10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 16, 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: September 30, 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 September 30, 1998 was 22,056,605.
Total number of pages in this report: 24
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
(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 nine months ended
September 30, 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") and its subsidiaries, which
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 September 30, 1998 and December 31, 1997,
and its results of operations, changes in shareholders' equity and cash
flows for the nine month periods ended September 30, 1998 and 1997. These
consolidated financial statements should be read in conjunction with the
1997 audited consolidated financial statements and related notes thereto
included in the Company's Annual Report and Form 10-K for the year ended
December 31, 1997. Certain comparative information has been reclassified
to conform to current presentation. Because of the potentially significant
variability and 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. Accounting Pronouncements
a) Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") 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 to the 1998 presentation. The adoption of this
accounting statement had no financial impact on the
7
Company's net income or shareholders' equity. Currently, other than the
net unrealized 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.
c) Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which revises disclosure
requirements about operating segments and establishes standards for
related disclosures about products and services, geographic areas and
major customers. SFAS No. 131 requires that public business enterprises
report financial and descriptive information about their reportable
operating segments. The statement is effective for fiscal years beginning
after December 15, 1997, and requires restatement of prior years financial
statements in the initial year of application.
d) Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 1999. Currently, the Company does not
expect the adoption of SFAS No. 133 to have a material impact on its
consolidated financial statements.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
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4. The Board of Directors of the Company declared, and the Company paid,
dividends of $.30 per share to shareholders of record on each of February
18, May 20, and August 19, 1998. On November 5, 1998 the Board of
Directors of the Company declared a dividend of $.30 per share payable on
December 19, 1998 to shareholders of record on December 3, 1998.
5. Interest paid was $3.0 million for the nine-month period ended September
30, 1998 and $3.1 for the same period in 1997. On September 1, 1998 the
Company paid a semi-annual dividend on the Company obligated mandatorily
redeemable capital securities of a subsidiary trust holding solely junior
subordinated debentures of the Company ("Capital Securities") of $4.3
million.
6. In January 1998, the Company began to provide personal lines coverages
through DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of
Glencoe Insurance Ltd. ("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.
7. On June 25, 1998, the Company completed its acquisition of the U.S.
operating subsidiaries of Nobel Insurance Limited, a Bermuda company
("Nobel Limited"), for $54.1 million. The Company also incurred
approximately $1 million of loan forgiveness and $1 million in costs
associated with the transaction. The Company also provided Nobel Limited
with a limited recourse loan of $8.9 million to support the liquidation of
Nobel Limited. The Company currently estimates that Nobel Limited, after
satisfying its liabilities, will have the ability to repay $7.9 million of
this loan. The gross assets and gross liabilities purchased in the
transaction were $188.1 million and $155.9 million, respectively, thereby
resulting in the recognition of $23.9 million of goodwill, which is being
amortized on a straight line basis over a 20 year period. The Company has
9
accounted for this acquisition using the purchase method of accounting.
The Company issued no shares as part of the purchase.
Nobel Limited's principal U.S. operating subsidiaries, Nobel Insurance
Company ("Nobel") and IAS/CatCrew Inc., are continuing to conduct business
under their historical names as subsidiaries of Renaissance U.S. Holdings,
Inc. ("Renaissance U.S."). The principal businesses of Nobel are the
service and underwriting of personal lines property coverage for low-value
dwellings, and casualty and surety risks for specialized industries,
through Nobel which is licensed as an admitted insurer in each of the 50
states of America. IAS/CatCrew Inc. provides professional loss adjustment
services to property insurance and reinsurance companies.
In connection with the Nobel acquisition, Renaissance U.S. borrowed $35
million from a syndicate of banks. In addition, the banks have provided a
$15 million revolving credit facility which as of September 30, 1998 has
been fully utilized. Effective September 30, 1998, the Company contributed
an additional $9 million of capital to Nobel resulting in total aggregate
capital contributions to Nobel and its affiliates of $65.1 million.
Contemporaneously with the Nobel acquisition, Nobel entered into a
retroactive reinsurance contract with its lead casualty reinsurers,
American Reinsurance Company and Inter-Ocean Reinsurance Company Ltd.
