10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 15, 2003
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number: 34-0-26512
RENAISSANCERE HOLDINGS LTD.
---------------------------
(Exact name of registrant as specified in its charter)
BERMUDA 98-014-1974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RENAISSANCE HOUSE HM 19
8-12 EAST BROADWAY (Zip Code)
PEMBROKE, BERMUDA
(Address of principal executive offices)
(441) 295-4513
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
The number of outstanding shares of RenaissanceRe Holding Ltd.'s common
stock, par value US $1.00 per share, as of March 31, 2003 was 69,839,702.
Total number of pages in this report: 29
RENAISSANCERE HOLDINGS LTD.
INDEX TO FORM 10-Q
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of United States Dollars, except per share amounts)
The accompanying notes are an integral part of these financial statements.
3
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands of United States Dollars, except per share amounts)
The accompanying notes are an integral part of these financial statements.
4
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands of United States Dollars)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
5
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands of United States Dollars)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
6
RenaissanceRe Holdings Ltd. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
1. The consolidated financial statements have been prepared on the basis of
U.S. generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. This
report on Form 10-Q should be read in conjunction with the Company's Annual
Report on Form 10-K. The consolidated financial statements include the
accounts of RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its
wholly-owned subsidiaries, including Renaissance Reinsurance Ltd.
("Renaissance Reinsurance"), Glencoe Insurance Ltd. ("Glencoe"), Stonington
Insurance Company ("Stonington"), Lantana Insurance Ltd. ("Lantana"),
Renaissance U.S. Holdings, Inc. ("Renaissance U.S."), RenaissanceRe Capital
Trust (the "Trust") and Renaissance Underwriting Managers, Ltd.
("Renaissance Managers"). DaVinciRe Holdings Ltd. ("DaVinciRe"), a
partially-owned subsidiary, is also consolidated into the Company's
financial statements.
RenaissanceRe and its subsidiaries are collectively referred to herein as
the "Company," and references herein to "our", "we", or "us" refer to the
Company. All intercompany transactions and balances have been eliminated on
consolidation.
The Company's principal products are property catastrophe reinsurance and
specialty reinsurance, principally provided through Renaissance
Reinsurance, and individual risk insurance, principally provided by
Glencoe, Stonington and Lantana, through individual risk selection and by
providing coverage to insurance companies on a quota share basis. The
Company acts as underwriting manager and underwrites worldwide property
catastrophe reinsurance programs on behalf of joint ventures, including Top
Layer Reinsurance Ltd. ("Top Layer Re") and DaVinci Reinsurance Ltd.
("DaVinci"). DaVinciRe and DaVinci were formed in October 2001 with other
equity investors. The Company owns a minority equity interest in, but
controls a majority of the outstanding voting shares of, DaVinciRe.
Minority interests represent the interests of external parties with respect
to net income and shareholders' equity of the Trust and DaVinci. The Trust
is the issuer of $84.6 million of outstanding mandatorily redeemable
preferred capital securities ("Capital Securities") and holds a like amount
of junior subordinated debentures issued by RenaissanceRe. RenaissanceRe's
guarantee of the distributions on the preferred securities issued by the
Trust, when taken together with RenaissanceRe's obligations under the
expense reimbursement agreement with the Trust, provides a full and
unconditional guarantee of amounts due on the Capital Securities issued by
the Trust.
Certain comparative information has been reclassified to conform to the
current presentation. Because of the seasonality of the Company's business,
the results of operations and cash flows for any interim period will not
necessarily be indicative of results of operations and cash flows for the
full fiscal year or subsequent quarters.
2. The Company purchases reinsurance to reduce its exposure to large losses.
The Company currently has in place contracts that provide for recovery of a
portion of certain claims and claims expenses from reinsurers in excess of
various retentions and loss warranties. The Company would remain liable to
the extent that any third-party reinsurance company fails to meet its
obligations. The earned reinsurance premiums ceded were $71.0 million and
$45.6 million for the three month periods ended March 31, 2003 and 2002,
respectively. Other than loss recoveries, certain of the Company's ceded
reinsurance contracts provide for recoveries of additional premiums,
reinstatement premiums and for unrecovered no claims bonuses which are
unrecoverable when losses are ceded to other reinsurance contracts.
