statements. Under GAAP, we are not permitted to establish estimates for catastrophe claims and claim expense reserves until an event occurs that gives rise to a loss.
Our claims and claim expense reserves are reviewed annually by an independent actuarial firm. The actuarial firm performs this work for the purpose of issuing an actuarial opinion on the reasonableness of the claims and claim expense reserves for each of the Company’s insurance subsidiaries. The actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its conclusions with management and presents its findings to the Audit Committee of the Board of Directors of the Company. Although we do not explicitly rely on the work performed by the actuarial firm for estimating our reserves for claims and claim expenses, we compare our recorded claims and claim expense reserves to those estimated by the actuarial firm to determine whether our estimates are within the actuarial firm’s reasonable range of estimates. To date, our estimates of claims and claim expense reserves have been within the actuarial firm&r squo;s reasonable range of estimates.
Reserving for our reinsurance claims involves other uncertainties, such as our dependence on information from ceding companies, which among other matters, includes the time lag inherent in reporting information from the primary insurer to us or to our ceding companies and differing reserving practices among ceding companies. The information received from ceding companies is typically in the form of bordereaux, broker notifications of loss and/or discussions with ceding companies or their brokers. This information can be received on a monthly, quarterly or transactional basis and normally includes estimates of paid claims and case reserves. We sometimes also receive an estimate or provision for IBNR. This information is often updated and adjusted from time to time during the loss settlement period as new data or facts in respect of initial claims, client accounts, industry or event trends may be reported or emerge in addition to changes in applicable statutory an d case laws.
During 2005, we incurred significant losses from hurricanes Katrina, Rita and Wilma. Our estimates of these losses are based on factors including currently available information derived from claims information from our clients and brokers, industry assessments of losses from the events, proprietary models and the terms and conditions of our contracts. In particular, due to the size and unusual complexity of certain legal and claims issues, particularly but not exclusively relating to hurricane Katrina, meaningful uncertainty remains regarding total covered losses for the insurance industry and, accordingly, our loss estimates. Our actual losses from these events will likely vary, perhaps materially, from our current estimates due to the inherent uncertainties in reserving for such losses, the potential inaccuracies and inadequacies in the data provided by clients and brokers, the inherent uncertainty of modeling techniques and the application of such techniques, and complex coverage and other legal issues.
Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.
Table of ContentsCAPITAL RESOURCES
Our total capital resources at March 31, 2007 and December 31, 2006 were as follows:
| | | | | | | | | | | | |
| (in thousands of U.S. dollars) | | | At March 31,
2007 | | | At December 31,
2006 |
| Common shareholders’ equity | | | | $ | 2,653,560 | | | | | $ | 2,480,497 | |
| Preference shares | | | | | 650,000 | | | | | | 800,000 | |
| Total shareholders’ equity | | | | | 3,303,560 | | | | | | 3,280,497 | |
| 7.0% Senior Notes | | | | | 150,000 | | | | | | 150,000 | |
| 8.54% subordinated obligation to capital trust | | | | | — | | | | | | 103,093 | |
| 5.875% Senior Notes | | | | | 100,000 | | | | | | 100,000 | |
| DaVinciRe revolving credit facility − borrowed | | | | | 200,000 | | | | | | 200,000 | |
| DaVinciRe revolving credit facility − unborrowed | | | | | — | | | | | | — | |
| Revolving credit facility − borrowed | | | | | — | | | | | | — | |
| Revolving credit facility − unborrowed | | | | | 500,000 | | | | | | 500,000 | |
| Total capital resources | | | | $ | 4,253,560 | | | | | $ | 4,333,590 | |
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In the first three months of 2007, our capital resources decreased by $80.0 million, primarily due to the redemption of our $103.1 million of 8.54% subordinated obligation to capital trust combined with our redemption of $150.0 million of our Series A Preference Shares, offset by our net income available to common shareholders of $190.8 million.
In December 2006, we raised $300.0 million through the issuance of 12 million Series D Preference Shares; in March 2004, we raised $250.0 million through the issuance of 10 million Series C Preference Shares; in February 2003, we raised $100.0 million through the issuance of 4 million Series B Preference Shares; and in November 2001, we raised $150.0 million through the issuance of 6 million Series A Preference Shares. The Series D, Series C and Series B Preference Shares may be redeemed at $25 per share at our option on or after December 1, 2011, March 23, 2009 and February 4, 2008, respectively. Dividends on the Series D, Series C and Series B Preference Shares are cumulative from the date of original issuance and are payable quarterly in arrears at 6.60%, 6.08% and 7.30%, respectively, when, if, and as declared by the Board of Directors. If RenaissanceRe submits a propos al 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 RenaissanceRe preference shares to vote as a single class, RenaissanceRe may redeem the Series D, Series C and Series B Preference Shares prior to December 11, 2011, March 23, 2009 and February 4, 2008, respectively, at $26 per share. On December 15, 2006, we gave redemption notices to the holders of the Series A Preference Shares to redeem such shares for $25 per share. At March 31, 2007, we had redeemed all of the Series A Preference Shares for $150.0 million plus accrued and unpaid dividends thereon. The preference shares have no stated maturity and are not convertible into any other of our securities.
