10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 14, 2003
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 34-0-26512
RenaissanceRe Holdings Ltd.
---------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-014-1974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Renaissance House HM 19
8-12 East Broadway (Zip Code)
Pembroke, Bermuda
(Address of principal executive offices)
(441) 295-4513
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No __
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes x No __
---
The number of outstanding shares of RenaissanceRe Holdings Ltd.'s common
stock, par value US $1.00 per share, as of June 30, 2003 was 70,319,608.
Total number of pages in this report: 35
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
2
Part I - Financial Information
Item 1 - Financial Statements
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States Dollars, except per share amounts)
The accompanying notes are an integral part of these financial statements.
3
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Income
For the three and six month periods ended June 30, 2003 and 2002
(in thousands of United States Dollars, except per share amounts)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
4
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 2003 and 2002
(in thousands of United States Dollars)
(Unaudited)
(1) Comprehensive income for the quarters ended June 30, 2003 and 2002 was
$202.0 million and $110.7 million, respectively.
The accompanying notes are an integral part of these financial statements.
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RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the six months ended June 30, 2003 and 2002
(in thousands of United States Dollars)
(Unaudited)
The accompanying notes are an integral part of these financial statements.
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RenaissanceRe Holdings Ltd. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
1. The consolidated financial statements have been prepared on the basis of
U.S. generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. This
report on Form 10-Q should be read in conjunction with the Company's Annual
Report on Form 10-K. The consolidated financial statements include the
accounts of RenaissanceRe Holdings Ltd. ("RenaissanceRe") and its
wholly-owned subsidiaries, including Renaissance Reinsurance Ltd.
("Renaissance Reinsurance"), Glencoe Insurance Ltd. ("Glencoe"), Stonington
Insurance Company ("Stonington"), Lantana Insurance Ltd. ("Lantana"),
Glencoe U.S. Holdings Inc. ("Glencoe U.S. ", formerly known as Renaissance
U.S. Holdings, Inc.), Glencoe Group Services Inc. ("Glencoe Services "),
RenaissanceRe Capital Trust (the "Trust"), and Renaissance Underwriting
Managers, Ltd. ("Renaissance Managers"). DaVinciRe Holdings Ltd.
("DaVinciRe"), a partially-owned subsidiary, is also consolidated into the
Company's financial statements.
RenaissanceRe and its subsidiaries are collectively referred to herein as
the "Company," and references herein to "our", "we", or "us" refer to the
Company. All intercompany transactions and balances have been eliminated on
consolidation.
The Company's principal products are property catastrophe reinsurance and
specialty reinsurance, principally provided through Renaissance
Reinsurance, and individual risk insurance, principally provided by
Glencoe, Stonington and Lantana, through individual risk selection and by
providing coverage to insurance companies on a quota share basis. The
Company also acts as underwriting manager and underwrites worldwide
property catastrophe reinsurance programs on behalf of joint ventures,
including Top Layer Reinsurance Ltd. ("Top Layer Re") and DaVinci
Reinsurance Ltd. ("DaVinci"). DaVinciRe and DaVinci were formed in October
2001 with other equity investors. The Company owns a minority equity
interest in, but controls a majority of the outstanding voting shares of,
DaVinciRe.
Minority interests represent the interests of external parties with respect
to net income and shareholders' equity of the Trust and DaVinciRe. The
Trust is the issuer of $84.6 million of outstanding mandatorily redeemable
preferred capital securities ("Capital Securities") and holds a like amount
of junior subordinated debentures issued by RenaissanceRe. RenaissanceRe's
guarantee of the distributions on the preferred securities issued by the
Trust, when taken together with RenaissanceRe's obligations under the
expense reimbursement agreement with the Trust, provides a full and
unconditional guarantee of amounts due on the Capital Securities issued by
the Trust (See Note 12 to Unaudited Consolidated Financial Statements).
Certain comparative information has been reclassified to conform to the
current presentation. Because of the seasonality of the Company's business,
the results of operations and cash flows for any interim period will not
necessarily be indicative of results of operations and cash flows for the
full fiscal year or subsequent quarters.
2. The Company purchases reinsurance to reduce its exposure to large losses.
The Company currently has in place contracts that provide for recovery of a
portion of certain claims and claims expenses from reinsurers in excess of
various retentions and loss warranties. The Company would remain liable to
the extent that any third-party reinsurance company fails to meet its
obligations. The earned reinsurance premiums ceded were $137.0 million and
$71.2 million for the six month periods ended June 30, 2003 and 2002,
respectively. In addition to loss recoveries, certain of the Company's
ceded reinsurance contracts provide for recoveries of additional premiums,
reinstatement premiums and for unrecovered no claims bonuses which are
unrecoverable when losses are ceded to other reinsurance contracts.
Total recoveries netted against claims and claim expenses incurred for the
six months ended June 30, 2003 were $13.0 million compared to $31.5 million
for the six months ended June 30, 2002.
3. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). In the second quarter of 2002, the Company completed its initial
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impairment review in compliance with the transition provisions of SFAS 142
and, as a result, the Company decided to record goodwill at zero value, the
low end of an estimated range of values, and record a write-off of $9.2
million. In accordance with the provisions of SFAS 142, this is required to
be recorded as a cumulative effect of a change in accounting principle in
the statement of income and is required to be recorded as if this
adjustment was recorded in the first quarter of 2002.
4. During 2002, the Company changed its policy regarding the classification of
certain investments previously recorded as cash and cash equivalents. These
investments were reclassified to short-term investments to more
appropriately reflect the Company's investment strategy regarding those
assets.
5. During the second quarter of 2003, the Company changed its policy regarding
the classification of equity appreciation on certain hedge funds and
private equity funds previously recorded as realized gains and losses. The
equity appreciation on these investments has been reclassified to net
investment income for all periods presented.
6. For the six month period ended June 30, 2003, the Company paid interest of
$9.8 million on its outstanding loans and Senior Notes. For the same period
in the previous year the Company paid interest of $6.1 million on its
outstanding loans. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Capital Resources and Shareholders'
Equity" for further discussion.
7. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options and
restricted stock grants. The following tables set forth the computation of
basic and diluted earnings per share (see Note 8 below):
8
8. The Board of Directors of the Company declared, and the Company paid, a
dividend of $0.15 per share to shareholders of record on each of March 3,
2003 and June 2, 2003. On August 7, 2003, the Board of Directors declared a
dividend of $0.15 per share payable on September 15, 2003 to shareholders
of record on September 10, 2003. During the second quarter of 2002,
RenaissanceRe effected a three-for-one stock split through a stock dividend
of two additional common shares for each common share owned. All of the
share and per share information provided in this 10-Q is presented as if
the stock dividend had occurred for all periods presented.
9. Effective January 1, 2003, the Company adopted, prospectively, the fair
value recognition provisions of SFAS 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), for all stock-based employee compensation
granted, modified or settled after January 1, 2003. Under the fair value
recognition provisions of SFAS 123, the Company estimates the fair value of
employee stock options and other stock-based compensation on the date of
grant and amortizes this value as an expense over the vesting period. Prior
to 2003, the Company followed Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, in
accounting for its employee stock compensation. No option related employee
compensation cost was recorded in net income prior to January 1, 2003 as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.