Total recoveries netted against claims and claim expenses incurred for the
three months ended March 31, 2003 were $5.4 million compared to $14.0
million for the three months ended March 31, 2002.
3. 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 to record goodwill at zero value, the
low end of an estimated range of values,
7
and record a write-off of $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 statement of income and is required
to be recorded as if this adjustment was recorded in the first quarter of
2002.
4. During 2002, the Company changed its policy regarding the classification of
certain investments previously recorded 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.
5. For the three month period ended March 31, 2003, the Company paid interest
of $4.5 million on its outstanding loans and 7% Senior Notes. For the same
period in the previous year the Company paid interest of $2.7 million on
its outstanding loans. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Capital Resources and
Shareholders' Equity" for further discussion.
6. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options and
restricted stock grants. The following tables set forth the computation of
basic and diluted earnings per share (see Note 7 below):
7. The Board of Directors of the Company declared, and the Company paid, a
dividend of $0.15 per share to shareholders of record on March 3, 2003.
During the second quarter of 2002, RenaissanceRe effected a three-for-one
stock split through a stock dividend of two additional common shares for
each common share owned. All of the share and per share information
provided in this 10-Q is presented as if the stock dividend had occurred
for all periods presented.
8. 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. Prior
to 2003, the Company followed Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, in
accounting for its employee stock compensation. No option related employee
compensation cost was recorded in net income prior to January 1, 2003 as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.
8
Under the prospective method of adoption selected by the Company under the
provisions of FASB Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, compensation cost recognized in
2003 includes all employee awards granted, modified, or settled after the
beginning of the fiscal year. Results for prior periods have not been
restated. The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied to all
outstanding and unvested awards in each period.
9. The Company has two reportable segments: reinsurance operations and
individual risk operations. The reinsurance segment, which includes the
results of DaVinci, primarily provides property catastrophe reinsurance and
specialty reinsurance to selected insurers and reinsurers on a worldwide
basis. During the third quarter of 2002, we renamed our primary segment
"individual risk" to more accurately describe the risk characteristics of
this business. We define our individual risk segment to include
underwriting that involves understanding the characteristics of the
original underlying insurance policy. The individual risk segment provides
insurance both on a direct and on a surplus lines basis and also provides
reinsurance on a quota share basis. Data for the three month periods ended
March 31, 2003 and 2002 are as follows:
9
(1) - Income for the reinsurance and individual risk segments represents
net underwriting income. Net underwriting income consists of net premiums
earned less claims and claims expenses incurred, acquisition costs, and
operational expenses.
(2) - Income for the other segment consists of net investment income, net
foreign exchange gains (losses), other income and net realized gains on
investments, partially offset by corporate expenses, interest expense,
minority interest expenses, cumulative effect of change in accounting
principle and income tax expense (benefit).
10. The provision for income taxes is based on income recognized for financial
statement purposes and includes the effects of temporary differences
between financial and tax reporting. Deferred tax assets and liabilities
are determined based on the difference between the financial statement
bases and tax bases of assets and liabilities using enacted tax rates.
RenaissanceRe's U.S. subsidiaries and Lantana are subject to U.S. tax. The
net deferred tax asset of $4.0 million is net of a $29.2 million valuation
allowance. Net operating loss carryforwards and future tax deductions will
be available to offset regular taxable U.S. income during the carryforward
period (which expires during the period ranging from 2018 through 2022),
subject to certain limitations.
11. In January 2003, the Company issued $100 million of 5.875% Senior Notes due
February 15, 2013. 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 intention of
calling the notes. The notes, which are senior obligations of the Company,
contain various covenants, including limitations on mergers and
consolidations, restrictions 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 these
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.
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Item 2. 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
three month periods ended March 31, 2003 and 2002 and financial condition as of
March 31, 2003. This discussion and analysis should be read in conjunction with
the attached unaudited consolidated financial statements and notes thereto and
the audited consolidated financial statements and notes thereto contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
GENERAL
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. We believe
our disciplined underwriting approach, sophisticated risk models and management
expertise have established us as a leader in businesses. We use our advanced
proprietary modeling and management systems to seek to maximize our return on
equity, subject to prudent risk constraints.
Our principal business is property catastrophe reinsurance. Our subsidiary
Renaissance Reinsurance 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.
