ANNUAL REPORT TO SHAREHOLDERS OF RENAISSANCE
Published on March 31, 1998
[RENAISSANCERE HOLDINGS LOGO]
ANNUAL REPORT 1997
COMPANY OVERVIEW
RenaissanceRe Holdings Ltd. ("RenaissanceRe") provides reinsurance and insurance
coverage where the risk of natural catastrophes represents a significant
component of the overall exposure. We are a leader in using sophisticated
computer models to construct an optimal portfolio of these coverages.
Our principal business is property catastrophe reinsurance. Our subsidiary,
Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"), is one of the largest
providers of this coverage in the world. We provide reinsurance to insurance
companies and other reinsurers primarily on an excess of loss basis, which means
that we begin paying when their claims, from all of the homes, businesses and
properties that they insure from a particular catastrophe, exceed a certain
retained amount. Through these coverages we are subject to claims arising from
large natural catastrophes, such as earthquakes and hurricanes, although we are
also exposed to claims arising from other events such as winter storms, floods,
tornadoes, fires and explosions.
We have also begun to provide primary insurance. This business is written
through two subsidiaries, Glencoe Insurance Ltd. ("Glencoe") and DeSoto
Insurance Company ("DeSoto"). Through these subsidiaries we write commercial
insurance in various areas of the United States and homeowners insurance in
Florida, focusing on business exposed to natural catastrophes.
CONTENTS
Financial Highlights 2
Letter to Shareholders 3
Overview of Operations
Reinsurance 5
Primary Operations 7
Capital Management 9
Focused Diversification 11
Selected Financial Data 12
Management's Discussion and Analysis 13
Management's Responsibility for Financial Statements 25
Report of Independent Auditors 25
Consolidated Financial Statements 26
Notes to the Consolidated Financial Statements 30
Directors and Officers 44
Financial and Investor Information Inside Back Cover
RenaissanceRe Holdings Ltd. 1997 Annual Report
FINANCIAL HIGHLIGHTS
(1)For the period June 7, 1993 (date of incorporation) through December 31,
1993.
(2)Excludes realized gains (losses) on investments.
[GRAPH REPRESENTING RETURN ON AVERAGE EQUITY FOR YEAR ENDING DEC. 31 1993-1997]
[GRAPH REPRESENTING BOOK VALUE PER SHARE FOR YEAR ENDING DEC. 31 1993-1997]
[GRAPH REPRESENTING QUARTERLY DIVIDENDS PER SHARE FROM 1995-1997]
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 2 ]
LETTER TO SHAREHOLDERS
Dear Fellow Shareholder:
Overall, this was a fine year for RenaissanceRe. In a continuing environment of
softening prices and fierce competition in the insurance and reinsurance
industries, we have continued to effectively execute our success factors of
underwriting, marketing and capital management.
We again achieved one of the highest ROE's in the property and casualty
insurance industry and had modest growth in earnings per share. We were,
however, aided by a mild year for natural catastrophes, following three
above-average years.
We completed a strategic planning process that crystallized our position on
diversification (for an explanation please see page 11) and then made meaningful
strides in executing that plan by building capabilities in the
catastrophe-exposed primary business in the U.S.
Although we suffered a 2.8% decline in our asset portfolio in the fourth quarter
due to the Asian financial crisis, we moved quickly to rebalance the portfolio
to maintain its conservative profile. These moves are described by John Lummis
on page 9.
Market Conditions
1997 saw a continuation and intensification of insurance market trends of
competition and consolidation.
Virtually all segments of the worldwide insurance and reinsurance markets have
seen falling prices; the property catastrophe market is no exception. Faced with
the classic strategic trade-off between market share and profitability, we
remain focused on maintaining the quality (by which I mean the risk/reward
relationship) of our portfolio. Therefore we allowed its size to decline for the
second year in a row. While net written premium was down 22%, our exposure to
loss (after reinsurance that we purchase) was also reduced. Note that the
decline in premium over the last two years is almost entirely due to our net
position in the retrocessional market (reinsurance of reinsurers): we are
purchasing more and selling less. Reinsurance of primary insurance clients was
about flat this year, after growing in 1996.
[PHOTO OF JAMES N. STANARD]
Consolidation continues among our production sources, our clients and our
competitors. We remain committed to using brokers as our sole source of
reinsurance proposals. Our emphasis on rapid response and creative product
design keeps us in a strong position with the now fewer and larger brokers. We
also leveraged our reputation as a highly sophisticated catastrophe modeler into
a marketing tool by conducting over thirty modeling seminars for our clients.
Consolidation among our clients has been a major contributor to the drop in our
retrocessional premium income, as the combined entity usually buys less
reinsurance.
Consolidation among our competitors has not hurt us so far. With the security we
offer, we benefit from the trend of clients seeking to deal with a smaller
number of reinsurers - we are one of the survivors when cuts are made.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 3 ]
Primary Operations
Our biggest operational accomplishment this year was the expansion of our
primary insurance businesses. Although still a small contributor to earnings, we
are carefully constructing a platform from which to pursue selected
catastrophe-exposed primary insurance business. Glencoe, our 80%-owned surplus
lines company, is now eligible in 26 states in the U.S. We started DeSoto to
write homeowners business in Florida, and have a definitive agreement to
purchase Nobel Insurance Company, a specialist in low value dwelling homeowners
insurance. Nobel has a strong management team led by CEO Jef Amsbaugh. Jef
established a fine track record since taking charge of an essentially bankrupt
company in 1989. Keith Hynes explains our strategy behind these moves on page 7.
We are sometimes asked whether these primary operations could jeopardize our
reinsurance client relationships. This is an important issue, but hardly unique
to Renaissance Reinsurance; almost all major reinsurers have some primary
operations. Further, it is not unusual for us to reinsure each of two fierce
competitors in the same market, relying on confidential business plans provided
by each one. The important issue is fair and ethical dealing in such situations.
Our primary operations are run by a different management team than reinsurance
and we have an explicit "Chinese wall" policy insuring confidentiality of client
information. In fact, our surplus lines primary capability in Glencoe has been
viewed favorably by some of our reinsurance clients with whom we have forged
cooperative arrangements. To them, Glencoe simply provides another vehicle to
shed unwanted catastrophe risk.
Challenges
In 1998 we will be working hard to:
- - Maintain our position as a leading specialist in catastrophe
reinsurance in the face of continued competition and consolidation.
Bill Riker explains our plan to do this on page 5.
- - Effectively execute our primary operations strategy. Our primary
business derives its strength from our core catastrophe management
skills, but presents us with new management challenges: increased
delegation and dispersion of risk-taking authority, requiring
management controls not needed in smaller reinsurance shops; importance
of expense control; more complex processing systems; and regulatory
complexities not found in reinsurance.
Conclusion
We enter 1998 with the strongest management team, client relationships, and
balance sheet ever. Although smaller in size, the quality of our catastrophe
excess portfolio is comparable to past years. We have established a focused
diversification strategy and made meaningful progress toward executing it.
Overall, we are well positioned to provide value and security to our customers
and attractive returns to our shareholders. To that, we pledge our very best
effort.
Sincerely,
/s/ James N. Stanard
James N. Stanard
Chairman, President and Chief Executive Officer
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 4 ]
REINSURANCE
The year 1997 solidified our position as a market leader. Low loss activity
contributed to continued pricing softness, with declines of 10-15% in the U.S.
and greater declines in the international arena. Early in the year, it was clear
that to retain our lead as the premier catastrophe market we needed to:
- - "Raise the bar" on service to our clients and producers;
- - Maintain underwriting discipline by further refining our risk selection
methodologies; and
- - Enhance the relationships we enjoy with our clients and producers.
[PHOTO WILLIAM I. RIKER]
WILLIAM I. RIKER
President & Chief Operating Officer
Renaissance Reinsurance Ltd.
[PHOTO DAVID A. EKLUND]
DAVID A. EKLUND
Executive Vice President
Renaissance Reinsurance Ltd.
We accomplished all three. The core service we provide to our clients and
producers is the application of our technological skills to their business
needs. Increasingly, our clients rely on us for informed solutions and insight
regarding catastrophe exposure management. We conducted seminars for over thirty
clients in 1997 during which we explained the behaviors of the different
catastrophe models and how they can be most effectively utilized. Based on
positive client feedback, we will expand this program in 1998. As information
providers and technology facilitators to our clients, we are able to earn
preferred positions on their reinsurance programs.
We remain a market leader in the development of custom products for our clients.
Many clients are expressing more interest in developing multi-year reinsurance
agreements with their reinsurers. Our analytical skills and modeling
capabilities enable us to structure such agreements while protecting us from
unfavorable long-duration contracts.
Superior service helps assure that we get the "first call". In the reinsurance
market, the opportunity to structure a new contract is extremely valuable, as
you are then given priority choice when the transaction is concluded. For
example, we provided companies who were assuming risks from the Florida
Residential Property and Casualty Joint Underwriting Association ("JUA") with
unique information which enabled them to optimize their selections from the JUA
and accomplish their corporate goals. We are now the leading reinsurer for these
new companies.
New insurance programs are being developed around technology that monitors and
selects risks. These new programs often need sophisticated, flexible structures.
We have worked closely with many organizations to develop programs which meet
these complex needs. Only Renaissance Reinsurance and a few other sophisticated
reinsurers can properly underwrite these structures.
In raising the bar for service, we reorganized our underwriting service
responsibilities to provide better and faster contract documentation. We have
also automated our high resolution modeling capabilities so that we are now
considered the most responsive reinsurance company in the world in this field.
Just as an ebbing tide brings the rocks to the surface, decreased pricing makes
understanding the risks you write more important. We improved our proprietary
REMS system and completed a new version, REMS 32, in the early spring. The
enhancements included faster performance, improved tracking of our customer
service, as well as refined and improved analytical analysis.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 5 ]
In 1997 we also expanded our relationship with EQECAT, one of the newer, more
sophisticated catastrophe modelers in the market; their models have been added
to our portfolio of the best models in the world. On the international front, we
work closely with Cartograph, one of the leaders in developing models for
international regions.
We continue to have the best multiple model capability in the world, a key
competitive advantage. As clients and brokers become more proficient in using
these tools, it disadvantages reinsurers lacking multiple model capabilities.