Under the prospective method of adoption selected by the Company under the
provisions of SFAS 123, "Accounting for Stock-Based Compensation -
Transition and Disclosure," compensation cost recognized in 2003 includes
all employee awards granted, modified, or settled after the beginning of
the fiscal year. Results for prior periods have not been restated. The
following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and
unvested awards in each period.
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10. The Company has two reportable segments: reinsurance operations and
individual risk operations. The reinsurance segment, which includes the
results of DaVinci, has three principal components, property catastrophe
reinsurance, specialty reinsurance and catastrophe reinsurance written
through our joint venture, DaVinci. During the third quarter of 2002, we
renamed our primary segment "individual risk" to more accurately describe
the risk characteristics of this business. We define our individual risk
segment to include underwriting that involves understanding the
characteristics of the original underlying insurance policy. The individual
risk segment provides direct insurance both on an admitted and on a surplus
lines basis, and also provides reinsurance on a quota share basis. Data for
the three and six month periods ended June 30, 2003 and 2002 are as
follows:
10
11
Six months ended June 30, 2002
(in thousands of U.S. dollars)
(1) Income for the reinsurance and individual risk segments represents net
underwriting income. Net underwriting income consists of net premiums
earned less claims and claims expenses incurred, acquisition costs, and
operational expenses.
(2) Income for the other segment consists of net investment income, net
foreign exchange gains (losses), other income and net realized gains on
investments, partially offset by corporate expenses, interest expense,
minority interest expenses, cumulative effect of change in accounting
principle, income tax benefit (expense), and dividends on preference
shares.
11. The provision for income taxes is based on income recognized for financial
statement purposes and includes the effects of temporary differences
between financial and tax reporting. Deferred tax assets and liabilities
are determined based on the difference between the financial statement
bases and tax bases of assets and liabilities using enacted tax rates.
RenaissanceRe's U.S. subsidiaries and Lantana are subject to U.S. tax. The
net deferred tax asset of $4.0 million is net of a $30.1 million valuation
allowance. Net operating loss carryforwards and future tax deductions will
be available to offset regular taxable U.S. income during the carryforward
period (which expires during the period ranging from 2018 through 2022),
subject to certain limitations.
12. In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS
150"). The provisions of SFAS 150 will require the Company's Capital
Securities to be classified on the balance sheet as liabilities with effect
from July 1, 2003, and for the related minority interest to be recorded as
interest expense.
13. Subsequent Events
a) On August 7, 2003, the Board of Directors authorized the Company to
purchase a portion of its outstanding common shares up to an aggregate
purchase price of $150 million. This authorization includes the remainder
amounts available under prior authorizations. The Company's decision to
repurchase common shares will depend on, among other things, the market
price of the common shares and capital requirements of the Company.
b) On August 8, 2003, the Company amended and restated its existing
revolving credit agreement with a syndicate of commercial banks to increase
the facility from $310 million to $400 million and to make certain other
changes. No balance was outstanding as of December 31, 2002, June 30, 2003
or at the time of the amendment and restatement, and no borrowings are
outstanding as of August 14, 2003. As amended, the agreement contains
certain financial covenants. These covenants generally provide that
consolidated debt to capital shall not exceed the ratio (the "Debt to
Capital Ratio") of 0.35:1 and that consolidated shareholders' equity plus
outstanding Capital Securities of RenaissanceRe and Renaissance Reinsurance
shall equal or exceed $1.0 billion and $500 million, respectively, subject
to certain adjustments under certain circumstances as more
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fully set forth in the agreement contained, as Exhibit 10.5 to this Form
10-Q. The scheduled commitment termination date under the amended agreement
is August 8, 2006.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of our results of operations for the
three and six month periods ended June 30, 2003 and 2002 and financial condition
as of June 30, 2003. This discussion and analysis should be read in conjunction
with the attached unaudited consolidated financial statements and notes thereto
and the audited consolidated financial statements and notes thereto contained in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002. We
also caution readers regarding certain forward-looking statements made in this
10-Q and direct readers to the Safe Harbor disclosures included in this 10-Q.
General
RenaissanceRe Holdings Ltd. was formed in 1993 to provide reinsurance to cover
the risk of natural and man-made catastrophes. Since our formation, we have
become one of the largest writers of catastrophe reinsurance and we are
recognized as a leader in the utilization of sophisticated computer models to
construct a superior portfolio of these coverages. Over the past two years,
there have been significant market dislocations across the worldwide insurance
and reinsurance markets and a substantial increase in the amount of premium that
meets our hurdle rates. Today, we conduct our business through two reportable
segments, Reinsurance and Individual Risk.
Reinsurance
Our reinsurance segment has three main components:
1) Catastrophe reinsurance written for our own account - our traditional core
business. Our subsidiary, Renaissance Reinsurance, is one of the world's
premier providers of this coverage. This coverage protects against large
natural catastrophes, such as earthquakes and hurricanes, as well as claims
arising from other natural and man-made catastrophes such as winter storms,
freezes, floods, fires, tornadoes and explosions. We offer this coverage to
insurance companies and other reinsurers primarily on an excess of loss
basis. This means that we begin paying when our customers' claims from a
catastrophe exceed a certain retained amount.
2) Specialty reinsurance covering certain targeted classes of non-catastrophe
business where we believe we have a sound basis for underwriting and
pricing the risk that we assume: our portfolio of these lines currently
includes catastrophe exposed workers' compensation and personal accident,
aviation, property per risk, surety, finite and terrorism. We believe that
we are seen as a market leader in certain classes of business and that we
have a growing reputation as a "first call" market in these lines.
3) Catastrophe reinsurance written for the account of joint ventures we have
established to expand our access to capital and leverage our catastrophe
underwriting skill to produce fee income. In 1999, we formed Top Layer Re
with State Farm to provide high layer coverage for non-U.S. risks.
Renaissance Reinsurance and State Farm each own 50% of Top Layer Re. We
formed DaVinciRe in 2001 with State Farm and other private investors to
write property catastrophe reinsurance side-by-side with Renaissance
Reinsurance. We own a minority of DaVinciRe's outstanding equity but
control a majority of its outstanding voting power, and accordingly,
DaVinciRe's financial results are consolidated in our financial statements.
We act as the exclusive underwriting manager for these joint ventures in
return for management fees and a profit participation (such fees earned
from DaVinciRe are eliminated in consolidation). We actively consider
additional joint venture opportunities; among other things in the future we
intend to pursue joint ventures which would underwrite targeted classes of
non-catastrophe business, although we can not assure you we will complete
such new ventures or that they will contribute materially to our results.
Individual Risk
Our individual risk business, which is written on an excess and surplus lines
basis by Glencoe and Lantana, and on an admitted basis by Stonington, has also
experienced substantial growth in 2003. We define our individual risk segment to
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include underwriting that involves understanding the characteristics of the
original underlying insurance policy. Our individual risk segment provides
insurance both on a direct and on a surplus lines basis and also provides
reinsurance on a quota share basis. During the third quarter of 2003, our
individual risk segment has begun writing certain types of casualty insurance.
