10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 14, 1998
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number: 34-0-26512
RenaissanceRe Holdings Ltd.
(Exact name of registrant as specified in its charter)
Bermuda 98-013-8020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Renaissance House
8-12 East Broadway
Pembroke, Bermuda HM 19
(Address of principal executive offices) (Zip Code)
(441) 295-4513
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No[ ]
The number of outstanding shares of RenaissanceRe Holding Ltd.'s common stock,
par value US $1.00 per share as of March 31, 1998 was 22,547,124.
Total number of pages in this report: 18
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
Part I -- Financial Information
2
Part I - Financial Information
Item 1 - Financial Statements
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(United States Dollars)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these financial statements
3
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
(United States Dollars)
(in thousands, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
4
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 1998 and 1997
(United States Dollars)
(in thousands, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
5
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(United States Dollars in thousands)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
6
RenaissanceRe Holdings Ltd., and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
(unaudited)
1. The consolidated financial statements have been prepared on the basis of
United States generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements. The consolidated financial statements include the accounts of
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), its wholly owned
subsidiary, Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") and
its majority owned subsidiary Glencoe Insurance Ltd. ("Glencoe").
RenaissanceRe, Renaissance Reinsurance and Glencoe are collectively
referred to herein as the "Company". In the opinion of the Company's
management, these financial statements reflect all the normal recurring
adjustments necessary for a fair presentation of the Company's financial
position at March 31, 1998 and December 31, 1997, its results of
operations for the three months ended March 31, 1998 and 1997 and cash
flows for the three months ended March 31, 1998 and 1997. These
consolidated financial statements should be read in conjunction with the
1997 audited consolidated financial statements and related notes thereto.
Certain comparative information has been reclassified to conform to
current presentation. Because of the seasonality of the Company's business
the results of operations for any interim period will not necessarily be
indicative of results of operations for the full fiscal year.
2. Significant Accounting Policies
a) Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS
No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
necessary, restated to conform to the requirements of SFAS No.128.
b) Comprehensive Income
As of January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires an enterprise to (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately in the equity section of a statement of financial
position. SFAS No. 130 requires net unrealized appreciation (depreciation)
on the Company's available for sale investments, which were previously
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform with the 1998 presentation. The adoption of this
accounting statement had no impact on the Company's net income or
shareholders' equity. Currently, other than the net unrealized gain (loss)
on
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the Company's investments available for sale, there are no other Company
balances which are required to be included as a component of other
comprehensive income.
3. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share.
1. During the quarter ended March 31, 1998, the Board of Directors of the
Company declared, and the Company paid, a dividend of $0.30 per share to
shareholders of record as of February 18, 1998.
2. Interest paid was $2.9 million for the quarter ended March 31, 1998 and
$1.7 million for the same period in the previous year. On March 1, 1998
the Company paid a semi-annual dividend on the Capital Securities of $4.3
million.
3. In January 1998, the Company began to provide personal lines coverages
through DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of
Glencoe. DeSoto is a special purpose Florida homeowners insurance company
that is licensed to assume and renew homeowner policies from the Florida
JUA, a state sponsored insurance company. DeSoto's initial assumption
approximated 12,000 policies and an in-force premium of approximately $10
million.
4. On December 19, 1997, the Company announced it had executed a definitive
agreement to acquire the operating subsidiaries of Nobel Insurance
Limited, through a newly established U.S. holding company. The principal
businesses of Nobel Insurance Limited are the service and underwriting of
commercial property, casualty and surety risks for specialized industries
and personal lines coverage for low value dwellings. The casualty business
will
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be substantially reinsured by Inter-Ocean Reinsurance Company Ltd., who
will provide comprehensive retrospective reinsurance. Nobel Insurance
Limited's principal operating unit, Nobel Insurance Company ("Nobel"), is
a Texas domiciled company, licensed in 50 states. The purchase of the
operating subsidiaries of Nobel Insurance Limited is expected to close by
the end of June 1998.
Effective April 20, 1998, Nobel sold the renewal rights to its surety
business for $3.5 million plus an additional contingent fee of up to an
additional $3.5 million. Nobel does not currently anticipate receiving any
portion of this contingent fee.
5. Subsequent Events
Glencoe has agreed to repurchase from Underwriters Reinsurance Company
("Underwriter Re") its 20 percent interest in Glencoe. The estimated
purchase price is $15.2 million. Following this repurchase, RenaissanceRe
will own 100% of the outstanding stock of Glencoe.