In January 2003, we issued $100.0 million of 5.875% Senior Notes due February 15, 2013, with interest on the notes payable on February 15 and August 15 of each year, commencing August 15, 2003. In July 2001, we issued $150.0 million of 7.0% Senior Notes due July 15, 2008 with interest on the notes payable on January 15 and July 15 of each year. The notes can be redeemed by us prior to maturity subject to payment of a ‘‘make-whole’’ premium; however, we have no current intention to call the notes. The notes, which are senior obligations, contain various covenants, including limitations on mergers and consolidations, restrictions as to the disposition of stock of designated subsidiaries and limitations on liens on the stock of designated subsidiaries. RenaissanceRe was in compliance with the related covenants at March 31, 2007.
In 1997, our Capital Trust issued Capital Securities which paid cumulative cash distributions at an annual rate of 8.54%, payable semi-annually. RenaissanceRe repurchased an aggregate of $15.4 million of the Capital Securities after their issuance. The sole asset of the Capital Trust consists of our junior subordinated debentures. On January 25, 2007, the Capital Trust called for redemption all of the outstanding Capital Securities on March 1, 2007, concurrent with the redemption by the Company of the underlying 8.54% junior subordinated debentures held by the Capital Trust. The redemption price
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Table of Contentsfor such Capital Securities was $1,042.70 per security plus accrued and unpaid dividends thereon, up to but excluding, the redemption date. The redemption of the 84,630 Capital Securities not already owned by the Company occurred on March 1, 2007, the redemption date. The aggregate redemption price, including accrued and unpaid dividends up to, but excluding March 1, 2007, was $91.9 million, exclusive of securities previously repurchased and held by us.
During April 2006, DaVinciRe amended and restated its credit agreement to, among other things, (i) extend the termination date of the revolving credit facility established thereunder from May 25, 2010 to April 5, 2011; (ii) increase the borrowing capacity to $200.0 million; and (iii) increase the minimum net worth requirement with respect to DaVinciRe and DaVinci by $100.0 million to $350.0 million and $450.0 million, respectively. All other material terms and conditions in the credit agreement remained the same, including the requirement that DaVinciRe maintain a debt to capital ratio of 30% or below. Neither RenaissanceRe nor Renaissance Reinsurance is a guarantor of this facility and the lenders have no recourse against us or our subsidiaries other than DaVinciRe and DaVinci under the DaVinciRe facility. Pursuant to the terms of the $500.0 million revolving credit facility maintained by RenaissanceRe, a defaul t by DaVinciRe on its obligations will not result in a default under the RenaissanceRe facility. At March 31, 2007, the initial $100.0 million drawn in 2002 remained outstanding as did an additional borrowing of $100.0 million which was made during 2006. Interest rates on the facility are based on a spread above LIBOR, and averaged approximately 6.0% during the first quarter of 2007 (2006 – 5.3%). The term of the credit facility may be further extended and the size of the facility may be increased to $250.0 million if certain conditions are met. At March 31, 2007, DaVinciRe was in compliance with the covenants under this agreement.
Under the terms of certain reinsurance contracts, our insurance and reinsurance subsidiaries and joint ventures may be required to provide letters of credit to reinsureds in respect of reported claims and/or unearned premiums. Our principal letter of credit facility is a syndicated secured facility which accepts as collateral shares issued by our subsidiary Renaissance Investment Holdings Ltd. (‘‘RIHL’’). Our participating operating subsidiaries and our managed joint ventures have pledged (and must maintain as pledged) RIHL shares issued to them with a sufficient collateral value to support their respective obligations under the facility, including reimbursement obligations for outstanding letters of credit. The participating subsidiaries and joint ventures have the option to post alternative forms of collateral. In addition, for liquidity purposes, in order to be permitted to pledge RIHL shares as collateral, each participating subsidiar y and joint venture must maintain additional unpledged RIHL shares that have a net asset value at least equal to 15% of its facility usage, and RIHL shares having an aggregate net asset value equal to at least 15% of the net asset value of all outstanding RIHL shares must remain unencumbered. In the case of a default under the facility, or in other circumstances in which the rights of our lenders to collect on their collateral may be impaired, the lenders may exercise certain remedies under the facility agreement, in accordance with and subject to its terms, including redemption of pledged shares and conversion of the collateral into cash or eligible marketable securities. The redemption of shares by the collateral agent takes priority over any pending redemption of unpledged shares by us or other holders. On April 27, 2007, the reimbursement agreement was amended and restated to, among other things, (i) extend the term of the agreement to April 6, 2010; (ii) change the total commitment t hereunder from $1.7 billion to $1.4 billion; (iii) provide for the potential increase of the total commitment to up to $1.8 billion if certain conditions are met; and (iv) increase the minimum net worth requirement with respect to DaVinci by $150.0 million to $300.0 million. At March 31, 2007, we had $1,028.9 million of letters of credit with effective dates on or before March 31, 2007 outstanding under the facility and total letters of credit outstanding under all facilities of $1,097.1 million.