This contract provides Nobel with approximately $40 million of protection
from adverse development on its pre October 1, 1997 casualty book of
business. During the third quarter of 1998, Nobel recognized pre-tax loss
development on this book of business of $4.2 million, which is recoverable
under this contract. In accordance with SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts",
Nobel must record recoveries on retroactive reinsurance over the remaining
settlement period. Accordingly, although the Company has reflected in its
third quarter 1998 income statement a $4.2 loss from adverse development
on Nobel's pre October 1, 1997 casualty book of business, the Company has
also recorded a $4.2 million deferred gain which the Company expects to
record over the future cash settlement period of this retroactive
reinsurance policy. The deferred gain is recognized into income by
multiplying the amount of such gain by a fraction, the numerator being the
cash recoveries collected by Nobel under the contract, and the denominator
being the total losses ceded to the contract. See Note 9 and Financial
Condition - Current Outlook for a discussion of the Company's reinsurance
and future operations of Nobel, respectively.
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.
Operating results of Nobel and its affiliates acquired by the Company have
been included in the consolidated financial statements from their date of
acquisition. As required by Accounting Principles Board Opinion No. 16,
the following selected unaudited pro forma information is being provided
to present a summary of the combined results of the Company and Nobel and
its affiliates assuming the acquisition of Nobel and its affiliates had
occurred as of January 1 of each year. The pro forma data is for
informational purposes only and does not necessarily represent results
which would have occurred if the acquisition had taken place on the basis
assumed above, nor is it indicative of the results of future combined
operations.
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Pro Forma Statements
8. In May 1998, the Company announced a $25 million share repurchase program.
An additional $25 million share repurchase program was announced in
September 1998. Through September 30, 1998, the Company had repurchased an
aggregate of 575,770 shares under these programs at a total cost of $25.4
million.
9. The Company utilizes reinsurance to reduce its exposure to large losses.
The Company currently has in place contracts that provide for recovery of
a portion of certain claims and claim expenses from reinsurers in excess
of various retentions and loss warranties. This reinsurance does not
discharge the Company from its primary liability, and accordingly the
Company would remain liable to the extent that any reinsurance company
fails to meet its obligations under these agreements. As of September 30,
1998, the amounts recoverable for claims and claim expenses from
reinsurers were approximately $136 million as reflected on the balance
sheet. The Company evaluates the financial condition of its reinsurers
through internal evaluation by senior management.
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.
The Company has U.S. net operating loss carryforwards and future tax
deductions of $2.5 million which will be available to offset regular
taxable U.S. income during the carryforward period (through 2018), subject
to certain limitations. The tax benefits of these items are reflected in
the accompanying table of deferred tax assets and liabilities.
11
Income taxes - period ended September 30, 1998
The effect of income taxes on operations is presented below:
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the quarter ended September 30, 1998 compared to the quarter ended September
30, 1997
For the quarter ended September 30, 1998, net income available to common
shareholders was $20.4 million or $.91 per share, compared to $35.4 million or
$1.56 per share for the same quarter in 1997.
Gross premiums written for the third quarter of 1998 increased to $78.1 million
compared to gross written premiums of $60.4 million for the same quarter of
1997. The 29.3 percent increase in gross premiums written was the result of a
60.0 percent increase in premiums relating to new business, a 10.1 percent
decrease relating to the Company not renewing certain coverages and a 20.6
percent decrease related to changes in coverage, participation level and pricing
on certain renewed business. The quarterly increase in premiums related to new
business is primarily the result of new business written by Renaissance
Reinsurance and the addition of Nobel and DeSoto. In the aggregate, the
Company's primary operations produced approximately $23.7 million in gross
written premium in the third quarter of 1998, compared to $2.6 million for the
same period in 1997. Gross written premiums from Nobel's casualty and surety
businesses were $11.5 million and $.3 million respectively, for the quarter
ended September 30, 1998.
During 1998, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the third quarter of 1998, ceded premiums
written were $11.7 million compared with $13.7 million for the same quarter in
1997. Ceded reinsurance reduces net premiums earned, but management believes
that purchases of reinsurance reduce the Company's level of risk that would
otherwise exist (See Note 9).
