of capital resources, which includes $3.9 billion of limit through
reinsurance provided by State Farm.
We believe that our position as a leading property catastrophe reinsurance
underwriter is reflected by the continued growth in the gross property
catastrophe premiums written by Renaissance Reinsurance and our joint ventures
(which, when combined, we refer to as "managed catastrophe premiums"). The total
managed catastrophe premiums written on behalf of Renaissance Reinsurance and
our joint ventures increased by 67% in 2002 to $738.8 million from $441.8
million in 2001.
The occurrence of the World Trade Center disaster in 2001 and the significant
losses stemming from this event caused an imbalance in the supply and demand for
reinsurance capacity. As a result of this increase in demand, we increased our
reinsurance operations, both in our established property catastrophe line and in
specialty reinsurance, and we also increased our individual risk operations
written through Glencoe Insurance. Accordingly, during 2002 we more than doubled
our gross written premiums to $1,173.0 million from $501.3 million of gross
written premiums in 2001. Also, for the year ended December 31, 2002, our
operating income available to common shareholders more than doubled to $365.2
million from $146.3 million for the year ended December 31, 2001. Operating
income is net income excluding realized gains and losses on investments, and for
2002 operating income also excludes a $9.2 million write-off of goodwill. Our
net income available to common shareholders also more than doubled during 2002
to $364.8 million from $164.4 million for the same period during 2001. During
2002 our total assets increased by $1.1 billion, or 41%, to $3.7 billion. At
December 31, 2002, total shareholders' equity attributable to common
shareholders was $1.5 billion and our book value per common share was $21.39,
compared with $1.1 billion and $15.83 per share at December 31, 2001.
Because we write 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 consider opportunistic diversification into new ventures,
either through organic growth or the acquisition of other companies or books of
business of other companies. We may explore opportunities in lines of insurance
or reinsurance business in which we have limited experience, such as certain
casualty coverages. If these opportunities come to fruition, they will present
us with additional management and operational risks for which we will need to
further
42
develop our resources to effectively manage this expansion. 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 and individual risk 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 almost all property and casualty insurance and reinsurance companies, the
most significant judgment made by management is the estimate of the claims and
claim expense reserves. Claim reserves represent estimates, including actuarial
and statistical projections at a given point in time, of our expectations of the
ultimate settlement and administration costs of claims incurred, and it is
possible that the ultimate liability may materially exceed or be materially 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.
Adjustments to our prior year estimated claims reserves will impact our current
year net income by increasing our net income if the prior year estimated claims
reserves are determined to be overstated, or by reducing our net income if the
prior year estimated claims reserves prove to be insufficient. During the years
ended December 31, 2002, 2001 and 2000, changes to prior year estimated claims
reserves, had the following impact on our net income; during 2002, prior years
estimated claims reserves were overstated by $2.0 million and accordingly, our
net income was increased by $2.0 million; during 2001, prior years estimated
claims reserves were overstated by $16.0 million, and our net income was
increased by $16.0 million; and during 2000, prior years estimated claims
reserves were deficient by $8.4 million, and our net income was decreased by
$8.4 million. (Also see Financial Condition - Reserves for Claims and Claims
Expenses).
For our property catastrophe reinsurance operations, we initially set our case
reserves based on case reserves and other reserve estimates reported by insureds
and ceding companies. We then add to these case reserves, our estimates for
additional case reserves, and an estimate for incurred but not reported reserves
("IBNR"). These estimates are normally based upon our experience with similar
claims, our knowledge of potential industry loss levels for each loss, and
industry information which we gather and retain in our REMS(C) modeling system.
Our estimates of claims resulting from catastrophic events is inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims.
In reserving for our individual risk and specialty reinsurance coverages we do
not have the benefit of a significant amount of our own historical experience in
these lines, and therefore we estimate our IBNR for our specialty reinsurance
and individual risk coverages by utilizing an actuarial method known as the
Bornhuetter-Ferguson technique. It is common for insurance and reinsurance
companies to utilize this method for lines of business where a company may have
limited historical loss experience. The utilization of the Bornhuetter-Ferguson
technique requires a company to estimate an ultimate claims and claim expense
ratio for each line of business. We select our estimates of the ultimate claims
and claim expense ratios by reviewing industry standards, and adjusting these
standards based upon the coverages we offer and the terms of the coverages we
offer.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that our estimates need adjusting, such adjustments are recorded in
the quarter in which they are identified. Although we believe we are cautious in
our assumptions, and in the application of these methodologies, we cannot be
certain that our ultimate payments will not vary, perhaps materially, from the
estimates we have made. Adjustments to our loss reserves can impact current year
net income by either increasing net income if the estimates of prior year loss
reserves proves to be overstated or by decreasing net income if the estimates of
prior year loss reserves proves to be insufficient. As of December 31, 2002, our
estimated IBNR reserves were $462.9 million, and a 5% change in such IBNR
reserves, would equate to a $23.1 million adjustment to claims and claim
expenses incurred, which would represent 6.3% of our 2002 net income, and 1.4%
of shareholders' equity as at December 31, 2002.
43
We incurred claims and claim expenses of $289.5 million, $149.9 million and
$108.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Our claims and claim expense reserves were $804.8 million, $572.9
million and $403.6 million at December 31, 2002, 2001 and 2000, respectively.
Other material judgments made by us are the estimates of potential impairments
in asset valuations, particularly 1) potential uncollectible reinsurance
recoverables; and 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. As of December 31,
2002, we have recoverables of $207.3 million and we have recorded a valuation
allowance of $7.8 million, based on specific facts and circumstances evaluated
by management. As of December 31, 2002, the majority of the $199.5 million of
losses recoverable relate to outstanding claims reserves on our books, and in
accordance with the terms of the policies, we generally must wait to collect
from our reinsurers until we pay the underlying claims. We expect to fully
collect the recorded net balance of the losses recoverable. There has been
little change in our reinsurance recoverables or our valuation allowance at
December 31, 2002 as compared to 2001 due to the relatively low level of
catastrophe losses during 2002, the slowdown in payments of older claims,
specifically claims resulting form the World Trade Center disaster, and the
continued financial strength of our reinsurers.
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 2002, 2001 and 2000 we recorded valuation allowances
of $5.6 million, $14.0 million and $8.2 million, respectively. As of December
31, 2002, the gross balance of the deferred tax asset was $32.7 million and the
net balance of the deferred tax asset was $4.0 million.
44
SUMMARY OF RESULTS OF OPERATIONS FOR 2002 AND 2001
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 realized gains and losses on investments and
the cumulative effect of a change in accounting principle
- -------------------------------------------------------------------------------
The $219.0 million increase in net operating income in 2002, compared to 2001,
was primarily the result of the following items:
o a $131.9 million increase in underwriting income from our reinsurance
operations due primarily to an increase in net earned premiums to $667.9
million from $325.2 million, primarily due to the market imbalances after
the World Trade Center disaster which enabled us to increase our property
catastrophe reinsurance premiums and more than triple our premiums from
specialty reinsurance as discussed above. Also, in large part as a result
of lower catastrophe losses during the year, our loss ratio decreased in
2002 to 38.1% compared with a loss ratio of 45.0% in 2001. The 2001 loss
ratio was higher due to losses emanating from the World Trade Center
disaster, plus
o the $76.1 million of underwriting income from the start-up of DaVinci
during 2002, however after offsetting this with the $54.3 million increase
related to the interests owned by other investors, the net increase to our
net income was $21.8 million, plus
o a $19.4 million increase in underwriting income from our individual risk
operations which resulted from the increase in our gross written premiums
in our individual risk segment to $260.3 million in 2002 from $50.0 million
in 2001, which was the result of the market imbalances as noted above, plus
o a $16.6 million increase in other income, which was primarily due to an
increase of $12.7 million in income from our Top Layer Re joint venture,
plus
45
o a $28.9 million increase in net investment income during the year, which
was primarily due to the $785 million increase in our assets from our net
capital raising activities in the second half of 2001 and the $935 million
increase in our assets during 2002, primarily resulting from the $778
million of cash flows generated from our operating activities during 2002.
The impact of the increase in available assets was partially offset by a
reduction in investment returns due to lower interest rates, plus
o a $17.1 million reduction in corporate expenses, taxes and other, which was
primarily due to the fact that in 2001 we decided to increase our valuation
allowance on our deferred tax asset by $14.0 million as a result of further
reductions of our U.S. based insurance, less
o a $16.7 million increase in interest and fixed charges, which are primarily
the result of the issuance of $150 million of debt in July 2001, and the
issuance of $150 million of our 8.1% Series A preference shares in November
2001.
The $11.9 million increase in net 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, 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.
RESULTS OF OPERATIONS FOR 2002 AND 2001
The following is a discussion and analysis of our results of operations for the
year ended December 31, 2002, compared to each of the years ended December 31,
2001, and 2000, and a discussion of our financial condition at December 31,
2002.
46
PREMIUMS
Gross Written Premiums
- -------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
(in thousands)
Cat Premium
Renaissance $ 442,980 $373,896 $345,086
DaVinci 187,822 - -
Assumed from OPCat 34,873 - -
----------------- ------------- -------------
Total Cat Premium 665,675 373,896 345,086
Specialty Reinsurance 247,020 77,468 37,730
----------------- ------------- -------------
Total Reinsurance 912,695 451,364 382,816
Individual Risk Premium (1) 260,354 49,957 50,186
----------------- ------------- -------------
Total gross written premiums $ 1,173,049 $501,321 $433,002
================= ============= =============
(1) Excludes $22 million of premium ceded to Renaissance Reinsurance and
DaVinci in 2002.