We are in the process of building our infrastructure to address the additional
management and operational risks associated with these coverages.
The individual risk business which Glencoe writes is primarily produced through
three distribution channels: 1) Brokers - where Glencoe writes primary insurance
through brokers on a risk-by-risk basis; 2) Program Managers - where Glencoe
writes primary insurance through a small number of high quality, specialized
program managers, who produce business under well-defined underwriting
guidelines, and provide related back-office functions; and 3) Quota Share
Reinsurance - where Glencoe writes quota share reinsurance with primary insurers
who, similar to our program managers, provide most of the back-office functions.
In addition to the reinsurance and insurance coverages discussed above, from
time to time, we consider opportunistic diversification into new ventures,
either through organic growth, the formation of new joint ventures, or the
acquisition of other companies or books of business of other companies. This
potential diversification includes opportunities to write targeted classes of
non-catastrophe business, both directly for our own account and through possible
new joint venture opportunities. In evaluating such new ventures, we seek an
attractive return on equity, the ability to develop or capitalize on a
competitive advantage, and opportunities that will not detract from our core
reinsurance and individual risk operations. Accordingly, we regularly review
strategic opportunities and periodically engage in discussions regarding
possible transactions, although there can be no assurance that we will complete
any such transactions or that any such transaction would contribute materially
to our results of operations or financial condition.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe that the most significant judgment made by management is our estimate
of the claims and claim expense reserves. Claim reserves represent estimates,
including actuarial and statistical projections at a given point in time, of the
ultimate settlement and administration costs of claims incurred, and it is
possible that the ultimate liability may materially exceed or be materially less
than such estimates. Such estimates are not precise in that, among other
matters, they are based on predictions of future developments and estimates of
future trends in claim severity and frequency and other variable factors such as
inflation.
Adjustments to our prior year estimated claims reserves will impact our current
year net income by increasing our net income if the prior year estimated claims
reserves prove to be overstated, or by reducing our net income if the prior year
estimated claims reserves prove to be insufficient. Changes to prior year
estimated claims reserves had the following impact on our net income: during the
first six months of 2003, we reduced prior year estimated claims reserves by
$24.4 million and accordingly, our net income was increased by $24.4 million;
during the first six months of 2002, we reduced prior year estimated claims
reserves by $6.6 million, and accordingly our net income was increased by $6.6
million. Also see Financial Condition - Reserves for Claims and Claims Expenses.
For our property catastrophe reinsurance operations, we initially set our case
reserves based on case reserves and other reserve estimates reported by insureds
and ceding companies. We then add to these case reserves, our estimates for
additional case reserves, and an estimate for incurred but not reported ("IBNR")
reserves. These estimates are normally based upon our experience with similar
claims, our knowledge of potential industry loss levels for each loss, and
industry information which we gather and retain in our REMS(C) modeling system.
Our estimates of claims resulting from catastrophic events is inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims.
In reserving for our individual risk and specialty reinsurance coverages we do
not have the benefit of a significant amount of our own historical experience in
these lines, which we believe further increases the uncertainty of these
estimates. We utilize the Bornhuetter-Ferguson actuarial method to estimate our
IBNR for our specialty reinsurance and individual risk coverages. The
utilization of the Bornhuetter-Ferguson technique requires a company to estimate
an ultimate claims and claim expense ratio for each line of business. We select
our estimates of the ultimate claims and claim expense ratios by reviewing
industry standards, and adjusting these standards based upon the type of
coverages we offer and the terms of the
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coverages we offer. We intend to establish our estimates for these classes of
business prudently, but we cannot assure you we will succeed in this.
Because any reserve estimate is an insurer's estimate of its ultimate liability,
and because there are numerous factors which affect reserves but can not be
determined with certainty in advance, our ultimate payments will vary, perhaps
materially, from our initial estimate of reserves. Therefore, because of these
inherent uncertainties, we have developed a reserving philosophy that attempts
to incorporate prudent assumptions and estimates. During the first and second
quarters of 2003, we reduced prior year net accident year reserves by $11.7
million and $12.7 million, respectively. For the remainder of the year, barring
unforeseen circumstances (including any increase in reported or paid claims), we
believe that as our reserves on older accident years continue to age, it is
likely that we will continue to experience quarterly net reductions to our older
accident year reserves.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that our estimates need adjusting, such adjustments are recorded in
the quarter in which they are identified. Although we believe we are cautious in
our assumptions, and in the application of these methodologies, we cannot be
certain that our ultimate payments will not vary, perhaps materially, from the
estimates we have made. As of June 30, 2003, our IBNR reserves were $581.4
million, and a 5% change in these IBNR reserves would equate to a $29.1 million
adjustment to claims and claim expenses incurred, which would represent 8.8% of
our net income earned in the first six months of 2003, and 1.4% of shareholders'
equity as at June 30, 2003.
Another material judgment made by management is our estimate of potential
impairments in reinsurance recoverables. To estimate reinsurance recoverables
which might be uncollectible, our senior managers evaluate the financial
condition of our reinsurers, on a reinsurer by reinsurer basis, both before
purchasing the reinsurance protection from them and after the occurrence of a
significant catastrophic event. We seek to evaluate the financial strength of
these reinsurers as well as other factors such as their historical record and
projected tendency for prompt claims payment. As of June 30, 2003 and December
31, 2002, we have recorded recoverables of $175.7 million and $207.3 million,
respectively, and a valuation allowance of $11.6 million and $7.8 million,
respectively, based on specific facts and circumstances evaluated by management.
SUMMARY OF RESULTS OF OPERATIONS
For the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002
The discussion below (and later in this report) includes, among other things,
references to our underwriting income and our net income before realized gains
and a cumulative effect of a change in accounting policy. We currently use these
measures to evaluate the underlying fundamentals of our operations and believe
them to be useful measures of our corporate performance.
A summary of the significant components of our revenues and expenses are as
follows:
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(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses.
The $37.4 million increase in net income before realized gains in the quarter
ended June 30, 2003, compared to the quarter ended June 30, 2002, was primarily
the result of the following items:
. a $29.2 million increase in underwriting income from our Renaissance
reinsurance operations due primarily to an increase in net earned
premiums to $162.2 million from $136.8 million, primarily as a result
of our success in capitalizing on market opportunities during 2003 and
2002, resulting in higher earned premiums in 2003 compared to 2002.
Also, during the second quarter of 2003, we recorded reductions to
prior years loss reserves, plus
. a $2.8 million increase in underwriting income from DaVinci due
primarily to an increase in net earned premiums to $46.7 million from
$34.2 million, primarily due to our ability to capitalize on market
opportunities as discussed above, offset by an increase in the losses
incurred to $14.6 million from $8.1 million as a result of the
specialty premiums written by DaVinci which typically have a higher
loss ratio than our property catastrophe book, plus
. a $5.2 million increase in underwriting income from our individual
risk operations which resulted from the increase in our gross written
premiums in our individual risk segment to $97.7 million in 2003 from
$76.0 million in 2002, which was primarily the result of positive
market conditions and our efforts to continue to increase premiums in
this segment of our business, plus
. an $8.0 million increase in net investment income, primarily due to an
increase in our invested assets due to our strong cash flow from
operations and the $196 million of net proceeds from our Series B
Preference Shares and 5.875% Senior Notes sold in the first quarter of
2003 and equity appreciation during this period on our hedge funds and
private equity funds of $6.1 million (a loss of $0.2 million in the
second quarter of 2002), partially offset by a reduction in investment
returns due to lower interest rates, less
. a $3.8 million increase in interest and preference share dividends,
which was primarily due to the additional dividends and interest
accrued on the Series B Preference Shares and 5.875% Senior Notes sold
in the first quarter of 2003, plus
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. a net $3.7 million reduction in corporate expenses, taxes and other,
which was primarily due to an increase in foreign exchange gains of
$4.0 million, less
. a $6.7 million increase related to the interests owned by other
investors in DaVinci (Minority Interests).