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 have also experienced substantial growth in our individual risk business,
which is written on an excess and surplus lines basis by Glencoe and Lantana,
and on an admitted basis by Stonington. We define our individual risk segment to
include underwriting that involves understanding the characteristics of the
original underlying insurance policy. Our individual risk segment also provides
reinsurance to other insureds on a quota share basis.
The individual risk business which Glencoe writes is primarily produced through
three distribution channels; 1) Brokers - where Glencoe writes primary insurance
through brokers on a risk-by-risk basis, 2) Program Managers - where Glencoe
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) Quota Share
Reinsurance - where 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.
In addition, we also manage property catastrophe reinsurance on behalf of two
joint ventures. In 1999 we formed Top Layer Re with State Farm to provide high
layer coverage for non-U.S. risks. Renaissance Reinsurance and State Farm each
own 50% of Top Layer Re. We formed 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 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).
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 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
11
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 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 matters, 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
quarter ended March 31, 2003, changes to prior year estimated claims reserves
had the following impact on our net income: during the first quarter of 2003, we
reduced prior year estimated claims reserves by $11.7 million and accordingly,
our net income was increased by $11.7 million; during the first quarter of 2002,
we reduced prior year estimated claims reserves by $2.3 million, and accordingly
our net income was increased by $2.3 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 ("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 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.
Because any reserve estimate is simply an insurer'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 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. As of March 31, 2003, our IBNR reserves were $524.2
million, and a 5% change in such IBNR reserves would equate to a $26.2 million
adjustment to claims and claim expenses incurred, which would represent 16.9% of
our first quarter 2003 net income, and 1.4% of shareholders' equity as at March
31, 2003.
Other material judgments made by us are the estimates of potential impairments
in asset valuations, particularly:
12
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 March 31, 2003
and December 31, 2002, we have recorded recoverables of $190.2 million and
$207.3 million, respectively, and a valuation allowance of $11.6 million and
$7.8 million, respectively, based on specific facts and circumstances evaluated
by management.
In estimating impairments to our deferred tax asset, we analyze the businesses
which generated the deferred tax asset, and the businesses that will potentially
utilize the deferred tax asset. Our deferred tax asset relates primarily to net
operating loss carryforwards that are available to offset future taxes payable
of our U.S. operating subsidiaries. However, due to the limited opportunities
that previously existed 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 2022, we have recorded a valuation allowance
of $29.2 million as of March 31, 2003 compared to $27.7 million as of December
31, 2002. As of March 31, 2003 and December 31, 2002, the net balance of the
deferred tax asset was $4.0 million and $4.0 million, respectively.
SUMMARY OF RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2003 COMPARED TO THE QUARTER ENDED MARCH 31,
2002
A summary of the significant components of our revenues and expenses are as
follows:
The $40.3 million increase in net income before realized gains and, in 2002,
before change in accounting principle, in the quarter ended March 31, 2003,
compared to the quarter ended March 31, 2002, was primarily the result of the
following items:
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o a $16.6 million increase in underwriting income from our Renaissance
reinsurance operations due primarily to an increase in net earned premiums
to $151.3 million from $117.0 million, primarily due to our ability to
capitalize on market opportunities, particularly our success with a number
of large property catastrophe programs and our success in continuing to
gain market share in our specialty reinsurance business, where we increased
our gross written premiums by 84%. Also there was a relatively low level of
property catastrophe losses during both the first quarter of 2003 and 2002,
thereby increasing both quarters underwriting income by approximately $24
million, plus
o the $15.5 million increase in underwriting income from DaVinci due
primarily to an increase in net earned premiums to $49.1 million from $23.6
million, primarily due to our ability to capitalize on market opportunities
as discussed above, however after offsetting this with the $11.4 million
increase related to the interests owned by other investors, the net
increase to our net income was $4.1 million, plus
o a $13.6 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 $63.0 million in 2003 from $27.7 million
in 2002, which was again the result of positive market conditions and our
efforts to continue to increase premiums in this segment of our business,
plus
o a net $5.8 million reduction in corporate expenses, taxes and other, which
was primarily due an increase in foreign exchange gains of $5.9 million,
plus
o a $5.4 million increase in net investment income, primarily due to an
increase in our invested assets due to our strong cash flow from operations
and the $196 million of net proceeds from the Series B Preference Shares
and 5.875% Senior Notes sold in the first quarter of 2003, partially offset
by a reduction in investment returns due to lower interest rates.