- -------------------------------------------------------------------------------
The increase in our property catastrophe premiums over the past two years is
primarily due to an improving market following 1) the World Trade Center
disaster in 2001 and 2) insured losses from nine significant worldwide
catastrophic events in 1999: hail storms in Sydney, Australia; tornados in
Oklahoma; Hurricane Floyd in the U.S.; Typhoon Bart in Japan; Turkish and
Taiwanese earthquakes; Danish windstorm, Anatol; and the French windstorms,
Lothar and Martin. Six of these events each resulted in over $1 billion of
insured damages.
Because of these events, as with many large losses, two changes 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, firstly
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. Also contributing to our increased written premiums in 2002 was the
inception of DaVinci, which wrote $187.8 million of gross written premiums.
The factors that caused the improved market conditions in the property
catastrophe market also contributed to improving market conditions in the lines
of specialty reinsurance which we write and accordingly, we began writing an
increased level of specialty reinsurance premiums in 2001 and, subsequent to the
World Trade Center disaster, we significantly increased our participation in
this market. We categorize our specialty reinsurance premiums as reinsurance
coverages that are not specifically property catastrophe coverages. Examples of
specialty lines of reinsurance premiums provided by us include
catastrophe-exposed workers' compensation, surety, terrorism, property per risk,
aviation and finite reinsurance. We expect specialty reinsurance written
premiums be a significant contributor to our overall written premiums in 2003.
The market conditions that caused the improvements in the property catastrophe
market and the specialty reinsurance market have also caused improvements in the
individual risk market, and accordingly, during 2002 we significantly increased
our premiums in the individual risk market. We define the individual risk market
as underwriting that involves understanding the characteristics of the original
underlying insurance policy. Our individual risk segment currently provides
insurance for commercial and homeowners catastrophe-exposed property business,
and also provides reinsurance to other insureds on a quota share basis. We
expect individual risk written premiums to be a significant contributor to our
overall written premiums in 2003.
47
GROSS PREMIUMS WRITTEN BY GEOGRAPHIC REGION
(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 written premiums written to date is predominantly from
Europe and Japan.
(2) The category Specialty Reinsurance consist of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks
being Worldwide.
(3) The category Individual Risk is made up of contracts that are primarily
exposed to U.S. risks.
- -------------------------------------------------------------------------------
CEDED REINSURANCE PREMIUMS
Ceded Premiums
(1) Excludes $22 million of premium ceded to Renaissance Reinsurance and
DaVinci in 2002.
- --------------------------------------------------------------------------------
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 2002 and 2001, we increased our
purchases of reinsurance because we received a number of new opportunities to
purchase reinsurance. Also affecting the increase in our 2002 ceded reinsurance
premiums were placements of structured quota share reinsurance agreements for
participations in our property catastrophe book of business. In accordance with
these agreements we retain fees and have the right to receive profit commissions
48
associated with these cessions. The fees and profit commissions are reflected as
a reduction to operating expenses and acquisition expenses, respectively.
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. As of December 31, 2002, the majority of the $199.5
million of losses recoverable relate to outstanding claims reserves on our
books, and in accordance with the terms of the policies, we generally must wait
to collect from our reinsurers until we pay the underlying claims. We expect to
fully collect the recorded net balance of the losses recoverable.
To the extent that appropriately priced coverage is available, we anticipate
continued use of reinsurance to reduce the potential volatility of our results.
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 costs 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 claims,
underwriting expense and combined ratios:
49
The increase in our 2002 net underwriting income from our reinsurance segment
was primarily the result of three factors: 1) the low level of property
catastrophe losses during 2002; 2) the increase in our net reinsurance premiums
earned during 2002, as a result of our increase in gross written property
catastrophe premiums and specialty reinsurance premiums (See "Premiums" above);
and 3) the inception of DaVinci's operations during 2002. Losses from our
property catastrophe reinsurance policies can be infrequent, but severe;
however, during periods with benign property catastrophe loss activity, such as
2002, we have the potential to produce an unusually low level of losses and a
related increase in underwriting income. Although this occurred during 2002,
there can be no guarantee that this reduced level of losses will continue in
2003 or beyond.
Also during 2002, as discussed in the "Premiums" section above, we significantly
increased our specialty reinsurance premiums written. Although specialty
reinsurance premiums will normally produce higher claims and claim expenses than
the property catastrophe reinsurance business, the reduction in our losses
resulting from the low level of catastrophe losses during 2002 more than offset
the increased normal loss activity arising from our specialty reinsurance
premiums.
50
The increase in our 2002 net underwriting income from our individual risk
segment was primarily the result of the growth in premiums in 2002 compared with
2001 (See "Premiums" above), and a reduction of the proportion of this business
that was ceded to third parties.
Our claims and claim expenses also benefited from our purchase of reinsurance
protection as we recorded reinsurance recoveries of $63.0 million, $160.4
million and $52.0 million during fiscal years 2002, 2001 and 2000, respectively.
Although there can be no assurance that our net claims and claim expenses will
continue to benefit from the purchase of reinsurance, we will continue to seek
to purchase reinsurance protection to the extent that appropriately priced
coverage is available.
Our underwriting expenses consist of acquisition costs and operational expenses.
Acquisition costs consist of costs to acquire premiums and are principally
comprised of broker commissions and excise taxes. Acquisition costs are driven
by contract terms and are normally a set percentage of premiums. Operational
expenses consist of salaries and other general and administrative expenses. Our
reinsurance business operates with a limited number of employees and we are able
to grow our written premiums without proportionally increasing our operating
costs. As our premiums increase, we expect that our operating costs will tend to
increase to a lesser extent and since our acquisition costs are based on a
percentage of the premiums earned, 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 2002 and 2001.
Recently, we have entered into joint ventures and specialized quota share
cessions of our book of business. In accordance with the joint venture and quota
share agreements, we are entitled to certain fee income and profit commissions.
We record these fees and profit commissions as a reduction in acquisition costs
or operating expenses and accordingly these fees have also contributed to the
reduction in our expense ratio.
Although industry wide insurance losses were the highest in history during 2001,
we recorded increases in net underwriting profit, cash flows from operations,
earnings per share and book value per share. We attribute our performance to our
disciplined underwriting approach, the experience of our underwriters, and the
advantage afforded by our sophisticated risk models.
During 2001 and 2000, the majority of the premiums written in the individual
risk segment were ceded to other reinsurers and as a result, net earned premiums
from the individual risk operations were relatively minor. Based on this reduced
level of net earned premiums, relatively modest increases or decreases to net
written premiums, claims and claim expenses incurred, acquisition costs or
operating expenses can cause, and did cause, unusual fluctuations in the claims
and claim expenses ratio and the underwriting expense ratio of such individual
risk operations.
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
-----------------------
(in thousands) $104,098 $ 75,156 $ 77,868
- --------------------------------------------------------------------------------
51
Because a majority of our coverages provide protection from damages resulting
from natural and man-made catastrophes, it is possible that we could become
liable for a significant amount of losses on 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 marketable 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 2002, the average
yield on our portfolio fell to 3.09% as of December 31, 2002 from 4.2% as of
December 31, 2001. As yields on our portfolio decrease, our interest income will
also decrease. However, the decline in interest rates during 2002 was offset by
our significant growth in invested assets during the year, which was primarily
due to our strong cash flows from operations. Also, in the latter half of 2001,
we raised a net $785 million from financing activities, which was available to
us for investment purposes for the full year of 2002 (See "Financial Condition -
Capital Resources").
During 2001, as a result of the declining interest rate environment, the average
yield on our portfolio fell from 6.8% as of December 31, 2000 to 4.2% as of
December 31, 2001, which caused a reduction in our investment income. The
decline in our investment income during 2001 to $75.1 million from $77.9 million
during 2000 would have been greater, except that offsetting the impact of the
decreased yields were our strong cash flows from operations of $341 million and
our capital raising activities in the latter half of 2001, as noted above.
OTHER INCOME
As discussed previously, in 1999 we began to manage property catastrophe books
of business for the Top Layer Re and OPCat joint ventures and in return for
managing these joint ventures, we receive fees, profit commissions and/or an
equity participation in these ventures.
During 2002, our fee income decreased primarily as a result of the reduced level
of fees received from OPCat, as a result of the decision by OPCat's parent
company, Overseas Partners Limited, to exit the reinsurance business. During
2002 our equity earnings from Top Layer Re increased as a result of the increase
in premiums written by Top Layer Re and the resultant increase in Top Layer Re's
net income.
The balance of the other items in other income increased primarily due to
profits of $7.2 million on derivative instruments under which losses or
recoveries are triggered by an industry loss index or geological or physical
variables (2001 - a loss of $4.6 million).
During 2001, we formed DaVinci, in which we currently own 25% of the outstanding
equity. However, we own a majority of DaVinci's outstanding voting rights and
its results are consolidated in our financial statements. Accordingly, our
income from this joint venture is not reflected in other income; rather, our
profit participation and equity participation in DaVinci are recorded 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 in Ceded Premiums, we have entered into certain placements of
structured quota share reinsurance agreements for participations in our property
catastrophe book of business. In accordance with these agreements we retain fees
and have the right to receive profit commissions associated with these cessions.