Net Income and Net Income before Realized Gains and Change in Accounting
Principle
Net income available to common shareholders rose 87% to $180.2 million, or $2.54
per common share, in the quarter, compared to $96.2 million, or $1.37 per share,
for the same quarter of 2002. For the quarter ended June 30, 2003, net income,
before realized gains, available to common shareholders was $130.5 million or
$1.84 per common share, compared to $93.1 million or $1.33 per common share for
the same quarter in 2002.
Gross Written Premiums
Gross Written Premiums for the second quarter of 2003 and 2002 were as follows:
Quarter ended June 30, 2003 2002
------------------------------
Cat Premium
Renaissance $ 64,211 $ 87,854
DaVinci 16,402 34,794
------------------------------
Total Cat Premium 80,613 122,648
Renaissance Specialty Reinsurance 33,557 71,632
DaVinci Specialty Reinsurance 702 -
------------------------------
Total Reinsurance 114,872 194,280
Individual risk premiums 97,688 76,014
------------------------------
Total gross written premiums $ 212,560 $ 270,294
==============================
Our reinsurance premiums during the second quarter of 2003 decreased primarily
because of:
1) timing differences on our total catastrophe premiums which decreased
primarily due to $38 million of premiums booked in the first quarter of this
year which were booked in the second quarter of 2002;
2) timing differences on our specialty reinsurance premiums which were written
in the second quarter of 2002 but renewed in the first quarter of 2003, and
three contracts which we did not renew because of pricing declines on the
programs.
The decrease in our reinsurance premiums was partially offset by our continuing
build-out of our individual risk operations, and our continued success in
utilizing selected producers to assist us in growing this book of business. Also
see "Current Outlook."
Underwriting Results
The underwriting results of an insurance or reinsurance company are discussed
frequently by reference to its loss ratio, expense ratio, and combined ratio.
The loss ratio is the result of dividing claims and claim expenses incurred by
net premiums earned. The expense ratio is the result of dividing underwriting
expenses (acquisition costs and operational expenses) by net premiums earned.
The combined ratio is the sum of the loss ratio and the expense ratio.
The table below sets forth our combined ratio and components thereof by segment
for the quarters ended June 30, 2003 and 2002:
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The low loss ratio for the reinsurance segment for the second quarter of 2003
was primarily due to the relatively few large loss events occurring during the
quarter. Additionally, during the second quarter of 2003, as our prior year loss
reserves matured, the losses which were reported to us were lower than our
original estimates, and, accordingly, we recorded a reduction in prior year
reinsurance reserves. (See Summary of Critical Accounting Policies and
Estimates)
We primarily utilize the Bornheutter-Ferguson actuarial method to estimate
reserves on the individual risk book of business, and therefore the loss ratio
from quarter to quarter could fluctuate depending on loss events occurring, or
not occurring, during a quarter. Accordingly, during the second quarter of 2003,
the loss ratio was higher than original expectations due to losses emanating
from mid-western storm activity occurring during the quarter and also from a
portion of a certain plant explosion also occurring during the second quarter.
Other Income
Our other income is principally generated from our equity pick-up from our 50%
ownership of Top Layer Re, the annual management fee we receive from Platinum
Underwriters Holdings Ltd. ("Platinum"), the underwriting of contracts related
to physical variables, and other miscellaneous activities.
We also generate fees from our joint venture with DaVinci; however, because
DaVinci is consolidated in our financial statements, these fees are not recorded
in other income, but are instead recorded in our consolidated underwriting
profits. We also receive fees from certain placements of structured quota share
reinsurance agreements for participations in our property catastrophe book of
business. These fees are also not recorded in other income, but instead are
recorded as reductions to acquisition costs and underwriting expenses.
The fee income, equity pick up and other items as reported in other income are
detailed below. Also provided is a summary of all fees from joint venture
relationships, including fee income, our profits earned on our capital at risk
in the joint ventures and other items.
18
(1) Reported GAAP presentation adjusted to reflect:
- fee income and our interest in DaVinci as if DaVinci were accounted for
under the equity method
- other fee income on managed cat business which is reflected on the income
statement as a reduction of acquisition and operational expenses
(2) Excludes fee income received on capital invested by RenaissanceRe.
For the six months ended June 30, 2003 compared to the six months ended June 30,
2002
A summary of the significant components of our revenues and expenses are as
follows:
(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses.
19
The $80.7 million increase in net income before realized gains and, in 2002,
before the cumulative effect of a change in accounting policy, for the six
months ended June 30, 2003, compared to the six months ended June 30, 2002, was
primarily the result of the following items:
. a $45.8 million increase in underwriting income from our Renaissance
reinsurance operations due primarily to an increase in net earned
premiums to $313.5 million from $253.9 million, primarily due to our
ability to capitalize on market opportunities during 2002, particularly
our success with a number of large property catastrophe programs and our
success in continuing to gain market share in our specialty reinsurance
business, where we increased our gross written premiums by 27%. Also,
during the first six months of 2003, we recorded a reduction to prior
years loss reserves, plus
. the $18.3 million increase in underwriting income from DaVinci due
primarily to an increase in net earned premiums to $95.8 million from
$57.8 million, primarily due to our ability to capitalize on market
opportunities as discussed above, plus
. an $18.8 million increase in underwriting income from our individual
risk operations which resulted from the increase in our net earned
premiums in our individual risk segment to $129.7 million in 2003 from
$23.4 million in 2002, which was again the result of positive market
conditions and our efforts to continue to increase premiums in this
segment of our business, plus
. a $16.3 million increase in net investment income, primarily due to an
increase in our invested assets due to our strong cash flow from
operations and the $196 million of net proceeds from the Series B
Preference Shares and 5.875% Senior Notes sold in the first quarter of
2003 and equity appreciation on our hedge funds and private equity funds
of $9.4 million ($0.1 million in the first six months of 2002),
partially offset by a reduction in investment returns due to lower
interest rates, plus
. a net $9.5 million reduction in corporate expenses, taxes and other,
which was primarily due to an increase in foreign exchange gains of $9.9
million, less
. a $6.3 million increase in interest and preferred share dividends, which
was primarily due to the additional dividends and interest accrued on
the Series B Preference Shares and 5.875% Senior Notes issued in the
first quarter of 2003, less
. a $3.5 million decrease in other income, primarily due to a decrease in
income from contracts related to physical variables, partially offset by
an increase in fee income related to our managed catastrophe business
and an increase in our equity pick up from our joint venture, Top Layer
Re, less
. an $18.1 million increase related to the interests owned by other
investors in DaVinci.
