COMPANY OVERVIEW
RenaissanceRe Holdings Ltd. ("RenaissanceRe") provides reinsurance and
insurance coverage where the risk of natural catastrophes represents a
significant component of the overall exposure. We are a leader in using
sophisticated computer models to construct an optimal portfolio of these
coverages.
Our principal business is property catastrophe reinsurance. Our
subsidiary, Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"), is one of
the three largest providers of this coverage in the world. We provide
reinsurance 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
particular catastrophe exceed a certain retained amount. Through these coverages
we are subject to claims arising from large natural catastrophes, such as
earthquakes and hurricanes, and we are also exposed to claims arising from other
natural and man-made catastrophes such as winter storms, freezes, floods, fires
and tornadoes. In addition, we opportunistically write other classes of risk,
which in the past has included aviation, satellite and marine reinsurance.
We also provide primary insurance. This business is written through two
subsidiaries, Glencoe Insurance Ltd. ("Glencoe") and DeSoto Insurance Company
("DeSoto"). Through these subsidiaries, we write commercial insurance in various
areas of the United States and homeowners' insurance in Florida, focusing on
business exposed to natural catastrophes.
RenaissanceRe Holdings Ltd. 1 1999 Annual Report
Table of Contents
Financial Highlights .................................. 3
Letter to Shareholders ................................ 4
Review of Operations .................................. 9
Finance ............................................... 15
Intelligent Use of Modeling ........................... 18
Selected Financial Data ............................... 20
Management's Discussion and Analysis .................. 21
Management's Responsibility for Financial Statements .. 33
Report of Independent Auditors ........................ 33
Consolidated Financial Statements ..................... 34
Notes to Consolidated Financial Statements ............ 38
Directors and Officers ................................ 55
Financial and Investor Information .................... 56
RenaissanceRe Holdings Ltd. 2 1999 Annual Report
Financial Highlights
RenaissanceRe Holdings Ltd. and Subsidiaries
(amounts in thousands, except per share amounts) 1999 1998 1997 1996 1995
Gross premiums written $ 351,305 $270,460 $228,287 $269,913 $292,607
Operating income* 119,961 121,547 142,144 159,098 160,471
Net income 104,241 74,577 139,249 156,160 162,786
Common dividends declared and paid 28,885 26,720 22,643 20,489 4,096
Per share amounts
Operating income - diluted $ 5.82 $ 5.42 $ 6.19 $ 6.12 $ 6.65
Net income - diluted 5.05 3.33 6.06 6.01 6.75
Book value 30.50 28.28 26.68 23.21 18.99
Dividends declared 1.40 1.20 1.00 0.80 0.16
Operating return on average
shareholders' equity 19.8% 19.2% 25.0% 29.8% 43.2%
Operating ratios
Claims and claim expense ratio* 34.9% 33.1% 23.7% 34.3% 38.3%
Underwriting expense ratio 28.1% 29.3% 23.8% 17.0% 13.7%
Combined ratio 63.0% 62.4% 47.5% 51.3% 52.0%
* Operating income excludes net realized gains (losses) on investments.
Operating income and operating ratios exclude 1998 fourth quarter charges
relating to Nobel Insurance Company. (See note 8 to the Consolidated Financial
Statements.)
Operating Return on Average Book Value per Share Equity
43.2% 29.8% 25.0% 19.2% 19.8% $18.99% $23.21% $26.68 $28.28 $30.50
1995 1996 1997 1998 1999 1995 1996 1997 1998 1999
RenaissanceRe Holdings Ltd. 3 1999 Annual Report
Letter to Shareholders
Jim Stanard
Chairman, President and
Chief Executive Officer
Dear Fellow Shareholder:
RenaissanceRe turned in a very strong performance in 1999, a year with the
second largest amount of insured catastrophe losses in history. Our 20% return
on average equity ("ROE") ranked us number one--by a wide margin--when compared
with our competitors. This marks the seventh year in a row in which we have been
the top performer among our peers.
Producing consistently superior returns comes down to execution. Ours
is explained by three "success factors":
o superior risk selection. This is based on our proprietary REMS(C) risk
modeling system, the deep experience of our underwriters and their effectiveness
at using REMS(C) as a decision support tool. The tutorial on page 18 discusses
practical issues in the effective use of catastrophe models.
o customer focused marketing. We are aggressive and responsive, known to our
market for the speed with which we offer quotes and pay claims.
o shareholder focused capital management. We have always actively managed our
capital, seeking to maximize value for our shareholders.
The Underwriting Cycle:
The prolonged slide in reinsurance pricing, combined with a year with
above-average loss activity, produced the worst results across the worldwide
RenaissanceRe Holdings Ltd. 4 1999 Annual Report
reinsurance industry since 1992. This year many insurance and reinsurance
companies are reporting unsatisfactory results, and have begun to cut their
total premium by shedding underpriced business. Although it was an above-average
year for insured cat losses, it was also a year of near misses. While winds over
100 mph on December 26 were truly unusual for Paris, Hurricanes Bret and Floyd
could easily have taken much more destructive paths, which would have turned
1999 into a record setting loss year for the industry. (For a detailed
description of this year's industry catastrophes, see the review of operations
on page 9.)
In this very active year of catastrophes, RenaissanceRe delivered an
outstanding underwriting profit and an attractive ROE. In addition, our core
reinsurance business showed significant growth both in gross and net written
premium income. How did we manage to deliver that performance?
To explain, let me start with a little history. We have always been
willing to be contrarian, and have been out of step with the market at several
points since we were formed:
o In 1993, as one of eight newly formed catastrophe companies, and the one with
the smallest capital, we were very active in our marketing. Our management team
had been through pricing cycles before; we knew that prices were very high, so
it was the right time to grow quickly. We also began to invest millions of
dollars to develop our REMS(C) pricing and exposure management system, before
cat modeling became fashionable.
o In 1996, as some competitors were just hitting their growth stride, we began
to cut back business as prices fell. We also began to buy retrocessional
protection for ourselves, even though these actions cut our top line and reduced
our earnings per share ("EPS") in years with low losses. Our ROE was still at a
very high level, and at this stage of the cycle we, as shareholders, felt the
right move was to reduce our risk--because we were not getting paid as much for
bearing that risk as we had been in 1993 through 1995.
o We allowed net premium to fall from 1996 through 1998. Although we still had
the best ROE of our peer group in 1996 and 1997, our margin of out-performance
was narrowing because we were hedging our risk by buying more reinsurance
(reducing net premium). These years were low loss years, which did not truly
test the quality of anyone's reinsurance portfolio (see graph on page 9).
o Beginning in the fall of 1998, the environment changed. A series of
catastrophes tested the effectiveness of reinsurance company risk management.
Our net losses were small, while many reinsurers experienced six disappointing
quarters from various
RenaissanceRe Holdings Ltd. 5 1999 Annual Report
events: Hurricane Georges, the record Australian hailstorm, the Oklahoma
tornadoes, Hurricane Floyd and Typhoon Bart, earthquakes in Turkey and Taiwan,
and the windstorms Anatol, Lothar and Martin in Europe.
During 1999, we maintained our operating ROE at about 20% because we had let
business go rather than follow pricing down and had carefully protected
ourselves by buying reinsurance. We were not surprised by our results from any
of these events, and we did not have underpriced business that we needed to cut.
Accordingly, as markets began to react to this string of losses, we were there
to provide coverage--at our prices. That is how we have achieved our premium
growth in 1999.
Although we have renewed a significant amount of our own reinsurance coverage,
we will have less protection and therefore will be keeping a larger net risk
position in 2000. Although reinsurance coverage will be costing us more, we
expect to get corresponding price increases on the business that we are writing,
so the combined effect should allow us to maintain the quality (the risk/reward
balance) of our net portfolio.
Primary Operations:
Our primary operations produced a satisfactory return in 1999. One
accomplishment was dealing with the problems at Nobel. We sold all of the old
lines of business, and we believe that the charge we took in fourth quarter 1998
is still adequate. The silver lining from the Nobel situation is that after the
initial problems were recognized, we moved quickly and effectively to address
them, and now have a 50-state-licensed company that we can use to expand
cat-exposed primary property business--when market conditions warrant. DeSoto
and Glencoe have been profitable, but have allowed their premium to shrink, due
to the current competitive conditions in the primary markets.
Capital Management:
We have always been active managers of our capital, and our depressed stock
price gave us the opportunity during 1999 to buy back 10% of the Company at an
average of 119% of year-end 1999 book value. We evaluate buybacks by looking at
the book value dilution that results and assessing how many quarters we expect
it will take to earn back the dilution. For 1999 the payback period was quite
short, and all buybacks have been accretive to EPS.