To us, information is a competitive weapon. We have built detailed files on the
complete catastrophe reinsurance industry and we are confident that our
information constitutes the best database in the world.
Tale of Two Markets
The emergence of new technology has changed the way reinsurers and insurers
evaluate catastrophe exposure, enabling them to better quantify and understand
the risks. However, not all reinsurers have embraced this technology and
reinsurers lacking technology are relying on outdated heuristics to evaluate
risks. This market rift, between those organizations which possess and utilize
new technology and those who don't, is responsible for numerous recent examples
of irrational pricing, almost exclusively on the side of underpricing the risk.
Many of the major reinsurance players have invested in technology and can now
better evaluate the "true cost" (expected losses) of the catastrophe product.
Understanding "true costs" is especially difficult in the catastrophe business
because we only get hints of true price discovery every few years (in the form
of catastrophes); hence, mistakes will not surface in years with low catastrophe
experiences and may not surface for many years.
Fortunately, relationship-driven, value-oriented clients are focusing on
long-term quality, benefiting the sophisticated players like Renaissance
Reinsurance.
Where are we going?
With a growing technology endowment, we continue to do a better job of selecting
and managing risks.
The migration of business to the informed, technologically sophisticated markets
will widen the gap between the two markets. Adverse selection, against companies
that do not embrace and properly utilize new technologies, will eventually erode
the margins of these companies in "average years".
In this framework, what are the questions to ask reinsurers?
- - How do you measure and evaluate your expected margins?
- - How do you avoid adverse selection as technology enables clients to tailor
their risks, and other reinsurers to select risks?
- - How do you determine/measure when you will no longer write a risk?
- - How do you incorporate price adequacy into your risk profile?
Answers to these questions can shed light on which of the two markets a
reinsurer is participating in.
In conclusion, we are maintaining our course of combining traditional values and
unsurpassed technology to retain our premier position as the most innovative
supplier of property catastrophe reinsurance in the world.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 6 ]
PRIMARY OPERATIONS
[PHOTO OF KEITH S. HYNES]
KEITH S. HYNES
Executive Vice President
Primary Operations
RenaissanceRe Holdings Ltd.
Our primary operations have the same goals and operate on the same business
principles that have made our reinsurance business successful. We seek to
maintain a portfolio of risks in both that is better than the market average. We
believe this is the only way to achieve our second goal, which is to produce an
attractive return on capital. We achieve these goals through superior execution
of the basics of the insurance business, underwriting and marketing, and by
matching the level of capital to the requirements of each business.
During 1997, we established the foundation for our primary activities. Glencoe
achieved surplus lines eligibility in 26 states. Its gross premium written
increased to $7.0 million from $1.5 million in 1996. We anticipate premiums will
grow further, but are focusing on maintaining a superior book of business in the
current, very competitive market conditions. Glencoe is presently focused on
writing commercial, catastrophe-exposed property business. It has achieved
profitability in each of its first two years of operations.
Based on our belief that there are segments of the homeowners insurance market
that can meet our goals, we incorporated DeSoto Insurance Company in September
with an initial capitalization of $10 million. In December, DeSoto became the
first "special purpose homeowners insurance company" to be licensed by the State
of Florida Department of Insurance. A special purpose homeowners insurance
company is not subject to assessment by either the Florida Residential Property
and Casualty Joint Underwriting Association (JUA) or the Florida Windstorm
Underwriting Association (WUA). DeSoto's freedom from JUA and WUA assessments
confers a unique competitive advantage. This regulatory advantage is augmented
by our ability to assess and manage catastrophe exposure, which is a critical
success factor for any company writing Florida homeowners business. DeSoto
commenced operations on January 1, 1998, an assumption of approximately 12,000
policies from the JUA. The in-force premium of these policies was approximately
$10 million.
[CATASTROPHE RISK ACCESS POINTS CHART APPEARS HERE, SHOWING DATA FOR RENAISSANCE
REINSURANCE, NOBEL, GLENCOE AND DESOTO]
Both Glencoe and DeSoto extend RenaissanceRe's capabilities into contiguous
business areas and leverage RenaissanceRe's catastrophe exposure assessment and
management skills. The chart on this page shows several points in the insurance
business where catastrophe risk can be accessed. Renaissance Reinsurance has
achieved a leadership position in writing and managing catastrophe coverage in
the reinsurance and retrocessional markets. Glencoe provides the opportunity to
write catastrophe-exposed business in the excess and surplus lines market.
DeSoto will be obtaining catastrophe risk in the Florida homeowners market
through an assumption of policies from the state JUA. We expect to establish
vehicles to write catastrophe-exposed business in additional sectors of the
insurance/reinsurance marketplace.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 7 ]
In December, we reached a definitive agreement to acquire Nobel Insurance
Company ("Nobel") and related entities for $54.1 million. Nobel is a licensed
insurer in all 50 states, writing in three focused insurance businesses. The
product line which we find most attractive is Nobel's low value dwelling
homeowners insurance (coverage for homes valued under $100,000). We've been one
of Nobel's reinsurers for its homeowners business, and have developed respect
for their management team. Nobel is a leader in this business in the southeast
United States, but does not write in Florida because of an aversion to
catastrophe exposure. We believe that the low value dwelling business is a
segment of the homeowners market where we can meet our corporate goals, and that
Nobel, together with the Company, have the requisite skills to be successful.
Nobel's second business segment is commercial casualty insurance, made up of
commercial auto and general liability. Nobel was founded in 1978 as a captive
casualty insurer for the explosives industry. Nobel continues to be the leading
casualty insurer for the explosives industry and has increased its customer base
beyond the explosives industry. A unique aspect of our acquisition of Nobel is
our strategic partnership with American Reinsurance Company and Inter-Ocean
Reinsurance Company Ltd., who will be providing comprehensive prospective and
retrospective reinsurance protection for Nobel's casualty business.
Nobel's third business segment is surety insurance, where they provide coverage
to small and mid-size contractors.
In addition to Nobel's insurance business, our acquisition includes IAS/CAT
Crew, which is an independent loss adjustment firm. Through the IAS/CAT Crew
division, Nobel is a leader in providing catastrophe claims adjustment and
planning services. Should a catastrophe occur, this capability will be valuable
to Glencoe, DeSoto and to Renaissance Reinsurance's customers.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 8 ]
CAPITAL MANAGEMENT
[PHOTO OF JOHN M. LUMMIS]
JOHN M. LUMMIS
Senior Vice President &
Chief Financial Officer
RenaissanceRe Holdings Ltd.
Capital management at RenaissanceRe serves two key constituencies - our
shareholders and our customers. We seek to generate attractive returns on our
shareholders' equity while providing unquestioned security to our customers.
At first look, it might appear that the interests of these two constituencies
are in conflict: higher return on equity might be presumed to come at the
expense of our customers. However, our management of risk and capital is
designed to harmonize the interests of our shareholders and our customers.
RenaissanceRe is differentiated from its peers by the way we integrate
underwriting and capital management. Our underwriters assess each potential
contract in the context of our whole portfolio. Each contract we write is
allocated capital based on its correlation with the rest of the portfolio; the
lower the correlation, the lower the capital allocation (other things being
equal).
Our system enables us to identify risks that are attractive in our portfolio
even where they are unattractive in the customer's portfolio. Both customer and
reinsurer win, as a risk - one that might be viewed as too large or concentrated
for a customer's balance sheet - finds a better "fit" in our portfolio.
In addition to carefully evaluating the risks we assume, RenaissanceRe
rigorously assesses the financial structure that stands behind these risks:
- - We seek to optimize the reinsurance that we purchase to enhance the
risk/reward characteristics of the net reinsurance portfolio.
- - We also seek to lower our overall cost of capital through the prudent use of
debt and preferred financing.
- - Finally, we are committed to actively managing our equity.
A year of low catastrophe losses, such as 1997, does not test our capital and
risk management. But while others may ignore the risks in this environment, we
will continue to actively manage our portfolio of risks.
1997 Achievements
RenaissanceRe's focus on capital was reflected in several ways during 1997:
- - In January and June, we repurchased a total of 1.5 million shares,
representing 6.4% of shares outstanding at the beginning of the year. The
total value was $53.5 million, or an average of $35.33 per share. The January
transaction was entered into shortly after a purchase of 2.1 million shares
for $71.9 million in December 1996 from our founding shareholders. The June
transaction was entered into in conjunction with a secondary offering by
these shareholders.
- - The Company's Board of Directors increased the quarterly dividend from $.20
to $.25 per share in February 1997 - the third consecutive annual increase.
- - The Company issued $100 million of 8.54% trust preferred, capital securities.
Proceeds were used to retire bank debt. This security is attractive to us for
its equity features in our capital structure.
- - The Company updated its proprietary underwriting and risk management system,
REMS, to incorporate retrocessional purchases. This enhancement allows us to
evaluate the amount of capital that is released under our capital allocation
rules by virtue of retrocessional purchases.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 9 ]
- - The Company increased its public ownership from 26% of the shares outstanding
at the beginning of the year to 54% at the end of the year. This increase
occurred through two secondary offerings by our founding shareholders.
Investment Portfolio
The majority of our assets are invested in what we call our core portfolio
(currently about 85% of the total invested assets). The mandate to our
investment manager for this portfolio is to maintain high credit quality
(average AA) with focus on preservation of capital and liquidity. The remainder
of our assets are invested in higher risk asset classes, equity and
non-investment grade bond portfolios focused on total return.
At year end, we held bonds in Korea, Thailand and Indonesia with a market value
of $66 million. In view of the increased risk associated with these bonds
following the financial crisis in Asia, we concluded that we needed to reduce
the overall risk in the investment portfolio. We achieved this by selling our
equity positions valued at $52.9 million (at a gain of $1.9 million). We decided
to retain our portfolio of primarily sovereign, dollar denominated bonds rather
than selling these bonds into the distressed market prevailing at year end. We
believe this portfolio will recover in value and, at current prices, is an
attractive use of capital.
Through our move into U.S. Treasuries and the sale of our equities, we have
maintained the conservative profile of our investment portfolio.