The table below sets forth the Company's combined ratio and components thereof
for the quarters ended September 30, 1998 and 1997:
Claims and claim adjustment expenses incurred for the quarter ended September
30, 1998 were $26.7 million or 45.5 percent of net premiums earned. In
comparison, claims and claim adjustment expenses for the quarter ended September
30, 1997 were $14.7 million or 27.7 percent of net premiums earned. The increase
in the Company's consolidated average loss ratio primarily relates to the
inclusion of Nobel and DeSoto. During the third quarter, Nobel incurred a
pre-tax loss of approximately $7.4 million, primarily as a result of adverse
developments for
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prior accident years in Nobel's casualty and surety businesses. (See Note 7, and
Financial Condition -Reserves and Current Outlook for further discussion on
Nobel.) The loss ratio of the Company's core property catastrophe reinsurance
business decreased during this period, compared to the same quarter in 1997. For
the quarter ended September 30, 1998, incurred losses related to Nobel's
casualty and surety businesses were $13.1 million and $1.5 million,
respectively.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $7.5 million for the quarter ended September
30, 1998 and $6.7 million in the same quarter of 1997. Operating expenses for
the third quarter of 1998 increased to $9.6 million compared with $6.1 million
for the same quarter of 1997, primarily as a result of the inclusion of the
results of Nobel and DeSoto.
Net investment income, excluding realized investment gains and losses, increased
to $13.3 million for the third quarter of 1998, compared to $12.7 million for
the same period in 1997. The increase is primarily the result of a higher asset
base due to cash flows from operations, partially offset by lower interest rates
for the quarter.
Interest expense and minority interest for the quarters ended September 30, 1998
and 1997 increased to $3.5 million from $3.2 million.
For the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997
For the nine months ended September 30, 1998, net income available to common
shareholders was $84.6 million or $3.74 per share, compared to $107.9 million or
$4.68 per share for the same period in 1997.
Gross premiums written for the first nine months of 1998 increased 12.8 percent
to $243.1 million compared to gross written premiums of $215.7 million for the
same nine months of 1997. The 12.8 percent increase in written premiums was the
result of a 41.1 percent increase in premiums relating to new business, a 15.9
percent decrease relating to the Company not renewing certain coverages and a
12.4 percent decrease related to changes in coverage, participation level and
pricing on certain renewed business. The increase in premiums relating to new
business is primarily the result of the addition of Nobel and DeSoto. In the
aggregate, the Company's primary business produced $41.9 million of gross
premiums written, compared to $5.2 million for the same period in 1997. Gross
written premiums from Nobel's casualty and surety businesses included in the
Company's financial statements for the nine month period ended September 30,
1998 were $11.5 million and $.3 million, respectively.
During 1998, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the first nine months of 1998, ceded premiums
written were $59.1 million compared with $30.6 million for the same period in
1997. Ceded reinsurance reduces net premiums earned, but management believes
that purchases of reinsurance significantly reduce the Company's level of risk
that would otherwise exist (See Note 9).
14
The table below sets forth the Company's combined ratio and components thereof
for the nine-month periods ended September 30, 1998 and 1997:
Claims and claim adjustment expenses incurred for the nine months ended
September 30, 1998 were $44.9 million or 29.6 percent of net premiums earned. In
comparison, claims and claim adjustment expenses for the nine months ended
September 30, 1997 were $40.0 million or 25.0 percent of net premiums earned.
The increase in the Company's consolidated average loss ratio primarily relates
to the inclusion of Nobel and DeSoto. (See Note 7, and Financial Condition
- - -Reserves and Current Outlook for further discussion on Nobel.) The loss ratio
of the Company's core property catastrophe reinsurance business decreased during
this period, compared to the same period for 1997. For the nine month period
ended September 30, 1998, incurred losses related to Nobel's casualty and surety
businesses included in the Company's financial statements were $13.1 million and
$1.5 million, respectively.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $19.4 million for the nine months ended
September 30, 1998 and $19.0 million in the same period of 1997. Operating
expenses for the first nine months of 1998 increased to $23.8 million compared
with $18.1 million for the same nine months of 1997 primarily as a result of the
inclusion of the results of Nobel and DeSoto.
Net investment income, excluding realized investment gains and losses, increased
for the first nine months of 1998 to $39.6 million, compared to $37.0 million
for the same period in 1997. The increase in net investment income was largely
the result of higher average invested assets which is primarily related to cash
flows from operations.