We record these fees and profit commissions as a reduction in acquisition costs
and operating expenses. If we were to record DaVinci on the
52
equity method of accounting, and if we were to record our fees from the quota
share relationships in other income, our pro-forma other income from all of
these relationships would be as follows:
CORPORATE EXPENSES
- -------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
-----------------------
(in thousands) $ 14,327 $ 11,485 $ 8,022
- --------------------------------------------------------------------------------
Corporate expenses incurred 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 increase in
corporate expenses during 2002 primarily related to an increase in legal costs
of $1.9 million and costs of $1.2 million related to accelerated vesting of
equity compensation. The majority of the increase in corporate expenses in 2001
primarily related to costs related to research and development initiatives
conducted by us in 2001.
INTEREST AND PREFERRED SHARE DIVIDENDS
Our interest payments and preferred dividends increased during 2002, primarily
as a result of the timing of our capital raising activities, which occurred in
the latter half of 2001. Accordingly, during 2002, the balance of the 7.0%
Senior Notes and the 8.1% Series A Preference Shares were outstanding for the
entire year, and we incurred a full year of charges related to these securities
as compared to a partial year of charges during 2001.
In January and February of 2003, we raised an additional $200 million from the
issuance of $100 million in 5.875% Senior Notes and $100 million in 7.3% Series
B Preference Shares, respectively, and as a result we expect our interest and
preferred share dividends to increase during 2003 as compared with 2002.
53
INCOME TAX EXPENSE (BENEFIT)
- --------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
- -----------------------
(in thousands) $ (115) $ 14,262 $ 4,648
- --------------------------------------------------------------------------------
During 2002 we chose to write a limited amount of business in our U.S.
operations, and, therefore, our U.S. net income was minimal and the related tax
impact for 2002 was also minimal
During 2001 and 2000, we also had little or no net income in the U.S., however,
as of December 31, 2001 we had accumulated a $26.9 million deferred tax asset.
As a result of the limited number of attractive opportunities in the U.S.
primary insurance market, our U.S. insurance operations did not generate taxable
income during those years, which called into question the recoverability of the
$26.9 million deferred tax asset. Although we retain the benefit of this asset
through 2020, during 2002, 2001 and 2000 we decided to increase our valuation
allowance by $5.6 million, $14.0 million and $8.2 million, respectively. As of
December 31, 2002, the gross and net balance of the deferred tax asset was $32.7
million and $4.0 million, respectively.
We currently plan to increase the business written by our U.S. insurance
subsidiaries. If, as a result, our U.S. operations begin to generate taxable
income, the appropriateness of the valuation allowance will be reassessed and,
accordingly, any potential profits from our U.S. operations would possibly not
have a corresponding offset for tax expenses, up to the $27.7 million valuation
allowance recorded as of December 31, 2002.
REALIZED GAINS/(LOSSES)
- --------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
- -----------------------
(in thousands) $ 8,765 $ 18,096 $ (7,151)
- --------------------------------------------------------------------------------
Because our investment portfolio is structured to preserve capital and provide
us with a high level of liquidity, a large majority of our investments are in
the fixed income markets and, therefore, our realized holding gains and losses
on investments are highly correlated to fluctuations in interest rates.
Therefore as interest rates decline, as occurred in 2002 and 2001, we will tend
to have realized gains from the turnover of our investment portfolio, and as
interest rates increase, as was the case in 2000, we will tend to have realized
losses from the turnover of our investment portfolio, although such correlation
for realized gains (losses) on sales of investments can be reduced depending on
which specific securities we choose to sell.
The amount of the realized gains or realized losses that will be recorded in the
future will be dependent upon the level of our investments, the changes in the
interest rate environment and how quickly or slowly we choose to turn over our
investment portfolio. A larger investment portfolio, greater fluctuations in the
interest rate environment, and turning over an investment portfolio quickly,
will affect the magnitude of realized gains or realized losses.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") 142, "Goodwill and Other Intangible Assets." In the second
quarter of 2002, the Company completed its initial impairment review in
compliance with the transition provisions of SFAS 142 and, as a result, the
Company decided to record goodwill at zero value, the low end of an estimated
range of values, and wrote off the balance of its goodwill during the second
quarter of 2002, which totaled $9.2 million. In accordance with the provisions
of SFAS 142, this is required to be recorded as a cumulative effect of a change
in accounting principle in the consolidated statement of income and is required
to be recorded retroactive to January 1, 2002.
54
FINANCIAL CONDITION
RenaissanceRe is a holding company, and we therefore rely on dividends from our
subsidiaries and investment income to make principal and interest and dividend
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 Bermuda subsidiaries is, under certain
circumstances, limited under U.S. statutory regulations and Bermuda insurance
law, which require our Bermuda insurance subsidiaries to maintain certain
measures of solvency and liquidity. At December 31, 2002, the statutory capital
and surplus of our Bermuda insurance subsidiaries was $1,974.6 million, and the
amount of capital and surplus required to be maintained was $414.7 million. Our
U.S. subsidiaries are also required to maintain certain measures of solvency and
liquidity. At December 31, 2002, the statutory capital and surplus of our U.S.
subsidiaries was $25.4 million and the amount of capital and surplus required to
be maintained was $9.0 million. During 2002, Renaissance Reinsurance and DaVinci
declared aggregate cash dividends to us of $224.3 million and $3.5 million,
respectively, compared with $147.1 million and $0.7 million, respectively, in
2001.
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 2002 were $778.4 million, which
principally consisted of net income of $377.0 million, plus $231.2 million for
increases to net reserves for claims and claim expenses, plus $186.1 million for
increases in reserves for unearned premiums. Our 2002 cash flows from operations
were primarily utilized to invest in fixed income securities.
We have generated cash flows from operations in 2002, 2001 and 2000
significantly in excess of our operating commitments. To the extent that capital
is not utilized in our reinsurance or individual risk segments, we will consider
using such capital to invest in new opportunities.
Because a large portion of the coverages we provide 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
As discussed in the Summary of Critical Accounting Policies and Estimates, for
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, we believe
that our ultimate payments will vary, possibly materially, from our initial
estimate of reserves.
A large portion of our coverages provide protection from natural and man-made
catastrophes which are generally infrequent, but can be significant, such as
losses from hurricanes and earthquakes. Because loss events to which we are
exposed can be 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 claims reserves will also fluctuate based on the
payments we make for these large loss events. The timing of our payments on loss
events can be affected by the event causing the loss, the location of the loss,
and whether our losses are from policies with insurers or reinsurers.
During 2002 we increased our specialty reinsurance and individual risk gross
written premiums (See - "Premiums"). The addition of these lines of business
adds additional uncertainty to our claims
55
reserving process and our claims reserve estimates as the reporting of
information, the setting of initial reserves and the loss settlement process for
these lines of business vary from our traditional property catastrophe line of
business.
For our reinsurance and individual risk operations, our estimates of claims
reserves include case reserves reported to us as well as our estimate of losses
incurred but not reported ("IBNR") to us. Our case reserve and our estimates for
IBNR 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 claims reserves on a regular basis. As of
December 31, 2002, 2001 and 2000, included in our claims and claim expense
reserves were IBNR reserves of $462.9 million, $286.7 million and $228.8
million, respectively.
CAPITAL RESOURCES
Our total capital resources at December 31, 2002 and 2001 were as follows:
- -----------------------------------------------------------------------------
Years ended December 31, 2002 2001
- ------------------------
(in thousands)
Common shareholders' equity $ 1,492,035 $ 1,075,024
8.1% Series A preference shares 150,000 150,000
--------------- ------------
Total shareholders' equity 1,642,035 1,225,024
7% senior notes 150,000 150,000
8.54% capital securities 84,630 87,630
DaVinci revolving credit facility - borrowed 100,000 -
Revolving credit facility - unborrowed 310,000 310,000
Revolving credit facility - borrowed - -
Term and revolving loan facility 25,000 33,500
--------------- ------------
Total capital resources $ 2,311,665 $ 1,806,154
=============== ============
- --------------------------------------------------------------------------------
During 2002, our capital resources increased primarily as a result of three
items: 1) our net income of $364.8 million; 2) an increase in unrealized gains
on our investment portfolio to $95.2 million ($16.3 million as of December 31,
2001), $36.1 million of which related to our investment in Platinum (See
Investments); and 3) the borrowing of the full $100 million available under
DaVinci's revolving credit facility.
On April 19, 2002, DaVinci entered into a credit agreement providing for a $100
million committed revolving credit facility. On May 10, 2002, DaVinci borrowed
the full $100 million available under this facility to repay $100 million of
bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor
Renaissance Reinsurance is a guarantor of this facility and the lenders have no
recourse against us or our subsidiaries 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 we own a minority of the economic interest of DaVinci, we control a
majority of its outstanding voting rights and, accordingly, DaVinci is
consolidated in our financial statements; as a result, the replacement of $100
million of debt from RenaissanceRe with $100 million of debt from a third party
has caused our reported consolidated debt to increase by $100 million. As of
December 31, 2002, the full amount was outstanding under this facility. Interest
rates on the facility are based on a spread above LIBOR, and averaged
approximately 2.63% during 2002. The credit agreement contains certain covenants
requiring DaVinci to maintain a debt to capital ratio of 30% or below and a
minimum net worth of $230 million. As at December 31, 2002, DaVinci was in
compliance with the covenants of this agreement.
56
With the increased opportunities to grow our business, we also decided to
materially increase our capital resources through the following activities:
1. In October 2001, we issued 2.5 million 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 8.1% 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 2001 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.