1998
The most important capital management question that faces RenaissanceRe is how
to utilize the excess capital that the reinsurance business is likely to
generate in 1998. While the reinsurance portfolio is declining in size, it
continues to generate substantial profits, beyond what can be deployed in that
business. There will be two uses of this excess capital:
- - First, it will be deployed in supporting new business activities,
particularly in the growth of our primary, catastrophe-exposed businesses,
but potentially in other new businesses as well. However, because of our high
standards for new business ventures (as described on the following page), it
is possible that we will be unable to fully deploy our excess capital.
- - To the extent that we have capital in excess of the needs of the business, we
will evaluate returning capital to our shareholders through share repurchases
and cash dividends.
As we actively manage our common equity, we will also continue to optimize our
use of retrocessional coverage, debt and preferred stock financing. Our actions
will be taken with a view to maximizing returns for our shareholders and
providing security for our customers.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 10 ]
FOCUSED DIVERSIFICATION
The key strategic question we faced this year concerned diversification. We
started the year with a very strong position in a relatively small, specialized
market: property catastrophe excess reinsurance. Through effective risk
selection, marketing and capital management, we have generated outstanding ROE's
for five years in a row. However, profit potential in this market is limited by
the absence of loss activity which would firm prices. Given this situation, what
should we do?
Our Mission
TO OBTAIN A PORTFOLIO OF PROPERTY CATASTROPHE REINSURANCE, INSURANCE AND
FINANCIAL RISKS THAT PRODUCES AN ATTRACTIVE RETURN ON CAPITAL AND IS
SIGNIFICANTLY BETTER THAN THE MARKET AVERAGE. WE DO THIS BY PROVIDING QUALITY TO
CUSTOMERS IN THE FORM OF EXCELLENT FINANCIAL SECURITY, INNOVATIVE PRODUCTS AND
RESPONSIVE SERVICE.
One strategic alternative would be aggressive diversification. This would follow
the consolidation theme in the industry, and, some argue, would improve the
valuation of our stock, based on the theory that if risk is spread among many
different types of insurance, earnings become more predictable. We rejected this
because it did not fit with our culture of tight control of risk, and our
organization lacked experience in managing a wide range of businesses.
A second alternative would be a pure "stick to our knitting" strategy. This
would have us continue to strengthen our position in the catastrophe market
while we wait for the inevitable market turn. Such a strategy has some appeal,
but we concluded that it would not maximize the value of the Company because we
would not be fully utilizing the core skills and competitive advantages which we
have developed.
This led to a third course that we call "focused diversification" - searching
for opportunities to replicate our success as a start-up (we have demonstrated
that we know how to start a successful business) in another market. As we
explained in last year's report, any diversification must meet three tests:
1. It must produce an attractive return on capital;
2. We must be able to develop a competitive advantage; and
3. It must not divert important resources from our core business.
As you might expect, the most promising opportunities are those that are
extensions of our core property catastrophe expertise. Glencoe, DeSoto, and the
homeowners segment of Nobel all extend our established catastrophe expertise
into the primary market. We refer to this extension of existing skills to
related markets as "mining".
We also search for opportunities beyond the catastrophe business (which we refer
to as "exploring"). Here, we look for an intersection of an attractive market
opportunity, an ability to develop a competitive advantage, and a cultural fit
(our ability to execute). So far, we have not seen any attractive market
opportunities, but we are actively pursuing new ideas.
To define the boundaries of our exploration activities, we revised our mission
statement (shown on the left) to encompass "financial risks" beyond insurance.
With the rapid change occurring in the markets for financial risk-bearing, we
are optimistic that we will find niches where we can excel. However, our focus
is on attractive return on capital, not revenue growth or diversification for
its own sake. So we will patiently wait for opportunities that fit with our
strategy.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 11 ]
SELECTED FINANCIAL DATA
The following summary financial information should be read in conjunction with
the Consolidated Financial Statements and the notes thereto presented on pages
26 to 43 in this Annual Report.
(1) For the period June 7, 1993 (date of incorporation) through December 31,
1993.
(2) Represents Minority interest - Company obligated, mandatorily redeemable
capital securities of a subsidiary trust holding solely junior subordinated
debentures of the Company.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 12 ]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND 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.
The Company's principal operating objective is to utilize its capital
efficiently by focusing on the writing of property catastrophe insurance and
reinsurance contracts with superior risk/return characteristics, while
maintaining a low cost operating structure in the favorable regulatory and tax
environment of Bermuda. The Company's primary underwriting goal is to construct
a portfolio of insurance and reinsurance contracts that maximizes the return on
shareholders' equity subject to prudent risk constraints.
The Company's principal business is property catastrophe reinsurance, written on
a worldwide basis through Renaissance Reinsurance. Based on gross premiums
written, the Company is one of the largest providers of this coverage in the
world. The Company provides property catastrophe reinsurance coverage to
insurance companies and other reinsurers primarily on an excess of loss basis.
Excess of loss catastrophe coverage generally provides coverage for claims
arising from large natural catastrophes, such as earthquakes and hurricanes, in
excess of a specified loss. In connection with the coverage it provides, the
Company is also exposed to claims arising from other natural and man-made
catastrophes such as winter storms, freezes, floods, fires and tornadoes.
The Company is continuing to expand its primary insurance business through
internal growth and acquisition. In 1997 the Company wrote $7 million of primary
insurance through Glencoe, an 80 percent-owned subsidiary. Glencoe provides
primary catastrophe-exposed property coverage on an excess and surplus lines
basis, and is eligible to write business in 26 states.
In January 1998, the Company began to provide personal lines coverages through
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 $10 million.
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 be substantially reinsured
by American Reinsurance Company and Inter-Ocean Reinsurance Company Ltd., who
will provide comprehensive prospective and 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 in the
second quarter of 1998. See Note 1 to the Consolidated Financial Statements and
"Financial Condition - Liquidity and Capital Requirements" regarding financing
of the acquisition.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 13 ]
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 in the
following discussion and elsewhere in this Annual Report. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments. In
particular, statements using verbs such as "expect", "anticipate", "hope",
"believe" or words of similar impact generally involve forward-looking
statements.
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, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events or
developments; some of which may be national or international in scope, such as
general economic conditions and interest rates; some of which may be related to
the reinsurance and insurance industries generally, such as pricing competition,
industry consolidation and regulatory developments, and others of which may
relate to the Company specifically, such as risks with implementing business
strategies and related organizational implications, adequacy of reserves,
exposure to catastrophe losses, technological risks inherent in developing
technological infrastructures, credit, interest rate, currency and other risks
associated with the Company's investment portfolio, and other factors. The
Company disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the year ended December 31, 1997, net income available to common
shareholders was $139.2 million compared to $156.2 million for the year ended
December 31, 1996. The decrease was primarily due to a decrease in gross
premiums written, an increase in ceded reinsurance premiums, an increase in
operating expenses and an increase in foreign exchange losses, which were
partially offset by a decrease in claims and claim expenses incurred and an
increase in net investment income. The above factors, combined with a 12 percent
decrease in the number of weighted average shares outstanding, as a result of
the purchase of Common Shares during late December 1996 and during 1997,
resulted in an increase in earnings per Common Share, on a diluted basis, to
$6.06 for the year ended December 31, 1997 from $6.01 for the year ended
December 31, 1996. Operating earnings (excluding realized gains and losses on
investments) decreased during 1997 to $142.1 million for the year ended December
31, 1997 from $159.1 million for the same period in 1996.
Gross premiums written for the year ended December 31, 1997 decreased 15.4
percent to $228.3 million from $269.9 million for the year ended December 31,
1996. The property catastrophe reinsurance market continues to be extremely
competitive due to the increased capital in the reinsurance market and the
limited opportunities to profitably deploy such capital. Because the property
catastrophe business has recently been among the most profitable segments of the
market, it is accordingly the focus of much competition which has resulted in
lower premiums measured on a risk adjusted basis. The decline in premiums
written is the result of the Company selectively deciding to non-renew those
policies where the pricing does not reflect the risk, and the reduced premiums
on renewed business.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 14 ]
The 15.4 percent premium decrease was the result of a 17.4 percent decrease in
premiums due to the Company not renewing coverage and a 9.6 percent decrease
related to changes in pricing, participation levels and coverage on renewed
business, partially offset by an 11.6 percent increase in premiums related to
new business. A majority of the decline in premiums written related to
reductions in the Company's book of assumed retrocessional premiums which were
$59.5 million in 1997 compared to $103.7 million in 1996.
During 1997, consistent with its risk management practices and the availability
of coverage responsive to the Company's risk profile, the Company increased the
level of property catastrophe reinsurance coverage purchased for its own
account. Ceded premiums written in 1997 were $32.5 million compared to $18.3
million in 1996. To the extent that appropriately priced coverage is available,
the Company anticipates continued use of reinsurance to reduce the potential
volatility of its results.
Property catastrophe reinsurance premiums accounted for approximately 91 percent
of the Company's gross premiums written in 1997. The remaining gross premiums
written in 1997 consisted primarily of excess and surplus lines primary premiums
written by Glencoe, and premiums on aviation and marine coverages. The Company's
gross premiums written by geographic region were as follows:
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, (in thousands) 1997 1996
- --------------------------------------------------------------------------------
GEOGRAPHIC REGION
United States $123,717 $126,611
Worldwide 27,930 44,460
Worldwide (excluding U.S.) 32,005 38,746
Europe (including the United Kingdom) 21,007 31,534
Other 16,738 18,958
Australia and New Zealand 6,890 9,604
- --------------------------------------------------------------------------------
TOTAL GROSS PREMIUMS WRITTEN $228,287 $269,913
================================================================================
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written to date is predominately from Europe and Japan.
The table below sets forth the Company's combined ratio and components thereof:
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
Claims/claim adjustment expense ratio 23.7% 34.3%
Underwriting expense ratio 23.8 17.0
- --------------------------------------------------------------------------------
COMBINED RATIO 47.5% 51.3%
================================================================================
Claims and claim expenses incurred for the year ended December 31, 1997 were
$50.0 million compared to $86.9 million for the year ended December 31, 1996.