During the year we also initiated two significant joint ventures that enhanced
our capital base. State Farm Mutual Automobile Insurance Company, the largest
property/casualty insurer in the United States, is our partner in the first
venture, Top Layer Re. This vehicle, which has $3 billion of capital, is devoted
to writing high-layer international cat busi-
RenaissanceRe Holdings Ltd. 6 1999 Annual Report
ness. Overseas Partners Ltd. is our partner in the second venture, known as
OPCat, which has $450 million in capital. OPCat will write "side-by-side" with
Renaissance in our core cat reinsurance business. These ventures provide us with
both additional presence in the market as well as fee income. They allow us to
leverage our access to business and our underwriting capability on a larger
capital base while still actively managing our equity base in Renaissance to
maximize value to our shareholders.
Our founding institutional shareholders sold some of their Renaissance stock
during the year. In light of the increasing public ownership of our stock, Brian
Hall and James MacGinnitie joined our Board as independent directors. Howard
Newman of Warburg Pincus will be resigning from our Board; we owe Howard a debt
of gratitude for his counsel and support to the Company since our formation.
Challenges:
We succeeded in the challenges that I laid out last year: to maintain the
positive momentum in our core business and to carefully build our start-ups, all
with a view to getting our ROE back up to our target levels. If it ain't broke,
don't fix it; so our focus in 2000 is more of the same. In addition, we will
manage our joint ventures to meet our commitments to both our shareholders and
our partners. The basic challenge of our business is to be agile and aggressive
in our marketing while maintaining high underwriting standards in a hardening
market environment. Our track record indicates that our management team is well
equipped to meet this challenge.
/s/ James N. Stanard
James N. Stanard
Chairman, President and Chief Executive Officer
RenaissanceRe Holdings Ltd. 7 1999 Annual Report
Quarterly Underwriting Review
The RenaissanceRe management team meets
in one of its quarterly underwriting sessions to review
the reinsurance portfolio.
RenaissanceRe Holdings Ltd. 8 1999 Annual Report
REVIEW OF OPERATIONS
Reinsurance
A Year of Substantial Catastrophe Losses
for the Industry
The insurance industry experienced a large number of significant catastrophe
losses in 1999 including losses from the following events:
Event Date Insurance Industry
Loss (in billions*)
Sydney hailstorm 4/14 $1.0
Oklahoma tornado 5/3 $1.5
Turkey earthquake 8/17 $2.0
Southeast US hurricane (Floyd) 9/13 $2.3
Taiwan earthquake 9/21 $1.0
Japanese typhoon (Bart) 9/24 $3.0
Danish windstorm (Anatol) 12/4 $0.5
European windstorms (Lothar & Martin) 12/26-27 $6.7
*Catastrophe loss data source: sigma No. 2/2000
Measured in current dollars, 1999 is estimated to have been the second worst
year on record, with estimates of total insured natural catastrophe losses at
over $24 billion. The year was distinguished by a relatively large number of
events, compared with other high loss years in which a single large event has
represented a larger proportion of the total (e.g., Hurricane Andrew's $19
billion of losses in 1992).
From the standpoint of the reinsurance industry, this type of year
stresses portfolios in a different way. No single event explains the industry's
poor performance; it was the accumulation of these events that caused the pain.
The impact of multiple events was accentuated by "second event" reinsurance
contracts, under which reinsurance coverage is triggered only if there are two
loss events of a specified magnitude.
Superior Underwriting Results at Renaissance In this environment of heavy loss
activity, Renaissance delivered a 20% ROE. In the following chart, we look at
the difference (shown by the yellow bars) between Renaissance's actual ROE and
the average of our peer group of reinsurance companies. This measure of
out-performance is compared with the level of insurance industry losses
(represented by the red line).
[GRAPHIC OMITTED]
This chart shows that our superior underwriting was most apparent in years of
higher losses: a larger industry loss translated into a greater difference
between Renaissance and the industry average. This past year of high frequency
was one that
RenaissanceRe Holdings Ltd. 9 1999 Annual Report
[Photo] (left to right):
Jon Paradine,
Russell Smith,
Bill Riker and
Craig Tillman
Underwriting
exposed underpriced portfolios. One of the insights from our modeling is that
the risk to a reinsurance portfolio comes as much from multiple, moderate events
as from single large events.
1999 reinforced our view that success in our business simply cannot be
achieved by taking the industry average. Our superior performance derives from
better risk selection and overall portfolio management. We assess our portfolio
management skill--understanding the correlation of reinsurance contracts with
each other--to be even more important to our performance than individual risk
selection:
Return on Equity
- ---------------------------- RenaissanceRe ROE
/\
/ \ Attributable to
/_ _\ Optimal Portfolio
|| Construction
||
|| Attributable to
Individual Risk
Section
- ---------------------------- Industry Average ROE
Part of our success this past year can be ascribed to our knowledge of
the retrocessional market (referring to transactions in which one reinsurance
company reinsures another). Our exposure management system has a unique capacity
to assess the reinsurance that we purchase to evaluate the portfolio benefit.
These purchases do not represent a simple arbitrage of one assumed contract
against one ceded contract, but rather involve the complex problem of
understanding how our assumed portfolio fits with our ceded portfolio. We
purchase reinsurance to enhance capacity (not to allow us to write bad
business). We dynamically manage our portfolio so that we are not over-reliant
on the retrocessional market.
On the other side of the retrocessional market, we are also active in
assuming premium from other reinsurance companies. Here we believe that there
are important challenges to good underwriting because the ultimate reinsurer is
at least one additional step
RenaissanceRe Holdings Ltd. 10 1999 Annual Report
[Photo] (left to right):
Ian Branagan,
Dave Eklund,
Kevin O'Donnell and
Alex Richards
Underwriting
removed from the underlying primary insurance risks. There continues to be wide
disparity in the quality of the retrocessional transactions in the market, so a
rigorous assessment of the risk is critical. We have built a proprietary system
for analyzing these risks, and since our inception, we have been active and
successful in assuming retrocessional business.
Structured Products--Leveraging Our Skills
In 1998, we formed our structured products unit to focus on joint ventures,
investment opportunities within the insurance and reinsurance industries and
non-traditional structured reinsurance. Most of the transactions executed to
date have focused on supporting the core catastrophe reinsurance business.
During 1999, in addition to our efforts in the catastrophe-linked financial
markets, we executed two notable joint ventures. Our business partners in these
ventures are State Farm Mutual Automobile Insurance Company and Overseas
Partners Ltd.
In January of this year, we formed Top Layer Re as a Bermuda domiciled
reinsurer, owned equally by State Farm and Renaissance Reinsurance. Each partner
contributed $50 million to capitalize the company. State Farm enhanced this
capacity with a $2.9 billion annual aggregate stop loss; strong enough support
to achieve a AAA rating from Standard and Poor's and an A++ rating from A. M.
Best. Top Layer Re combines the underwriting skill and discipline of Renaissance
with the financial strength of State Farm to offer significant capacity to
high-layer property catastrophe reinsurance programs in all territories outside
the United States.
In November, we entered into an agreement with Overseas Partners Cat
Ltd., a subsidiary of Overseas Partners Ltd., both domiciled in Bermuda. With
this agreement, OPCat, a new entity capitalized by its parent with $450 million
of equity and rated A+ by
RenaissanceRe Holdings Ltd. 11 1999 Annual Report
STRUCTURED PRODUCTS
[Photograph of Jay Nichols (standing) and Monte Combe]
A.M. Best, appointed Renaissance as its sole underwriting manager. By offering
companion layers with Renaissance Reinsurance, this partnership has established
a significant new entrant in the property catastrophe reinsurance marketplace--a
participant that is both stable and disciplined.
We are excited about these joint ventures for three reasons. First, our
partners have a long-term commitment to the business and share our optimism
about the future opportunities. Second, we believe that these two partnerships
will further validate our leadership in the business of underwriting property
catastrophe risk. We have consistently pointed to our track record in this
marketplace, and we are confident these ventures will broaden that track record
beyond the operating results of Renaissance Reinsurance. Third, these
partnerships offer a significant commercial opportunity for Renaissance. Both
ventures are structured with significant risk and premium sharing between the
partners, and they also compensate Renaissance with underwriting fee income. We
have formed Renaissance Underwriting Managers, Ltd. to provide services to these
ventures.
We continued to participate in the catastrophe-linked securities market
in 1999, participating in both the new issue and secondary market. We evaluate
catastrophe-linked securities using the same methodologies we use to evaluate
traditional reinsurance. However, these offerings provide less exposure
information than a typical reinsurance submission and also contain different
structural risks. We model each deal with the information provided, and
participate in offerings that provide the appropriate portfolio return with
acceptable structural risk. We are very selective in purchasing these
securities, participating in less than one third of the transactions
underwritten in 1999.