Net Income and Net Income before Realized Gains and Change in Accounting
- ------------------------------------------------------------------------
Principle
- ---------
Net income available to common shareholders rose 94% to $151.3 million, or $2.14
per common share, in the quarter, compared to $78.1 million, or $1.12 per share,
for the same quarter of 2002. For the quarter ended March 31, 2003, net income
before realized gains and, in 2002, before change in accounting principle,
available to common shareholders was $126.9 million or $1.80 per common share,
compared to $86.6 million or $1.24 per common share for the same quarter in
2002.
Gross Written Premiums
Gross Written Premiums for the first quarter of 2003 and 2002 were as follows:
- -------------------------------------------------------------------------------
Quarter ended March 31, 2003 2002
------------------------------------------
Cat Premium
Renaissance $ 308,719 $ 236,793
DaVinci 106,816 95,269
------------------------------------------
Total Cat Premium 415,535 332,062
Renaissance Specialty Reinsurance 186,082 101,023
DaVinci Specialty Reinsurance 19,707 -
------------------------------------------
Total Reinsurance 621,324 433,085
Individual risk premiums 63,843 27,749
------------------------------------------
Total gross written premiums $ 685,167 $ 460,834
==========================================
- -------------------------------------------------------------------------------
Our premiums during the first quarter of 2003 increased primarily from:
1. our success in writing a number of large property catastrophe reinsurance
programs;
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2. our continuing focus and success on building our book of specialty
reinsurance premiums; and
3. our continuing build-out of our individual risk operations, and our
continued success in utilizing selected producers to assist us in growing
this book of business.
We measure our penetration into the property catastrophe reinsurance market
based on the amount of catastrophe premiums we write. For the quarter ended
March 31, 2003, our total managed catastrophe premiums, representing catastrophe
premiums we write on behalf of Renaissance Reinsurance and our joint ventures,
were $464.7 million, compared with $370.4 million during the first quarter of
2002. Of this premium, $156.0 million was derived from DaVinci and Top Layer Re
during the first quarter of 2003, compared with $133.6 million during the first
quarter of 2002.
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 combined ratio and components thereof by segment
for the quarters ended March 31, 2003 and 2002:
During the first quarter of 2003, there were relatively few loss events which
were large enough to penetrate our property catastrophe reinsurance contracts,
and accordingly our losses from our property catastrophe operations were only
$16.8 million during the quarter, or a loss ratio of 14.1%. This compares with
property catastrophe losses of $16.6 million during the first quarter of 2002,
or a loss ratio of 15.3%.
We estimate our ultimate losses for our specialty reinsurance book of business
by utilizing an actuarial technique known as the Bornhuetter-Ferguson technique.
This technique requires us to make estimates regarding loss ratios of certain
lines of business, as well as payment patterns of losses. In utilizing this
technique, as an underwriting year matures, and as losses are reported, the
dependence on initial estimates in setting loss reserves is reduced, and
replaced with actual losses reported. During the first quarter of 2003, as our
2002 specialty reinsurance underwriting year matured, the losses which were
reported to us were lower than our original estimates and, accordingly, we
reflected a reduction of losses of $14.0 million and a corresponding increase to
net income. In the future, we could continue to experience positive reserve
development; however because of the inherent uncertainty with setting loss
reserves, and the variability of factors which can affect loss reserves, there
can be no assurance that we will continue to experience positive reserve
development in the future.
The increase in our loss ratio for the individual risk business is primarily due
to the fact that during 2002, our book of individual risk business was
relatively small and accordingly small one time adjustments would cause the loss
and expense ratios to fluctuate by wide percentages. As this book of business
grows, we would expect that, absent major catastrophes, fluctuations in the loss
and expense ratios associated with this segment of business will be moderated.
For example, during the third and fourth quarters of 2002 this business produced
loss ratios of 38.0% and 44.3%, respectively, and expense ratios of 33.9% and
37.4%, respectively.
Other Income
- ------------
Our other income is principally generated from our equity pick-up from our 50%
ownership of Top Layer Re, the annual management fee we receive from Platinum
Underwriters Holdings Ltd. ("Platinum"), the underwriting of contracts related
to physical variables, and other miscellaneous activities.