Net Income and Net Income before Realized Gains and Change in Accounting
Principle
Net income available to common shareholders rose 90% to $331.4 million, or $4.68
per common share, in the first six months of 2003, compared to $174.3 million,
or $2.49 per share, for the same period of 2002. For the six months ended June
30, 2003, net income before realized gains, and, in 2002, before the cumulative
effect of a change in accounting principle, available to common shareholders was
$260.7 million or $3.68 per common share, compared to $180.0 million or $2.57
per common share for the same period in 2002.
Gross Written Premiums
Gross Written Premiums for the first six months of 2003 and 2002 were as
follows:
20
Six months ended June 30, 2003 2002
------------------------------
Cat Premium
Renaissance $ 372,930 $ 324,647
DaVinci 123,218 130,063
------------------------------
Total Cat Premium 496,148 454,710
Renaissance Specialty Reinsurance 219,639 172,655
DaVinci Specialty Reinsurance 20,409 -
------------------------------
Total Reinsurance 736,196 627,365
Individual risk premiums 161,531 103,763
------------------------------
Total gross written premiums $ 897,727 $ 731,128
==============================
Our premiums during the first six months of 2003 increased primarily from:
1. our success in writing a number of large property catastrophe reinsurance
programs in the first three months of 2003;
2. our continuing focus and success on building our book of specialty
reinsurance premiums; and
3. our continuing build-out of our individual risk operations, and our continued
success in utilizing selected producers to assist us in growing this book of
business.
Underwriting Results
The table below sets forth our combined ratio and components thereof by segment
for the six months ended June 30, 2003 and 2002:
The low loss ratio for the reinsurance segment for the first six months of 2003
was primarily due to the relatively few large loss events occurring during the
period and a reduction in prior year reinsurance reserves.
Other Income
The fee income, equity pick up and other items as reported in other income (as
described in more detail on page 17) for the six month period ending June 30,
2003 and 2002 are set forth below. Also provided is a summary of all fees from
joint venture relationships, including fee income, our profits earned on our
capital at risk in the joint ventures and other items.
21
(1) Reported GAAP presentation adjusted to reflect:
- fee income and our interest in DaVinci as if DaVinci were accounted for
under the equity method
- other fee income on managed cat business which is reflected on the income
statement as a reduction of acquisition and operational expenses
(2) Excludes fee income received on capital invested by RenaissanceRe.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets." In the second quarter of 2002, the Company completed its
initial impairment review in compliance with the transition provisions of SFAS
142 and, as a result, the Company decided to record goodwill at zero value, the
low end of an estimated range of values, and wrote off the balance of its
goodwill during the second quarter of 2002, which totaled $9.2 million. In
accordance with the provisions of SFAS 142, this was required to be recorded as
a cumulative effect of a change in accounting principle in the consolidated
statement of income and was required to be recorded retroactive to January 1,
2002.
FINANCIAL CONDITION
RenaissanceRe is a holding company, and we therefore rely on dividends from our
subsidiaries and investment income to make principal and interest and dividend
payments on our debt and capital securities, and to make dividend payments to
our preference shareholders and common shareholders.
The payment of dividends by our Bermuda subsidiaries is, under certain
circumstances, limited under U.S. statutory regulations and Bermuda insurance
law, which require our Bermuda insurance subsidiaries to maintain certain
measures of solvency and liquidity. At June 30, 2003, the statutory capital and
surplus of our Bermuda insurance subsidiaries was $2,180.3 million, and the
amount of capital and surplus required to be maintained was $361.4 million. Our
U.S. subsidiaries are also required to maintain certain measures of solvency and
liquidity. At June 30, 2003, the statutory capital and surplus of our U.S.
subsidiary was $26.4 million and the amount of capital and surplus required to
be maintained was $8.6 million. For the six months ended June 30, 2003,
Renaissance Reinsurance declared dividends to RenaissanceRe of $194.3 million
compared to $136.4 million for the same period in 2002.
CASH FLOWS
Our operating subsidiaries have historically produced sufficient cash flows to
meet their own expected claims payments and operational expenses and to provide
dividend payments to us. Our subsidiaries also maintain a concentration of
investments in high quality liquid securities, which management believes will
provide sufficient liquidity to meet
22
extraordinary claims payments should the need arise. Additionally, we maintain a
$400.0 million revolving credit facility to meet additional capital
requirements, if necessary (See Note 13(b) to Unaudited Consolidated Financial
Statements).
Cash flows from operations in the first six months of 2003 were $500.9 million,
which principally consisted of net income of $340.5 million, plus $221.8 million
for increases in reserves for unearned premiums, plus $162.6 million for
increases to net reserves for claims and claim expenses, partially offset by an
increase of $181.7 million in premiums receivable and an increase of $30.9 in
deferred acquisition costs.
Because a large portion of the coverages we provide typically can produce losses
of high severity and low frequency, it is not possible to accurately predict our
future cash flows from operating activities. As a consequence, cash flows from
operating activities may fluctuate, perhaps significantly, between individual
quarters and years.
We have generated cash flows from operations in 2002 and the first six months of
2003, significantly in excess of our operating commitments. To the extent that
capital is not utilized in our reinsurance or individual risk segments, we will
consider using such capital to invest in new opportunities. We would also
consider returning capital to shareholders in the form of share repurchases
under certain circumstances (See Note 13(a) to Unaudited Consolidated Financial
Statements).
RESERVES FOR CLAIMS AND CLAIMS EXPENSES
As discussed in the Summary of Critical Accounting Policies and Estimates, the
most significant judgment made by management is the estimation of the claims and
claim expense reserves. Because of the variability and uncertainty associated
with loss estimation, it is possible that our individual case reserves are
incorrect, possibly materially.
A large portion of our coverages provide protection from natural and man-made
catastrophes which are generally infrequent, but can be significant, such as
losses from hurricanes and earthquakes. Our claims and claim expense reserves
will normally fluctuate, sometimes materially, based upon the occurrence of a
significant natural or man-made catastrophic loss for which we provide
reinsurance. Our claims reserves will also fluctuate based on the payments we
make for these large loss events. The timing of our payments on loss events can
be affected by the event causing the loss, the location of the loss, and whether
our losses are from policies with insurers or reinsurers.
During 2002 and continuing in the first six months of 2003, we increased our
specialty reinsurance and individual risk gross written premiums (See - "Gross
Written Premiums"). The addition of these lines of business adds complexity to
our claims reserving process and therefore adds uncertainty to our claims
reserve estimates, as the reporting of information, the setting of initial
reserves and the loss settlement process for these lines of business vary from
our traditional property catastrophe line of business.