Marketing Success
Our gross reinsurance premium grew 36% and net reinsurance premium grew 21%,
comparing 1999 with 1998. While our focus will always be on portfolio quality
rather than on simple premium growth, the increase in premium this year reflects
our ability to access business when market conditions harden and more contracts
meet our hurdle rate.
To ensure our access to business, our underwriters are also active in
their marketing roles. Over the
RenaissanceRe Holdings Ltd. 12 1999 Annual Report
course of 1999, they met with over 500 brokers and 400 clients or potential
clients. Our reputation is that we make quick decisions on submissions, and we
are proactive in offering alternative structures to our brokers and clients.
Because of our effective desktop systems, we are able to provide very rapid, but
still rigorous, underwriting decisions.
Premium grew in our reinsurance of primary companies, but even more
profoundly in our assumed retrocessional business, where our 1999 premium
doubled from the amount that we wrote in 1998. Here our success is a function
not only of our access to business, but also of our confidence in our
underwriting systems, as described above. Other companies needed to focus on
re-underwriting their books of business, while we were expanding into a
hardening market.
Market Outlook
Investors and senior executives in the reinsurance business are focusing on the
past two years of heavy loss activity. The industry is recognizing that success
in the catastrophe business is difficult to achieve--as a result of three
interrelated factors:
o Catastrophe risks are difficult to understand. Underwriters must assess the
risks based on their absolute exposure as well as their relative exposures.
Given the low frequency of the events covered by catastrophe reinsurance, these
risks must be considered by looking at the tails of the probability
distributions, which are sensitive to key model assumptions and subject to
uncertainty.
[Photo]
MARKETING & OPERATIONS
(left to right): Charles Hollis, Michelle Johnson and Bob Hykes
o Efficiently utilizing capital in the cat business requires a detailed
understanding of cat risk. The property/casualty industry is often viewed as
over-capitalized by as much as 20-30%. Yet, ironically, the solvency of some
companies may be threatened by a single catastrophe event in one region, even
while the same companies could support more risk in other regions. So the real
question is having access to the portfolio management skills to efficiently
manage capital.
o Available talent is in short supply. There are only a few underwriters with a
successful track record writing catastrophe reinsurance. Recently, investors
have become reluctant to support people who do not have successful track
records.
We are optimistic that much of the naive capaci-
RenaissanceRe Holdings Ltd. 13 1999 Annual Report
INFORMATION TECHNOLOGY
[Photograph of (left to right): John Gill, John Wineinger and Dion Tucker]
ty has dried up for the long run, given the poor results of many players over
the past two years and a greater appreciation of the complexity of achieving
success in this business. Against this backdrop, we saw an increasing level of
opportunities in catastrophe reinsurance in 1999, and see the positive market
environment continuing into 2000.
PRIMARY INSURANCE
Our primary operations consist of: (1) DeSoto, writing Florida homeowner
business, (2) Glencoe, writing commercial "E&S" coverage in the U.S., and (3)
Nobel, which is in run-off, but has licenses in 50 states. During 1999, bottom
line contribution from our primary business was limited, and the focus of each
of these businesses was to maintain and develop an operating platform for future
growth.
Market conditions are beginning to show signs of firming. However, we
remain very disciplined in the primary area and will grow only to pursue
attractive opportunities. One area with potential is developing new distribution
systems for the primary product, and we are exploring various ways to
efficiently provide primary insurance in catastrophe-exposed areas that are
underserved by traditional carriers.
Our primary business units can provide value in two ways. First,
particularly if market conditions improve, we can expand our access to
catastrophe-exposed insurance risks. Second, we are using insights gained from
running our primary operations to be more effective in our reinsurance business.
For example, knowledge gained from our DeSoto venture helped us understand the
unique circumstances facing the new Florida companies, and allowed us to design
better products for them. Glencoe provides us additional insight into conditions
in the catastrophe-exposed commercial property market.
RenaissanceRe Holdings Ltd. 14 1999 Annual Report
FINANCE
[Photograph of (left to right): Simon Jack, Preston Hutchings, John Lummis,
Marty Merritt and Diana Petty]
Expanding capital resources
Our traditional capital resources include common equity, preferred and bank
debt. Over time these resources have expanded significantly:
[GRAPHIC OMITTED]
The growth in 1999 arose principally from the renewal and expansion of our bank
credit facility from $200 million to $300 million. The facility has a five-year
term, and is available for general corporate purposes.
It is important to understand that financial leverage is not the driver
of our high returns on equity. At year-end 1999, we had over $200 million of
liquidity at the parent holding company, which was available to us to pay down
debt. We made a tactical decision that we would retain this liquidity, which
serves as stand-by capital that we could contribute to the capital of our
operating units following a large catastrophe year (a year much worse than this
past one).
Perhaps the most important theme for capital resources in 1999 is our
newly developed off-balance-sheet financing capacity: the combination of Top
Layer Re and OPCat (described in the Review of Operations on page 11) gives us
access to an additional $3.4 billion of capital. The innovation in this approach
is that we can maintain our equity base at a moderate size, and ensure its
efficient use,
RenaissanceRe Holdings Ltd. 15 1999 Annual Report
at the same time that we have access to much larger amounts of capital. This
additional pool of capital is viewed as equity-like from the standpoint of
customers and ratings agencies--without diluting our common equity. With total
capital resources of $4.4 billion, we believe that we have more capital
available for the catastrophe reinsurance business than all but a very small
number of competitors--each with a much larger common equity base.
By assembling these long-term capital resources, we are convinced that
we have more than adequate financial scale to support our growing operational
scale as one of the three largest writers of catastrophe reinsurance in the
world.
Active management of our common equity
1999 was another year of active management of our equity capital. We repurchased
a total of 2.2 million shares for $80 million. The average price per share was
$36.26 for the year, compared with our book value per share of $30.50 at the end
of the year. The benefit of this for our remaining shareholders is clear: we
project that our 1999 repurchases will result in accretion to book value per
share within two years.
Turning to our dividend, in February 1999, our Board increased our
quarterly dividend from $.30 to $.35, our fifth consecutive annual increase. As
re-cently announced, in February 2000, we again in-creased our quarterly
dividend, from $.35 to $.375. With a payout ratio of approximately 25%, we
continue to focus capital management around repurchases, given their tax
efficiency for many of our shareholders, as well as greater flexibility for the
Company.
Over the course of this year, our three founding shareholders each
exited portions of their positions. The St. Paul Companies sold 700,000 shares
to the Company. The Warburg Limited Partnership distributed 1.3 million shares
to its partners, and we now view those shares as being part of the public float.
An affiliate of General Electric's pension fund sold over 300,000 shares into
the public market. Together, these transactions represent important progress
toward expanding the public float for Renaissance, which has grown over time as
depicted below:
[GRAPHIC OMITTED]
Investments
Our investment strategy balances the need for liquidity in the event of large
catastrophe losses with the desire to enhance the attractive return on equity
already provided by our underwriting activities. Consequently, the Company
maintains a diversified portfolio of U. S. dollar, fixed-income securities with
a short average duration and a very high average credit quality. This portfolio,
though highly liquid, should provide an attractive return over time. At
year-end, the portfolio had a yield to maturity of
RenaissanceRe Holdings Ltd. 16 1999 Annual Report
7.15% and an effective duration of 2.7 years.
Given the rising interest rate environment of the past year, our
portfolio's total return delivered less than cash for the year, understandable
but disappointing nonetheless. Offsetting that result, we were pleased that, on
a relative basis, our investment managers generally outperformed their
benchmarks, and that the total portfolio outperformed a comparable duration U.S.
Treasury index. We believe that a consistent approach to our investment strategy
will enhance value over time.
At year-end our investment portfolio was allocated as follows:
Treasuries & Agencies 28%
Asset Backed (AAA) 17%
Mortgage Backed (AAA) 14%
Other 3%
Sovereigns & Supra-Nationals (AA/AAA) 6%
Global High Yield 9%
Investment Grade Corporate Debt 10%
Cash & Cash Equivalents 13%
RenaissanceRe Holdings Ltd. 17 1999 Annual Report
INTELLIGENT USE OF MODELING
A distinguishing element in the successful management of catastrophe exposure is
the intelligent use of computer models. Over the past two decades, catastrophe
(or "cat") models have evolved to become important decision tools in property
underwriting. Our use of these cat models enables each Renaissance business
segment to assess risk (and reward for bearing risk) on a consistent basis. The
several major vendors of these models have spent tens of millions of dollars on
model development and employ hundreds of engineers, scientists and statisticians
to develop cat models for many areas around the world. We evaluate and use
models from all major vendors and have developed a unique perspective on the
applicability of these models to underwriting cat risk. By comparing and
contrasting different models, we are able to determine which model results are
most relevant to the different risks we evaluate.