15
We also generate fees from our joint venture with DaVinci; however, because
DaVinci is consolidated in our financial statements, these fees are not
reflected in other income, but are instead reflected in the underwriting profits
of DaVinci consolidated in our results. We also receive fees from certain
placements of structured quota share reinsurance agreements for participations
in our property catastrophe book of business. These fees are also not reflected
in other income, but instead are required to be reflected as reductions to
acquisition costs and underwriting expenses.
The fee income, equity pick up and other items as reported in other income are
detailed below. Also provided is a summary of all fees from joint venture
relationships, including fee income, our profits earned on our capital at risk
in the joint ventures and other items.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL
Effective January 1, 2002, the Company adopted 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 was required to be recorded as
a cumulative effect of a change in accounting principle in the consolidated
statement of income and was required to be recorded retroactive to January 1,
2002.
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 March 31, 2003, the statutory capital and
surplus of our Bermuda insurance subsidiaries was $2,003.4 million, and the
amount of capital and surplus required to be maintained was $328.3 million. Our
U.S. subsidiaries are also required to maintain certain measures of solvency and
liquidity. At March 31, 2003, the statutory capital and surplus of our U.S.
subsidiaries was $26.2 million and the amount of capital and
16
surplus required to be maintained was $9.0 million. During the first quarter of
2003, Renaissance Reinsurance declared dividends to RenaissanceRe of $123.8
million compared to $40.5 million for the same period in 2002.
CASH FLOWS
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 revolving credit facility
to meet additional capital requirements, if necessary.
Cash flows from operations in the first three months of 2003 were $283.2
million, which principally consisted of net income of $155.4 million, plus
$350.7 million for increases in reserves for unearned premiums, plus $90.2
million for increases to net reserves for claims and claim expenses, partially
offset by an increase of $236.6 in net reinsurance balances and an increase of
$33.2 in deferred acquisition costs. The 2003 cash flows from operations were
primarily utilized to invest in fixed income securities.
We have generated cash flows from operations in 2002 and the first quarter of
2003, 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, it is
possible that our individual case reserves for each catastrophic event are
incorrect, possibly materially.
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 and continuing in the first quarter of 2003, we increased our
specialty reinsurance and individual risk gross written premiums (See -
"Premiums"). The addition of these lines of business adds complexity to our
claims reserving process and therefore adds uncertainty to 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.
- ---------------------------------------------------------------------------
As at March 31, As at December 31,
2003 2002
----------------------------------------
Gross reserves $ 874,092 $ 804,795
Recoverables 178,593 199,533
----------------------------------------
Net reserves $ 695,499 $ 605,262
========================================
Shareholders' equity 1,882,268 1,642,035
Gross reserves as a % of equity 46.4% 49.0%
Net reserves as a % of equity 37.0% 36.9%
- ---------------------------------------------------------------------------
17
For our reinsurance and individual risk operations, our estimates of claims
reserves include case reserves reported to us as well as our estimate of IBNR
losses 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.
During the three months ended March 31, 2003 we incurred net claims and claim
expenses of $82.8 million and paid net losses of $7.4 million. Due to the high
severity and low frequency of losses related to the property catastrophe
insurance and reinsurance business, there can be no assurance that we will
continue to experience this level of losses and/or recoveries. IBNR reserves at
March 31, 2003 were $524.2 million compared with $462.9 million at December 31,
2002.
CAPITAL RESOURCES
Our total capital resources as at March 31, 2003 and December 31, 2002 were as
follows:
During the first quarter of 2003, our capital resources increased primarily as a
result of three items: 1) our net income of $151.3 million; 2) the issuance of
$100 million of Series B Preference Shares; and 3) the issuance of $100 million
of 5.875% Senior Notes.
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
March 31, 2003, the full amount was outstanding under this
18
facility. Interest rates on the facility are based on a spread above LIBOR, and
averaged approximately 2.34% during the first quarter of 2003. 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
March 31, 2003, DaVinci was in compliance with the covenants of this agreement.
With the increased opportunities to grow our business, we also decided to
materially increase our capital resources through the following activities:
1. In January 2003, we issued $100 million of 5.875% Senior Notes due February
15, 2013. 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.