As at June 30, As at December 31,
2003 2002
-------------------------------------
Gross reserves $ 931,901 $ 804,795
Recoverables 164,069 199,533
------------------------------------
Net reserves $ 767,832 $ 605,262
===================================
Shareholders' equity 2,073,965 1,642,035
Gross reserves as a % of equity 44.9% 49.0%
Net reserves as a % of equity 37.0% 36.9%
For our reinsurance and individual risk operations, our estimates of claims
reserves include case reserves reported to us as well as our estimate of IBNR
losses to us. Our case reserves and our estimates for IBNR reserves are based on
1) claims reports from insureds, 2) our underwriters' experience in setting
claims reserves, 3) the use of computer models where applicable and 4)
historical industry claims experience. Where necessary we will also use
statistical and actuarial methods to estimate ultimate expected claims and claim
expenses. We review our claims reserves on a regular basis.
23
During the six months ended June 30, 2003 our net incurred claims and claim
expenses were $182.9 million and our net paid losses were $18.3 million. IBNR
reserves at June 30, 2003 were $581.4 million compared with $462.9 million at
December 31, 2002 (See Summary of Critical Accounting Policies and Estimates).
CAPITAL RESOURCES
Our total capital resources as at June 30, 2003 and December 31, 2002 were as
follows:
During the first half of 2003, our capital resources increased primarily as a
result of three items: 1) our net income of $340.5 million; 2) the issuance of
$100 million of Series B Preference Shares; and 3) the issuance of $100 million
of 5.875% Senior Notes.
On April 19, 2002, DaVinci entered into a credit agreement providing for a $100
million committed revolving credit facility. On May 10, 2002, DaVinci borrowed
the full $100 million available under this facility to repay $100 million of
bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor
Renaissance Reinsurance is a guarantor of this facility and the lenders have no
recourse against us or our subsidiaries other than DaVinci under this facility.
Pursuant to the terms of the $400.0 million facility maintained by
RenaissanceRe, a default by DaVinci in its obligations will not result in a
default under the RenaissanceRe facility.
Although we own a minority of the economic interest of DaVinci, we control a
majority of its outstanding voting rights and, accordingly, DaVinci is
consolidated in our financial statements; as a result, the replacement of $100
million of debt from RenaissanceRe with $100 million of debt from a third party
caused our reported consolidated debt to increase by $100 million. As of June
30, 2003, the full amount was outstanding under this facility. Interest rates on
the facility are based on a spread above LIBOR, and averaged approximately 2.3%
during the first six months of 2003, compared to 2.8% for the same period in
2002. The credit agreement contains certain covenants requiring DaVinci to
maintain a debt to capital ratio of 30% or below and a minimum net worth of $230
million. As at June 30, 2003, DaVinci was in compliance with the covenants of
this agreement.
With the increased opportunities to grow our business at the beginning of 2003,
we also decided to increase our capital resources through the following
activities:
1. In January 2003, we issued $100 million of 5.875% Senior Notes due February
15, 2013. Interest on the notes is payable on February 15 and August 15 of
each year, commencing August 15, 2003. The notes can be redeemed by us
prior to maturity subject to payment of a "make-whole" premium; however, we
have no current intentions of calling the notes. The notes, which are
senior obligations, contain various covenants, including limitations on
mergers and
24
consolidations, restriction as to the disposition of stock of designated
subsidiaries and limitations on liens on the stock of designated
subsidiaries.
2. In February 2003, we issued 4,000,000 $1.00 par value Series B preference
shares at $25 per share. The shares may be redeemed at $25 per share at our
option on or after February 4, 2008. Dividends are cumulative from the date
of original issuance and are payable quarterly in arrears at 7.3%,
commencing June 1, 2003 when, if, and as declared by the Board of
Directors. If we submit a proposal to our shareholders concerning an
amalgamation or submits any proposal that, as a result of any changes to
Bermuda law, requires approval of the holders of these preference shares to
vote as a single class, we may redeem the shares prior to February 4, 2008
at $26 per share. The preference shares have no stated maturity and are not
convertible into any other securities of the Company.
Our subsidiary, Glencoe U.S., had a $10.0 million term loan and $15.0 million
revolving loan facility with a syndicate of commercial banks. Interest rates on
the facility were based upon a spread above LIBOR, and averaged 1.8% during the
first six months of 2003, compared to 2.5% during the same period in 2002. The
term loan and revolving credit facility were repaid in full in June 2003 in
accordance with the mandatory repayment provisions and terminated.
Our subsidiary, RenaissanceRe Capital Trust, has issued capital securities which
pay cumulative cash distributions at an annual rate of 8.54%, payable
semi-annually. During 2002, RenaissanceRe repurchased $3.0 million of the
Capital Securities. The sole asset of the Trust consists of our junior
subordinated debentures in an amount equal to the outstanding capital
securities. The Indenture relating to these junior subordinated debentures
contains certain covenants, including a covenant prohibiting us from the payment
of dividends if we are in default under the Indenture. We were in compliance
with all of the covenants of the Indenture at December 31, 2002 and June 30,
2003. The capital trust securities mature on March 1, 2027. Generally Accepted
Accounting Principles do not allow these securities to be classified as a
component of shareholders' equity, therefore, they are recorded as minority
interest (see Footnote 12).
On August 8, 2003, the Company amended and restated its existing revolving
credit agreement with a syndicate of commercial banks to increase the facility
from $310 million to $400 million and to make certain other changes. No balance
was outstanding as of December 31, 2002, June 30, 2003 or at the time of the
amendment and restatement, and no borrowings are outstanding as of August 14,
2003. As amended, the agreement contains certain financial covenants. These
covenants generally provide that Debt to Capital Ratio shall not exceed 0.35:1
and that consolidated shareholders' equity plus outstanding Capital Securities
of RenaissanceRe and Renaissance Reinsurance shall equal or exceed $1.0 billion
and $500 million, respectively, subject to certain adjustments under certain
circumstances as more fully set forth in the agreement contained, as Exhibit
10.5 to this Form 10-Q. The scheduled commitment termination date under the
amended agreement is August 8, 2006.
SHAREHOLDERS' EQUITY
During the first six months of 2003, our consolidated shareholders' equity
increased by $431.9 million to $2.07 billion as of June 30, 2003, from $1.64
billion as of December 31, 2002. The significant components of the change in
shareholders' equity included net income from continuing operations of $340.5
million, the issuance of $100 million of Series B Preference Shares and an
increase in net unrealized gains on investments of $17.7 million, partially
offset by dividends to common and preference shareholders of $30.1 million.
INVESTMENTS
At June 30, 2003, we held investments and cash totaling $3.9 billion (compared
to $3.1 billion at December 31, 2002). Our investment portfolio is subject to
the risk of declines in realizable value. We attempt to mitigate this risk
through diversification and active management of our portfolio.
25
The table below shows the aggregate amounts of our invested assets:
The $734.5 million growth in our portfolio of invested assets for the six months
ended June 30, 2003 resulted primarily from net cash provided by operating
activities of $500.9 million, the proceeds from our sale of $100 million of
5.875% Senior Notes and the proceeds from our sale of $100 million of Series B
Preference Shares.
The equity investment in reinsurance company relates to our November 1, 2002
purchase of 3,960,000 common shares of Platinum in a private placement
transaction. In addition, we received a ten-year warrant to purchase up to 2.5
million additional common shares of Platinum for $27.00 per share. We purchased
the common shares and warrant for an aggregate price of $84.2 million. As at
June 30, 2003, we own 9.2% of Platinum's outstanding common shares. We have
recorded our investments in Platinum at fair value, and at June 30, 2003 the
aggregate fair value was $130.0 million, compared to $120.3 million as at
December 31, 2002. The aggregate unrealized gain of $45.8 million on the
Platinum investment is included in accumulated other comprehensive income, of
which $22.5 million represents our estimate of the value of the warrant.