Compared to historical averages, the year ended December 31, 1997 was a
relatively light year for natural catastrophes worldwide. Accordingly, the
reduced level of catastrophe losses resulted in a significantly lower loss ratio
in 1997 compared to 1996 and therefore positively affected the Company's results
from 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 experience this reduced level of losses in
future years.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 15 ]
Included in the expenses for the year ended December 31, 1996 are provisions of
$15.0 million for claims incurred from Hurricane Fran which struck North
Carolina during the third quarter of 1996, $9.3 million for claims incurred by
regional midwestern clients related to severe wind and hail storms during the
second quarter of 1996, $8.3 million for losses related to the Northeast U.S.
winter storms in the first quarter of 1996, and a provision of $7.0 million for
Northwestern U.S. floods in December of 1996. Also, during 1996, there was $12.1
million of development on prior year losses, which primarily related to a $3.2
million development on losses related to the 1994 Northridge Earthquake and a
net development of $3.5 million for Hurricanes Luis, Marilyn and Opal which
occurred in 1995.
Estimates of claims and claim expenses incurred are based in part upon the
estimation of claims resulting from catastrophic events. Estimation by the
Company of claims resulting from catastrophic events based upon its own
historical claim experience is inherently difficult because of the Company's
short operating history and the possible severity of property catastrophe
claims. Therefore, the Company utilizes both proprietary and commercially
available models, as well as historical reinsurance industry property
catastrophe claims experience, for purposes of evaluating future trends and
providing an estimate of ultimate claims costs.
Underwriting expenses, consisting of brokerage commissions, excise taxes and
other costs directly related to underwriting, for the year ended December 31,
1997 were $50.4 million or 23.8 percent of net premiums earned, compared to
$42.9 million or 17.0 percent for the year ended December 31, 1996. The primary
contributors to the increase in underwriting expenses were the increased
operating costs related to the hiring of additional professional staff and
continued investment in modeling technology. Also, since there is no reduction
in acquisition expenses related to the purchase of reinsurance, the purchase of
reinsurance causes acquisition costs to be a higher percentage of net premiums
earned. Additionally, premiums written by Glencoe, due to the nature of the
business, have a higher ratio of acquisition costs.
Net investment income (excluding net realized investment gains and losses) for
the year ended December 31, 1997 was $49.6 million, compared to $44.3 million
for the year ended December 31, 1996. The increase in investment income resulted
primarily from the increase in the amount of invested assets which was primarily
the result of cash flows provided by operations, partially offset by amounts
used to purchase common stock during the year. Invested assets at December 31,
1997 were $859.5 million compared to $802.5 million at December 31, 1996.
During each of 1997 and 1996, the Company recorded net realized losses on
investments of $2.9 million. Included in the 1997 net realized loss figure is a
provision of $3.8 million for what the Company believes to be an other than
temporary impairment of certain securities of Asian issuers held by the Company
as at December 31, 1997. See Financial Condition - Investments.
During 1997 the Company realized net foreign exchange losses of $3.4 million
compared to net realized foreign exchange gains of $0.8 million for the year
ended December 31, 1996. The foreign exchange losses recorded in 1997 resulted
primarily in the strengthening of the U.S. dollar against the British pound and
the German mark. The exchange gains in 1996 resulted primarily in the weakening
of the U.S. dollar against the British pound.
During the year ended December 31, 1997 net income available to common
shareholders was reduced by $7.0 million for minority interests related to the
Capital Securities that were issued in March 1997. The proceeds from the Capital
Securities were utilized to partially reduce the
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 16 ]
amount outstanding under the Company's Revolving Credit Facility and
accordingly, interest expense for the year ended December 31, 1997 decreased to
$4.3 million from $6.6 million for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
For the year ended December 31, 1996, net income available to common
shareholders was $156.2 million compared to $162.8 million for the year ended
December 31, 1995. The decrease was primarily due to a decrease in gross
premiums written, an increase in ceded reinsurance premiums and an increase in
operating expenses, which were partially offset by an increase in net investment
income. The above factors, combined with an 8 percent increase in the number of
weighted average shares outstanding, as a result of the initial public offering
of 3,105,000 Common Shares in July 1995, resulted in a decrease in earnings per
Common Share, on a diluted basis, to $6.01 for the year ended December 31, 1996
from $6.75 for the year ended December 31, 1995. Operating earnings (excluding
realized gains and losses on investments) were $159.1 million for the year ended
December 31, 1996 compared to $160.5 million for the year ended December 31,
1995.
Gross premiums written for the year ended December 31, 1996 decreased 7.8
percent to $269.9 million from $292.6 million for the year ended December 31,
1995. The decline in the gross premiums written was primarily related to the
competitive market for property catastrophe reinsurance. The principal
components of the decline related to a decrease in premiums from renewing
business of 8.8 percent, an 11.8 percent decrease due to the Company not
renewing coverage and a decrease in reinstatement premiums of 1.3 percent, which
was partially offset by a 14.1 percent increase in premiums related to new
business.
Reinsurance ceded premiums written were $18.3 million for the year ended
December 31, 1996 compared to $2.7 million for the year ended December 31, 1995,
resulting in net premiums written of $251.6 million for the year ended December
31, 1996 compared with $289.9 million for the year ended December 31, 1995.
Approximately 95 percent of the Company's gross premiums written in 1996 were in
respect of property catastrophe reinsurance. The remaining gross premiums
written in 1996 consisted primarily of aviation and marine coverages. The
Company's gross premiums written by geographic region were as follows:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
GEOGRAPHIC REGION
United States $126,611 $144,077
Worldwide 44,460 59,137
Worldwide (excluding U.S.) 38,746 41,311
Europe (including the United Kingdom) 31,534 25,365
Other 18,958 11,720
Australia and New Zealand 9,604 10,997
- --------------------------------------------------------------------------------
TOTAL GROSS PREMIUMS WRITTEN $269,913 $292,607
================================================================================
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written to date is predominately from Europe and Japan.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 17 ]
The table below sets forth the Company's combined ratio and components thereof:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------
Claims and claim expense ratio 34.3% 38.3%
Underwriting expense ratio 17.0 13.7
- --------------------------------------------------------------------------------
COMBINED RATIO 51.3% 52.0%
================================================================================
Claims and claim expenses incurred for the year ended December 31, 1996 were
$86.9 million. Included in the expenses for the year are provisions of $15.0
million for claims incurred from Hurricane Fran which struck North Carolina
during the third quarter of 1996, $9.3 million for claims incurred by regional
midwestern clients related to severe wind and hail storms during the second
quarter of 1996, $8.3 million for losses related to the Northeast U.S. winter
storms in the first quarter of 1996, and a provision of $7.0 million for
Northwestern U.S. floods in December of 1996. Also, during 1996, there was $12.1
million of development on prior year losses, which primarily related to a $3.2
million development on losses related to the 1994 Northridge Earthquake and a
net development of $3.5 million for Hurricanes Luis, Marilyn and Opal which
occurred in 1995. In comparison, claims and claim expenses incurred for the year
ended December 31, 1995 were $110.6 million or 38.3 percent of net premiums
earned.
Estimates of claims and claim expenses incurred are based in part upon the
estimation of claims resulting from catastrophic events. Estimation by the
Company of claims resulting from catastrophic events based upon its own
historical claim experience is inherently difficult because of the Company's
short operating history and the possible severity of property catastrophe
claims. Therefore, the Company utilizes both proprietary and commercially
available models, as well as historical reinsurance industry property
catastrophe claims experience, for purposes of evaluating future trends and
providing an estimate of ultimate claims costs.
Underwriting expenses, consisting of brokerage commissions, excise taxes and
other costs directly related to underwriting, for the year ended December 31,
1996 were $42.9 million or 17.0 percent of net premiums earned, compared to
$39.7 million or 13.7 percent for the year ended December 31, 1995. The primary
contributors to the increase in underwriting expenses were the increased
operating costs related to the hiring of additional professional staff. Also
affecting the increase in acquisition costs as a percentage of net premiums
earned is the increase in reinsurance purchased, which provides no reduction in
the associated acquisition expenses.
Net investment income (excluding net realized investment gains and losses) for
the year ended December 31, 1996 was $44.3 million, compared to $32.3 million
for the year ended December 31, 1995. The increase in investment income resulted
primarily from the increase in the amount of invested assets which was primarily
the result of cash flows provided by operating activities and increased
borrowings under the Company's Revolving Credit Facility. The Company recorded
net realized losses of $2.9 million on the sale of investments compared to net
realized gains of $2.3 million for the year ended December 31, 1995.
The Company realized net foreign exchange gains for each of the years ended
December 31, 1996 and 1995 of $0.8 million and $3.0 million, respectively. The
exchange gains in 1996 resulted primarily from the weakening of the U.S. dollar
against the British pound and in 1995 resulted from the weakening of the U.S.
dollar against most European currencies, the Japanese yen and the Australian
dollar.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 18 ]
FINANCIAL CONDITION
Liquidity and Capital Requirements
As a holding company, RenaissanceRe relies on investment income, cash dividends
and other permitted payments from its subsidiaries to make principal payments,
interest payments, cash distributions on outstanding obligations and pay
quarterly dividends, if any, to the Company's shareholders. The payment of
dividends by the Company's subsidiaries to the Company 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 Company's subsidiaries to maintain certain measures of solvency and
liquidity. As at December 31, 1997 the statutory capital and surplus of the
Company's subsidiaries was $665.2 million, and the amount required to be
maintained was $115.0 million. During 1997 Renaissance Reinsurance paid
aggregate cash dividends of $117.5 million to RenaissanceRe. See Notes 11 and 16
to the Consolidated Financial Statements.
The Company's operating subsidiaries have historically produced sufficient cash
flows to meet expected claims payments, operational expenses and provide
dividend payments to RenaissanceRe. The Company's 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.
In January 1996, the Company capitalized a new subsidiary, Glencoe, with a $50.0
million capital contribution, $38.0 million of which was derived from a dividend
from Renaissance Reinsurance and the balance of which came from other available
funds. In June 1996 the Company sold a 29.9 percent interest in Glencoe, which
is reflected as minority interest on the consolidated balance sheets. During the
third quarter of 1997, the Company purchased an additional 9.9 percent of
Glencoe for $5.2 million and increased its ownership of Glencoe from 70.1
percent to 80.0 percent. Also, during the fourth quarter of 1997, the Company
contributed an additional $12 million to Glencoe pro-rata with Glencoe's
minority investor, maintaining the Company's ownership in Glencoe at 80.0
percent.