Interest expense and minority interest for the nine months ended September 30,
1998 increased to $10.0 million from $8.9 million for the same period in 1997.
The increase was primarily related to a full nine months of accrued interest on
the $100.0 million of Capital Securities that were issued during the first
quarter of 1997.
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, through the Company's primary operations, the
15
Company writes personal homeowners coverage, personal lines property coverage
for low-value dwellings and casualty and surety risks for specialized
industries. The Company also writes minimal amounts in other lines of
reinsurance on a limited basis, and actively explores 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 the Company's Bermuda subsidiaries to
RenaissanceRe is, under certain circumstances, limited under Bermuda insurance
law and in the case of Nobel, Texas insurance law. The Bermuda Insurance Act
1978, amendments thereto and related regulations of Bermuda require the
Company's Bermuda subsidiaries to maintain certain measures of solvency and
liquidity. Nobel is subject to regulation under the insurance statutes
(including holding company regulations) of all 50 states and the District of
Columbia, including the state of Texas, where Nobel is domiciled. These
regulations relate to, among other things, such matters as the adequacy of
Nobel's reserves, restrictions on the dividends Nobel may pay to the Company,
the maintenance of capital necessary to support elements of risk pursuant to
risk-based capital requirements, and mandated deposits of securities owned by
Nobel with state insurance commissioners for the benefit of policyholders. As at
September 30, 1998 the statutory capital and surplus of the Company's
subsidiaries was $690.9 million, and the amount required to be maintained was
$171.4 million.
The Company's operating subsidiaries have historically produced sufficient cash
flows to meet expected claims payments and operational expenses and to provide
dividend payments to RenaissanceRe. However, the Company's cash flow from
operations may be influenced by a variety of factors, including cyclical changes
in the property and casualty insurance and reinsurance markets, insurance
regulations and changes in general economic conditions. The Company's
subsidiaries maintain a concentration of their investments in high quality
liquid securities, which management believes will provide sufficient liquidity
to meet claims payments should the need arise.
During the second quarter of 1998, Glencoe purchased the 20 percent minority
interest in Glencoe held by Underwriters Re for $15.2 million. As a result of
the purchase of Glencoe's shares from Underwriters Re, Glencoe is now
wholly-owned by RenaissanceRe.
Under the terms of its agreement to acquire the operating subsidiaries of Nobel
Limited, the Company paid $54.1 million in cash to consummate the purchase, and
provided a limited recourse loan of approximately $8.9 million to enable Nobel
Limited to support certain of its obligations in the liquidation of its
remaining operations. (See Note 7, and Financial Condition -Capital Resources
and Equity for further discussion).
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 as and if they
arise.
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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.
Cash flows from operating activities for the first nine months of 1998 resulted
principally from premium and investment income, partially offset by paid losses,
acquisition costs and underwriting expenses. Cash flows from operations in the
first nine months of 1998 were $74.8 million, compared to $125.9 million for the
same period in 1997. This reduction is primarily related to (1) a reduction in
net income of $23.2 million, due to lower earned premium and higher losses and
expenses, and (2) increased payments on the Company's ceded reinsurance of $27.1
million. The Company has produced cash flows from operations in the first nine
months 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 of the
property catastrophe coverages written by the Company (which constitute the
majority of its coverages), the potential variability of results from the
Company's casualty and surety businesses and the seasonality of the Company's
business, it is not possible to precisely predict the Company's future cash
flows from operating activities from past results. As a consequence, cash flows
from operating activities may fluctuate, perhaps significantly, between
individual quarters and years.
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 September 30, 1998 the Company incurred claims
of $26.7 million and paid losses of $36.7 million.
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, all of which may vary as claims are settled. The amount of
uncertainty in these estimates is affected by such factors as the amount of
historical claims information relative to the development period for the type of
risks, knowledge of the underlying facts and circumstances, and the amount of
insurance risk retained. 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
17
are continually reviewed and, in accordance with GAAP, as adjustments to these
reserves become necessary, such adjustments are reflected in current operations.
During the third quarter of 1998, Nobel experienced adverse development for
prior accident years of its casualty and surety operations and recorded a
pre-tax loss of $7.4 million (after-tax $4.9 million). As discussed in Note 7,
Nobel has reflected a deferred gain of $4.2 million related to future cash
recoveries on a retroactive reinsurance contract with its lead casualty
reinsurers. See Note 7 for further discussion of this deferral and Financial
Condition-Current Outlook for discussion of current case reserves for Nobel.