Because our coverages include substantial protection for damages resulting from
natural and man-made catastrophes, we may become liable for substantial claim
payments on short-term notice. Accordingly, our investment portfolio is
structured to preserve capital and provide a high level of liquidity which means
that the large majority of our investment portfolio contains investments in
fixed income securities, such as U.S. Government bonds, corporate bonds and
mortgage backed and asset backed securities.
At June 30, 2003, our invested asset portfolio of fixed maturities and short
term investments had a dollar weighted average rating of AA, an average duration
of 2.1 years and an average yield to maturity of 2.4%.
At June 30, 2003, $18.4 million of cash and cash equivalents were invested in
currencies other than the U.S. dollar, which represented less than 1.0% of our
invested assets.
For the first six months of 2003, we recorded an increase of $67.3 million in
net realized gains on investments to $70.8 million from $3.5 million for the
same period in 2002. The increase was primarily a consequence of a general
repositioning of the invested asset portfolio in response to changing market
conditions. In addition, we substantially reduced our holdings in our mortgage
backed securities portfolio during the second quarter, which also contributed to
realized gains.
A portion of our investment assets are directly held by our subsidiary
Renaissance Investment Holdings Ltd. ("RIHL"), a Bermuda company we organized
for the primary purpose of holding the investments in high quality marketable
securities for RenaissanceRe, our operating subsidiaries and certain of our
joint venture affiliates. We believe that RIHL permits us to consolidate and
substantially facilitate our investment management operations. RenaissanceRe and
each of our participating operating subsidiaries and affiliates have transferred
to RIHL marketable securities or other assets, in return for a subscription of
RIHL equity interests. Each RIHL share is redeemable by the subscribing
companies for cash or in marketable securities. Over time, the subsidiaries and
joint ventures who participate in RIHL are expected to both subscribe for
additional shares and redeem outstanding shares, as our and their respective
liquidity needs change. RIHL is currently rated AAAf/S2 by Standards & Poor's
Ratings Group.
CATASTROPHE LINKED INSTRUMENTS
We have assumed risk through derivative instruments under which losses could be
triggered by an industry loss index or geological or physical variables. During
the first six months of 2003, we recorded a loss on non-indemnity catastrophe
26
index transactions of $1.6 million, compared to gains of $2.1 million for the
same period in 2002. We report these gains or losses in other income.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on us are considered in our catastrophe loss models. The effects of inflation
are also considered in pricing and in estimating reserves for unpaid claims and
claim expenses. The actual effects of this post-event inflation on our results
cannot be accurately known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
As of June 30, 2003, we have not entered into any off-balance sheet
arrangements, as defined by Item 303(a)(4) of Regulation S-K.
27
CURRENT OUTLOOK
We believe that the principal components of our operations - property
catastrophe reinsurance, specialty reinsurance and individual risk, continue to
display strong fundamentals.
Currently, we believe that prices in certain specialty casualty insurance
markets have risen to levels that offer us additional opportunities to deploy
our capital and accordingly, during the third quarter, we have begun writing
casualty insurance premiums in certain niche markets. Because of these
opportunities, and continued opportunities in the primary property markets, we
believe that our premiums in our individual risk segment for the full year 2003
will grow substantially as compared with the total individual risk premiums for
2002. Recognizing that there are many segments of the casualty market that
remain unattractive even after recent price increases, we intend to be selective
and write business only in those segments that we believe can produce an
acceptable return on capital. We are hiring staff, and building systems, to
support our entry into the casualty business. We expect to supplement our
internal resources with external service providers, including, most importantly,
a select number of leading program managers and third party claims
administrators. We have assembled a team of professionals in our U.S. operations
to support this initiative, which will include internal auditing and oversight
of these external service providers.
In our reinsurance segment, we believe that the specialty reinsurance markets in
which we operate continue to present attractive opportunities. We believe that,
as a result of factors including our reputation for superior service, prompt
claims payment and financial strength, and our investment in modeling and other
analytic tools, we have developed a leadership position in certain segments of
this market, and we will continue to see opportunities for overall growth in our
2003 consolidated specialty reinsurance premiums. For our property catastrophe
reinsurance operations, we believe that as a result of the additional capacity
provided by the new capital entering the market subsequent to the World Trade
Center tragedy, combined with continued light catastrophe losses thus far in
2003, pricing in the property catastrophe market has leveled off and we have
started to see initial indications of reduced pricing in select instances. As a
consequence of the current pricing environment, we currently expect gross
managed catastrophe premium in 2003 to be approximately in line with gross
managed catastrophe premiums for 2002. To the extent that industry pricing of
our products does not meet our hurdle rate, we would expect to reduce our
catastrophe premiums.
The current market environment is also providing us with increased opportunities
with our joint venture and structured product initiatives. In evaluating these
initiatives, we are not only considering alternatives in the property
catastrophe markets, but also considering opportunities in other areas of the
insurance and reinsurance markets, either through organic growth, the formation
of new joint ventures, or the acquisition of other companies or books of
business of other companies. In evaluating such new ventures, we seek an
attractive return on equity, the ability to develop or capitalize on a
competitive advantage, and opportunities that will not detract from our core
reinsurance and individual risk operations. This diversification may include new
opportunities to write additional targeted classes of non-catastrophe business,
both directly for our own account and through possible new joint ventures. We
are currently in the process of reviewing certain opportunities and periodically
engage in discussions regarding possible transactions, although there can be no
assurance that we will complete any such transactions or that any such
transaction would contribute materially to our results of operations or
financial condition.
28
Safe Harbor Disclosure
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements contained
in this report.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which, with respect to future business
decisions, are subject to change. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, us.
In particular, statements using words such as "may", "should", "estimate",
"expect", "anticipate", "intends", "believe", "predict" or words of similar
import generally involve forward-looking statements. In light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be considered as a
representation by the Company or any other person that its objectives or plans
will be achieved. Numerous factors could cause the Company's actual results to
differ materially from those addressed by the forward-looking statements,
including the following:
1. the occurrence of natural or man-made catastrophic events with a frequency
or severity exceeding our estimates;
2. a decrease in the level of demand for our reinsurance or insurance
business, or increased competition in the industry;
3. the lowering or loss of one of the financial or claims-paying ratings of
ours or one or more of our subsidiaries;
4. risks associated with implementing our business strategies and initiatives
for organic growth, including risks relating to managing that growth;
5. acts of terrorism or acts of war;
6. slower than anticipated growth in our fee-based operations, including
risks associated with retaining our existing partners and attracting
potential new partners;
7. changes in economic conditions, including interest and currency rate
conditions which could affect our investment portfolio;
8. uncertainties in our reserving process, which we believe are increasing as
we diversify into new product classes;
9. failures of our reinsurers, brokers or program managers to honor their
obligations;
10. extraordinary events affecting our clients, such as bankruptcies and
liquidations, and the risk that we may not retain or replace our large
clients in all future periods;
11. loss of services of any one of our key executive officers;
12. the passage of federal or state legislation subjecting Renaissance
Reinsurance to supervision or regulation, including additional tax
regulation, in the United States or other jurisdictions in which we
operate;
13. changes in insurance regulations in the United States or other
jurisdictions in which we operate, including potential challenges to
Renaissance Reinsurance's claim of exemption from insurance regulation
under current laws;
14. a contention by the United States Internal Revenue Service that our
Bermuda subsidiaries, including Renaissance Reinsurance, are subject to
U.S. taxation; and
29
15. actions of competitors, including industry consolidation, the launch of
new entrants and the development of competing financial products.