Using Cat Models
Cat models are software applications that simulate the interaction between
exposure (e.g., insured value of properties), vulnerability (e.g., how much
damage different wind speeds will cause) and hazards (e.g., the chance of a
windstorm hitting a particular location) to estimate risk (e.g., the dollar loss
that a reinsurer will suffer). Understanding the cat models' strengths and
limitations requires a detailed knowledge of how they are developed and the
level of science they capture. The goal is a probabilistic description of
complex natural phenomena. Misuse of modeling information is prevalent due to
the tendency to attribute precision to output that is generated by computers. It
is important to understand the trade-offs between different levels of resolution
in the analysis (e.g. by county, by zip code, by individual property location)
and the need to collect accurate data about the insured risks. A cat model
should not be seen as exact, but rather as an educated scientific estimate of
the loss potential. Renaissance works closely with the vendors, especially when
there are opportunities for validating the models by drawing upon our own loss
experience and modeling knowledge.
The Evolution of Cat Models
In the past two decades, we have witnessed three stages of modeling
sophistication.
o First, deterministic models evaluated the impact of large catastrophes to
understand the potential worst case scenarios.
o Second, probabilistic models were used to evaluate many different scenarios on
a particular exposure to create a picture of the probability distribution of
potential loss.
o Third, and currently, models are increasingly descriptive of not only scenario
risk, but also the uncertainty associated with that risk--acknowledging that our
understanding of hurricanes and associated property vulnerability, for example,
is inexact.
Multiple Models
Many property underwriting operations employ a single
RenaissanceRe Holdings Ltd. 18 1999 Annual Report
model for gauging the risk on both individual reinsurance contracts and
portfolios of contracts. This is an important step forward compared to past
practices in catastrophe risk underwriting. However, since any single model is
necessarily biased towards the judgments of its developers, reliance on a single
model will incorporate those same biases during the underwriting and portfolio
selection process. Our own experience shows that models vary considerably,
depending upon the underlying characteristics of the exposures simulated.
Without a second or third opinion of the exposure and risk posed, it is
impossible to gauge the variability in potential outcomes of natural hazard
modeling. Effective risk management requires the anticipation of all credible
estimates of loss, so the use of multiple models results in fewer surprises and
can highlight hidden exposures.
Moreover, no one vendor model covers all perils for all areas. Although our
largest exposure is to hurricane/typhoon and our next largest is earthquake,
many other events such as hail, freeze and brushfire can cause losses. Also,
some vendor models do not reflect the expenses of settling losses, or the
localized inflation in rebuilding costs that follows a large event. Using models
for decision making without adjusting for these "unmodeled" exposures can be
worse than not modeling at all.
Helping Our Clients
One of our roles as a reinsurer is to use our modeling experience to help our
clients identify the best models to use in their own risk management decisions.
We continually test, compare and critique models to assist our clients in their
own loss reduction and prevention efforts. Renaissance's unique model-based
approach has afforded us a very prominent role in guiding model development.
Effective Management Systems
We could have access to the best modeling systems in the world but, if our
underwriters did not actually use these results to make better decisions, the
models would be pointless. Getting the "traders" (in our business, the
underwriters) working effectively with the "quants" (the modelers) is a weak
link in many financial organizations. Our underwriters, who are making the
day-to-day pricing and risk-taking decisions, understand the inner workings of
the models, and their strengths and weaknesses. When an answer comes out of the
computer that differs from the underwriter's intuition, the underwriter neither
believes nor discards it. He drills back into the model to find out where the
difference lies. Is it a problem with the input data? Is there a weakness in
some aspect of the model? Is the model giving the underwriter a new insight?
Effective use of catastrophe models is a key factor in our ability to
consistently produce industry-leading results. But it is vital to understand the
weaknesses along with the strengths of these models. Perhaps these models should
come with warning labels: "improper use can be hazardous to your financial
health--don't try this at home."
RenaissanceRe Holdings Ltd. 19 1999 Annual Report
SELECTED FINANCIAL DATA
RenaissanceRe Holdings Ltd. and Subsidiaries
The following summary financial information should be read in
conjunction with the Consolidated Financial Statements and the notes thereto
presented on pages 34 to 54 in this Annual Report.
- -----------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Gross premiums written $ 351,305 $ 270,460 $ 228,287 $ 269,913 $ 292,607
Net premiums written 213,513 195,019 195,752 251,564 289,928
Net premiums earned 221,117 204,947 211,490 252,828 288,886
Net investment income 60,334 52,834 49,573 44,280 32,320
Total revenue 270,235 260,527 254,726 294,959 326,566
Claims and claim expenses 77,141 112,752 50,015 86,945 110,555
Acquisition and operating expenses 62,268 61,031 50,358 42,893 39,734
Net income 104,241 74,577 139,249 156,160 162,786
Earnings per Common Share - basic $ 5.10 $ 3.39 $ 6.19 $ 6.15 $ 6.84
Earnings per Common Share - diluted 5.05 3.33 6.06 6.01 6.75
Dividends per share 1.40 1.20 1.00 0.80 0.16
- -----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total investments $ 942,669 $ 826,608 $ 736,538 $ 603,484 $ 528,836
Cash and cash equivalents 132,112 115,701 122,929 198,982 139,163
Total assets 1,617,243 1,356,164 960,749 904,764 757,060
Reserve for claims and claim expenses 478,601 298,829 110,037 105,421 100,445
Capital Securities(1) 89,630 100,000 100,000 -- --
Shareholders' equity 600,329 612,232 598,703 546,203 486,336
Book value per Common Share $ 30.50 $ 28.28 $ 26.68 $ 23.21 $ 18.99
- -----------------------------------------------------------------------------------------------------------------
OPERATING RATIOS
Claims and claim expense ratio 34.9% 55.0% 23.7% 34.3% 38.3%
Underwriting expense ratio 28.1% 29.8% 23.8% 17.0% 13.7%
Combined ratio 63.0% 84.8% 47.5% 51.3% 52.0%
- -----------------------------------------------------------------------------------------------------------------
(1) Minority interest - Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated debentures
of the Company.
RenaissanceRe Holdings Ltd. 20 1999 Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Results of Operations and Financial Condition
GENERAL
RenaissanceRe Holdings Ltd. ("RenaissanceRe") is a Bermuda based holding company
with operating subsidiaries engaged in reinsurance, insurance and related
services. RenaissanceRe's principal operating subsidiary, Renaissance
Reinsurance Ltd. ("Renaissance Reinsurance") provides property catastrophe
reinsurance coverage to insurers and reinsurers, primarily on an excess of loss
basis. During 1999, Renaissance Reinsurance wrote $282.3 million of premium
(1998 - $207.2 million) and based on gross premiums written, Renaissance
Reinsurance is one of the largest providers of this coverage in the world.
Excess of loss catastrophe coverage generally provides coverage for claims
arising from large natural catastrophes, such as earthquakes and hurricanes, in
excess of a specified loss. In connection with the coverage it provides,
Renaissance Reinsurance is also exposed to claims arising from other natural and
man-made catastrophes such as winter storms, freezes, floods, fires and
tornadoes.
Renaissance Reinsurance of Europe ("Renaissance Europe") was incorporated in
1998 under the laws of Ireland as a wholly owned subsidiary of Renaissance
Reinsurance. Renaissance Europe was formed to provide certain property
catastrophe reinsurance coverage in Europe.
Glencoe Insurance Ltd. ("Glencoe") was incorporated in 1996 as a wholly
owned subsidiary of RenaissanceRe. Glencoe provides primary catastrophe exposed
property coverage on an excess and surplus lines basis, and is eligible to write
business in 29 states. During 1999, Glencoe wrote $5.0 million of primary
insurance premium (1998 - $5.6 million).
DeSoto Insurance Company ("DeSoto") was incorporated in 1997 as a
wholly owned subsidiary of Glencoe. DeSoto is a special purpose Florida
homeowners insurance company that is licensed to assume and renew homeowner
policies from the Florida JUA, a state sponsored insurance company. During 1999,
DeSoto wrote $14.3 million of primary homeowners insurance coverage (1998 -
$26.7 million).