In October 2001 we formed DaVinci, and raised $300 million of outside capital
($275 million as of December 31, 2001). We also utilized $200 million of our own
capital in the formation of DaVinci when we contributed $100 million as equity
and provided $100 million as bridge financing. The bridge financing was repaid
in May 2002 when DaVinci entered into a revolving credit facility, as noted
above.
Also, in conjunction with market opportunities, as of December 31, 2002 we
increased the capital of Renaissance Reinsurance to $1.1 billion and increased
the capital of Glencoe to $325 million.
We maintain a revolving credit and term loan agreement with a syndicate of
commercial banks. There was no outstanding balance as of December 31, 2002 and
2001. During the third quarter of 2001, we repaid our borrowings of $16.5
million on this facility. Interest rates on the facility are based on a spread
above LIBOR and averaged 5.45% during 2001. If we were to borrow under this
agreement, the 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 $175.0 million or 125%
of consolidated debt; and 80% of invested assets must be rated BBB- by S&P or
Baa3 by Moody's Investor Service or better.
Our subsidiary, Renaissance U.S. Holdings ("Renaissance U.S."), has a $10.0
million term loan and $15.0 million revolving loan facility with a syndicate of
commercial banks. Interest rates on the facility are based upon a spread above
LIBOR, and averaged 2.35% during 2002, compared to 4.71% during 2001. 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 and revolving credit facility has a mandatory
repayment provision of $25 million in June 2003. During 2002, Renaissance U.S.
repaid the third installment of $8.5 million in accordance with the terms of the
loan. Renaissance U.S. was in compliance with all the covenants of this term
loan and revolving loan facility as at December 31, 2002.
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 2002, RenaissanceRe repurchased $3.0 million of the
Capital Securities. No Capital Securities were repurchased in 2001.
RenaissanceRe has repurchased an aggregate $15.4 million of the Capital
Securities since their issuance in 1997. 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, 2002. The capital
trust securities mature on March 1, 2027. Generally Accepted Accounting
57
Principles do not allow these securities to be classified as a component of
shareholders' equity, therefore, they are recorded 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. At December 31, 2002, we had outstanding letters of credit
aggregating $223.1 million, compared to $125.8 million in 2001. Also, in
connection with our Top Layer Re joint venture we have committed $37.5 million
of collateral to support a letter of credit.
Our principal facility is a $385 million secured facility which accepts as
collateral shares issued by our subsidiary Renaissance Investment Holdings Ltd.,
or "RIHL." Our participating operating subsidiaries and our managed joint
ventures have pledged (and must maintain) RIHL shares issued to it with a
sufficient collateral value to support their respective obligations under the
facility, including reimbursement obligations for outstanding letters of credit.
The participating subsidiaries also have the option to post alternative forms of
collateral. In addition, each participating subsidiary and joint venture must
maintain additional unpledged RIHL shares at least equal to 15% of its facility
usage, and in the aggregate total unpledged RIHL shares must be maintained at
least equal to 15% of all of the outstanding RIHL shares, for liquidity
purposes, in addition to those pledged to support the facility. In the case of a
default under the facility, or in other circumstances in which the rights of our
lenders to collect on their collateral may be impaired, the lenders are granted
broad enforcement powers under the facility agreements, in accordance with and
subject to its terms. Upon the occurance of certain events (including events of
default) specified in the facility, the collateral agent acting on behalf of the
lenders is permitted to redeem pledged shares and convert the collateral into
cash or eligible marketable securities. The redemption of shares by the
collateral agent takes priority over any pending redemption of unpledged shares
by us or other holders.
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, 2002 was $22.9
million, compared to $24.1 million in 2001. 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. No further loans or draws will be made under this facility. We
anticipate the repayment of these loans and the subsequent closure of this
facility prior to December 31, 2003.
In January 2003, we issued $100 million of 5.875% Senior Notes due February 15,
2013. The proceeds will be used for general corporate purposes. Interest on the
notes is payable on February 15 and August 15 of each year, commencing August
15, 2003. The notes can be redeemed by us prior to maturity subject to payment
of a "make-whole" premium; however, we have no current intentions of calling the
notes. The notes, which are senior obligations, 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.
In February 2003, we issued 4,000,000 Series B preference shares at $25 per
share. The shares may be redeemed at $25 per share at our option on or after
February 4, 2008. Dividends are cumulative from the date of original issuance
and are payable quarterly in arrears at 7.30%, commencing June 1, 2003 when, if,
and as declared by the Board of Directors. If we submit a proposal to our
shareholders concerning an amalgamation or submit 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, we may redeem the shares prior to
February 4, 2008 at $26 per share. The preference shares have no stated maturity
and are not convertible into any other of our securities.
SHAREHOLDERS' EQUITY
During 2002, shareholders' equity increased by $417 million to $1.6 billion as
of December 31, 2002, from $1.2 billion as of December 31, 2001. The significant
components of the change in shareholders' equity included net income from
continuing operations of $364.8 million and an increase in our unrealized gains
on investments available for sale of $78.9 million, offset by dividends to
common and preference shareholders of $51.2 million.
From time to time, we have returned capital to our shareholders through share
repurchase programs. The value of the remaining shares authorized under the
repurchase programs is $27.1 million. No shares were repurchased during
58
2002 or 2001. In the future, we may purchase shares under our current
authorization, or increase the size of our program. Any such determination will
be subject to market conditions and numerous other factors. Under Bermuda law,
RenaissanceRe common shares repurchased are normally cancelled and retired.
INVESTMENTS
At December 31, 2002, we held cash and investments totaling $3.1 billion,
compared to $2.2 billion in 2001.
The table below shows the aggregate amounts of our invested assets:
The $934.5 million growth in our portfolio of invested assets for the year ended
December 31, 2002 resulted primarily from net cash provided by operating
activities of $778.4 million, an addition of $100 million in debt by DaVinci and
the increase in the net unrealized appreciation on the available for sale
investment portfolio of $78.9 million.
The equity investment in reinsurance company relates to our November 1, 2002
purchase of 3,960,000 common shares of Platinum Underwriters Holdings, Ltd.
("Platinum") in a private placement transaction. In addition, we received a
ten-year warrant to purchase up to 2.5 million additional common shares of
Platinum for $27.00 per share. We purchased the common shares for an aggregate
price of $84.2 million. As at December 31, 2002, we own 9.2% of Platinum's
outstanding common shares. We have recorded our investment in Platinum at fair
value, and at December 31, 2002 the aggregate fair value was $120.3 million. The
aggregate unrealized gain of $36.1 million on the Platinum investment is
included in accumulated other comprehensive income, of which $15.9 million
represents our estimate of the value of the warrants.
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.
Alternative Investments
- -----------------------
Included in other investments are investments in hedge funds and a fund invested
in bank loans of $81.8 million (2001 - $28.4 million) and private equity funds
of $14.6 million (2001 - $4.9 million) (collectively "Investment Funds"). Fair
values for our investments in such Investment Funds are established on the basis
of the net valuation criteria established by the managers of such Investment
Funds. These net valuations are determined based upon the valuation criteria
established by the governing documents of such Investment Funds. Such valuations
may differ significantly from the values that would have been used had ready
markets existed for the shares of the Investment Funds. Realized and unrealized
gains and losses on Investment Funds are included as a component of net
investment income.
We have committed capital to private equity funds of $54.0 million, of which
$14.4 million has been contributed as at December 31, 2002.
59
Our current investment guidelines call for the invested asset portfolio, which
includes investments available for sale and short term investments, to have at
least an average AA rating as measured by Standard & Poor's Ratings Group. At
December 31, 2002, our invested asset portfolio had a dollar weighted average
rating of AA, an average duration of 2.25 years and an average yield to maturity
of 3.09%.
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 2002, 2001 and 2000 we recorded income or recoveries on
non-indemnity catastrophe index transactions of $7.2 million, a loss of $4.6
million and nil, respectively. We report these recoveries in other income. We
cannot provide assurances that this performance will continue.
MARKET SENSITIVE INSTRUMENTS
Our investment portfolio includes investments whose market values will fluctuate
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 2.25%, which equated to a
decrease in market value of approximately $62.8 million on a portfolio valued at
$2,791.6 million at December 31, 2002. At December 31, 2001, the decrease in
total return would have been 1.9%, which equated to a decrease in market value
of approximately $41.0 million on a portfolio valued at $2,156.1 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, 2002, 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, 2002, we have not entered into any off-balance sheet
arrangements, as defined by Item 303 (a)(4) of Regulation S-K.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") 142, "Goodwill and Other Intangible Assets." See Results of
Operations - Cumulative Effect of a Change in Accounting Principle - Goodwill,
above.
60
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and provides transitional
disclosure requirements. For the years ended December 31, 2002 and for the prior
years, the Company followed Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock compensation. Effective
January 1, 2003, the Company adopted, prospectively, the fair value recognition
provisions of SFAS 123 for all stock-based employee compensation granted,
modified or settled after January 1, 2003. Under the fair value recognition
provisions of SFAS 123, the Company estimates the fair value of employee stock
options and other stock-based compensation on the date of grant and amortizes
this value as an expense over the vesting period.