Our subsidiary, Stonington, has provided a letter of credit in the amount of $30.7 million to one counterparty which is secured by cash and eligible marketable securities. In connection with our Top Layer Re joint venture, we have committed $37.5 million of collateral to support a letter of credit and are obligated to make a mandatory capital contribution of up to $50.0 million in the event that a loss reduces Top Layer Re’s capital below a specified level.
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Table of ContentsDuring August 2004, we amended and restated our committed revolving credit agreement to increase the facility from $400.0 million to $500.0 million, to extend the term to August 6, 2009 and to make certain other changes. The interest rates on this facility are based on a spread above LIBOR. No advances were outstanding under this facility at March 31, 2007 (December 31, 2006 – $nil). Interest rates on the facility are based on a spread above LIBOR, and averaged nil% during the first quarter of 2007 as there were no advances outstanding at March 31, 2007 (March 31, 2006 – 5.1%). 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 the consolidated net worth (the ‘‘Net Worth Requirements’’) of RenaissanceRe and Renaissance Reinsurance shall equal or exceed $1.0 billion and $500.0 million, respectively, subject to certain adjustments under certain circumstances in the case of the Debt to Capital Ratio and certain grace periods in the case of the Net Worth Requirements, all as more fully set forth in the agreement. We have the right, subject to certain conditions, to increase the size of this facility to $600.0 million.
In the fourth quarter of 2005 our consolidated joint venture, DaVinciRe, raised $320.6 million of equity capital. The capital was funded by new and existing investors, including $50.0 million contributed by us. In conjunction with the transaction, we modified the DaVinciRe shareholders agreement and provided new and existing shareholders with new rights. The second amended and restated shareholders agreement provides DaVinciRe shareholders, excluding us, with certain redemption rights, which allow each shareholder to notify DaVinciRe of such shareholder’s desire for DaVinciRe to repurchase up to half of such shareholder’s aggregate number of shares held. Any share repurchases are subject to certain limitations, as described in the second amended and restated shareholders agreement, such as limiting the aggregate of all share repurchase requests to 25% of DaVinciRe’s capital in any given year and subject to ensuring all applicable regu latory requirements are met. If the total shareholder requests exceed 25% of DaVinciRe’s capital, the number of shares repurchased will be reduced among the requesting shareholders pro rata, based on the amounts desired to be repurchased. Shareholders must notify DaVinciRe before March 1 of each year, commencing March 1, 2007, if they desire to have DaVinciRe repurchase shares. The repurchase price will be GAAP book value as of the end of the year in which the shareholder notice is given, and the repurchase will be effective as of such date. Payment will be made by April 1 of the following year, following delivery of the audited financial statements for the year in which the repurchase was effective. The repurchase price will be subject to a true-up for development on outstanding loss reserves after settlement of all claims relating to the applicable years. As of March 31, 2007, one shareholder had put in a repurchase notice on or before the March 1, 2007 repurch ase notice date. The repurchase notice was for shares with a GAAP book value of $28.7 million at December 31, 2006.
Effective January 1, 2006, the Company purchased the shares of one of DaVinciRe’s original shareholders for $15.4 million, subject to a true-up for development on outstanding loss reserves after the settlement of all claims relating to the applicable years; thereby increasing our economic ownership to 22.3%. In addition, on February 1, 2006, DaVinciRe raised an additional $53.9 million of equity capital. We continue to maintain majority voting control of DaVinciRe and, accordingly, will continue consolidating the results of DaVinciRe into the Company’s consolidated results of operations and financial position. Our economic ownership interest in DaVinciRe was 20.5% at March 31, 2007.
SHAREHOLDERS’ EQUITY
In the first quarter of 2007, our consolidated shareholders’ equity, including preference shares, increased by $23.1 million to $3.3 billion at March 31, 2007, from $3.3 billion at December 31, 2006. The change in shareholders’ equity was due to our net income available to common shareholders of $190.8 million, reduced by $16.0 million of dividends paid to our common shareholders and the redemption of all our Series A Preference Shares of $150.0 million plus accrued and unpaid dividends.
30
Table of ContentsINVESTMENTS
At March 31, 2007, we held investments totaling $6.2 billion, compared to $6.3 billion at December 31, 2006.
The table below shows the aggregate amounts of our invested assets:
| | | | | | | | | | | | |
| (in thousands of U.S. dollars) | | | At March 31,
2007 | | | At December 31,
2006 |
| Fixed maturity investments available for sale, at fair value | | | | $ | 3,155,864 | | | | | $ | 3,111,930 | |
| Short term investments, at cost | | | | | 2,183,564 | | | | | | 2,410,971 | |
| Other investments, at fair value | | | | | 620,576 | | | | | | 592,829 | |
| Total managed investments portfolio | | | | | 5,960,004 | | | | | | 6,115,730 | |
| Investments in other ventures, under equity method | | | | | 239,021 | | | | | | 227,075 | |
| Total investments | | | | $ | 6,199,025 | | | | | $ | 6,342,805 | |
|
Our total investments for the three months ended March 31, 2007 decreased by $143.8 million from December 31, 2006, primarily due to the use of proceeds from our investment portfolio to fund certain financing activities during the first quarter of 2007 including the redemptions of our Series A Preference Shares and our debentures underlying the Capital Securities.