RenaissanceRe owns a U.S. holding company, Renaissance U.S. Holdings,
Inc. ("Renaissance U.S."), whose principal subsidiary was primarily Nobel
Insurance Company, a Texas-domiciled insurance company ("Nobel"). Following a
1998 fourth quarter after-tax charge of $40.1 million, Nobel disposed of its
business lines in 1999. Nobel continues to be a licensed insurer in all 50
states, although there can be no assurance such licenses can be retained. See
Financial Condition - Nobel. Currently, Renaissance U.S. also owns Paget
Insurance Services, Pembroke Managing Agents and DeSoto Prime Insurance Company
all of which are active in the Florida homeowners market.
In January 1999, Renaissance Reinsurance entered into a joint venture,
Top Layer Reinsurance Ltd. ("Top Layer Re"), with State Farm Mutual Automobile
Insurance Company ("State Farm") to provide high layer coverage for non-U.S.
risks.
In November 1999, RenaissanceRe incorporated Renaissance Underwriting
Managers ("Renaissance Managers") to act as underwriting manager to Overseas
Partners Cat Ltd. ("OP Cat"), a subsidiary of Overseas Partners Ltd. Renaissance
Managers will underwrite worldwide property catastrophe reinsurance programs for
OP Cat.
RenaissanceRe and its subsidiaries' (the "Company") results depend to a
large extent on the frequency and severity of catastrophic events, and the
coverage offered to clients impacted thereby. In addition, from time to time,
the Company may consider opportunistic diversification into new ventures, either
through organic growth or the acquisition of other companies or books of
business. In evaluating such new ventures, the Company seeks an attractive
return on equity, the ability to develop or capitalize on a competitive
advantage and opportunities that will not detract from its core reinsurance
operations. Accordingly, the Company regularly reviews strategic opportunities
and periodically engages in discussions regarding possible transactions,
although there can be no assurance that the Company will complete any such
transactions or that any such transaction would contribute materially to the
Company's results of operations or financial condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net operating income for the year ended December 31, 1999 was $120.0 million
compared with $121.5 million for the year ended December 31, 1998. Operating
earnings per Common Share were $5.82 for the year ended December 31, 1999
compared with $5.42 for the year ended December 31, 1998.
RenaissanceRe Holdings Ltd. 21 1999 Annual Report
The Company's net operating income excludes the impact of realized investment
gains and losses, as well as, in the case of 1998, the fourth quarter charge of
$40.1 million related to Nobel. See Financial Condition - Nobel.
Gross premiums written for the year ended December 31, 1999 increased by
$80.8 million, or 29.9 percent to $351.3 million from $270.5 million for the
year ended December 31, 1998. Gross premiums written by segment were:
(in thousands)
Year ended December 31, 1999 1998
-------------------------
Reinsurance $282,344 $207,189
Primary 68,961 63,271
-------------------------
Total $351,305 $270,460
-------------------------
Increased reinsurance premiums resulted primarily from the numerous industry
losses which occurred late in 1998 and during 1999 and the related contraction
in capacity in the property catastrophe reinsurance market, which resulted in
increased prices in certain pockets of the property catastrophe reinsurance
market during 1999. The $75.2 million or 36.3 percent increase in premiums from
the reinsurance operations was the result of a 26.8 percent increase in premiums
related to new business and a 25.3 percent increase related to changes in
pricing, participation levels and coverage on renewed business, partially offset
by a 15.8 percent decrease in premiums due to the Company or the cedant not
renewing coverage.
Premiums written by the primary companies increased in 1999, largely because
such results reflect a full year of premiums written for Nobel, compared with
only six months of Nobel premium during 1998. This increase was partially offset
by reduced premiums written for DeSoto. The reduction in DeSoto premiums was due
to the one-time initial premiums assumed from the Florida JUA during 1998 of
approximately $10 million. During 1999 Nobel sold its principal operating units
and, as a result, the Company expects a decrease in future premium volume from
the primary businesses. See Financial Condition - Nobel.
During 1999, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During 1999, the consolidated ceded premiums were as
follows:
(in thousands)
Year ended December 31, 1999 1998
-------------------------
Reinsurance $ 77,152 $ 40,036
Primary 60,640 33,405
-------------------------
Total $137,792 $ 75,441
-------------------------
The increase in ceded reinsurance was the result of 1) increased costs of ceded
reinsurance contracts renewed by Renaissance Reinsurance; 2) increased purchases
of reinsurance by Renaissance Reinsurance; and 3) Nobel ceding the large
majority of its 1999 gross premiums written as part of the planned reduction of
its operations. Nobel's ceded reinsurance was $41.5 million in 1999 compared
with $21.8 million during 1998. See Financial Condition - Nobel. To the extent
that appropriately priced coverage is available, the Company anticipates
continued use of reinsurance to reduce the potential volatility of its results.
The Company's gross premiums written by geographic region were as follows:
(in thousands)
Year ended December 31, 1999 1998
-------------------------
Geographic Region
United States - reinsurance $160,195 $128,387
United States - primary 68,961 63,271
Worldwide 49,482 20,584
Worldwide
(excluding U.S.) 27,276 26,380
Europe (including the
United Kingdom) 26,437 18,532
Other 15,742 9,374
Australia and New Zealand 3,212 3,932
-------------------------
Total Gross Premiums
Written $351,305 $270,460
-------------------------
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written to date is predominately from Europe and Japan.
The table below sets forth the Company's combined ratio and components
thereof, excluding, in the case of 1998, the Nobel charge:
RenaissanceRe Holdings Ltd. 22 1999 Annual Report
Year ended December 31, 1999 1998
---------------------------
Claims and claim expenses 34.9% 33.1%
Underwriting expense ratio 28.1 29.3
---------------------------
Combined ratio 63.0% 62.4%
---------------------------
The net claims and claim expenses incurred for the year ended December 31, 1999
were $77.1 million, or 34.9 percent of net premiums earned. In comparison,
claims and claim expenses incurred for the year ended December 31, 1998 were
$67.8 million, or 33.1 percent of net premiums earned. The primary reason for
the increase in the net incurred losses was the significant catastrophe losses
that occurred during 1999. During 1999 nine significant worldwide catastrophic
events occurred: the hail storms in Sydney Australia in April; the mid-western
("Oklahoma") tornadoes in May; Hurricane Floyd in September; Typhoon Bart which
struck Japan in September; Turkish and Taiwanese earthquakes in August and
September, respectively; and the Danish windstorm Anatol and the French
windstorms, Lothar and Martin in December. Seven of these events are each
expected to cause over $1 billion of insured damages. These events caused net
incurred losses for Renaissance Reinsurance to increase to $64.4 million for
1999 or a loss ratio of 32.7 percent, compared with $42.4 million for 1998 or a
loss ratio of 25.0 percent. Due to the potential high severity of claims related
to the property catastrophe reinsurance business, there can be no assurance that
Renaissance Reinsurance will continue to experience this level of net claims in
future years.
Renaissance Reinsurance's net incurred losses in 1998 included claims
on a number of aggregate stop loss and excess of loss contracts, as well as
claims related to Hurricane Georges, the January Canadian Freeze, Hurricane
Bonnie and additional claims from various U.S. wind, hail, tornado and flood
events.
The claims and claim expenses incurred from the Company's primary operations
for the year ended December 31, 1999 were $12.7 million, or a loss ratio of 52.2
percent of net premiums earned. In comparison, claims and claim expenses
incurred from the Company's primary operations for the year ended December 31,
1998 were $25.4 million, or a loss ratio of 72.1 percent. During 1999, DeSoto
and Glencoe continued to perform within targeted loss ratios. The primary factor
contributing to the reduction in net losses from the primary operations was the
recognition of a portion of a deferred gain related to a retroactive reinsurance
contract entered into by Nobel during 1998. The Company's 1998 combined ratio
and components thereof exclude the 1998 Nobel charge. See Financial Condition -
Nobel.
For the Company's reinsurance operations, estimates of claims and claim
expenses incurred and losses recoverable are based in part upon the estimation
of claims resulting from catastrophic events. Estimation by the Company of
claims resulting from catastrophic events based upon its own historical claim
experience is inherently difficult because of the variability and uncertainty
associated with property catastrophe claims. Therefore, the Company utilizes
both proprietary and commercially available models, as well as historical
reinsurance industry property catastrophe claims experience, for purposes of
evaluating future trends and providing an estimate of ultimate claims costs.
For both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to estimate ultimate expected claims and claim
expenses. The period of time from the reporting of a loss to the Company through
the settlement of the Company's liability may be several years. During this
period, additional facts and trends will be revealed. As these factors become
apparent, case reserves will be adjusted, sometimes requiring an increase in the
overall reserves of the Company, while at other times the Company may affect a
reallocation of IBNR reserves to specific case reserves. Reserve estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates. See Notes 2 and 5 to the Consolidated Financial
Statements.