In accordance with the transitional disclosure provisions of SFAS 148, the
following table sets out the effect on the Company's net income and earnings per
share for all reported periods had the compensation cost been calculated based
upon the fair value method recommended in SFAS 123:
CURRENT OUTLOOK
We believe that there has been a significant dislocation in the insurance
and reinsurance markets, due primarily to:
o the increase in demand for insurance and reinsurance protection, and the
withdrawal in supply, as a result of the substantial losses stemming from
the World Trade Center disaster;
o substantial increases in prior years loss reserves stemming from asbestos
related claims and an increase in losses from other casualty coverages
written in the late 1990's and 2000; and
o significant reductions in shareholders' equity of many insurance and
reinsurance companies due to the decline in the global equity markets.
Based on the factors above, the financial strength ratings of various insurance
and reinsurance companies were reduced during late 2001 and during 2002. Because
of these and other factors, we believe that the property catastrophe reinsurance
market, the specialty reinsurance market, and the individual risk markets in
which we participate, will continue to display strong fundamentals and will
provide us with growth opportunities during 2003. Also, because we experienced
relatively limited net losses from the World Trade Center disaster and the other
61
events noted above, we believe that we are well positioned to take advantage of
these and other potential opportunities during 2003.
Subsequent to the World Trade Center disaster, 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 offset the widespread underwriting and
investment losses sufficiently to cause significant adverse changes to the
prevailing pricing structure in the property catastrophe reinsurance market.
However, it is possible that the new capital in the market, an environment with
continued light catastrophe losses, or other factors could cause a reduction in
prices of our products. To the extent that industry pricing of our products does
not meet our hurdle rate, we would plan to reduce our future underwriting
activities thus resulting in reduced premiums and a reduction in expected
earnings from this portion of our business.
The growth in our premiums from the specialty reinsurance and individual risk
markets presents us with added operational and management risks for which our
historical experience is limited. Accordingly, we plan to continue to expand and
enhance our underwriting, risk management and operational capabilities in our
specialty reinsurance and individual risk operations to help control the risks
associated with these businesses.
We also believe that some of our future opportunities may arise in other lines
of business in which we have limited experience, such as certain casualty
coverages. If these opportunities come to fruition, they will present us with
additional management and operational risks for which we would need to further
develop our resources.
The World Trade Center disaster 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 coverages that we write,
however, we have offered specific coverage for certain terrorism or terrorism
related events and, accordingly, we do have potential exposures to this risk.
Also, our subsidiary, Glencoe Insurance Ltd., in accordance with recently passed
legislation in the United States, is required to offer terrorism insurance to
the majority of its customers. Currently the take up rate by Glencoe's customers
has approximated 2%, however, we can not be certain on what the future take up
rates by Glencoe's clients will be. We continue to monitor our aggregate
exposure to terrorist attacks.
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. However, depending on market
conditions, it is also possible that we will have increased opportunities to
purchase reinsurance, resulting in increased levels of ceded premium. In order
to obtain longer-term retrocessional 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 generate
fees and profit commissions.
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 60 of this Form 10-K under the caption "Market
Sensitive Instruments."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 15(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.
62
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 2003 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 AND
RELATED SHAREHOLDER MATTERS
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.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure Controls and Internal Controls: We have designed various controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, the "Exchange Act") to help ensure that information required to be
disclosed in our periodic Exchange Act reports, such as this Annual Report, is
captured, processed, summarized and reported on a timely and accurate basis. Our
disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our senior management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our internal controls and
procedures for financial reporting are likewise designed with the objective of
providing reasonable assurance that (1) transactions are properly authorized;
(2) our corporate assets are safeguarded against unauthorized or improper use;
and (3) transactions are properly recorded and reported.
Limitations on the effectiveness of controls: Our Board of Directors and
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls or internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, we believe that the design of
any prudent control system must reflect appropriate resource constraints, such
that the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, there can be no
absolute assurance that all control issues and instances of fraud, if any,
applicable to us have been or will be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some individuals, by
collusion of more than one person, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Evaluation: An evaluation was performed within the 90-day period prior to the
filing of this Report under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and
63
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Exchange Act. Based upon that evaluation, the Company's management, including
our Chief Executive Officer and Chief Financial Officer, concluded, subject to
the limitations noted above, that the Company's disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this Annual Report has been made known to them in a timely fashion.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
64
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits.
1. The Consolidated Financial Statements of RenaissanceRe Holdings Ltd. 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
Holdings Ltd. 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 Holdings Ltd.++
4.1 Specimen Common Share certificate.*
10.1 RenaissanceRe Holdings Ltd. Restricted Stock Plan.*
10.2 Fifth Amended and Restated Employment Agreement, dated as of November 8,
2002, between RenaissanceRe Holdings Ltd. and James N. Stanard.
10.3 Amended and Restated Employment Agreement, dated as of November 8, 2002,
between RenaissanceRe Holdings Ltd. and John M. Lummis.
10.4 Amended and Restated Employment Agreement, dated as of November 8, 2002,
between Renaissance Reinsurance Ltd. and William I. Riker.
10.5 Amended and Restated Employment Agreement, dated as of November 8, 2002,
between Renaissance Reinsurance Ltd. and David A. Eklund.
10.6 Employment Agreement, dated as of November 8, 2002, between Renaissance
Reinsurance Ltd. and John D. Nichols.
10.7 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.+++
10.8 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.#
10.9 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.++++
10.10 First Amendment Agreement, dated as of September 22, 2000, to the Credit
Agreement, among RenaissanceRe Holdings Ltd., the Lenders listed on the
signature pages thereto, Deutsche Bank AG, as LC Issuer and Bank of
America, National Association, as Administrative Agent for the Lenders.
65
10.11 Second Amendment Agreement, dated as of August 20, 2001, to the Credit
Agreement, among RenaissanceRe Holdings Ltd., the Lenders listed on the
signature pages thereto, Deutsche Bank AG, as LC Issuer and Bank of
America, National Association, as Administrative Agent for the Lenders.
10.12 Third Amendment Agreement, dated as of December 14, 2001, to the Credit
Agreement, among RenaissanceRe Holdings Ltd., the Lenders listed on the
signature pages thereto, Deutsche Bank AG, as LC Issuer and Bank of
America, National Association, as Administrative Agent for the Lenders.
10.13 Fourth Amendment Agreement, dated as of March 22, 2002, to the Credit
Agreement, among RenaissanceRe Holdings Ltd., the Lenders listed on the
signature pages thereto, Deutsche Bank AG, as LC Issuer and Bank of
America, National Association, as Administrative Agent for the Lenders.
10.14 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.##
10.15 Credit Agreement, dated as of April 19, 2002, among DaVinciRe Holdings
Ltd. and Citibank, N.A.++++
10.16 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan.****
10.17 Amendment No. 3 to the RenaissanceRe Holdings Ltd. Second Amended and
Restated 1993 Stock Incentive Plan, dated May 4, 2001.###
10.18 RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan.***
10.19 Amended and Restated RenaissanceRe Holdings Ltd. Non-Employee Director
Stock Plan.**
10.20 Guaranty Agreement, dated June 23, 1997, between RenaissanceRe Holdings
Ltd. and The Bank of America.+
10.21 Amended and Restated Declaration of Trust of RenaissanceRe Capital Trust,
dated as of March 7, 1997, among RenaissanceRe Holdings Ltd., 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.@
10.22 Indenture, dated as of March 7, 1997, among RenaissanceRe Holdings Ltd.,
as Sponsor, and The Bank of New York, as Debenture Trustee.@
10.23 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between RenaissanceRe Holdings Ltd. and The Bank of New York, as
Trustee.@
10.24 Registration Rights Agreement, dated March 7, 1997, among RenaissanceRe
Holdings Ltd., the Trust, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Salomon Brothers Inc.@
10.25 Guaranty, dated as of June 24, 1998, among RenaissanceRe Holdings, Ltd.,
as Guarantor, and Bank of America National Trust & Savings
Association.+++
10.26 Master Standby Letter of Credit Reimbursement Agreement, dated as of
November 2, 2001, between Renaissance Reinsurance Ltd. and Fleet National
Bank. Glencoe Insurance Ltd. and Timicuan Reinsurance Ltd. have each
become a party to this agreement pursuant to an accession agreement, and
66
DaVinci Reinsurance Ltd. has entered in a substantially similar agreement
with Fleet National Bank. ####
10.27 Certificate of Designation, Preferences and Rights of 8.10% Series A
Preference Shares.@@
10.28 Certificate of Designation, Preferences and Rights of 7.30% Series B
Preference Shares.@@@@@@
10.29 Senior Indenture, dated as of July 1, 2001, between RenaissanceRe
Holdings Ltd., as Issuer, and Bankers Trust Company, as Trustee.@@@
10.30 First Supplemental Indenture, dated as of July 17, 2001, to the
Indenture, dated as of July 1, 2001, between RenaissanceRe Holdings Ltd.,
as Issuer, and Bankers Trust Company, as Trustee.@@@
10.31 Second Supplemental Indenture, by and between RenaissanceRe Holdings Ltd.
and Deutsche Bank Trust Company Americas (f/k/a Bankers Trust Company,
dated as of January 31, 2003).@@@@@
10.32 Investment Agreement, dated as of September 20, 2002, by and among
RenaissanceRe Holdings Ltd., Platinum Underwriters Holdings, Ltd. and The
St. Paul Companies, Inc.**
10.33 First Amendment to the Investment Agreement by and among Platinum
Holdings Ltd., The St. Paul Companies, and RenaissanceRe Holdings Ltd.,
dated as of November 1, 2002.@@@@
10.34 Option Agreement, between Platinum Underwriters Holdings, Ltd. and
RenaissanceRe Holdings Ltd., dated as of November 1, 2002.@@@@
10.35 Transfer Restrictions, Registration Rights and Standstill Agreement
between Platinum Underwriters Holdings, Ltd. and RenaissanceRe Holdings
Ltd., dated as of November 1, 2002.@@@@
10.36 Services and Capacity Reservation Agreement between Platinum Underwriters
Holdings, Ltd. and RenaissanceRe Holdings Ltd., dated as of November 1,
2002.@@@@
10.37 Reimbursement Agreement, dated as of December 20, 2002, among Renaissance
Reinsurance Ltd., Renaissance Reinsurance of Europe, Glencoe Insurance
Ltd., DaVinci Reinsurance Ltd., Timicuan Reinsurance Ltd., RenaissanceRe
Holdings Ltd., the Lenders named therein, Wachovia Bank, National
Association, National Australia Bank, Ltd., ING Bank N.V., London Branch,
and Barclays Bank PLC.