Because the reinsurance coverages we sell include substantial protection for damages resulting from natural and man-made catastrophes, we expect from time to time to become liable for substantial claim payments on short notice. Accordingly, our investment portfolio is structured to seek to preserve capital and provide a high level of liquidity which means that the large majority of our investment portfolio consists of highly rated fixed income securities, including U.S. Treasuries, highly rated sovereign and supranational securities, high-grade corporate securities and mortgage-backed and asset-backed securities. At March 31, 2007, our invested asset portfolio of fixed maturities and short term investments had a dollar weighted average rating of AA (December 31, 2006 – AA), an average duration of 1.3 years (December 31, 2006 – 1.3 years) and an average yield to maturity of 5.1% (December 31, 2006 – 5.3%).
Other Investments
The table below shows our portfolio of other investments at March 31, 2007 and December 31, 2006:
| | | | | | | | | | | | |
| (in thousands of U.S. dollars) | | | At March 31,
2007 | | | At December 31,
2006 |
| Private equity partnerships | | | | $ | 247,809 | | | | | $ | 223,245 | |
| Catastrophe bonds | | | | | 115,865 | | | | | | 114,614 | |
| Senior secured bank loan fund | | | | | 83,007 | | | | | | 81,428 | |
| Hedge funds | | | | | 73,283 | | | | | | 72,439 | |
| Non-US convertible fund | | | | | 37,754 | | | | | | 36,080 | |
| European high yield credit fund | | | | | 32,847 | | | | | | 31,919 | |
| Medium term note representing an interest in a pool of European fixed income securities | | | | | 30,000 | | | | | | 30,000 | |
| Miscellaneous other investments | | | | | 11 | | | | | | 3,104 | |
| Total investments | | | | $ | 620,576 | | | | | $ | 592,829 | |
|
The fair value of certain of our other investments is generally established on the basis of the net valuation criteria established by the managers of such investments, if applicable. These net valuations are determined based upon the valuation criteria established by the governing documents of such investments. Such valuations may differ significantly from the values that would have been used had ready markets existed for the shares, partnership interests or notes. Many of the investments are
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Table of Contentssubject to restrictions on redemptions and sale which are determined by the governing documents and limit our ability to liquidate these investments in the short term. Due to a lag in the valuations reported by the fund managers, the majority of our hedge fund and private equity partnership valuations are reported on a one month or one quarter lag. Our estimate of the fair value of catastrophe bonds are based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications. Interest income, income distributions and realized and unrealized gains and losses on other investments are included in net investment income and totaled $37.0 million at March 31, 2007, compared to $26.7 million at March 31, 2006 of which $22.6 million (2005 – $18.3 million) was related to net unrealized gains.
At March 31, 2007, we have committed capital to private equity partnerships of $361.7 million, of which $221.5 million had been contributed at March 31, 2007.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local 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
At March 31, 2007, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a) (4) of Regulation S-K.
CONTRACTUAL OBLIGATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2007 | | | Total | | | Less than
1 year | | | 1-3 years | | | 3-5 years | | | More than
5 years |
| (in thousands of U.S. dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt obligations (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 7.0% Senior Notes | | | | $ | 163,549 | | | | | $ | 10,500 | | | | | $ | 153,049 | | | | | $ | — | | | | | $ | — | |
| 5.875% Senior Notes | | | | | 134,542 | | | | | | 5,875 | | | | | | 11,750 | | | | | | 11,750 | | | | | | 105,167 | |
| DaVinciRe revolving credit facility (2) | | | | | 237,808 | | | | | | 12,000 | | | | | | 24,000 | | | | | | 201,808 | | | | | | — | |
| Private equity commitments (3) | | | | | 138,715 | | | | | | 138,715 | | | | | | — | | | | | | — | | | | | | — | |
| Operating lease obligations | | | | | 48,227 | | | | | | 5,493 | | | | | | 10,069 | | | | | | 8,767 | | | | | | 23,898 | |
| Obligations under credit derivative contracts | | | | | 1,991 | | | | | | 1,343 | | | | | | 648 | | | | | | — | | | | | | — | |
| Reserve for claims and claim expenses (4) | | | | | 2,109,864 | | | | | | 731,696 | | | | | | 670,650 | | | | | | 259,167 | | | | | | 448,351 | |
| Total contractual obligations | | | | $ | 2,834,696 | | | | | $ | 905,622 | | | | | $ | 870,166 | | | | | $ | 481,492 | | | | | $ | 577,416 | |
|
| (1) | Includes contractual interest and dividend payments. |
| (2) | The interest on this facility is based on a spread above LIBOR. We have reflected the interest due in 2007 through 2011 based upon the current interest rate on the facility. |
| (3) | Private equity commitments do not have a defined contractual commitment date and we have therefore included them in the less than one year category. |
| (4) | We caution the reader that the information provided above relates to estimated future payment dates of our reserves for claims and claim expenses, is not prepared or utilized for internal purposes and that we currently do not estimate the future payment dates of claims and claim expenses. Because of the nature of the coverages that we provide, the amount and timing of the cash flows associated with our policy liabilities will fluctuate, at times significantly, and therefore are highly uncertain. In order to estimate the payment dates of our contractual obligations for our |
32
Table of Contents | reserve for claims and claim expense, we have used the work of an actuarial firm. This firm has based its estimate of future claim payments upon benchmark payment patterns constructed internally, drawing upon available relevant sources of loss and allocated loss adjustment expense development data. These benchmarks are revised periodically as new trends emerge. We believe that it is likely that this benchmark data will not be predictive of our future claim payments and that material fluctuations can occur due to the nature of the losses which we insure and the coverages which we provide. |
In certain circumstances, many of our contractual obligations may be accelerated to dates other than those reflected in the table, due to defaults under the agreement governing those obligations (including pursuant to cross-default provisions in such agreement) or in connection with certain changes in control of the Company, if applicable. In addition, in connection with any such default under the agreement governing these obligations, in certain circumstances these obligations may bear an increased interest rate or be subject to penalties as a result of such a default.