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, and
will provide approximately $8.9 million of limited recourse financing, in
exchange for a promissory note from Nobel Insurance Limited (the "Note"), to
enable Nobel Insurance Limited to support certain of its obligations in the
liquidation of the remaining operations. It is expected that the transaction
will be financed with debt and cash at a 2:1 ratio of debt to cash. See Note 1
to the Consolidated Financial Statements.
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.
Cash flows from operating activities resulted principally from premium and
investment income, net of paid losses, acquisition costs and underwriting
expenses. Cash flows from operations in 1997 were $153.3 million, compared to
$174.8 million in 1996. The 1997 cash flows from
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 19 ]
operations were utilized to purchase $53.5 million of the Company's Common
Shares and pay aggregate quarterly dividends of $22.6 million. The 1996 cash
flows from operations were utilized to purchase $73.5 million of the Company's
Common Shares and pay aggregate quarterly dividends of $20.5 million.
The operating results of the Company have generated cash flows from operations
in 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.
Capital Resources
The total capital of the Company as at December 31, 1997 and 1996 was as
follows:
- --------------------------------------------------------------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Revolving Credit Facility $ 50,000 $150,000
Minority interest - Company obligated mandatorily
redeemable capital securities of a subsidiary trust 100,000 --
Shareholders' Equity 598,703 546,203
- --------------------------------------------------------------------------------
TOTAL CAPITAL RESOURCES $748,703 $696,203
================================================================================
On March 7, 1997 the Company completed the sale of $100 million of Capital
Securities - see Note 7 to the Consolidated Financial Statements. The Capital
Securities mature on March 1, 2027, and pay cumulative cash distributions at an
annual rate of 8.54 percent, payable semi-annually. Such securities are required
to be classified as minority interest, rather than as a component of
shareholders' equity of the Company.
During the third quarter of 1997, the Company executed the First Amendment to
the Third Amended and Restated Credit Agreement dated as of December 12, 1996
(the "Revolving Credit Facility"). The amendments became effective on September
8, 1997, except for the amendments relating to invested assets, which were
effective on June 30, 1997. The Revolving Credit Facility was amended to a)
extend the termination date from December 1, 1999 to December 1, 2001; b)
specifically define the Capital Securities as a component of Net Worth; c) amend
the definition of invested assets and the covenants related to invested assets;
d) amend certain restrictions regarding acquisitions, and e) amend certain fee
schedules. As of December 31, 1997, $50 million was outstanding under the
Revolving Credit Facility. Under the terms of the agreement, and if the Company
is in compliance with the covenants thereunder, the Company has access to an
additional $150 million should the need arise. During 1997, the average interest
cost of the Revolving Credit Facility was 6.07 percent.
Shareholders' Equity
During 1997, shareholders' equity increased by $52.5 million, from $546.2
million at December 31, 1996 to $598.7 million at December 31, 1997. The
components of the increase included net income from continuing operations of
$139.2 million and a repayment of officers loans of $3.9
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 20 ]
million, partially offset by the purchase of Common Shares of $53.5 million (see
below), the payment of dividends of $22.6 million, the unrealized depreciation
on investments of $11.7 million and $2.8 million of costs related to two
secondary offerings and the Company's stock option plan.
Significant capital transactions have included:
- - On June 23, 1997, in conjunction with a secondary offering for the Company's
founding institutional shareholders, the Company purchased and cancelled
700,000 Common Shares at $36.29 per share for an aggregate purchase price of
$25.4 million from the Company's founding institutional shareholders or their
successors.
- - On December 13, 1996, the Board of Directors approved a capital plan, which
was comprised of two components. First the Company purchased and cancelled
2,085,361 Common Shares at $34.50 per share from its founding institutional
investors or their successors for an aggregate purchase price of $71.9
million. Second, on January 22, 1997, the Company completed a fixed price
tender offer and purchased and cancelled 813,190 Common Shares from its
public shareholders at $34.50 per share for an aggregate purchase price of
$28.1 million.
- - In July 1995, the Company completed the Initial Public Offering of its Common
Shares. The net proceeds of approximately $54.5 million were used to reduce
the Company's then-outstanding borrowings under the Revolving Credit Facility
and for general corporate purposes.
Investments
Primarily because of the potential for large claims payments, the Company's
investment portfolio is structured to provide a high level of liquidity. During
1997, the Company adjusted its investment guidelines to allow the reallocation
of $50 million of its fixed maturity portfolio to equity securities. 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:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, (IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
Investments available for sale at fair value $710,166 $603,484
Equity securities, at fair value 26,372 --
Cash, cash equivalents 122,929 198,982
- --------------------------------------------------------------------------------
TOTAL INVESTED ASSETS $859,467 $802,466
================================================================================
The growth in the Company's portfolio of invested assets for the year ended
December 31, 1997 resulted from net cash provided by operating activities of
$153.3 million offset by net cash used in financing activities of $72.0 million
and net unrealized depreciation of investments of $11.7 million.
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an AA rating as
measured by Standard & Poor's Ratings Group. At December 31, 1997, the invested
asset portfolio had a dollar weighted average rating of AA, an average duration
of 2.8 years and an average yield to maturity of 6.61 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 statement of operations,
but rather are reflected in shareholders' equity. See Notes 2 and 3 to the
Consolidated Financial Statements.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 21 ]
The Company periodically evaluates the creditworthiness of each issuer whose
securities it holds. Special attention is paid to those securities whose market
values have declined materially, for reasons other than changes in interest
rates, to evaluate the realizable value of the investment, the specific
condition of the issuer, and the issuer's ability to comply with the material
terms of the security. Information reviewed may include the recent operational
results and financial position of the issuer, information about its industry,
recent press releases and other information as deemed necessary. If evidence
does not exist to support a realizable value equal to or greater than the
carrying value of the investment, and such decline in market value is determined
to be other than temporary, the Company reduces the carrying amount to its net
realizable value, which becomes the new cost basis. The amount of the reduction
is reported as a realized loss. The Company recognizes any recovery of such
reductions in the cost basis of an investment only upon the sale of the
investment.
As at December 31, 1997 the Company held investments and cash totaling $859.5
million with a net unrealized depreciation balance of $10.2 million. Of the
$859.5 million, the Company had dollar denominated fixed income investments in
Korea, Thailand and Indonesia totaling $66.2 million with a net unrealized
depreciation balance of $12.7 million. During the fourth quarter, the Company
recognized $3.8 million in realized losses from the writedown of investments
with an exposure to the financial conditions in Asia. The primary reasons for
the writedown in the investments were the declines in the financial condition of
the respective issuers and the related reduction in credit ratings by rating
agencies. These changes caused the Company to conclude that the decline in fair
value of certain investments was other than temporary. The Company's investment
portfolio, specifically the remaining securities of Asian issuers, is subject to
the risks of further declines in realizable value. The Company attempts to
mitigate this risk through the active management of its portfolio.
At December 31, 1997 the Company's $26.4 million of equity securities, which
were sold in January of 1998, were invested in currencies other than the U.S.
dollar. Also at December 31, 1997, $9.6 million of cash and cash equivalents
were invested in currencies other than the U.S. dollar. The combined $36.0
million represented approximately 4.2 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.
Under the terms of certain reinsurance contracts, the Company may be required to
provide letters of credit to reinsureds in respect of reported claims and/or
unearned premiums. The Company has obtained a facility providing for the
issuance of letters of credit. This facility is secured by a lien on a portion
of the Company's investment portfolio. At December 31, 1997 the Company had
outstanding letters of credit aggregating $24.7 million.
In order to encourage employee ownership of Common Shares, the Company has
guaranteed certain loan and pledge agreements (collectively, the "Employee
Credit Facility") between certain employees of the Company (the "Participating
Employees") and Bank of America Illinois ("BofA"). Pursuant to the terms of the
Employee Credit Facility, BofA has agreed to loan the Participating Employees up
to an aggregate of $25 million solely to purchase Common Shares and to pay
certain taxes relating to compensation payable in Common Shares. Each loan under
the Employee Credit Facility is required to be initially collateralized by the
respective Participating
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 22 ]
Employee with Common Shares or other collateral acceptable to BofA. If the value
of the collateral provided by a Participating Employee subsequently decreases,
such Participating Employee is required to contribute additional collateral in
the amount of such deficiency. Loans under the Employee Credit Facility are
otherwise nonrecourse to the Participating Employees. Given the level of
collateral, the Company does not presently anticipate that it will be required
to honor any guarantees under the Employee Credit Facility, although there can
be no assurance that the Company will not be so required in the future.
CURRENCY
The Company's functional currency is the United States ("U.S.") dollar. The
Company writes a substantial portion of its business in currencies other than
U.S. dollars and may, from time to time, experience significant exchange gains
and losses and incur underwriting losses in currencies other than U.S. dollars,
which will in turn affect the Company's financial statements. See Note 2 to the
Consolidated Financial Statements.
The Company's foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including loss reserves and reinsurance balances payable.
All changes in the exchange rates are recognized currently in the Company's
statement of income. As a result of the Company's exposure to foreign currency
fluctuations, it is anticipated that during periods in which the U.S. dollar
appreciates, the Company will likely recognize foreign exchange losses.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local 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 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 on 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.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 23 ]
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 technical advantages, and the Company's
relationships with leading brokers, 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, such as
the expansion of Glencoe, the capitalization of DeSoto and the purchase of
Nobel. 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.
During recent fiscal years, there has been considerable consolidation among the
leading reinsurance brokerage firms; whereby 70.1 percent of the Company's
assumed premiums are sourced from five reinsurance brokers. Although there can
be no assurance as to how this consolidation may effect the property catastrophe
reinsurance business and the business of the Company, the Company believes that
its valued relationships with the brokers will minimize any effect on the
Company's business.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 24 ]
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the integrity of the consolidated financial
statements and other financial information presented in this annual report. The
accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, applying certain
estimates and judgements as required.
The Company's internal controls are designed so that transactions are authorized
and executed in accordance with management's authorization, to provide
reasonable assurance as to the integrity and reliability of the financial
statements and to adequately safeguard the assets against unauthorized use or
disposition. Such controls are based on established policies and procedures and
are implemented by qualified personnel with an appropriate segregation of
duties.