10.38 Form of Director Retention Agreement, dated as of November 8, 2002,
entered into by each of the non-employee directors of RenaissanceRe
Holdings Ltd.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
99.1 Certification of James N. Stanard, Chief Executive Officer of
RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of John M. Lummis, Chief Financial Officer of RenaissanceRe
Holdings Ltd., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On November 6, 2002, RenaissanceRe Holdings Ltd. filed a report on Form 8-K,
dated November 1, 2002, reporting that RenaissanceRe Holdings Ltd. purchased
3,960,000 common shares, par value $.01 of Platinum Underwriters Holdings, Ltd.,
in a private placement transaction.
67
On January 31, 2003, RenaissanceRe Holdings Ltd. filed a report on Form 8-K,
dated January 28, 2003, reporting that RenaissanceRe Holdings Ltd. entered into
an Underwriting Agreement as to the issue and sale of 4,000,000 7.30% Series B
Preference Shares.
On February 4, 2003, RenaissanceRe Holdings Ltd. filed a report on Form 8-K,
dated January 30, 2003, reporting that RenaissanceRe Holdings Ltd. entered into
an Underwriting Agreement as to the issue and sale of $100,000,000 aggregate
principal amount of its 5.875% Senior Notes due 2013.
- ----------
* Incorporated by reference to the Registration Statement on Form S-1 of
RenaissanceRe Holdings Ltd. (Registration No. 33-70008) which was
declared effective by the Commission on July 26, 1995.
** Incorporated by reference to Exhibit 99.1 to the Registration Statement
on Form S-8 (Registration No. 333-90758) dated July 19, 2002.
*** Incorporated by reference to Exhibit 99.2 to the Registration Statement
on Form S-8 (Registration No. 333-90758) dated July 19, 2002.
**** Incorporated by reference to Exhibit 99.3 to the Registration Statement
on Form S-8 (Registration No. 333-90758) dated July 19, 2002.
@ Incorporated by reference to RenaissanceRe Holdings Ltd.'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 Holdings Ltd.'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 Holdings Ltd.'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.
@@@@ Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on November 6, 2002,
relating to certain events which occurred on November 1, 2002.
@@@@@ Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on January 31, 2003,
relating to certain events which occurred on January 28, 2003.
@@@@@@ Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on February 2, 2003,
relating to certain events which occurred on January 30, 2003.
+ Incorporated by reference to RenaissanceRe Holdings Ltd.'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 Holdings Ltd.'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 Holdings Ltd.'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 Holdings Ltd.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed with
the Commission on November 15, 1999
68
+++++ Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended March 31, 2002, filed with the
Commission on May 15, 2002.
++++++ Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 2002, filed with the
Commission on August 4, 2002.
# Incorporated by reference to RenaissanceRe Holdings Ltd.'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 Holdings Ltd.'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 Holdings Ltd.'s Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the
Commission on April 1, 2002. (a) Financial Statements and Exhibits.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Hamilton, Bermuda on
March 31, 2003.
RENAISSANCERE HOLDINGS LTD.
/s/ James N. Stanard
--------------------
James N. Stanard
Chief Executive Office
Chairman of the Board of Directors
70
CERTIFICATION
I, James N. Stanard, certify that:
1. I have reviewed this annual report on Form 10-K of RenaissanceRe Holdings
Ltd. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ James N. Stanard
--------------------
James N. Stanard
Chief Executive Office
71
CERTIFICATION
I, John M. Lummis, certify that:
1. I have reviewed this annual report on Form 10-K of RenaissanceRe Holdings
Ltd. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 /s/ John M. Lummis
------------------
John M. Lummis
Chief Financial Officer
72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENAISSANCERE HOLDINGS LTD.
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young
Hamilton, Bermuda
February 4, 2003
F-2
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2002 AND 2001
(in thousands of United States dollars, except per share amounts)
See accompanying notes to the consolidated financial statements.
F-3
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands of United States dollars, except per share amounts)
See accompanying notes to the consolidated financial statements.
F-4
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands of United States dollars)
See accompanying notes to the consolidated financial statements.
F-5
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands of United States dollars)
See accompanying notes to the consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (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, the Company
provides reinsurance and insurance to a broad range of customers.
- 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. Renaissance Reinsurance
also writes specialty reinsurance in certain lines, including such lines as
catastrophe-exposed workers' compensation coverage, surety, property per
risk, terrorism, aviation and finite reinsurance.
- During the year, the Company renamed its primary segment "individual
risk" to more accurately reflect the risk characteristics of this business.
The individual risk segment currently provides insurance for commercial and
homeowners catastrophe-exposed property business, and also provides
reinsurance on a quota share basis. The Company's individual risk
operations principally include Glencoe Insurance Ltd. ("Glencoe"), and
Stonington Insurance Company ("Stonington").
- The Company also manages property catastrophe reinsurance written on
behalf of joint ventures, principally including Top Layer Reinsurance Ltd.
("Top Layer Re") and DaVinci Reinsurance Ltd. ("DaVinci"). The results of
DaVinci, and the results of DaVinci's parent, DaVinciRe Holdings Ltd.
("DaVinciRe"), are consolidated in the Company's financial statements (Note
7). The Company acts as exclusive underwriting manager for these joint
ventures in return for fee-based income and profit participation.
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 (Note 7).
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 most significant judgment made by
management is the estimation of claims and claims expense reserves. Other
material judgments made by management include the estimates of potential
impairments in assets, particularly regarding the collectibility of reinsurance
recoverables and the recoverability of deferred tax assets.
PREMIUMS AND RELATED EXPENSES
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on policy and contract terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserve for unearned premiums represents the portion of premiums
written that relate to the unexpired terms of contracts and policies in force.
Such reserves are computed by pro-rata methods based on statistical data or
reports received from ceding companies.
F-7
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim expenses, based on
historical and current experience, and anticipated investment income related to
those premiums are considered in determining the recoverability of deferred
acquisition costs.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management. For retroactive reinsurance contracts, the amount by which
liabilities associated with the reinsured policies exceed the amount paid for
reinsurance coverage is deferred and amortized into income using the recovery
method.
CLAIMS AND CLAIM EXPENSES
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Also, the Company has
recently increased its specialty reinsurance and individual risk premiums, but
does not have the benefit of a significant amount of its own historical
experience in these lines of business. Accordingly, the setting and reserving
for incurred losses in these lines of business could be subject to greater
variability.
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 in fixed maturities and the equity investment in reinsurance company
are classified as available for sale and are reported at fair value. The net
unrealized appreciation or depreciation on these 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 cost basis
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 and/or internal pricing valuation techniques.
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.
During 2002, the Company changed 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 comparative
information has been reclassified to conform with the current year presentation.
GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In the second
quarter of 2002, the Company completed its initial impairment review in
compliance with the transition provisions of SFAS 142 and, as a result, the
Company decided
F-8
to reflect goodwill at zero value, the low end of an estimated
range of values. In accordance with the provisions of SFAS 142, this is required
to be reflected as a cumulative effect of a change in accounting principle in
the statement of income and is required to be reflected as if this adjustment
was recorded in the first quarter of 2002.
EARNINGS PER SHARE
Basic earnings per share is based on weighted average Common Shares and excludes
any dilutive effects of options and restricted stock. Diluted earnings per share
assumes the exercise of all dilutive stock options and restricted stock grants.
FOREIGN EXCHANGE
The Company's functional currency is the United States dollar. Revenues and
expenses denominated in foreign currencies are translated at the prevailing
exchange rate at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates in effect at
the balance sheet date, which may result in the recognition of exchange gains or
losses which are included in the determination of net income.
STOCK INCENTIVE COMPENSATION PLANS
For the years ended December 31, 2002 and for the prior years, the Company
followed Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting for
its employee stock compensation. Effective January 1, 2003, the Company adopted,
prospectively, the fair value recognition provisions of SFAS 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), for all stock-based employee
compensation granted, modified or settled after January 1, 2003. Under the fair
value recognition provisions of SFAS 123, the Company estimates the fair value
of employee stock options and other stock-based compensation on the date of
grant and amortizes this value as an expense over the vesting period.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS 123
and provides transitional disclosure requirements. In accordance with the
transitional disclosure provisions of SFAS 148, the following table sets out the
effect on the Company's net income and earnings per share for all reported
periods had the compensation cost been calculated based upon the fair value
method recommended in SFAS 123:
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
F-9
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.