CURRENT OUTLOOK
We currently anticipate the following developments in our business:
Market conditions
The insurance industry experienced relatively benign catastrophe loss activity in 2006, which was in contrast to 2005, where hurricane Katrina is estimated to have resulted in a record level of insured property losses. There had also been an aggregation of other catastrophic insured losses in 2005, including hurricanes Emily, Rita and Wilma, European windstorm Erwin and flooding in several European cities. These losses followed an active year in 2004 in which there were four major hurricanes that made landfall in Florida. These losses increased perceptions of risk resulting in increased demand for, and reduced availability of, catastrophe exposed insurance and reinsurance during 2006. The affected lines include catastrophe reinsurance and catastrophe-exposed homeowners business, and also includes other catastrophe exposed lines of business, such as large account commercial property. The increased demand for catastrophe reinsurance products along with improved pr icing and policy terms resulted in an increase in new capital within the industry including substantial new company formation, with a significant amount of capital raised to support the affected catastrophe exposed classes of business. With benign catastrophe loss activity in 2006, the competition for catastrophe reinsurance has increased and we currently expect competition to continue to increase in 2007. In addition, we believe that current market dynamics and overall capacity supply and demand levels may unfavorably impact our non-catastrophe lines in 2007.
In January 2007, the State of Florida enacted legislation known as Bill No. CS/HB-1A (the ‘‘Bill’’), that increased the access of primary Florida insurers to the FHCF. Through the FHCF, the State of Florida now provides below market rate reinsurance of up to $28.0 billion per season, an increase from the previous cap of $16.0 billion, with the State able to further increase the limits up to an additional $4.0 billion per season. In addition, the legislation allows Florida insurers to choose a lower retention level for FHCF reinsurance coverage, at specified rates for specified layers of coverage. Further, the legislation expands the ability of Citizens, a state-sponsored entity, to compete with private insurance companies, such as ours. While we intend to seek to utilize our strong relationships, record of superior service and financial strength to mitigate the impact of the Bill, because of our position as one of the largest providers of catastrophe-exposed coverage, both on a global basis and in respect of the Florida market, the Bill may have a disproportionate adverse impact on us compared to other market participants.
Reinsurance segment
For 2007, we are currently projecting an approximate 15% decline in our property catastrophe gross premiums written, compared to our 2006 property catastrophe gross premiums written. The market for our catastrophe reinsurance products is dynamic and changes in state-sponsored catastrophe funds such as the FHCF noted above, increased or decreased catastrophe loss activity, and changes in the amount of capital in the industry, can result in significant changes to the pricing, policy
33
Table of Contentsterms and demand for our catastrophe reinsurance contracts over a relatively short period of time. As a consequence, our estimate of catastrophe gross premiums written for 2007 is subject to material change.
In our specialty reinsurance unit, we are projecting our gross premiums written will remain relatively flat compared to our 2006 specialty gross premiums written. In general, our specialty reinsurance premiums are attributable to a relatively small number of relatively large contracts and the amount of specialty premiums can fluctuate significantly between quarters and between years depending upon the number of, and nature of, the transactions which we complete.
Individual Risk segment
We currently expect that our Individual Risk business gross premiums written will be essentially flat for 2007 when compared to 2006. While we are actively pursuing new business opportunities, our disciplined underwriting approach and in depth due diligence process means that growth opportunities within this segment take time. We believe that we may experience increasing competition for attractive new programs, and for the retention of our current programs, in light of current market dynamics.
New business
We established our Ventures unit to facilitate strategic investments. We may consider opportunities in other areas of the insurance and reinsurance markets, or in other financial markets, either through organic growth, the formation of new joint ventures, or the acquisition of other companies or books of business of other companies. 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.