Ernst & Young, independent auditors, are retained to audit the Company's
consolidated financial statements and express their opinion thereon. Their
accompanying report is based on audits conducted in accordance with auditing
standards generally accepted in the United States, which includes the
consideration of the Company's internal controls and an examination, on a test
basis, of evidence supporting the amounts and disclosures in the financial
statements. These procedures enable them to obtain a reasonable assurance about
whether the financial statements are free of material misstatement and provide a
reasonable basis for their opinion.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with the independent auditors, both privately and with management present, to
review accounting, auditing, internal controls and financial reporting matters.
/s/ James N. Stanard
- --------------------
James N. Stanard
Chairman, President and Chief Executive Officer
/s/ John M. Lummis
- -------------------
John M. Lummis
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENAISSANCERE HOLDINGS LTD.
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young
Hamilton, Bermuda
January 14, 1998
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 25 ]
CONSOLIDATED BALANCE SHEETS
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 26 ]
CONSOLIDATED STATEMENTS OF INCOME
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 27 ]
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RenaissanceRe Holdings Ltd. and Subsidiaries
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 28 ]
CONSOLIDATED STATEMENTS OF CASH FLOWS
RenaissanceRe Holdings Ltd. and Subsidiaries
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 29 ]
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), was formed under the laws of
Bermuda on June 7, 1993 and serves as the holding company for its wholly owned
subsidiaries, Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") and
RenaissanceRe Capital Trust ("the Trust") and its majority owned subsidiary,
Glencoe Insurance Ltd. ("Glencoe"). Renaissance Reinsurance and Glencoe were
also incorporated in Bermuda and the Trust was incorporated in Delaware.
Renaissance Reinsurance primarily provides property catastrophe reinsurance
coverage to insurers and reinsurers on a worldwide basis. Renaissance
Reinsurance commenced its reinsurance underwriting operations on June 15, 1993.
Glencoe primarily provides catastrophe-exposed property coverage on an insurance
and reinsurance basis. Glencoe commenced its insurance underwriting operations
on January 2, 1996.
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 principal operating unit, Nobel Insurance Company
("Nobel"), is a Texas domiciled company, licensed in 50 states. In connection
with the acquisition, Nobel's lead casualty reinsurers, American Reinsurance
Company, and Inter-Ocean Reinsurance Company Ltd., have agreed to provide
reinsurance for the casualty business with respect to future and prior accident
years. Under the terms of the agreement, the Company will acquire the
subsidiaries for $54.1 million in cash, and will provide $8.9 million of limited
recourse financing to enable Nobel Insurance Limited to support certain
obligations in the liquidation of its remaining operations. The acquisition is
expected to be financed with a combination of bank debt and cash.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared on the basis of United
States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe and its subsidiaries, Renaissance Reinsurance and
Glencoe. RenaissanceRe, Renaissance Reinsurance and Glencoe are collectively
referred to herein as the "Company". All intercompany transactions and balances
have been eliminated on consolidation. Minority interests represent the
interests of external parties in respect of net income and shareholders' equity
of Glencoe and the Trust (see Note 7). Certain comparative information has been
reclassified to conform to current presentation.
Use of estimates in financial statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported and
disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The Company's principal
estimates include claims and claim adjustment expenses and certain premiums
estimated on information from ceding companies. Actual results could differ from
those estimates.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 30 ]
Premium revenues and related expenses
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are estimated based on information received from ceding companies and any
subsequent differences arising on such estimates are recorded in the period in
which they are determined. Unearned premium reserves represent the portion of
premiums written that relate to the unexpired terms of contracts and policies in
force. Such reserves are computed by pro-rata methods based on statistical data
or reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim adjustment expenses,
based on historical and current experience, and anticipated investment income
related to those premiums are considered in determining the recoverability of
deferred acquisition costs.
Claims and claim adjustment expenses
The reserve for claims and claim adjustment expenses includes estimates for
unpaid claims and claim adjustment expenses on reported losses as well as an
estimate of losses incurred but not reported. The reserve is based on reports
and individual case estimates received from ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in results of operations in
the period in which they become known and are accounted for as changes in
estimates.
Investments
Investments are considered available for sale and are reported at fair value.
The net unrealized appreciation or depreciation on investments is included as a
separate component of shareholders' equity. Investment transactions are recorded
on the trade date with balances pending settlement reflected in the balance
sheet as a component of other assets.
Realized gains or losses on the sale of investments are determined on the basis
of the specific identification method and include adjustments to the net
realizable value of investments for declines in value that are considered to be
other-than-temporary. Net investment income includes interest and dividend
income together with amortization of market premiums and discounts and is net of
investment management and custody fees. The amortization of premium and
accretion of discount for fixed maturity securities is computed utilizing the
interest method. The effective yield utilized in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when such prices are not available, by reference to broker or underwriter bid
indications.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 31 ]
Fair value of financial instruments
Fair value disclosures with respect to certain financial instruments are
included separately herein where appropriate. The carrying values of other
financial instruments, including the bank loan payable, reinsurance premiums
receivable and accrued investment income, approximate their fair value due to
the short-term nature of the balances.
Earnings per share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. All earnings per
share amounts for prior periods have been restated to conform to the
requirements of SFAS No. 128.
Foreign exchange
The Company's functional currency is the United States dollar. Monetary assets
and liabilities denominated in foreign currencies are translated at exchange
rates in effect at the balance sheet date. Revenues and expenses denominated in
foreign currencies are translated at the prevailing exchange rate at the
transaction date. Exchange gains and losses are included in the determination of
net income.
Cash and cash equivalents
For the purposes of the statements of cash flows, cash equivalents include money
market instruments with a maturity of ninety days or less when purchased.
Stock incentive compensation plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under SFAS No. 123 requires the use of option
valuation models that were not necessarily developed for use in valuing employee
stock options. It is the opinion of management that disclosure of the pro forma
impact of fair values provides a more relevant and informative presentation of
the impact of stock options issued to employees than financial statement
recognition of such amounts. Under APB 25, the Company recognizes compensation
expense for stock option grants to the extent that the fair value of the stock
exceeds the stock option exercise price at the date of grant.
New accounting pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130 requires that a company classify items of other
comprehensive income in a financial statement and display the accumulated
balance of other comprehensive income in the equity section of a statement of
financial position. SFAS No. 131 requires disclosures about segments of a
company and related information about the different types of business activities
and the different economic environments in which it operates. These statements
will be effective for periods beginning after December 15, 1997 with earlier
application permitted. The effect of adopting these standards will not be
material to the Company's financial position.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 32 ]
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
The gross unrealized gains and losses on equity securities at December 31, 1997
were as follows:
Contractual maturities of fixed maturity securities are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by ratings assigned by rating agencies (e.g. Standard &
Poor's Corporation) or, with respect to non-rated issues, as estimated by the
Company's investment managers.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 33 ]
Investment income
The components of net investment income are as follows:
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
Proceeds from maturities and sales of fixed maturity investments were $697.5
million, $317.6 million and $268.6 million for the years ended December 31,
1997, 1996 and 1995, respectively. Proceeds from the sales of equity securities
were $58.0 million for the year ended December 31, 1997.
At December 31, 1997, the Company's investments in equity securities and in cash
and cash equivalents included $36.0 million of investments in non-U.S. dollar
currencies, representing approximately 4.2 percent of invested assets. At
December 31, 1996, cash and cash equivalents included $25.3 million of
investments in non-U.S. dollar currencies, representing approximately 3.2
percent of invested assets.
NOTE 4. CEDED REINSURANCE
The Company utilizes reinsurance to reduce its exposure to large losses. The
Company currently has in place contracts that provide for recovery of a portion
of certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. If reinsurers are unable to meet their
obligations under the agreements, the Company would remain liable to the extent
that any reinsurance company fails to meet its obligation. To date, there have
been no losses reported to indicate that the Company's reinsurance coverage will
be reached, and there are no amounts recoverable for claims and claim expenses
from reinsurers. The earned reinsurance premiums ceded during 1997 were $25.1
million.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 34 ]
NOTE 5. RESERVE FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Estimates of claims and claim adjustment expenses are based in part upon the
estimation of claims resulting from catastrophic events. Estimation by the
Company of claims resulting from catastrophic events based upon its own
historical claim experience is inherently difficult because of the Company's
short operating history and the possible severity of property catastrophe
claims. Therefore, the Company utilizes both proprietary and commercially
available models, as well as historical reinsurance industry property
catastrophe claims experience, for purposes of evaluating future trends and
providing an estimate of ultimate claims costs.
Activity in the liability for unpaid claims and claim adjustment expense is
summarized as follows:
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------
(amounts expressed in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Balance as of January 1 $105,421 $100,445 $ 63,268
Incurred related to:
Current year 50,015 75,118 80,939
Prior years -- 11,827 29,616
- --------------------------------------------------------------------------------
Total incurred 50,015 86,945 110,555
Paid related to:
Current year 3,740 26,415 29,253
Prior years 41,659 55,554 44,125
- --------------------------------------------------------------------------------
Total paid 45,399 81,969 73,378
- --------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31 $110,037 $105,421 $100,445
================================================================================
The Company had no development of prior year reserves in 1997. During 1996, the
Company incurred $11.8 million of claims and claim expenses for 1995 and prior
periods primarily as a result of reserve increases for claims related to the
Northridge, California earthquake and a retrocessional quota share contract. The
additional development on both of these claims was partially offset by
additional premiums received under the reinsured contracts. During 1995, the
Company incurred $29.6 million of claims and claim expenses for 1994 and prior
periods primarily as a result of reserve increases for claims related to the
Northridge, California earthquake, reserve changes related to a retrocessional
quota share contract and a large industrial catastrophe that occurred late in
1994. The additional development on these claims was partially offset by
additional premiums received under the reinsured contracts. The Company's total
reserve for incurred but not reported claims was $66.5 million at the end of
1997 compared to $42.7 million at the end of 1996.