On May 5, 1998, the Company conducted its Annual General Meeting of
Shareholders, at which each proposal to be considered by the shareholders
described in the Company's Proxy Statement relating to the Annual Meeting
(the "Proxy Statement") was adopted. Accordingly, the Memorandum of
Association and Bye-laws of the Company have been amended pursuant to such
shareholder approval, as described more fully in the Proxy Statement.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the quarter ended March 31, 1998 compared to the quarter ended March 31,
1997
For the quarter ended March 31, 1998, net income available to common
shareholders was $35.7 million or $1.57 per share, compared to $35.4 million or
$1.52 per share for the same quarter in 1997.
Gross premiums written for the first quarter of 1998 have remained relatively
flat at $119.1 million compared to gross written premiums of $120.4 million for
the same quarter of 1997. The 1.1 percent decrease in written premiums was the
result of a 12.3 percent decrease in premiums due to the Company not renewing
coverage and a 10.1 percent decrease related to changes in pricing,
participation level and coverage on renewed business, which was partially offset
by a 23.5 percent increase in premiums related to new business, which is
primarily the result of new business written by the primary operations.
During 1998, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the first quarter of 1998, ceded premiums
written were $6.7 million compared with $2.7 million for the same quarter in
1997.
The table below sets forth the Company's combined ratio and components thereof
for the quarters ended March 31, 1998 and 1997:
Claims and claim adjustment expenses incurred for the quarter ended March 31,
1998 were $7.9 million or 17.1 percent of net premiums earned. In comparison,
claims and claim adjustment expenses for the quarter ended March 31, 1997 were
$14.2 million or 25.5 percent of net premiums earned. The decrease relates
primarily to a lower level of catastrophe events in the first quarter of 1998.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $6.4 million for each of the quarters ended
March 31, 1998 and 1997.
Operating expenses for the first quarter of 1998 increased to $6.4 million
compared with $5.9 million for the same quarter of 1997. The primary cause for
the increase in operating expenses, is the continued development of the
Company's primary operations.
Net investment income, excluding realized investment gains and losses, for the
first quarter of 1998 was $13.6 million, compared to $12.1 million for the same
period in 1997. The increase in
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net investment income was the result of an increased return on the investment
portfolio and higher average invested assets which is primarily related to cash
flows from operations.
Interest expense and minority interest for the quarter ended March 31, 1998
increased to $2.9 million from $2.7 million for the same period in 1997. The
increase was primarily related to the higher interest rate on the $100.0 million
of Capital Securities which were issued during the first quarter of 1997.
As of January 1, 1998 the company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires an enterprise to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately in the equity
section of a statement of financial position. SFAS No. 130 requires net
unrealized appreciation (depreciation) on the Company's available for sale
investments, which were previously reported separately in shareholders' equity,
to be included in other comprehensive income. Prior year financial statements
have been reclassified to conform with the 1998 presentation. The adoption of
this accounting statement had no impact on the Company's net income or
shareholders' equity. Currently, other than the net unrealized gain (loss) on
the Company's investments available for sale, there are no other Company
balances which are required to be included as a component of other comprehensive
income.
FINANCIAL CONDITION
General
The Company provides reinsurance and insurance where risk of natural catastrophe
represents a significant component of the overall exposure. The Company's
results depend to a large extent on the frequency and severity of catastrophic
events, and the concentration and coverage offered to clients impacted thereby.
In addition, the Company writes other lines of insurance and reinsurance on a
limited basis, and is actively exploring new opportunities.
Liquidity and Capital Requirements
As a holding company, RenaissanceRe relies on invested assets, investment
income, cash dividends and permitted payments from its subsidiaries to make
principal payments, interest payments, cash distributions on outstanding
obligations and pay quarterly dividends, if any, to RenaissanceRe's
shareholders. The payment of dividends by its subsidiaries to RenaissanceRe is,
under certain circumstances, limited under Bermuda insurance law. The Bermuda
Insurance Act 1978, amendments thereto and related regulations of Bermuda (the
"Act"), requires the subsidiaries to maintain certain measures of solvency and
liquidity. As at March 31, 1998 the statutory capital and surplus of the
Company's subsidiaries was $655.0 million, and the amount required to be
maintained was $150.0 million.
The operating subsidiaries have historically produced sufficient cash flows to
meet expected claims payments and operational expenses and to provide dividend
payments to RenaissanceRe. The subsidiaries also maintain a concentration of
their investments in high quality liquid securities, which management believes
will provide sufficient liquidity to meet extraordinary claims payments should
the need arise.
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During the second quarter of 1998, Glencoe entered into an agreement to purchase
the 20 percent minority interest in Glencoe held by Underwriters Re. Following
the purchase of Glencoe's shares from Underwriters Re, Glencoe will be wholly
owned by RenaissanceRe.