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Table of ContentsNOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). 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’’, ‘‘potential’’, or words of similar import generally involve forward-looking statements. For example, we may include certain forward-looking statements in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ with regard to trends in results, prices, volumes, operations, investment results, margins, combined ratios, reserves, overall market trends, risk management and exchange rates. This Form 10-Q also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objecti ves, trends in market conditions, prices, market standing and product volumes, investment results and pricing conditions in the reinsurance and insurance industries.
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 us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those addressed by the forward-looking statements, including the following:
| | |
| • | we are exposed to significant losses from catastrophic events and other exposures that we cover that may cause significant volatility in our financial results; |
| | |
| • | the frequency and severity of catastrophic events could exceed our estimates and cause losses greater than we expect; |
| | |
| • | risks associated with implementing our business strategies and initiatives, including the risks that we will fail to build or maintain the operations, controls and other infrastructure necessary in respect of our more recent, new or proposed initiatives; |
| | |
| • | risks relating to our strategy of relying on program managers, third-party administrators, and other vendors to support our Individual Risk operations; |
| | |
| • | other risks of doing business with program managers, including the risk we might be bound to policyholder obligations beyond our underwriting intent, and the risk that our program managers or agents may elect not to continue or renew their programs with us; |
| | |
| • | risks associated with executing our strategy in our newer specialty reinsurance and Individual Risk businesses; |
| | |
| • | the risk of the lowering or loss of any of the ratings of RenaissanceRe or of one or more of our subsidiaries or changes in the policies or practices of the rating agencies; |
| | |
| • | risks relating to the passage of recent legislation in Florida relating to reinsurance coverages offered by the Florida Hurricane Catastrophe Fund (‘‘FHCF’’), and competition from the state-sponsored Citizens Property Insurance Corporation (‘‘Citizens’’), as well as the risk that similar legislation will be enacted in other states or regions; |
| | |
| • | the inherent uncertainties in our reserving process, including those related to the 2005 catastrophes, which uncertainties we believe are increasing as we diversify into new product classes; |
| | |
| • | risks associated with appropriately modeling, pricing for, and contractually addressing new or potential factors in loss emergence, such as the possible trend toward significant global warming and other aspects of climate change which have the potential to adversely affect our business, or the potential for significant industry losses from a matter such as an avian flu pandemic which could cause us to underestimate our exposures and potentially adversely impact our financial results; |
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Table of Contents | | |
| • | we may be affected by increased competition, including from new entrants formed following hurricane Katrina, or in future periods by a decrease in the level of demand for our reinsurance or insurance products, particularly as capital markets products provide alternatives and replacements for our more traditional reinsurance and insurance products; |
| | |
| • | risks due to our dependence on a few insurance and reinsurance brokers for a large portion of our revenue, a risk we believe is increasing as a larger portion of our business is provided by a small number of these brokers; |
| | |
| • | emerging claims and coverage issues, which could expand our obligations beyond the amount we intend to underwrite; |
| | |
| • | failures of our reinsurers, brokers or program managers to honor their obligations, including their obligations to make third-party payments for which we might be liable; |
| | |
| • | the risk that ongoing or future industry regulatory developments will disrupt our business, or that of our business partners, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business; |
| | |
| • | risks that the ongoing industry investigations, or the current governmental investigations and related proceedings involving former executives of the Company might impact us adversely, including as regards to our senior executive team; |
| | |
| • | risks relating to the availability and collectibility of our reinsurance with respect to both our Reinsurance and Individual Risk operations; |
| | |
| • | changes in economic conditions, including interest rate, currency, equity and credit conditions which could affect our investment portfolio or declines in our investment returns for other reasons; |
| | |
| • | a contention by the U.S. Internal Revenue Service that our Bermuda subsidiaries, including Renaissance Reinsurance, DaVinciRe, Glencoe and RIHL, are subject to U.S. taxation; |
| | |
| • | the passage of federal or state legislation subjecting Renaissance Reinsurance or our other Bermuda subsidiaries to supervision, regulation or taxation in the U.S. or other jurisdictions in which we operate; |
| | |
| • | loss of services of any one of our key executive officers, or difficulties associated with the transition of new members of our senior management team; |
| | |
| • | risks that we may require additional capital in the future, in particular after a catastrophic event, which may not be available or may be available only on unfavorable terms; |
| | |
| • | changes in the distribution or placement of risks due to increased consolidation of clients or insurance and reinsurance brokers, or program managers, or from potential changes in their business practices which may be required by future regulatory changes; |
| | |
| • | extraordinary events affecting our clients or brokers, such as bankruptcies and liquidations, and the risk that we may not retain or replace our large clients; |
| | |
| • | sanctions against us, as a Bermuda-based company, by multinational organizations; |
| | |
| • | changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the risks that U.S. federal or state governments will take actions to diminish the size of the private markets in respect of the coverages we offer, the risk of potential challenges to the Company’s claim of exemption from insurance regulation under current laws, the risk of increased global regulation of the insurance and reinsurance industry, and the risk that the Terrorism Risk Insurance Act of 2002 will not be renewed after 2007; |
| | |
| • | acts of terrorism, war or political unrest; |
| | |
| • | possible challenges in maintaining our fee-based operations, including risks associated with retaining our existing partners and attracting potential new partners; and |
| | |
| • | operational risks, including system or human failures. |
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Table of ContentsThe 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 SEC. 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.