2. In February 2003, we 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 our
option on or after February 4, 2008. Dividends are cumulative from the date
of original issuance and are payable quarterly in arrears at 7.3%,
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 submits any proposal that, as a result of any changes to
Bermuda law, requires approval of the holders of these 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 securities of the Company.
We maintain a $310 million revolving credit and term loan agreement with a
syndicate of commercial banks. There was no outstanding balance as of March 31,
2003 and December 31, 2002. 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., 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 1.90%
during the first quarter of 2003, compared to 2.15% during the same quarter in
2002. 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 March 31, 2003.
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 the first quarter
of 2003. 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
Principles do not allow these securities to be classified as a component of
shareholders' equity, therefore, they are recorded as minority interest.
SHAREHOLDERS' EQUITY
During the first quarter of 2003, shareholders' equity increased by $240.2
million to $1.88 billion as of March 31, 2003, from $1.64 billion as of December
31, 2002. The significant components of the change in shareholders' equity
included net income from continuing operations of $155.4 million and the
issuance of $100 million of Series B Preference Shares, partially offset by
dividends to common and preference shareholders of $14.6 million.
19
INVESTMENTS
At March 31, 2003, we held investments and cash totaling $3.8 billion (compared
to $3.1 billion at December 31, 2002) with a net unrealized appreciation balance
of $96.0 million. Our investment portfolio is subject to the risk of declines in
realizable value. We attempt to mitigate this risk through diversification and
active management of our portfolio.
The table below shows the aggregate amounts of our invested assets:
The $673.0 million growth in our portfolio of invested assets for the quarter
ended March 31, 2003 resulted primarily from net cash provided by operating
activities of $283.2 million, an addition of $100 million in senior notes and an
addition of $100 million in Series B Preference Shares and also a net liability
of $210.6 million for investments purchased as March 31, 2003 but not yet paid
for.
The equity investment in reinsurance company relates to our November 1, 2002
purchase of 3,960,000 common shares of 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 and warrant for an aggregate price of $84.2 million. As at
March 31, 2003, we own 9.2% of Platinum's outstanding common shares. We have
recorded our investments in Platinum at fair value, and at March 31, 2003 the
aggregate fair value was $117.9 million, compared to $120.3 million as at
December 31, 2002. The aggregate unrealized gain of $33.7 million on the
Platinum investment is included in accumulated other comprehensive income, of
which $17.5 million represents our estimate of the value of the warrant.
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.
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
March 31, 2003, our invested asset portfolio had a dollar weighted average
rating of AA, an average duration of 2.41 years and an average yield to maturity
of 2.94%.
At March 31, 2003, $38.1 million of cash and cash equivalents were invested in
currencies other than the U.S. dollar, which represented 1.0% of our invested
assets.
For the first quarter of 2003, we recorded an increase of $23.7 million in net
realized gains on investments to $24.4 million for the first quarter of 2003
from $.7 million for the same period in 2002. The increase was primarily due to
a repositioning of the invested asset portfolio in response to changing market
conditions.
A portion of our investment assets are directly held by 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 by the subscribing
companies for cash or in marketable securities. Over time, the subsidiaries and
joint ventures who
20
participate in RIHL are expected to both subscribe for additional shares and
redeem outstanding shares, as our and their respective liquidity needs change.
RIHL is currently rated AAAf/S2 by Standards & Poor's Ratings Group.
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 the first quarter of 2003, we recorded a loss on non-indemnity
catastrophe index transactions of $1.7 million, compared to recoveries of $2.5
million for the same period in 2002. We report these losses/recoveries in other
income.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on us are considered in our catastrophe loss models. The effects of inflation
are also considered in pricing and in estimating reserves for unpaid claims and
claim expenses. The actual effects of this post-event inflation on our results
cannot be accurately known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
As of March 31, 2003, we have not entered into any off-balance sheet
arrangements, as defined by Item 303(a)(4) of Regulation S-K.