- ---------------------------------------------------------------------------
Amortized Fair
At December 31, 2002 Cost Value
-------------------- ---------- -----------
Due in less than one year $ 23,102 $ 23,203
Due after one through five years 1,078,572 1,107,899
Due after five through ten years 337,759 350,275
Due after ten years 109,084 118,991
Mortgage-backed securities 292,551 301,632
Asset-backed securities 312,647 319,109
----------- -----------
Total $ 2,153,715 $ 2,221,109
=========== ===========
- ------------------------------------------------------------------------------
Investment Income
- -----------------
The components of net investment income are as follows:
F-10
- ------------------------------------------------------------------------------
Year ended December 31,
------------------------
2002 2001 2000
Fixed maturities $ 91,784 $ 65,168 $ 62,588
Short term investments 11,137 7,785 6,213
Cash and cash equivalents 3,238 3,285 10,858
Other investments 1,029 955 -
--------- -------- ---------
107,188 77,193 79,659
Investment expenses 3,090 2,037 1,791
--------- -------- --------
Net investment income $ 104,098 $ 75,156 $ 77,868
========= ======== ========
- ------------------------------------------------------------------------------
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
- -------------------------------------------------------------------------------
Year ended December 31,
-----------------------
2002 2001 2000
Gross realized gains $ 70,815 $ 78,247 $ 11,173
Gross realized losses (62,050) (60,151) (18,324)
-------- -------- --------
Net realized gains (losses) on investments 8,765 18,096 (7,151)
Unrealized gains 78,939 9,464 25,301
-------- -------- --------
Total realized and unrealized gains on
(losses) on investments $ 87,704 $ 27,560 $ 18,150
======== ======== ========
- -------------------------------------------------------------------------------
At December 31, 2002 approximately $29.7 million (2001 - $12.1 million) of cash
and investments at fair value were on deposit with, or in trust accounts for the
benefit of, various regulatory authorities as required by law.
Alternative Investments
- -----------------------
Included in other investments are investments in hedge funds and a fund invested
in bank loans totaling $81.8 million (2001 - $28.4 million) and private equity
funds of $14.6 million (2001 - $4.9 million) (collectively "Investment Funds").
Fair values for the Company's investments in such Investment Funds are
established on the basis of the net valuation criteria established by the
managers of such Investment Funds. These net valuations are determined based
upon the valuation criteria established by the governing documents of such
Investment Funds. Such valuations may differ significantly from the values that
would have been used had ready markets existed for the shares of the Investment
Funds. Realized and unrealized gains and losses on Investment Funds are included
as a component of net investment income.
The Company has committed capital to private equity funds of $54.0 million, of
which $14.4 million has been contributed as at December 31, 2002.
Equity Investment in Reinsurance Company
- ----------------------------------------
On November 1, 2002, the Company purchased 3,960,000 common shares of Platinum
Underwriters Holdings, Ltd. ("Platinum") in a private placement transaction and
received ten-year warrants to purchase up to 2.5 million additional common
shares of Platinum for $27.00 per share. The Company purchased the common shares
and warrants for an aggregate price of $84.2 million. As at December 31, 2002,
the Company owns 9.2% of Platinum's outstanding common shares. The Company
records its investments in Platinum at fair value, and at December 31, 2002 the
aggregate fair value was $120.3 million. The aggregate unrealized gain of $36.1
million is included in accumulated other comprehensive income.
F-11
Derivatives Related to Physical Variables
- -----------------------------------------
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 2002, 2001 and
2000, the Company recognized gains (losses) on these contracts of $7.2 million,
a loss of $4.6 million, and nil, respectively, which are included in other
income.
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 $218.0 million, $155.7 million and $149.8
million for 2002, 2001 and 2000, 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 $63.0 million, $160.4 million and $52.0 million for 2002,
2001 and 2000, respectively. As of December 31, 2002, the Company has recorded a
$7.8 million valuation allowance against losses recoverable (2001 - $7.5
million).
Included in losses recoverable as of December 31, 2002 are recoverables of $10.0
million (2001 - $14.4 million) which relate to a retroactive reinsurance
contract entered into by Stonington. SFAS 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, 2002 was $5.6 million (2001 - $8.4 million).
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
is inherently difficult because of the potential severity of property
catastrophe claims. Additionally, the Company has recently increased its
individual risk and specialty reinsurance premiums but does not have the benefit
of a significant amount of its own historical experience in these lines.
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 individual risk 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 or
decrease 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. Adjustments to the Company's
claims and claim expense reserves can impact current year net income by either
increasing net income if the estimates of prior year claims and claim expense
reserves prove to be overstated or by decreasing net income if the estimates of
prior year claims and claim expense reserves prove to be insufficient.
Activity in the liability for unpaid claims and claim expenses is summarized as
follows:
F-12
The prior year favorable development in 2001 was due primarily to net additional
recoveries on 1999 property catastrophe loss events. The prior year adverse
development in 2000 was due primarily to adverse development on the 1999 losses
related to the European storms. The Company's total gross reserve for IBNR
claims was $462.9 million as of December 31, 2002 (2001 - $286.7 million).
Claims and claim expenses incurred were reduced by $15.0 million during 2002
(2001 - nil) related to income earned on an assumed reinsurance contract that is
classified as an underwriting-risk only deposit contract. A deposit liability of
$103.0 million is included in reinsurance balances payable at December 31, 2002
(2001 - $80.0 million).
NOTE 6. DEBT
In July 2001, RenaissanceRe issued $150 million of 7% Senior Notes due July
2008. RenaissanceRe 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 RenaissanceRe prior to maturity subject to
payment of a "make-whole" premium; however, RenaissanceRe has no current
intentions of calling the notes. The notes, which are senior obligations of
RenaissanceRe, 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, 2002 the fair value of the notes was $164.0 million (2001 -
$151.1 million).
On April 19, 2002, DaVinciRe entered into a credit agreement providing for a
$100 million committed revolving credit facility. On May 10, 2002, DaVinciRe
borrowed the full $100 million available under this facility to repay $100
million bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor
Renaissance Reinsurance is a guarantor of this facility and the lenders have no
recourse against RenaissanceRe or its subsidiaries other than DaVinciRe under
this facility. Pursuant to the terms of the $310.0 million facility maintained
by RenaissanceRe, a default by DaVinciRe on its obligations will not result in a
default under the RenaissanceRe facility. Although RenaissanceRe owns a minority
of the economic interest of DaVinciRe, RenaissanceRe controls a majority of its
outstanding voting rights and, accordingly, DaVinciRe is consolidated in the
Company's financial statements; as a result, the replacement of $100 million of
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. As of
December 31, 2002, the full amount was outstanding under this facility. Interest
rates on the facility are based on a spread above LIBOR, and averaged
approximately 2.63% during 2002. The credit agreement contains certain covenants
requiring DaVinciRe
F-13
to maintain a debt to capital ratio of 30% or below and a minimum net worth of
$230 million. As at December 31, 2002, DaVinciRe was in compliance with the
covenants of this agreement.
RenaissanceRe has a $310 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. There was no outstanding balance
as of December 31, 2002 and 2001. During the third quarter of 2001,
RenaissanceRe repaid its borrowings of $16.5 million on this facility. Interest
rates on the facility are based on a spread above LIBOR and averaged 5.45% in
2001. If RenaissanceRe were to borrow under this agreement, the 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 $175 million or 125% of consolidated debt; and 80% of
invested assets must be rated BBB- by S&P or Baa3 by Moody's Investor Service or
better.
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 2.35% during 2002 (4.71% in
2001). As of December 31, 2002 the balance outstanding was $25 million (2001 -
$33.5 million). The credit agreement contains certain financial covenants, the
primary one being that RenaissanceRe be its principal guarantor and maintain a
ratio of liquid assets to debt service of 4:1. The term loan and revolving
credit facility has a mandatory repayment provision of $25 million in 2003.
During 2002, the Company repaid the third 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,
2002. The fair value of the borrowings approximate the carrying values because
such loans reprice frequently.
Interest payments on the above debt totaled $13.1 million, $7.3 million and
$17.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
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% 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%, 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. RenaissanceRe's guarantee of the distributions on the Capital
Securities issued by the Trust, when taken together with RenaissanceRe's
obligations under an expense reimbursement agreement with the Trust, provides
full and unconditional guarantee of amounts due on the Capital Securities issued
by the Trust.
During 2002, the Company repurchased $3.0 million of the Capital Securities. No
Capital Securities were repurchased in 2001. The Company has repurchased an
aggregate $15.4 million of the Capital Securities since their issuance in 1997.
DAVINCI
In October 2001, the Company formed DaVinciRe with other equity investors.
RenaissanceRe owns a minority economic interest in DaVinciRe however, because
RenaissanceRe controls a majority of DaVinciRe's outstanding voting rights, the
financial statements of DaVinciRe are included in the consolidated financial
statements of the Company. The 75% portion of DaVinciRe's earnings and
shareholders' equity held by third parties is recorded 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:
F-14
On October 15, 2001, the Company issued 7.5 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 17.1 million common shares for 12.6 million Diluted Voting I Shares
and 4.5 million Diluted Voting II Shares, and as such are the sole holders of
the Diluted Voting I Shares.
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% 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. No shares were repurchased during 2002 or
2001. Common shares repurchased by the Company are normally cancelled and
retired.
During 2001, GEI completed the sale of 0.9 million Diluted Voting I Shares,
pursuant to shelf registrations on Form S-3. The Diluted Voting I Shares sold by
GEI were subsequently converted into common shares.