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Table of Contents | |
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are principally exposed to five types of market risk: interest rate risk; foreign currency risk; equity price risk; credit risk; and energy and weather-related risk. The Company’s investment guidelines permit, subject to approval, investments in derivative instruments such as futures, options, foreign currency forward contracts and swap agreements, which may be used to assume risks or for hedging purposes. See the Company’s Form 10-K for the fiscal year ended December 31, 2006 for additional information related to the Company’s exposures to interest rate risk, foreign currency risk, equity price risk, credit risk and energy and weather-related risk.
| |
| Item 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Internal Controls: We have designed various disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Exchange Act), to help ensure that information required to be disclosed in our periodic Exchange Act reports, such as this quarterly report, is recorded, processed, summarized and reported on a timely and accurate basis. Our disclosure controls and procedures 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 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 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 Chief Financial Officer, do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. Controls, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Further, we believe that the design of prudent controls 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 controls, 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 r ealities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some individuals, by collusion of more than one person, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Evaluation: 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 as required by Rules 13a-15(b) and 15d-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 at March 31, 2007, the Company’s disclosure controls and procedures were effective in ensuring that all material information required to be filed in this Form 10-Q has been made known to them in a timely fashion. There has been no change in the Company’s
38
Table of Contentsinternal control over financial reporting during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – OTHER INFORMATION
Item 1 – Legal Proceedings
We received a subpoena from the SEC in February 2005, a subpoena from the Office of the NYAG in March 2005, and a subpoena from the United States Attorney’s Office for the Southern District of New York in June 2005, each of which related to the industry-wide investigations into non-traditional, or loss mitigation, (re)insurance products. The subpoenas from the SEC and the United States Attorney’s Office also related to our business practice review and to our determination to restate our financial statements for the fiscal years ended December 31, 2003, 2002 and 2001. In addition, we understand that certain of our customers or reinsurers may have been asked to provide or have provided documents and information with respect to contracts to which we are a party in the framework of the ongoing industry-wide investigations.
On February 6, 2007, we announced that the SEC had accepted our offer of settlement to resolve the SEC’s investigation, pursuant to which we have consented, without admitting or denying any wrongdoing, to entry of a final judgment enjoining future violations of certain provisions of the federal securities laws, and to pay disgorgement of $1 and a civil penalty of $15.0 million. We will also retain an independent consultant to review certain of our internal controls, policies and procedures as well as the design and implementation of the review conducted by independent counsel reporting to the non-executive members of our Board of Directors and certain additional procedures performed by our auditors in connection with their audit of our financial statements for the fiscal year ended December 31, 2004. The amount of the monetary penalty discussed above was provided for in 2005. The settlement was approved by the United States Distric t Court for the Southern District of New York pursuant to a final judgment entered on March 20, 2007. While we will strive to fully comply with the settlement agreement with the SEC, it is possible that the enforcement staff of the SEC or the independent consultant may take issue with our cooperation despite our efforts. Any such failure to comply with the settlement agreement or to be perceived to have failed to so comply could adversely affect us, perhaps materially so.
In September 2006, the SEC filed an enforcement action in the United States District Court for the Southern District of New York against James N. Stanard, our former Chairman and Chief Executive Officer, Martin J. Merritt, our former controller, and Michael W. Cash, a former officer of RenaissanceRe charging Messrs. Stanard, Merritt and Cash with violations of federal securities laws, including securities fraud, and seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company. Mr. Merritt, without admitting or denying the allegations in the SEC’s complaint, consented to a partial final judgment that will permanently enjoin him from violating or aiding or abetting future violations of the federal securities laws, bar him from serving as an officer or director of a public company, and defer the determination of civil penalties and disgorgement to a later date. In addition, Mr. Merritt agreed to an SEC administrative order barring him from appearing or practicing before the SEC as an accountant under Rule 102(e) of the SEC’s Rules of Practice. This ongoing matter could give rise to additional costs, distractions, or impacts to our reputation. It is possible that the ongoing investigation into our former officers could give rise to additional investigations or proceedings being commenced against us and/or our current or former senior executives in connection with these matters, which could be criminal or civil. While we intend to continue to cooperate with the ongoing investigations, we are unable to predict the ultimate outcome of these ongoing matters or the ultimate impact these investigations may have on our business, including as to our senior management team.
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Table of ContentsBeginning in July 2005, several putative class actions were filed in the United States District Court for the Southern District of New York in respect of the Company. In December 2005, these actions were consolidated and in February 2006, the plaintiffs filed a Consolidated Amended Complaint, purportedly on behalf of all persons who purchased and/or acquired the publicly traded securities of the Company between April 22, 2003 and July 25, 2005. The Consolidated Amended Complaint, which was amended in December 2006, names as defendants, in addition to the Company, current and former officers of the Company (Messrs. Stanard, Riker, Lummis, Cash and Merritt) and alleges that the Company and the other named defendants violated the U.S. federal securities laws by making material misstatements and failing to state material facts about our business and financial condition in, among other things, SEC filings and public statements. The Consolidated Amended Complaint, as amended, seeks compensatory damages without specifying an amount.