Capital Resources and Shareholders' Equity
The total capital resources of the Company as at September 30, 1998 and December
31, 1997 was as follows:
The Company has a $200 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. Interest rates on the facility
are based on a spread above LIBOR and have averaged approximately 6.0 percent
during the third quarter of 1998. The credit agreement contains certain
financial covenants including requirements of a consolidated debt to capital
ratio of .35:1; a consolidated net worth of not less than 125 percent of
consolidated debt; and 80 percent of invested assets to be rated BBB- or better.
The Company was in compliance with all the covenants of this revolving credit
and term loan agreement as at September 30, 1998.
Renaissance U.S. has a $35 million term loan and $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
are based upon a spread above LIBOR, and have averaged approximately 5.9
percent. The Credit Agreement contains certain financial covenants, including a
debt service coverage ratio of 125 percent and a covenant that Nobel maintain
adjusted surplus at 125 percent of the level required by the risk based capital
guidelines of the Texas Department of Insurance. This five year term loan has
mandatory repayment provisions approximating 25 percent in each of years two
through five. The Company was in compliance with all the covenants of this term
loan and revolving loan facility as at September 30, 1998.
The Capital Securities pay cumulative cash distributions at an annual rate of
8.54 percent, payable semi-annually. The Indenture relating to the Capital
Securities contains certain covenants, including a covenant prohibiting the
payment of dividends by the Company if the Company shall
18
be in default under the Indenture. The Company was in compliance with all of the
covenants of the Indenture at September 30,1998.
During the first nine months of 1998, shareholders' equity increased by $50.2
million, from $598.7 million at December 31, 1997, to $648.9 million at
September 30, 1998. The significant components of the increase included net
income from continuing operations of $84.6 million, a decrease in the unrealized
depreciation on investments of $8.7 million and share option and restricted
stock movement of $2.5 million partially offset by the payment of dividends of
$20.2 million and the purchase of common stock of $25.4 million.
In May 1998, the Company announced a $25 million share repurchase program. An
additional $25 million share repurchase program was announced in September 1998.
Through September 30, 1998, the Company had repurchased an aggregate of 575,770
shares under these programs at a total cost of $25.4 million.
Investments
As of September 30, 1998, the Company held investments and cash totaling $946.2
million with net unrealized depreciation of $1.4 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.
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 nine months
ended September 30, 1998 primarily resulted from net cash provided by operating
activities of $74.8 million, partially offset by realized losses generated by
the sale of securities from the Company's emerging market debt portfolio. The
Company's investment income also increased during this period, largely as a
result of the increased size of the fixed income portfolio.
At September 30, 1998, the Company's invested asset portfolio had a dollar
weighted average rating of AA, an average duration of 2.76 years and an average
yield to maturity of 5.45 percent, before 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
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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.
At September 30, 1998, $8.9 million of cash and cash equivalents were invested
in currencies other than the U.S. dollar, which represented less than 1.0
percent of the aggregate value of the Company's invested assets.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked securities
and derivative instruments under which losses could be triggered by an industry
loss index or natural parameters. For the nine months ended September 30, 1998
the Company's activities with respect to these securities has approximated $2
million of fees and risk premiums. To date the Company has not experienced any
losses from such securities or derivatives. The Company is currently accounting
for all risk premium as reinsurance premium. The Company may in the future also
utilize other derivatives.
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 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.
Impact of Year 2000
Certain computer programs and embedded computer chips use only the last two
digits to refer to a year. Therefore, during computer operations, the "00" may
be interpreted as being the year 1900, instead of the Year 2000. If not
corrected, many computer systems could fail or create erroneous results.
Computer systems, equipment and programs that are free from the Year 2000
problem are generally referred to as being compliant.
Year 2000 - Internal Systems
The Company has completed an assessment of its internal business applications
and computer systems, including those used in underwriting, policy processing
and recording policy details. The Company believes that all critical business
applications and systems will function properly with respect to dates in the
Year 2000 and thereafter. The Company has backup systems in place for power,
certain facilities infrastructure and computer systems in the event of such
system failures. While there can be no assurance that these systems will be free
from failure, the Company believes that any failure from its internal systems
will not materially impact the Company's results of operations or financial
condition.