NOTE 6. BANK LOAN
On December 12, 1996, the Company amended and restated its unsecured Revolving
Credit Facility with a syndicate of commercial banks. The amended and restated
Revolving Credit Facility provides for the borrowing of up to $200 million on
terms generally extended to prime borrowers. Effective September 8, 1997 the
Revolving Credit Facility was amended to extend the termination date from
December 1, 1999 to December 1, 2001. The full amount of the Revolving Credit
Facility is available with two optional one year extensions, if requested by the
Company and approved by the lenders, subject to certain maximum leverage ratios
and other covenants. As of December 31, 1997, $50 million was outstanding under
this agreement.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 35 ]
Interest payments on the Company's Revolving Credit Facility totaled $4.6
million, $6.9 million and $5.8 million for the years ended December 31, 1997,
1996 and 1995, respectively.
NOTE 7. CAPITAL SECURITIES
On March 7, 1997 the Company completed the sale of $100 million of "Company
Obligated, Mandatorily Redeemable Capital Securities of a Subsidiary Trust
holding solely $103,092,783.51 of the Company's 8.54 percent Junior Subordinated
Debentures due March 1, 2027" ("Capital Securities") issued by the Trust, a
newly created subsidiary business trust of the Company. The Capital Securities
pay cumulative cash distributions at an annual rate of 8.54 percent, payable
semi-annually. Proceeds from the offering were used to repay a portion of the
Company's outstanding indebtedness. Effective September 11, 1997 the Trust
exchanged the Capital Securities for substantially the same securities
registered under the Securities Act of 1933.
The Trust is a wholly owned subsidiary of the Company and is consolidated into
the Company's consolidated financial statements. The Capital Securities and the
related accrued dividends, are reflected in the consolidated financial
statements as a minority interest.
NOTE 8. SHAREHOLDERS' EQUITY
The Company's 100,000,000 authorized $1.00 par value Common Shares consist of
three separate series with differing voting rights as follows:
The Diluted Voting I Shares and the Diluted Voting II Shares (together the
Diluted Voting Shares) were authorized at a special general meeting of
shareholders on December 23, 1996 and subsequent to the authorization,
affiliates of General Electric Investment Corporation exchanged 5.7 million
Common Shares for 4.2 million Diluted Voting I Shares and 1.5 million Diluted
Voting II Shares, and as such are the sole holders of such diluted voting
securities.
The Diluted Voting Shareholders vote together with the common shareholders. The
Diluted Voting I Shares are limited to a fixed voting interest in the Company of
up to 9.9 percent on most corporate matters. Each Diluted Voting II Share has a
one-third vote on most corporate matters. The Diluted Voting Shareholders are
entitled to the same rights, including receipt of dividends and the right to
vote on certain significant corporate matters, and are subject to the same
restrictions as the common shareholders. The Company currently does not intend
to register or list the Diluted Voting Shares on the New York Stock Exchange.
On June 23, 1997, concurrent with a secondary offering, the Company purchased
for cancellation 700,000 Common Shares at $36.29 per share, for an aggregate
price of $25.4 million from the
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 36 ]
Company's founding institutional shareholders or their successors.
On May 8, 1997 the shareholders voted to reduce the authorized number of Common
Shares from 200,000,000 to 100,000,000. Subsequent to that vote, shareholders
approved the authorization of 100,000,000 shares of preference stock.
On December 13, 1996, the Board of Directors approved a capital plan which was
comprised of two components. First, the Company purchased 2,085,361 Common
Shares at $34.50 per share for an aggregate price of $71.9 million on a pro-rata
basis from its founding institutional investors. Second, on January 22, 1997 the
Company completed a fixed price tender offer for 813,190 Common Shares at $34.50
per share for an aggregate price of $28.1 million.
In November 1997, June 1997 and February 1996, the Company paid for the costs of
secondary offerings of the Company's Common Shares sold by the founding
institutional investors. The Company incurred costs of $0.6, $0.7 and $0.5
million, respectively, with respect to the registrations which are reflected as
a reduction to additional paid-in capital on the balance sheet.
On July 26, 1995, the Company issued 3,105,000 Common Shares for proceeds, net
of fees, discounts and commissions, of approximately $56.3 million in an initial
public offering (the "IPO"). Costs associated with the IPO, totaling
approximately $2.0 million were deducted from the related proceeds. The net
amount received in excess of Common Share par value was recorded as additional
paid-in capital.
In March 1995, the Company adopted a plan of recapitalization (the
"Recapitalization") and completed certain other transactions designed to produce
a capital structure comprised entirely of Common Shares. In connection
therewith:
- - The Company effected a consolidation and subdivision of its authorized share
capital allocated to Common Shares of $1.00 par value each and reallocated
the entire $200 million authorized capital of the Company to its Common
Shares. The Company issued a stock dividend of one fully-paid Common Share
for each two issued and outstanding Common Shares (the "Stock Dividend").
This issuance reclassified $7.5 million to the Company's Common Shares from
additional paid-in capital.
- - The Series A Preference Shares were converted into 21,037,500 Common Shares.
- - 673,500 Common Shares were issued to USF&G in the form of a stock dividend.
575,584 of such Shares were issued to restore USF&G's economic position in
the Company (i.e., ownership percentage) to the level immediately preceding
the Recapitalization. 99,416 of such Shares were granted in the form of a
special stock dividend, in exchange for USF&G's surrender of certain rights
as holder of all the then-outstanding Common Shares in connection with
conversion of the Series A Preference Shares. In connection with the 99,416
Shares granted, the approximately $1.2 million fair value of such Shares, as
determined by the Company's Board of Directors, has been reflected in the
financial statements as a non-cash organizational expense for the year ended
December 31, 1995.
In May, 1994 the Company received $100 million with respect to the issuance of
1,000,000 Series B Preference Shares at a price of $100 each to the founding
institutional investors. Dividends related to the Series B Preference Shares
amounted to $2.5 million in 1994. In December, 1994 the Company redeemed 575,414
Series B Preference Shares, and in April 1995 all remaining Series B Preference
Shares and accumulated dividends were redeemed.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 37 ]
NOTE 9. EARNINGS PER SHARE
As discussed in Note 2, the Company adopted SFAS No. 128 - "Earnings per Share",
as of December 31, 1997. The numerator in both the Company's basic and diluted
earnings per share calculations are identical. The following table sets forth
the reconciliation of the denominator from basic to diluted weighted average
shares outstanding:
NOTE 10. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
The Company has in force several treaties with USF&G, subsidiaries of USF&G and
affiliates of General Electric Investments ("GEI") covering property catastrophe
risks in several geographic regions. The terms of these treaties were determined
in arms length negotiations and the Company believes that such terms are
comparable to terms the Company would expect to negotiate in similar
transactions with unrelated parties. For the years ended December 31, 1997, 1996
and 1995, the Company received $19.2 million, $27.9 million and $45.7 million in
reinsurance premiums and deposits related to these treaties, respectively.
Renaissance Reinsurance has entered into Investment Advisory Agreements with
each of Warburg, Pincus Investments International (Bermuda) Ltd.,
("Counselors"), an affiliate of Warburg, Pincus, GE Investment Management, an
affiliate of GEI, and Falcon Asset Management (Bermuda), Ltd. ("Falcon"), an
affiliate of USF&G. Counselors, GE Investment Management and Falcon currently
manage approximately 95 percent of the Company's investment portfolio, subject
to the Company's investment guidelines. The terms of the Investment Advisory
Agreements were determined in arms length negotiations. The performance of, and
the fees paid to, Counselors, GE Investment Management and Falcon under the
Investment Advisory Agreements are reviewed periodically by the Board. Such fees
paid to Counselors, GE Investment Management and Falcon aggregated to $1.2
million, $1.1 million and $1.4 million for the years ended December 31, 1997,
1996 and 1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company received
70.1%, 58.5%, and 47.9%, respectively, of its premium assumed from its five
largest reinsurance brokers. Subsidiaries and affiliates of J&H Marsh &
McLennan, Inc., E. W. Blanch & Co., Benfield Greig Ltd., AON Re Group and Bates
Turner, L.L.C. (a GE Capital Services Company, an affiliate of GEI) accounted
for approximately 23.5%, 21.2%, 13.1%, 7.9% and 4.4%, respectively, of the
Company's net premiums written in 1997.
NOTE 11. DIVIDENDS
During 1997, four regular quarterly dividends of $0.25 per share were paid to
shareholders of record as of February 19, May 22, August 20, and November 20.
During 1996, four regular quarterly dividends of $0.20 per share were paid to
shareholders of record as of February 20, May 16, August 20, and November 19.
During 1995 the Company paid a dividend of $0.16 per share, payable to
shareholders of record as of November 21. The total amount of dividends paid to
common shareholders during 1997, 1996 and 1995 was $22.6 million, $20.5 million
and $4.1 million, respectively.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 38 ]
NOTE 12. TAXATION
Under current Bermuda law, neither RenaissanceRe, Renaissance Reinsurance nor
Glencoe are required to pay taxes in Bermuda on either income or capital gains.
NOTE 13. GEOGRAPHIC INFORMATION
Financial information relating to gross premiums by geographic region is as
follows:
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written to date is predominantly from Europe and Japan.
NOTE 14. EMPLOYEE BENEFIT PLANS
Pension plans
The Company's employees that are not subject to U.S. taxation may participate in
a contributory savings and investment plan. Each employee in the non-U.S. plan
may contribute to the plan. Employee contributions are matched at a rate of 100
percent of the first 6 percent of compensation contributed to the plan. The
Company's employees that are subject to U.S. taxation participate in a defined
contribution savings and investment plan. Employee contributions are matched at
a rate of 50 percent, subject to IRS and ERISA regulations. In addition the
Company provides a health benefit plan providing hospital, medical and other
health benefits.
NOTE 15. STOCK INCENTIVE COMPENSATION PLANS
The Company has a stock option plan under which all employees of the Company and
its subsidiaries may be granted stock options. A stock option award under the
Company's stock option plan allows for the purchase of the Company's Common
Shares at a price that is generally equal to the market price of the Common
Shares on the date of grant. Options to purchase Common Shares are granted
periodically by the Board of Directors and generally expire ten years from the
date of grant.