On February 14, 2007, we executed a memorandum of understanding with plaintiffs’ representatives setting forth an agreement in principle to settle the claims alleged in the Consolidated Amended Complaint, as amended. Pursuant to the terms of the agreement in principle, we did not make any admission of liability, and we continue to deny any and all liability in connection with the allegations of the Consolidated Amended Complaint, as amended. The total amount to be paid in settlement of the claims is $13.5 million. A portion of this amount is expected to be offset by insurance recoveries. These amounts have been provided for in our financial statements. The settlement provides for the full release of all parties, including the Company and our present and former directors and officers, including without limitation the defendants who were named in the suits. The settlement is subject to, among other things, court review and approval and other c ustomary conditions.
Our operating subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages. Generally, our primary insurance operations are subject to greater frequency and diversity of claims and claims-related litigation and, in some jurisdictions, may be subject to direct actions by allegedly-injured persons or entities seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves which are discussed in our loss reserves discussion. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation may involve allegations of underwriting or claims-handling er rors or misconduct, employment claims, regulatory activity or disputes arising from our business ventures. Any such litigation or arbitration contains an element of uncertainty, and we believe the inherent uncertainty in such matters may have increased recently and may continue to increase. Currently, we believe that no individual, normal course litigation or arbitration, to which we are presently a party, is likely to have a material adverse effect on our business or operations.
Item 1A – Risk Factors
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Below is a summary of stock purchases for the quarter March 31, 2007. RenaissanceRe’s Board has authorized a share repurchase program of $150.0 million, which the Company publicly announced on August 7, 2003. The table below details the repurchases that were made under the program during the quarter ended March 31, 2007, and also includes purchases representing withholdings from employees surrendered in respect of withholding tax obligations on the vesting of restricted stock, or in lieu of cash payments for the exercise price of employee stock options.
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Table of Contents
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Total shares purchased | | | Shares purchased
for withholding tax | | | Shares purchased under
repurchase program | | | Dollar
amount still
available
under
repurchase
program |
| Shares
purchased | | | Average
price
per share | | | Shares
purchased | | | Average
price
per share | | | Shares
purchased | | | Average
price
per share |
| | | | | | | | | | | | | | | | | | | | | | (in millions) |
| Beginning shares available to be repurchased | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 149.3 | |
| January 1 − 31, 2007 | | | | | 1,551 | | | | | $ | 58.90 | | | | | | 1,551 | | | | | $ | 58.90 | | | | | | — | | | | | $ | — | | | | | | — | |
| February 1 − 28, 2007 | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| March 1 − 31, 2007 | | | | | 222,655 | | | | | $ | 49.97 | | | | | | 26,355 | | | | | $ | 50.57 | | | | | | 196,300 | | | | | $ | 49.90 | | | | | | 9.8 | |
| Total | | | | | 224,206 | | | | | $ | 50.03 | | | | | | 27,906 | | | | | $ | 51.03 | | | | | | 196,300 | | | | | $ | 49.90 | | | | | $ | 139.5 | |
|
Subsequent to March 31, 2007 and through April 23, 2007, the Company has repurchased an additional 26,400 shares at an average price of $49.93. This reduces the amount available for repurchase under the Company’s current authorization to $138.2 million. These repurchases were effected pursuant to a trading plan adopted by the Company under Rule 10b5-1, which expires May 3, 2007. In the future, the Company may adopt additional trading plans or authorize purchase activities under the remaining authorization, which the Board may increase in the future.
Item 3 – Defaults Upon Senior Securities
None
Item 4 – Submission of Matters to a Vote of Security Holders
None
Item 5 – Other Information
None
Item 6 – Exhibits
| | | | | | |
| a | . | | | | Exhibits: |
| 31 | .1 | | | | Certification of Neill A. Currie, 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 Fred R. Donner, 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 Neill A. Currie, 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 Fred R. Donner, 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. |
| 99 | .1 | | | | Amendment No. 1 dated as of March 1, 2007, to the Amended and Restated Employment Agreement, dated as of February 22, 2006, between RenaissanceRe Holdings Ltd. and Neill A. Currie. |
| 99 | .2 | | | | Amendment No. 1 to the RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan. |
| 99 | .3 | | | | Amendment No. 2 to the RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan. |
| 99 | .4 | | | | Amendment No. 1 to the RenaissanceRe Holdings Ltd. Non-Employee Director Stock Plan. |
|
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Table of ContentsSIGNATURES
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/ Fred R. Donner
Fred R. Donner
Executive Vice President,
Chief Financial Officer |
| By: /s/ Mark A. Wilcox
Mark A. Wilcox
Senior Vice President,
Corporate Controller and
Chief Accounting Officer |
Date: May 2, 2007
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