Under the terms of its agreement to acquire the operating subsidiaries of Nobel
Insurance Limited, the Company is required to pay $54.1 million in cash to
consummate the purchase, and will provide approximately $8.9 million of limited
recourse financing, in exchange for a promissory note from Nobel Insurance
Limited, to enable Nobel Insurance Limited to support certain of its obligations
in the liquidation of the remaining operations. The Company's U.S. holding
company has received a commitment from a syndicate of banks to provide $35
million of term debt and a $15 million revolving credit facility. The loan will
be guaranteed by RenaissanceRe.
The Company anticipates that its primary insurance operations, including
Glencoe, DeSoto and Nobel, will become an increasingly important element of the
Company over time. The Company currently believes that internally generated
capital will be sufficient to support its reinsurance and insurance businesses,
however external financing may be utilized to finance significant transactions.
From time to time, the Company may consider opportunistic diversification into
new ventures, either through organic growth or the acquisition of other
companies or books of business. In evaluating such new ventures, the Company
seeks an attractive return on equity, the ability to develop or capitalize on a
competitive advantage and opportunities that will not detract from its core
reinsurance operations. Accordingly, the Company regularly reviews strategic
transaction opportunities and periodically engages in discussions regarding
possible transactions. However, other than with respect to the anticipated
acquisition of Nobel, the Company has no definitive agreements with respect to
any material transaction and there can be no assurance that the Company will
enter into any such agreement in the future, or that any consummated transaction
would contribute materially to the Company's results.
Cash flows from operating activities for the first quarter of 1998 resulted
principally from premium and investment income, net of paid losses, acquisition
costs and underwriting expenses. Cash flows from operations in the first quarter
of 1998 were $49.9 million, compared to $49.0 million for the same period in
1997. The Company has produced cash flows from operations in the first quarter
of 1998, and the full years of 1997 and 1996 significantly in excess of its
commitments. To the extent that capital is not utilized in the Company's
reinsurance business, the Company will consider using such capital to invest in
new opportunities or will consider returning such capital to its shareholders.
Because of the potential high severity and low frequency of losses on the
coverages written by the Company, and the seasonality of the Company's business,
it is not possible to accurately predict the Company's future cash flows from
operating activities. As a consequence, cash flows from operating activities may
fluctuate, perhaps significantly, between individual quarters and years.
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Reserves
The Company's policy is to establish claim reserves for the settlement costs of
all claims and claim adjustment expenses incurred by the Company when an event
occurs. During the quarter ended March 31, 1998 the Company incurred claims of
$7.9 million and paid losses of $7.0 million. This was a relatively light
quarter for natural catastrophes which therefore positively affected the
Company's results of operations. 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 the Company will continue to experience this
reduced level of losses.
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 possible that the ultimate liability may exceed or be less
than such estimates. Such estimates are not precise in that, among other things,
they are based on predictions of future developments and estimates of future
trends in claim severity and frequency and other variable factors such as
inflation. During the claim settlement period, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward. Even after such adjustments, ultimate liability may exceed or be less
than the revised estimates.
Reserves for claims and claim expenses may include reserves for unpaid reported
claims and claim expenses and reserves for estimated losses that have been
incurred but not reported to the Company. Such reserves are estimated by
management based upon reports received from ceding companies, as supplemented by
the Company's own estimates of reserves on such reported losses as well as
reserves for losses that are incurred but not reported. The Company's reserve
estimates are continually reviewed and, in accordance with GAAP, as adjustments
to these reserves become necessary, such adjustments are reflected in current
operations.
Capital Resources & Shareholders' Equity
During the first quarter of 1998, shareholders' equity increased by $32.9
million, from $598.7 million at December 31, 1997 to $631.6 million at March 31,
1998. The significant components of the increase included net income from
continuing operations of $35.7 million and a decrease in the unrealized
depreciation on investments of $3.8 million, partially offset by the payment of
dividends of $6.8 million and the issuance of restricted stock under the
Company's 1993 Stock Incentive Plan.
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Investments
The table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
The growth in the Company's portfolio of invested assets for the quarter ended
March 31, 1998 primarily resulted from net cash provided by operating activities
of $49.9 million.
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an average AA
rating as measured by Standard & Poor's Ratings Group. At March 31, 1998, the
invested asset portfolio had a dollar weighted average rating of AA, an average
duration of 2.3 years and an average yield to maturity of 5.87 percent, after
investment expenses.
All fixed income securities in the Company's investment portfolio are classified
as securities available for sale and are carried at fair value. Any unrealized
gains or losses as a result of changes in fair value over the period such
investments are held are not reflected in the Company's statement of operations,
but rather are reflected in accumulated other comprehensive income in the
consolidated statement of shareholders' equity, in accordance with SFAS No. 115
and 130.