CURRENT OUTLOOK
During 2002 there was 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 the specialty reinsurance market, and the
individual risk markets in which we participate, will continue to display strong
fundamentals and will continue to provide us with growth opportunities during
the remainder of 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 believe that
the new capital has provided sufficient additional capacity to the property
catastrophe reinsurance market, so that there currently exists a healthy balance
between buyers and sellers and accordingly we believe the pricing environment of
the property catastrophe reinsurance market could begin to level off. However,
it is possible that, an environment with continued light catastrophe losses, or
other factors could cause a reduction in prices of property catastrophe
reinsurance 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.
We believe that pricing of casualty insurance has increased substantially, and
we anticipate entering into certain specialty segments during 2003. Recognizing
that there are many segments of the casualty market that remain unattractive
even after recent price increases, we intend to be selective and write business
only in those segments that we believe can produce an acceptable return on
capital. We are hiring staff, and building systems, to support our entry into
the casualty business. We expect to supplement our internal resources with
external service providers, including most importantly several leading program
managers and third party claims
21
administrators. We have assembled a team of professionals in our US operations
to support this initiative, which will include auditing these external service
providers.
The growth in our premiums from the specialty reinsurance, individual risk and
the casualty reinsurance 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 to help control the risks associated with these
businesses.
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. In
addition, Glencoe, Stonington and Lantana are subject to 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, equal to 7.0% during 2003, 10.0% in 2004 and 15.0% in
2005. For losses in excess of a company's deductible, our participating
subsidiaries will retain an additional 10.0% of the excess losses, with the
balance to be covered by the federal government. To date, the acceptance rate
by our clients of the coverages we have offered pursuant to TRIA has been
approximately 2%; however, we can not be certain what our future take up rates
might be, how the Department of the Treasury will govern certain aspects of TRIA
or whether TRIA will be renewed. We continue to monitor our aggregate exposure
to terrorist attacks.
22
SAFE HARBOR DISCLOSURE
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements contained
in this report.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities 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", "intends", "believe", "predict" or words of similar
import generally involve forward-looking statements. In light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be considered as a
representation by the Company or any other person that its objectives or plans
will be achieved. Numerous factors could cause the Company's actual results to
differ materially from those addressed by 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;
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
23
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 from time to time in our filings with the
Securities and Exchange Commission. We undertake no obligation to release
publicly the results of any future revisions we may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
24
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET SENSITIVE INSTRUMENTS
Our investment portfolio includes investments available for sale and short-term
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 2.41%, which equated to a decrease in market value of
approximately $83.0 million on a portfolio valued at $3,443.7 million at March
31, 2003. At December 31, 2002, the decrease in total return would have been
2.25%, which equated to a decrease in market value of approximately $62.8
million on a portfolio valued at $2,791.6 million. The foregoing reflects the
use of an immediate time horizon, since this presents the worst-case scenario.
Credit spreads are assumed to remain constant in these hypothetical examples.
Item 4. DISCLOSURE 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 quarterly 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 the 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 our 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.
Within the 90-day period prior to the filing date of this report, an evaluation
was performed under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and 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 quarterly 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.
25
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
We are, from time to time, a party to litigation and arbitration that
arises in the normal course of our business operations. While any
proceeding contains an element of uncertainty, we believe that we are not
presently a party to any such litigation or arbitration that is likely to
have a material adverse effect on our business or operations.
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Certificate of Designation, Preferences and Rights of 7.30%
Series B Preference Shares (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.)
10.2 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)
(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).
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. Current Reports on Form 8-K:
The Registrant filed a report on Form 8-K on January 31, 2003 with respect
to the sale of $100.0 million aggregate principal amount of its 5.875%
Senior Notes due 2013.
The Registrant filed a report on Form 8-K on February 4, 2003 with respect
to the sale of $150.0 million aggregate liquidation amount of its 7.30%
Series B Preference Shares.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
RENAISSANCERE HOLDINGS LTD.
By: /s/ John M. Lummis
------------------------------------
John M. Lummis
Executive Vice President and
Chief Financial Officer
Date: May 15, 2003
27
CERTIFICATION
I, James N. Stanard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RenaissanceRe
Holdings Ltd. (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 15, 2003
........................
/s/ James N. Stanard
---------------------------
James N. Stanard
Chief Executive Officer
28
CERTIFICATION
I, John M. Lummis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RenaissanceRe
Holdings Ltd. (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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
quarterly 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: May 15, 2003
........................
/s/ John M. Lummis
---------------------------
John M. Lummis
Chief Financial Officer
29