The Company adopted the disclosure-only method under SFAS No. 123, "Accounting
for Stock Based Compensation", as of December 31, 1996. In accordance with SFAS
No. 123, the fair value of option grants is estimated on the date of grant using
the Black-Scholes option pricing model for pro forma footnote purposes with the
following assumptions used for grants in all years; dividend yield of 2.5
percent, expected option life of five years, and expected volatility of 25.09
percent per annum. The risk-free interest rate was assumed to be 6.50 percent in
1996 and 6.00 percent in 1997. If the compensation cost had been determined
based upon the fair value method recommended in SFAS No. 123, the Company's net
income would have been $135.4 million, $155.4
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 39 ]
million and $161.8 million for each of 1997, 1996 and 1995, respectively, and
the Company's earnings per share on a diluted basis would have been $5.89, $5.98
and $6.71 for each of 1997, 1996 and 1995, respectively.
The following is a table of the changes in options outstanding for 1997, 1996
and 1995:
In 1996, the Company established a Non-Employee Director Stock Plan to issue
stock options and shares of restricted stock. The maximum number of shares which
may be issued under the plan shall not exceed 100,000 Common Shares. Under this
plan, 24,000 options to purchase Common Shares and 1,870 restricted Common
Shares have been issued. The options and restricted Common Shares vest ratably
over three years.
Under the Company's 1993 Stock Incentive Plan, options for 100,000 Common Shares
(base options) were issued to employees. The exercise price of the base options
was one U.S. dollar per share, which approximated fair value at the date of
grant for 85,000 of the base options. The remaining 15,000 base options were
granted when the exercise price was below the estimated fair value per share,
and, as such, the difference of approximately $1 million between the estimated
fair value at the date of grant, as determined by the Company's Board of
Directors and the exercise price was reflected in the accompanying financial
statements as a non-cash compensation charge. In connection with the
Recapitalization, the base option plan was amended to allow for the immediate
exercise of all base options into 787,500 restricted Common Shares with a
vesting schedule identical to the original base option plan. In connection with
the issuance of the restricted Common Shares in 1995, the $2.5 million fair
value of such shares, based on the fair value as determined by the Company's
Board of Directors, has been reflected in the financial
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 40 ]
2
statements as a non-cash compensation expense. There was no compensation expense
in 1997 or 1996. Compensation expense for this plan was $2.8 million in 1995.
During 1997, the shareholders approved an increase in the number of authorized
shares by 1,000,000 shares, the issuance of share-based awards, the issuance of
restricted Common Shares and an adjustment in the calculation of shares
available for issuance thereunder by deeming the number of shares tendered to,
or withheld by the Company in connection with certain option exercises and in
satisfaction of tax withholding liabilities to be so available.
During 1997, the Company's Board of Directors approved an employee stock bonus
plan. Under the plan, eligible employees may elect to receive a grant of Common
Shares of up to 50 percent of their bonus in lieu of cash, with an associated
grant of an equal number of restricted shares. The restricted Common Shares vest
ratably over three years. During the restricted period, the employee receives
dividends and votes the restricted Common Shares, but the restricted shares may
not be sold, transferred or assigned. In 1997, the Company issued 46,424
restricted shares with a value of $1.7 million under this plan. Additionally,
the Board of Directors granted 128,279 restricted shares with a value of $4.9
million to certain executive officers of the Company. The shares granted to
executive officers vest ratably over four years. At the time of grant, the
market value of the shares awarded under these plans is recorded as unearned
stock grant compensation and is presented as a separate component of
shareholders' equity. The unearned compensation is charged to operations over
the vesting period. Compensation expense related to these plans was $0.7 million
in 1997.
NOTE 16. STATUTORY REQUIREMENTS
Under the Insurance Act, 1978, amendments thereto and related regulations of
Bermuda ("the Act"), Renaissance Reinsurance and Glencoe are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires Renaissance Reinsurance and Glencoe to maintain
certain measures of solvency and liquidity during the period. As at December 31,
1997 the statutory capital and surplus of the Company's subsidiaries was $665
million and the amount required to be maintained was $115 million.
Under the Act, Renaissance Reinsurance is classified as a Class 4 insurer, and
is therefore restricted as to the payment of dividends in the amount of 25
percent of the prior year's statutory capital and surplus, unless at least two
members of the board of directors attest that a dividend in excess of this
amount would not cause Renaissance Reinsurance to fail to meet its relevant
margins. During 1997, Renaissance Reinsurance paid aggregate cash dividends of
$117.5 million to RenaissanceRe.
Glencoe is also eligible as an excess and surplus lines insurer in a number of
states in America. There are various capital and surplus requirements in these
states, with the most onerous requiring the Company to maintain a minimum of $15
million in capital and surplus. In this regard the declaration of dividends from
retained earnings and distributions from additional paid-in capital are limited
to the extent that the above requirements are met.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Lease commitments and fixed assets
The Company maintains an operating lease with respect to its offices. Rent
payments totaled $0.6 million in 1997 which will continue through September 30,
2001. In addition, the Company is
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 41 ]
party to certain lease commitments with respect to housing on behalf of certain
officers of the Company.
Financial instruments with off-balance sheet risk
As of December 31, 1997, the Company did not maintain any financial instruments
that exposed the Company to any off-balance sheet risks.
Concentration of credit risk
None of the Company's investments exceeded 10 percent of shareholders' equity at
December 31, 1997.
Letters of credit
Effective as of December 31, 1997 the Company's bankers have issued letters of
credit of approximately $24.7 million in favor of certain ceding companies. The
letters of credit are secured by cash and cash equivalents of similar amounts.
Employment agreements
The Board of Directors has authorized the execution of employment agreements
between the Company and certain officers. These agreements provide for severance
payments under certain circumstances, as well as accelerated vesting of options
and restricted stock under a change in control, as defined therein and by the
Company's stock option plan.
Employee credit facility
In June of 1997, the Company executed a credit facility in order to encourage
direct, long-term ownership of the Company's stock, and to facilitate purchases
of the Company's stock by officers of the Company. Under the terms of the
facility, the purchases are financed by personal loans to the officers from the
bank. Such loans are collateralized by the stock purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. In addition, the Company has agreed to provide loans to the
officers for interest payments under the bank loans. At December 31, 1997, the
bank loans guaranteed by the Company totaled $7.9 million. At December 31, 1997,
the common stock that collateralizes the loans had a fair value of $20.4
million.
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 42 ]
NOTE 18. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
All earnings per share amounts have been restated to conform to the requirements
of Financial Accounting Standards Board Statement No. 128, "Earnings per Share".
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 43 ]
DIRECTORS AND OFFICERS (as of March 1, 1998)
BOARD OF DIRECTORS
RenaissanceRe Holdings Ltd.
JAMES N. STANARD(3)
Chairman of the Board
ARTHUR S. BAHR(1) (2)
Retired
General Electric Investment Corporation
THOMAS A. COOPER(1) (2)
TAC Associates
EDMUND B. GREENE
General Electric Company
DAN L. HALE(1) (2)
USF&G
GERALD L. IGOU(3)
General Electric Investment Corporation
KEWSONG LEE(1)
E. M. Warburg, Pincus & Co., L.L.C.
HOWARD H. NEWMAN(2)
E. M. Warburg, Pincus & Co., L.L.C.
SCOTT E. PARDEE(1) (3)
Massachusetts Institute of Technology
JOHN C. SWEENEY(3)
Falcon Asset Management
DAVID A. TANNER(3)
E. M. Warburg, Pincus & Co., L.L.C.(4)
Committees of the Board:
(1) Audit
(2) Compensation
(3) Investment
(4)through December 1, 1997
OFFICERS
RenaissanceRe Holdings Ltd.
JAMES N. STANARD
Chairman of the Board,
President & Chief Executive Officer
KEITH S. HYNES
Executive Vice President
WILLIAM I. RIKER
Executive Vice President
JOHN M. LUMMIS
Senior Vice President
& Chief Financial Officer
MARTIN J. MERRITT
Vice President & Controller
JOHN D. NICHOLS, JR.
Vice President, Secretary & Treasurer
Renaissance Reinsurance Ltd.
JAMES N. STANARD
Chairman of the Board
WILLIAM I. RIKER
President & Chief Operating Officer
DAVID A. EKLUND
Executive Vice President
ROBERT E. HYKES
Vice President
JAYANT S. KHADILKAR
Vice President
KEVIN J. O'DONNELL
Vice President
RUSSELL M. SMITH
Vice President
Glencoe Insurance Ltd.
JAMES N. STANARD
Chairman of the Board
KEITH S. HYNES
President & Chief Executive Officer
ALBERT J. COLOSIMO
Vice President
CRAIG W. TILLMAN
Assistant Vice President
DeSoto Insurance Company
KEITH S. HYNES
Chairman of the Board
ROBERT L. RICKER
President
JOHN D. MCCONNELL
Chief Financial Officer
RenaissanceRe Holdings Ltd. 1997 Annual Report [ 44 ]
FINANCIAL AND INVESTOR INFORMATION
For general information about the Company or for copies of the annual report,
quarterly earnings releases and Forms 10-K and 10-Q, please contact:
John D. Nichols, Jr.
Vice President, Secretary & Treasurer
Tel: 441-299-7215
Internet: jdn@renre.com
STOCK INFORMATION
The Company's stock is listed on The New York Stock Exchange under the symbol
RNR.
The following table sets forth the high and low closing sales prices per share,
as reported on the New York Stock Exchange Composite Tape for the four fiscal
quarters of 1997 and 1996:
- --------------------------------------------------------------------------------
1997 PRICE RANGE 1996 PRICE RANGE
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First quarter 40.00 32.63 31.75 26.88(1)
Second quarter 39.63 34.13 31.00 26.88(1)
Third quarter 45.88 37.88 30.88 26.75
Fourth quarter 49.94 39.88 36.00 27.88
- --------------------------------------------------------------------------------
(1) The Company's stock was traded on the Nasdaq National Market ("NNM") through
July 23, 1996. For this period the prices above represent the NNM high ask and
low bid information.
INDEPENDENT AUDITORS
Ernst & Young
Hamilton, Bermuda
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
USA
Web site: www.chasemellon.com
All written requests should be sent to:
Shareholder Services
RenaissanceRe Holdings Ltd.
Renaissance House
8-12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
RENAISSANCERE HOLDINGS LTD.
Renaissance House
8-12 East Broadway
Pembroke HM19, Bermuda
Tel: 441-295-4513
Fax: 441-292-9453
Internet: jdn(a)renre.com
Web site: www.renre.com