Acquisition and operational expenses, consisting of brokerage commissions,
excise taxes and other costs directly related to the underwriting operations of
the Company, for the year ended December 31, 1999 were $62.3 million, or 28.1
percent of net premiums earned, compared with $60.1 million, or 29.3 percent of
net premiums earned for the year ended December 31, 1998, excluding the 1998
Nobel charge. The primary contributor to the decrease in the underwriting
expense ratio was the increase in premiums earned by Renaissance Reinsurance
with no corresponding increase in the costs to operate the reinsurance
operations. This was slightly offset by increased costs at Nobel, primarily
related to severance costs, and increased costs at DeSoto for additional hires.
RenaissanceRe Holdings Ltd. 23 1999 Annual Report
Net investment income (excluding net realized investment gains and
losses) for the year ended December 31, 1999 was $60.3 million, compared with
$52.8 million for the year ended December 31, 1998. The increase in investment
income resulted primarily from an increase in interest rates during 1999 plus
the $132.5 million increase in the amount of invested assets during the year,
which was primarily the result of cash flows provided by operations of $130.3
million and an increase in the borrowings under the Company's line of credit of
$150.0 million, partially offset by dividends paid and share repurchases of
$28.9 million and $80.1 million, respectively.
During 1999, the Company reported other income of $4.9 million,
compared with $9.8 million for the year ended December 31, 1998. The majority of
the other income relates to recoveries on non-indemnity catastrophe index
transactions. See Financial Condition - Derivative Instruments.
During 1999, net realized losses on investments were $15.7 million,
compared with $6.9 million in 1998. The 1999 losses were primarily the result of
increased interest rates during 1999 and the subsequent sale of fixed income
securities. See Financial Condition - Investments.
Excluding a write-off of goodwill attributable to Nobel, corporate
expenses were $3.1 million in 1999, compared with $4.2 million in 1998. During
1999, in conjunction with the sale and reinsurance of the primary business units
of Nobel, the Company wrote off $6.7 million of goodwill. The 1998 amount
excludes charges related to Nobel. See Financial Condition - Nobel.
During the year ended December 31, 1999, the Company recorded interest
expense of $9.9 million on its outstanding debt and $8.3 million on its Capital
Securities, compared with $4.5 million and $8.5 million in 1998, respectively.
The increase in interest expense on the Company's outstanding debt was primarily
related to an increase in borrowing rates and the additional borrowings of
$150.0 million during 1999, $125.0 million of which was drawn on August 17,
1999.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net operating income, excluding the Nobel fourth quarter $40.1 million after tax
charge and excluding realized investment gains and losses, for the year ended
December 31, 1998 was $121.5 million compared with $142.1 million for the year
ended December 31, 1997. The decrease was primarily related to a decrease in net
premiums earned, an increase in net claims and claim expenses and an increase in
operating expenses, partially offset by an increase in investment income and an
increase in other income. The above factors resulted in a decrease in operating
earnings per Common Share to $5.42 for the year ended December 31, 1998 from
$6.19 for the year ended December 31, 1997. Earnings, excluding the Nobel
charge, but including realized gains and losses on investments, decreased to
$114.7 million in 1998 from $139.2 million in 1997.
Including the Nobel charge, net operating income for the year ended December
31, 1998 was $81.5 million compared with $142.1 million for the year ended
December 31, 1997. The decrease was primarily due to the fourth quarter Nobel
charge. The Nobel charge included after tax amounts of $29.6 million for adverse
development on Nobel's casualty and surety books of business, a goodwill
write-down of $6.6 million, and other related costs of $3.9 million. Earnings
per Common Share decreased to $3.33 per share in 1998, compared with $6.06 in
1997 primarily as a result of the Nobel charge. See Financial Condition - Nobel.
Gross premiums written for the year ended December 31, 1998 increased 18.5
percent to $270.5 million from $228.3 million for the year ended December 31,
1997. The increase resulted from the inclusion of $30.9 million of premiums from
Nobel, which was acquired in June 1998, and of $26.7 million of premiums from
DeSoto, which began providing coverage in January of 1998. Partially offsetting
the growth in the primary insurance premiums was a 6.3 percent decrease in the
Company's reinsurance operations from $221.2 million in 1997 to $207.2 million
in 1998.
The property catastrophe reinsurance market and the primary insurance market
were highly competitive in 1998. Because the property catastrophe reinsurance
business has been one of the most profitable segments of the market, it is the
focus of much competition, which resulted in lower premiums measured on a
risk-adjusted basis. The 6.3 percent
RenaissanceRe Holdings Ltd. 24 1999 Annual Report
premium decrease from the Company's reinsurance operations was the result of a
16.4 percent decrease in premiums due to the Company or the cedent not renewing
coverage and a 14.0 percent decrease related to changes in pricing,
participation levels and coverage on renewed business, partially offset by a
24.1 percent increase in premiums related to new business. The decrease in
premiums resulted in part from consolidation of the Company's customers.
During 1998, consistent with its risk management practices and the
availability of coverage responsive to the Company's risk profile, the Company
increased the level of property catastrophe reinsurance coverage purchased for
its own account. Ceded premiums written in the Company's reinsurance operations
during 1998 were $40.0 million compared with $35.4 million in 1997.
Additionally, the Company's primary operations had ceded written premiums of
$27.7 million (1997 - $0.9 million).
The Company's gross premiums written by geographic region were as follows:
(in thousands)
Year ended December 31, 1998 1997
-----------------------
Geographic Region
United States - reinsurance $128,387 $116,676
Unites States - primary 63,271 7,041
Worldwide 20,584 27,930
Worldwide
(excluding U.S.) 26,380 32,005
Europe (including the
United Kingdom) 18,532 21,007
Other 9,374 16,738
Australia and New Zealand 3,932 6,890
-----------------------
Total Gross Premiums
Written $270,460 $228,287
-----------------------
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written to date is predominately from Europe and Japan.
The table below sets forth the Company's combined ratio and components
thereof, excluding the Nobel charge:
Year ended December 31, 1998 1997
----------------------------
Claims and claim expenses 33.1% 23.7%
Underwriting expense ratio 29.3 23.8
----------------------------
Combined ratio 62.4% 47.5%
----------------------------
The Company's combined ratio and components thereof, including the Nobel charge,
were as follows:
Year ended December 31, 1998 1997
--------------------------
Claims and claim expenses 55.0% 23.7%
Underwriting expense ratio 29.8 23.8
--------------------------
Combined ratio 84.8% 47.5%
--------------------------
The 1998 claims ratio does not reflect the benefits of a $7.5 million recovery
on a non-indemnity catastrophe index transaction, which is included in other
income.
In the fourth quarter of 1998, the Company recorded pre tax charges of
$45.0 million for claims and claim expenses on the casualty and surety books of
business of Nobel. See Financial Condition - Nobel.
Excluding the Nobel charge, the claims and claim expenses incurred for
the year ended December 31, 1998 were $67.8 million, or 33.1 percent of net
premiums earned. In comparison, claims and claim expenses incurred for the year
ended December 31, 1997 were $50.0 million, or 23.7 percent of net premiums
earned. The primary reasons for the increase in the loss ratios were 1) a
decrease in net earned premiums, which is primarily related to an increase in
ceded premiums written and 2) the inclusion of the operations of Nobel and
DeSoto during 1998, whose loss ratios, based on the nature of those businesses,
are normally higher than those of Renaissance Reinsurance.
The year ended December 31, 1998 was the third worst year for insured
U.S. catastrophe losses. In comparison, the year ended December 31, 1997 was a
relatively light year for natural catastrophe losses. However, largely due to
Renaissance Reinsurance's reinsurance protection, the net loss ratio of
Renaissance Reinsurance was not significantly impacted by the 1998 catastrophe
loss events. Net reinsurance claims for Renaissance Reinsurance in 1998 were
$42.4 million, or 25.0 percent of net premiums earned as compared with $49.0
million in 1997 or 23.6 percent of net premiums earned. Gross claims in 1998
included claims on a number of aggregate stop loss and excess of loss contracts,
as well as claims related to Hurricane Georges, the January Canadian Freeze,
Hurricane Bonnie and additional claims from various U.S. wind, hail, tornado and
flood events.