Year 2000 Exposure from Third Parties; Contingency Plan
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 on for supporting
20
information and certain services, will be timely converted and would not have an
effect on the Company's business operations, financial results or financial
condition.
The Company has developed a contingency plan in the event that certain
communication systems, key utilities, or vendor systems prove not to be Year
2000 compliant. However, the Company realizes that any reasonable contingency
plan cannot accurately account for all possible scenarios which may arise as a
result of Year 2000 related computer problems. The Company continually evaluates
the status of its Year 2000 exposures and modifies its contingency plan as
needed.
Year 2000 Policy Coverage
In addition to the risks and costs associated with its internal systems and
third party vendors, the Company continues to evaluate its underwriting risk
arising from potential losses associated with Year 2000 failures. Variables
which may affect the pervasiveness and severity of Year 2000 problems include,
but are not limited to, the magnitude of the amount of costs and expenses
directly attributable to Year 2000 failures, the portion of such amount, if any,
that constitutes insurable losses, and the extent of governmental intervention.
Moreover, standard insurance and reinsurance contracts neither explicitly
include nor explicitly exclude coverage for Year 2000 failures. The Company does
not believe that Year 2000 losses should be covered under the standard forms of
contracts that it provides. However, some Year 2000 related losses may or may
not be determined to be covered under standard insurance and reinsurance
contracts, depending upon the specific contract language, the applicable case
law, and the facts and circumstances of each loss. The Company's Year 2000
initiative seeks to minimize its potential Year 2000 underwriting exposure by
(1) performing an underwriting evaluation of potential Year 2000 exposures; (2)
not renewing certain contracts where the Company believes the potential risk
from Year 2000 losses is too great, and (3) structuring reinsurance contractual
language to mitigate potential exposure. The Company cannot be certain that
these steps will adequately minimize its Year 2000 underwriting exposures, and
given the possible magnitude of the Year 2000 problem, it is possible that the
Company may incur Year 2000 insurance coverage related losses. The Company
believes it is taking reasonable and appropriate measures in the course of its
business operations and client relationships to avoid or mitigate such Year 2000
related exposures.
Current Outlook
As discussed in Note 7, and in Financial Condition - Reserves, during the third
quarter of 1998, Nobel experienced adverse development in its casualty and
surety businesses resulting in a pre-tax loss of $7.4 million (after-tax $4.9
million). In view of the losses recorded by Nobel during the third quarter, the
Company has initiated an evaluation of individual case reserves and potential
additional reserve development on both the casualty and surety operations at
Nobel. At this time, the Company does not have sufficient information to enable
it to provide a reasonable estimate of any additional reserve development that
may be recorded in the fourth quarter.
It is anticipated that the competitive pressures in the property catastrophe
reinsurance market that have existed since 1995 will continue through 1998 and
1999. During the past four years, these pressures have suppressed the premiums
for property catastrophe coverages. However, partially as a result of the $8.3
billion of U.S. catastrophe losses reported in the first three quarters of
1998, as estimated by Property Claims Services, the Company believes that the
rate reductions,
21
which have been evident in the past four years, may subside. Also, 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, should enable the Company to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
The Company has entered the primary insurance business, focusing particularly on
catastrophe exposed business, with a view to leveraging the risk assessment
skills of the core reinsurance business. Through Nobel, the Company's business
activities now also include casualty and surety insurance businesses (see
above). In addition, the Company will continue to evaluate other new business
opportunities, which may be related or unrelated to its current insurance or
reinsurance businesses.
The Company's financial strength has enabled it to pursue these opportunities
outside of the property catastrophe reinsurance market and 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,
however, 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.
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 the Company's reinsurance or insurance business, or
increased competition owing to increased capacity in the industry; (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; (ix) uncertainties with respect to the
Company's acquisition of Nobel Insurance Company, including the possibility that
Nobel will incur greater than foreseen losses; (x) risks relating to the Year
2000 issue; or (xi) 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.
22
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:
27.1 Financial Data Schedule
b. Current Reports on Form 8-K:
None.
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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: November 16, 1998
By: /s/ John M. Lummis
------------------
John M. Lummis
Senior Vice President and
Chief Financial Officer