The factors listed above should not be construed as exhaustive. Certain of these
factors are described in more detail from time to time in our filings with the
Securities and Exchange Commission. We undertake no obligation to release
publicly the results of any future revisions we may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
30
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our investment portfolio includes fixed maturity investments available for sale
and short-term investments, whose market values will fluctuate with changes in
interest rates. The aggregate hypothetical loss generated from an immediate
adverse parallel shift in the treasury yield curve of 100 basis points would
cause a decrease in total return of 2.07%, which equated to a decrease in market
value of approximately $72.1 million on a portfolio valued at $3,482.5 million
at June 30, 2003. At December 31, 2002, the decrease in total return would have
been 2.25%, which equated to a decrease in market value of approximately $62.8
million on a portfolio valued at $2,791.6 million. The foregoing reflects the
use of an immediate time horizon, since this presents the worst-case scenario.
Credit spreads are assumed to remain constant in these hypothetical examples.
Foreign Currency Risk
Our functional currency is the U.S. dollar. We write a substantial portion of
our business in currencies other than U.S. dollars and may, from time to time,
experience exchange gains and losses and incur underwriting losses in currencies
other than U.S. dollars, which will in turn affect our consolidated financial
statements.
Our current foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including claims and claim expense reserves and
reinsurance balances payable. All changes in exchange rates are recognized
currently in our statements of income. When necessary, the Company will use
foreign currency forward and option contracts to minimize the effect of
fluctuating foreign currencies on the value of non-U.S. dollar denominated
assets and liabilities. As of June 30, 2003, the Company had notional exposure
of $26.4 million related to foreign currency forward and option contracts. These
contracts are recorded at fair value which are determined principally by
obtaining quotes from independent dealers and counterparties. The fair value of
these contracts as of June 30, 2003 was nil. The Company had no investments in
these foreign currency derivative instruments as of December 31, 2002.
Item 4. DISCLOSURE CONTROLS AND PROCEDURES
Disclosure Controls and Internal Controls: We have designed various controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act") to help ensure that information required to be
disclosed in our periodic Exchange Act reports, such as this quarterly report,
is captured, processed, summarized and reported on a timely and accurate basis.
Our disclosure controls are also designed with the objective of ensuring that
such information is accumulated and communicated to our senior management,
including our Chief Executive Officer and the Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with the
generally accepted accounting principles and includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the issuer; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with authorizations
of management and directors of the issuer; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the issuer's assets that could have a material effect on
financial statements.
Limitations on the effectiveness of controls: Our Board of Directors and
management, including our Chief Executive Officer and our Chief Financial
Officer, do not expect that our disclosure controls or internal controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, we believe that the design of
any prudent control system must reflect appropriate resource constraints, such
that the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, there can be no
absolute assurance that all control issues and instances of fraud, if any,
applicable to us have been or will be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or
31
mistakes. Additionally, controls can be circumvented by the individual acts of
some individuals, by collusion of more than one person, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
An evaluation was performed under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Exchange Act. Based upon that evaluation, the Company's management, including
our Chief Executive Officer and Chief Financial Officer, concluded, subject to
the limitations noted above, that the Company's disclosure controls and
procedures as of June 30, 2003 are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There has been no change in the Company's internal
control over financial reporting that occurred during the fiscal quarter ended
June 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
32
Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
We are, from time to time, a party to litigation and arbitration that
arises in the normal course of our business operations. While any
proceeding contains an element of uncertainty, we believe that we are not
presently a party to any such litigation or arbitration that is likely to
have a material adverse effect on our business or operations.
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
(a) Our 2003 Annual General Meeting of Shareholders was held on May 28, 2003.
(b) Proxies were solicited by our management pursuant to Regulation 14A under
the Securities Exchange Act of 1934; there was no solicitation of
opposition to our nominees listed in the proxy statement; the reelected
directors were re-elected for three year terms as described in item
(c)(1) below.
The other directors, whose term of office as a director continued after
the meeting are:
Edmund B. Greene
Brian R. Hall
William F. Hecht
Scott E. Pardee
William I. Riker
(c) The following matters were voted upon at the Annual General Meeting with
the voting results indicated:
(1) The Board Nominees Proposal
Our Bye-laws provide for a classified Board, divided into three classes
of approximately equal size. At the 2003 Annual Meeting, the shareholders
elected three of our Directors as Class II Directors, who shall serve
until our 2006 Annual Meeting.
Nominee Votes For Votes Withheld
------- --------- --------------
James N. Stanard 60,221,270 88,102
Thomas A. Cooper 56,360,569 3,948,803
W. James MacGinnitie 60,221,444 87,928
(2) The Auditors Proposal
Our shareholders voted to approve the appointment of Ernst & Young as our
independent auditors for the 2003 fiscal year.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
59,293,780 990,957 24,635
33
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Employment Agreement, dated as of June 30, 2003, between
RenaissanceRe Holdings Ltd. and William I. Riker.
10.2 Amended and Restated Employment Agreement, dated as of June 30, 2003,
between RenaissanceRe Holdings Ltd. and John M. Lummis.
10.3 Employment Agreement, dated as of June 30, 2003, between
RenaissanceRe Holdings Ltd. and David A. Eklund.
10.4 Amended and Restated Employment Agreement, dated as of June 30, 2003,
between Renaissance Reinsurance Ltd. and John D. Nichols, Jr.
10.5 Amended and Restated Credit Agreement, dated as of August 8, 2003, by
and among RenaissanceRe Holdings Ltd., various financial institutions
parties thereto (the "Lenders"), Deutsche Bank AG New York Branch as
letter of credit issuer and co-documentation agent, Wachovia Bank,
National Association, as co-documentation agent, Citibank, N.A., as
syndication agent, and Bank of America, N.A., as administrative agent
for the Lenders.
31.1 Certification of James N. Stanard, Chief Executive Officer of
RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of John M. Lummis, Chief Financial Officer of
RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certification of James N. Stanard, Chief Executive Officer of
RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of John M. Lummis, Chief Financial Officer of
RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
b. Current Reports on Form 8-K:
The Registrant filed a report on Form 8-K on April 28, 2003 with respect to
non-GAAP financial measures within the meaning of Regulation G as set forth
in the Company's press release announcing the Registrant's preliminary
results for its first quarter ended March 31, 2003.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
RenaissanceRe Holdings Ltd.
By: /s/ John M. Lummis
------------------
John M. Lummis
Executive Vice President and
Chief Financial Officer
Date: August 14, 2003
35