As at March 31, 1998 the Company held investments and cash totaling $910.0
million with a net unrealized depreciation balance of $6.3 million. The
Company's investment portfolio, is subject to the risks of declines in
realizable value. The Company attempts to mitigate this risk through the
diversification and active management of its portfolio.
At March 31, 1998, $20.6 million of cash and cash equivalents were invested in
currencies other than the U.S. dollar, which represented approximately 2.3
percent of the Company's invested assets.
The Company's investment portfolio does not contain any investments in
derivatives. Also, the Company's investment portfolio does not contain any
direct investments in real estate, mortgage loans or similar securities.
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 the Company are implicitly considered in the
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Company's catastrophe loss models. The effects of inflation are also considered
in pricing and in estimating reserves for unpaid claims and claim adjustment
expenses. The actual effects of this post event inflation on the results of the
Company cannot be accurately known until claims are ultimately settled.
Year 2000
Certain computer programs and/or software may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in miscalculations or
system failures. The Company has completed an assessment of its business
applications and computer systems, and believes that all critical business
applications and systems will function properly with respect to dates in the
year 2000 and thereafter.
The Company is in the process of evaluating its potential exposures from the
non-compliance, if any, of its vendors' and customers' systems with the Year
2000. There can be no assurance that the systems of its vendors and customers,
on which the Company relies for supporting information, will be timely converted
and would not have an effect on the Company's business operations.
Currently, none of the Company's reinsurance or insurance policies specifically
provides coverage for Year 2000 losses. The Company has begun to explicitly
exclude coverage for Year 2000 losses from its policies, and expects to adopt
this wording for the majority of its policies and contracts going forward. The
Company believes that the potential for a material loss due to this exposure has
been, or will be, minimized; however, there can be no assurance that potential
losses would not have an adverse effect on the future results of operations.
The Company anticipates completing the Year 2000 evaluation prior to December
31, 1998 and it is anticipated that any future costs associated with the Year
2000 project will be minimal and accordingly not have an adverse effect on the
future results of operations.
Current Outlook
It is anticipated that the competitive pressures that have existed since 1995
will continue into 1998. The Company anticipates that these pressures will
continue to suppress the growth in premiums from property catastrophe
reinsurance contracts. However, although no assurance can be given, the Company
believes that opportunities in certain select markets will continue to exist,
which because of the Company's competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, will enable the Company to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
Additionally, the Company's financial strength has enabled it to pursue
opportunities outside of the property catastrophe reinsurance market into the
catastrophe exposed primary insurance market. The Company believes that its
financial strength will enable it to continue to pursue other opportunities in
the future. There can be no assurance that the Company's pursuit of such
opportunities will materially impact the Company's financial condition and
results of operations.
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Note on Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. Forward-looking statements are statements other than historical
information or statements of current condition. Some forward-looking statements
may be identified by use of terms such as "believes," "anticipates," "intends,"
or "expects." These forward-looking statements relate, among other things, to
the plans and objectives of the Company for future operations. 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 the objectives or plans
of the Company will be achieved. Numerous factors could cause the Company's
actual results to differ materially from those in the forward-looking
statements, including the following: (i) the occurrence of catastrophic events
with a frequency or severity exceeding the Company's estimates; (ii) a decrease
in the level of demand for property catastrophe reinsurance, or increased
competition owing to increased capacity of property catastrophe reinsurers;
(iii) any lowering or loss of one of the financial or claims-paying ratings of
the Company or one or more of its subsidiaries; (iv) actions of competitors; (v)
loss of services of any one of the Company's key executive officers; (vi) the
passage of federal or state legislation subjecting Renaissance Reinsurance to
supervision or regulation in the United States; (vii) challenges by insurance
regulators in the United States to Renaissance Reinsurance's claim of exemption
from insurance regulation under the current laws; (viii) changes in economic
conditions, including currency rate conditions; or (ix) a contention by the
United States Internal Revenue Service that the Company or Renaissance
Reinsurance is engaged in the conduct of a trade or business within the U.S. The
foregoing review of important factors should not be construed as exhaustive; the
Company undertakes no obligation to release publicly the results of any future
revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
None
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 3.1 - Memorandum of Increase in Share Capital of the
Company.
Exhibit 3.2 - Amended and Restated Bye-laws of the Company.
Exhibit 27 - Financial Data Schedule.
b. Current Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on January 6,
1998.
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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.
Date: May 14, 1998
By: /s/ John M. Lummis
-------------------------
John M. Lummis
Senior Vice President and
Chief Financial Officer
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