Excluding the Nobel charge, the Company's primary operations produced a
loss ratio of 72.1 percent. Including the Nobel charge, the loss ratio of the
primary operations was
RenaissanceRe Holdings Ltd. 25 1999 Annual Report
200.0 percent. See Financial Condition - Nobel. In connection with the Company's
acquisition of Nobel, Nobel purchased a retroactive reinsurance contract to
cover $38.0 million of adverse loss development on certain prior year casualty
reserves. Accounting guidelines require that adverse development of the reserves
covered by this contract be reflected in the Company's statement of income at
the time of the adjustment. However, the offsetting recovery under the contract
is required to be deferred and recognized into income as payments are received
from the reinsurer. During 1998, Nobel recognized $27.6 million of adverse
development on the business covered by this contract with the offsetting
recovery reflected on the balance sheet as a deferred gain. In future years, as
payments are received from the reinsurer, the gain will be pro-rated and
reflected in the statement of income as a reduction to claims and claim
expenses.
For additional information on the Company's reserves and reserving
methodology, see Notes 2 and 5 to the Consolidated Financial Statements.
Acquisition and operational expenses, consisting of brokerage commissions,
excise taxes and other costs directly related to the underwriting operations of
the Company, for the year ended December 31, 1998 were $60.1 million, or 29.3
percent of net premiums earned, compared with $50.4 million, or 23.8 percent for
the year ended December 31, 1997. The primary contributors to the increase in
underwriting expenses were the inclusion of Nobel and DeSoto, which operate with
a greater expense ratio than that of Renaissance Reinsurance. Further, the
increased purchase of reinsurance, which in turn reduces net premiums earned,
causes acquisition and operational costs to increase as a percentage of net
premiums earned.
Net investment income (excluding net realized investment gains and losses) for
the year ended December 31, 1998 was $52.8 million, compared with $49.6 million
for the year ended December 31, 1997. The increase in investment income resulted
primarily from the increase in the amount of invested assets which was primarily
the result of cash flows provided by operations and the assets purchased in the
Nobel acquisition, partially offset by amounts used to pay dividends, purchase
common stock and fund the acquisition of Nobel during the year.
During 1998, the Company reported other income of $9.8 million. The majority
of the other income related to a recovery on a non-indemnity catastrophe index
transaction. See Financial Condition - Derivative Instruments. During 1998, net
realized losses were $6.9 million, compared with $2.9 million in 1997. The 1998
losses were primarily generated from the sale of a portion of the Company's
emerging market debt securities. See Financial Condition - Investments.
Excluding the Nobel charge, corporate expenses were $4.0 million in 1998,
compared with $3.2 million in 1997. The increase primarily related to the
amortization of goodwill related to the purchase of Nobel during 1998. Including
the Nobel charge, corporate expenses, on a pre tax basis, were $18.9 million,
which included a write-down of goodwill of $9.9 million and additional costs and
charges related to the expected sale of certain aspects of the Nobel operations
of $5.0 million. See Financial Condition - Nobel.
For the year ended December 31, 1998, the Company realized net foreign
exchange losses of $0.2 million compared with $3.4 million for the year ended
December 31, 1997. The foreign exchange losses recorded in 1997 resulted
primarily from the strengthening of the U.S. dollar against the British pound
and the German mark.
During the year ended December 31, 1998, the Company recorded expenses of $8.5
million related to the Capital Securities that were issued in March 1997,
compared with $7.0 million in 1997. Interest expense for the year ended December
31, 1998 was $4.5 million as compared with $4.3 million for the year ended
December 31, 1997.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, RenaissanceRe relies on investment income, cash dividends
and other permitted payments from its subsidiaries to make principal payments,
interest payments, cash distributions on outstanding obligations and to pay
quarterly dividends to its shareholders. The payment of dividends by
RenaissanceRe's subsidiaries is, under certain circumstances, limited under U.S.
statutory regulations and Bermuda insurance law. U.S. statutory regulations and
The Bermuda Insurance Act 1978, amendments thereto and related regulations of
Bermuda (the "Act"), require RenaissanceRe's Bermuda subsidiaries to maintain
certain measures of solvency and liquidity. As at December 31, 1999, the
statutory capital and surplus of RenaissanceRe's Bermuda subsidiaries was $653.9
million, and the amount required to be maintained by the Act, was $103.1
million.
RenaissanceRe Holdings Ltd. 26 1999 Annual Report
During 1999, Renaissance Reinsurance paid aggregate cash dividends of $95.1
million to RenaissanceRe, compared with $102.1 million in 1998.
RenaissanceRe's operating subsidiaries have historically produced
sufficient cash flows to meet expected claims payments and operational expenses
and to provide dividend payments to RenaissanceRe. RenaissanceRe's subsidiaries
also maintain a concentration of investments in high quality liquid securities,
which management believes will provide sufficient liquidity to meet
extraordinary claims payments should the need arise. Additionally, the Company
maintains a $300.0 million credit facility from which $200.0 million has been
borrowed and is available at the holding company, RenaissanceRe, to meet the
liquidity needs of the Company's subsidiaries.
NOBEL
On June 25, 1998, the Company completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel Limited"),
for $56.1 million. The Company accounted for this acquisition using the purchase
method of accounting. The Company did not issue shares as part of the purchase.
During the fourth quarter of 1998, the Company recorded an after tax charge of
$40.1 million, consisting of $29.6 million of adverse development on Nobel's
casualty and surety books of business, a goodwill write-down of $6.6 million,
and other related costs of $3.9 million. Consequently, RenaissanceRe adopted a
plan to exit each of Nobel's business units. During 1999, Nobel completed the
reinsurance of the casualty and surety books of business and signed agreements
under which its bail and low-value dwelling books of business have been assumed
by third parties, with obligations to make certain future payments to Nobel
based on future revenues and/or profitability of these businesses. Also, Nobel
has completed the sale of its IAS/Cat Crew subsidiary to its management team in
an earn-out transaction.
Nobel and its affiliates have continued to conduct certain functions of the
casualty, surety, low-value dwelling and bail businesses on a transitional
basis. Renaissance U.S. expects to retain ownership of Nobel along with its
licenses in the 50 U.S. states, although there can be no assurance that such
licenses can be successfully maintained following the disposition of the
business units.
Contemporaneously with the Nobel acquisition, Nobel purchased a retroactive
reinsurance contract. This contract provides Nobel with $38.0 million of
protection from adverse development on its pre October 1, 1997 casualty book of
business plus $22.0 million on transferred reserves. SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts",
requires that adverse development of the reserves covered by this contract be
reflected in the Company's statement of income when the adverse development
becomes known. However, the offsetting recovery under the contract is required
to be deferred and recognized into income as payments are received from the
reinsurer. During 1998, Nobel recognized in its statement of income $27.6
million of adverse development on the business covered by this contract with the
offsetting recovery reflected on the balance sheet as a deferred gain. During
1999 and in future years, as payments are received from the reinsurer, the gain
will be pro-rated and reflected in the statement of income as a reduction to
claims and claim expenses.
Primarily as a result of the losses from Nobel, Renaissance U.S. has recorded
a deferred tax asset, the balance of which is $23.5 million as of December 31,
1999. The Company believes the future operations of Nobel, combined with other
operating subsidiaries of Renaissance U.S., will enable it to utilize the net
operating loss carry-forward.
In connection with the Nobel acquisition, Renaissance U.S. borrowed $35.0
million from a syndicate of banks. In addition, the banks provided a $15.0
million revolving loan facility which has been fully utilized as of December 31,
1999. RenaissanceRe has guaranteed these borrowings. See Note 6 to the
Consolidated Financial Statements.
CASH FLOWS
Cash flows from operating activities resulted principally from premiums and
investment income, net of paid losses, acquisition costs and underwriting
expenses. Cash flows from operations in 1999 were $130.3 million, compared with
$102.5 million in 1998. The 1999 cash flows from operations were primarily
utilized to purchase $80.1 million of the Company's Common Shares and pay
aggregate quarterly dividends of $28.9 million. Also during 1999, the Company
borrowed an additional $150.0 million under its revolving credit facility, which
was primarily used to purchase additional fixed income securities for the
holding company's portfolio of investments. The 1998 cash flows from operations
of $102.5 million, plus the proceeds from bank loans of $50.0 million were
primarily used to purchase $42.7 million of the Company's Common Shares, pay
aggregate quarterly dividends of $26.7 million
RenaissanceRe Holdings Ltd. 27 1999 Annual Report
and purchase Nobel for $56.1 million.
The Company has generated cash flows from operations in 1999 and 1998
significantly in excess of its operating commitments. To the extent that capital
is not utilized in the Company's reinsurance business, the Company will consider
using such capital to invest in new opportunities or will consider returning
such capital to its shareholders.
Because of the nature of the coverages provided by the Company, which
typically can produce losses of high severity and low frequency, it is not
possible to accurately predict the Company's future cash flows from operating
activities. As a consequence, cash flows from operating activities may
fluctuate, perhaps significantly, between individual quarters and years.