NOTE 9. EARNINGS PER SHARE
The Company utilizes SFAS 128, "Earnings per Share" to account for its weighted
average shares. The numerator in both the Company's basic and diluted earnings
per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares
outstanding (in thousands of per share amounts):
F-15
NOTE 10. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Other assets include the Company's investment in Top Layer Re of $36.1 million
(2001 - $23.4 million), which is 50% owned by Renaissance Reinsurance and is
carried using the equity method. The Company's earnings from Top Layer Re
totaled $22.3 million for the year ended December 31, 2002 (2001 - $9.7 million)
and are included in other income. During 2002 and 2001, the Company also
received distributions from Top Layer Re of $9.7 million and $7.5 million,
respectively.
During the years ended December 31, 2002, 2001 and 2000, the Company received
71.1%, 76.9%, and 78.3%, respectively, of its reinsurance premium assumed from
four reinsurance brokers. Subsidiaries and affiliates of Marsh Inc., the
Benfield Group PLC, Willis Faber and AON Re Group accounted for approximately
27.5%, 19.0%, 13.1% and 11.5%, respectively, of the Company's gross premiums
written in 2002.
NOTE 11. GOODWILL
In connection with the Company's adoption of SFAS 142, the Company wrote-off the
balance of its goodwill during the second quarter of 2002, which totaled $9.2
million. As required by SFAS 142, this charge has been reflected in the
statement of operations as a cumulative effect of a change in accounting
principle. The following table sets forth the effect of goodwill amortization on
comparative period earnings:
NOTE 12. DIVIDENDS
Dividends declared and paid on Common Shares amounted to $0.57, $0.53 and $0.50
per common share for the years ended December 31, 2002, 2001, and 2000,
respectively.
F-16
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 common share and per common share information provided
in these financial statements is as if the stock dividend had occurred for all
periods presented.
The total amount of dividends paid to holders of the Common Shares during 2002,
2001 and 2000 was $39.0 million, $32.8 million and $29.2 million, respectively.
NOTE 13. TAXATION
Under current Bermuda law, the Company is not required to pay taxes in Bermuda
on either income or capital gains. Income from 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 (benefit) expense for 2002, 2001 and 2000 is comprised as follows:
F-17
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
The net deferred tax asset is included in other assets in the consolidated
balance sheet. The net operating loss carryforward of $65.9 million (2001 -
$58.5 million) is available to offset regular taxable U.S. income during the
carryforward period (through 2022).
During 2002, the Company recorded additions to the valuation allowance of $5.6
million. The Company's deferred tax asset relates primarily to net operating
loss carryforwards that are available to offset future taxes payable by the
Company's U.S. subsidiaries. Although the net operating losses, which gave rise
to a deferred tax asset have a carryforward period through 2022, the Company's
U.S. operations did not generate significant taxable income during the year
ended December 31, 2002 and prior years. 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.
NOTE 14. GEOGRAPHIC INFORMATION
Financial information relating to gross premiums by geographic region is as
follows:
F-18
NOTE 15. SEGMENT REPORTING
The Company has two reportable segments: reinsurance operations and individual
risk operations (formerly primary operations). The reinsurance segment, which
includes the results of DaVinci in 2002, primarily provides property catastrophe
reinsurance and specialty reinsurance to selected insurers and reinsurers on a
worldwide basis. During the year, we renamed our primary segment "individual
risk" to more accurately describe the risk characteristics of this business. We
define the individual risk segment to include underwriting that involves
understanding the characteristics of the original underlying insurance policy.
The individual risk segment currently provides insurance for commercial and
homeowners' catastrophe-exposed property business, and also provides reinsurance
on a quota share basis.
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
individual risk segments. The pre-tax loss of the holding companies primarily
consisted of interest expense on bank loans, minority interests, 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-19
Data for the years ended December 31, 2002, 2001 and 2000 was as follows:
(1) - Income (loss) for the Reinsurance and Individual Risk segments represents
net underwriting income. Net underwriting income consists of net premiums earned
less claims and claims expenses, acquisition costs and operational expenses.
(2) - Represents premium ceded from Individual Risk segment to Reinsurance
segment.
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With the low level of net earned premium for the individual risk operations of
$7.8 million and $6.5 million in 2001 and 2000, respectively, relatively modest
adjustments to claims and claim expenses incurred and to operating expenses
caused unusual fluctuations in the claims and claim expenses ratio and the
underwriting expense ratio of our individual risk operations.
The Company does not manage its assets by segment and therefore investment
income and total assets are not allocated to the segments.
NOTE 16. STOCK INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
The Company has a stock incentive plan under which all employees of the Company
and its subsidiaries may be granted stock options and restricted stock awards. A
stock option award under the Company's stock incentive plan allows for the
purchase of the Company's common shares at a price that is generally equal to
the five day average closing price of the common shares immediately prior to the
date of grant. Options to purchase common shares are granted periodically by the
Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The fair value of option grants is estimated on the date of grant using a
Black-Scholes option pricing model for pro-forma footnote purposes with the
following weighted average assumptions used for grants in 2002, 2001 and 2000,
F-20
respectively: dividend yield of 1.4%, 1.7% and 1.9%; expected option life of
five years for all years; expected volatility of 30%, 31% and 29%; and a
risk-free interest rate of 2.7%, 4.8% and 5.0%.
The following is a table of the changes in options outstanding for 2002, 2001
and 2000, respectively:
F-21
The Company's 2001 Stock Incentive Plan 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, 2002 was 656,700
shares. As of December 31, 2002, the number of options issued to directors and
unexercised was 300,000. In 2002, 12,000 options to purchase common shares were
granted and 3,132 restricted common shares were granted. In 2001, 12,000 options
to purchase common shares and 5,616 restricted common shares were granted. In
2000, 210,000 options to purchase common shares and 9,984 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% 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 2002, 2001 and 2000 the Company issued
101,536, 150,660 and 232,026 shares under this plan, respectively, with fair
values of $3.9 million, $3.2 million and $2.9 million, respectively.
Additionally, in 2002, 2001 and 2000 the Board of Directors granted 278,697,
566,088 and 478,611 restricted shares with a value of $10.7 million, $14.0
million, and $6.3 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
F-22
separate component of shareholders' equity. The unearned compensation is charged
to operations over the vesting period. Compensation expense related to these
plans was $8.2 million, $7.2 million, and $5.5 million in 2002, 2001 and 2000,
respectively.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 17. STATUTORY REQUIREMENTS
Under the Insurance Act 1978, amendments thereto and Related Regulations of
Bermuda ("the Act"), 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,
2002 the statutory capital and surplus of the Bermuda subsidiaries was $2.0
billion and the amount required to be maintained under Bermuda law was $414.7
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% 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 2002, Renaissance Reinsurance and DaVinci paid aggregate cash dividends
of $224.3 million and $3.5 million, respectively.
Under the Act, Glencoe is classified as a Class 3 insurer and Glencoe is also
eligible as an excess and surplus lines insurer in a number of states in
America. Under the various capital and surplus requirements in Bermuda and in
these states, Glencoe is required to maintain a minimum of 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 requirement is 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 $25.4 million at
December 31, 2002 and the amount required to be maintained was $9.0 million.
NOTE 18. COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and, except for U.S. Government bonds, none of the Company's
investments exceeded 10% of shareholders' equity at December 31, 2002.
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. The Company had no investments in
these derivative instruments as of December 31, 2002 and 2001.
LETTERS OF CREDIT
As of December 31, 2002, the Company's bankers have issued letters of credit of
approximately $223.1 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.
F-23
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, upon a change in control, as defined therein and by
the Company's 2001 Stock Incentive Plan.
EMPLOYEE CREDIT FACILITY
In June 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. Following the adoption of revised rules by the Securities
and Exchange Commission in 2002 which prohibit the Company from extending credit
to its employees, there have been no further advances of credit to employees
under this facility. At December 31, 2002, the bank loans guaranteed by the
Company totaled $22.9 million (2001 - $24.1 million). At December 31, 2002, the
common shares that collateralize the loans had a fair value of $53.7 million
(2001 - $59.2 million). No new loans may be made under this facility and the
Company anticipates the repayment of these loans and the subsequent closure of
the facility prior to December 31, 2003.
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.
NOTE 19. SUBSEQUENT EVENTS
In January 2003, the Company issued $100 million of 5.875% Senior Notes due
February 15, 2013. The proceeds will be used for general corporate purposes.
Interest on the notes is payable on February 15 and August 15 of each year,
commencing August 15, 2003. 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.
In February 2003, the Company issued 4,000,000 $1.00 par value Series B
preference shares at $25 per share. The shares may be redeemed at $25 per share
at the Company's option on or after February 4, 2008. Dividends are cumulative
from the date of original issuance and are payable quarterly in arrears at 7.3%,
commencing June 1, 2003 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 February 4, 2008 at $26 per share. The
preference shares have no stated maturity and are not convertible into any other
securities of the Company.
F-24
NOTE 20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(amounts in tables expressed in thousands of United States dollars, except per
share amounts)
F-25
RENAISSANCERE HOLDINGS LTD AND SUBSIDIARIES.
INDEX TO SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002 and 2000, and for each of the
three years in the period ended December 31, 2002, and have issued our report
thereon dated February 4, 2003; 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 15(a)(2) of this
Annual Report on Form 10-K for the year ended December 31, 2002. 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.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young
Hamilton, Bermuda
February 4, 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)
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, 2002
RenaissanceRe Holdings Ltd.
1
EXHIBITS
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