In 1999, the Company formed Top Layer Re with State Farm and organized
Renaissance Managers to act as underwriting manager to OPCat. The Company
believes that Top Layer Re and the activities of Renaissance Managers will
provide the Company with growing fee-based income in future periods. However,
there can be no assurance that such income will contribute materially to the
Company's cash flows, results of operations or financial condition.
CAPITAL RESOURCES
The total capital of the Company as at December 31, 1999 and 1998 was as
follows:
(in thousands) 1999 1998
-----------------------------
Revolving Credit Facility -
Borrowed $ 200,000 $ 50,000
Term Loan & Loan Facility 50,000 50,000
Revolving Credit Facility -
Unborrowed 100,000 150,000
Minority interest -
Capital Securities 89,630 100,000
Shareholders' equity 600,329 612,232
-----------------------------
Total Capital Resources $1,039,959 $962,232
-----------------------------
The Company has a revolving credit and term loan agreement with a syndicate of
commercial banks. During 1999, the Company re-negotiated its revolving credit
facility and among other things, increased the commitment to $300.0 million from
$200.0 million. The Company also increased its borrowings under the facility to
$200.0 million as of December 31, 1999 from $50.0 million as of December 31,
1998. The additional funds drawn during the year have increased the liquidity at
the holding company, RenaissanceRe, and are available if necessary, to be
contributed to the operating subsidiaries following a large catastrophic event.
Interest rates on the facility are based on a spread above LIBOR and averaged
5.76 percent during 1999 (6.12 percent in 1998). The credit agreement contains
certain financial covenants including requirements that consolidated debt to
capital does not exceed a ratio of 0.35:1; consolidated net worth must exceed
the greater of $100.0 million or 125 percent of consolidated debt; and 80
percent of invested assets to be rated BBB- or better. Under the terms of the
agreement, and if the Company is in compliance with the covenants thereunder,
the Company has access to an additional $100.0 million should the need arise.
The Company was in compliance with all the covenants of this revolving credit
and term loan agreement as of December 31, 1999.
Renaissance U.S. has a $35.0 million term loan and $15.0 million
revolving loan facility with a syndicate of commercial banks, each of which is
guaranteed by RenaissanceRe. Interest rates on the facility are based upon a
spread above LIBOR, and averaged 5.91 percent during 1999 (6.03 percent in
1998). The agreements contain certain financial covenants, the primary one being
that, RenaissanceRe, being its principal guarantor, maintain a ratio of liquid
assets to debt service of 4:1. This five year term loan has mandatory repayment
provisions approximating 25 percent in each of years 2000 through 2003. The
Company was in compliance with all the covenants of this term loan and revolving
loan facility as of December 31, 1999.
The Company's Capital Securities pay cumulative cash distributions at an
annual rate of 8.54 percent, payable semi-annually. During 1999 the Company
purchased $10.4 million of its Capital Securities recognizing a gain of $1.8
million which has been reflected in shareholders' equity. The Indenture relating
to the Capital Securities contains certain covenants, including a covenant
prohibiting the payment of dividends by the Company if the Company is in default
under the Indenture. The Company was in compliance with all of the covenants of
the Indenture at December 31, 1999. The Capital Securities mature on March 1,
2027. Such securities are required by accounting principles to be classified as
minority interest, rather than as a component of shareholders' equity of the
Company.
Under the terms of certain reinsurance contracts, the Company may be required
to provide letters of credit to rein-
RenaissanceRe Holdings Ltd. 28 1999 Annual Report
sureds in respect of reported claims and/or unearned premiums. The Company has
obtained a facility providing for the issuance of letters of credit. This
facility is secured by a lien on a portion of the Company's investment
portfolio. At December 31, 1999 the Company had outstanding letters of credit
aggregating $73.2 million (1998 $42.0 million). Also, in connection with the Top
Layer Re joint venture, the Company has committed $37.5 million of collateral in
the form of a letter of credit.
In order to encourage employee ownership of Common Shares, the Company has
guaranteed certain loan and pledge agreements (collectively, the "Employee
Credit Facility") between certain employees of the Company (the "Participating
Employees") and Bank of America Illinois ("BofA"). Pursuant to the terms of the
Employee Credit Facility, BofA has agreed to loan the Participating Employees up
to an aggregate of $25.0 million and the balance outstanding as of December 31,
1999 was $24.1 million (1998 - $19.1 million). Each loan under the Employee
Credit Facility is required to be initially collateralized by the respective
Participating Employee with Common Shares or other collateral acceptable to
BofA. If the value of the collateral provided by a Participating Employee
subsequently decreases, such Participating Employee is required to contribute
additional collateral in the amount of such deficiency. Loans under the Employee
Credit Facility are otherwise non-recourse to the Participating Employees. Given
the level of collateral, the Company does not presently anticipate that it will
be required to honor any guarantees under the Employee Credit Facility, although
there can be no assurance that the Company will not be so required in the
future.
SHAREHOLDERS' EQUITY
During 1999, shareholders' equity decreased by $11.9 million, from $612.2
million at December 31, 1998, to $600.3 million at December 31, 1999. The
significant components of the change in shareholders' equity included net income
from continuing operations of $104.2 million, less an increase in unrealized
depreciation on investments of $13.3 million, the payment of dividends of $28.9
million and the purchase of common stock of $80.1 million.
In each of February, May and November of 1999, the Company announced $25
million share repurchase programs. During 1999, the Company repurchased
2,226,700 shares of stock for an aggregate value of $80.1 million. For the year
ended December 31, 1998, the Company had repurchased an aggregate of 1,020,670
shares at a total cost of $42.7 million. Significant capital transactions during
1999 included:
o On November 17, 1999, the Company purchased and canceled 700,000 Common Shares
at $38.00 per share for an aggregate purchase price of $26.6 million from one of
the Company's founding institutional shareholders.
o On December 1, 1999, one of the Company's founding institutional shareholders
sold 318,213 Diluted Voting Class II Common Shares into the public market, where
they were subsequently converted into full voting Common Shares.
INVESTMENTS
As of December 31, 1999, the Company held investments and cash totaling $1,074.8
million (1998 - $942.3 million) with net unrealized depreciation of $18.5
million (1998 - $5.1 million).
Because the Company primarily provides coverage for damages resulting from
natural and man-made catastrophes, the Company may become liable for substantial
claim payments. Accordingly, the Company's investment portfolio is structured to
provide a high level of liquidity.
The table below shows the aggregate amounts of investments available for sale,
other investments and cash and cash equivalents comprising the Company's
portfolio of invested assets:
(in thousands) 1999 1998
------------------------------
Investments available for
sale, at fair value $ 907,706 $ 799,995
Other investments 22,204 1,630
Cash, cash equivalents and
short term investments 144,871 140,684
------------------------------
Total Invested Assets $1,074,781 $ 942,309
------------------------------
The growth in the Company's portfolio of invested assets for the year ended
December 31, 1999 resulted primarily from net cash provided by operating
activities of $130.3 million and increased borrowings under the Company's
revolving credit facility of $150.0 million, partially offset by $28.9 million
of dividends paid and $80.1 million of Common Share repurchases. The Company's
investment income also increased during this period, largely as a result of the
increased size of the fixed income portfolio and an increase in interest rates.
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an average AA
rating as measured by
RenaissanceRe Holdings Ltd. 29 1999 Annual Report
Standard & Poor's Ratings Group. At December 31, 1999, the Company's invested
asset portfolio had a dollar weighted average rating of AA, an average duration
of 2.7 years and an average yield to maturity of 7.15 percent.
LOSSES RECOVERABLE AND RESERVES FOR CLAIMS
AND CLAIM EXPENSES
As of December 31, 1999, losses recoverable and reserves for claims and claim
expenses increased by $128.3 million and $179.8 million, respectively, from the
balances as of December 31, 1998. The increases primarily related to the
occurrence of seven major catastrophes from September through December 1999. As
discussed in the results of the Company's operations, the estimates of losses
recoverable and of claims and claim expenses are based in part upon the
estimation of claims resulting from catastrophic events such as these. During
the period of time between the reserving for the losses and the settlement of
the losses, additional facts and trends will be revealed. As these factors
become apparent, losses recoverable and case reserves will be adjusted as
needed. These adjustments may require an increase in the reserves or a reduction
in the losses recoverable of the Company. At other times the Company may affect
a reallocation of IBNR reserves to specific case reserves. The recoverable and
reserve estimates are reviewed regularly, and adjustments, if any, will be
reflected in the statements of income in the period in which they become known
and will be accounted for as changes in estimates.
DERIVATIVE INSTRUMENTS
The Company has assumed risk through catastrophe and weather linked securities
and derivative instruments under which losses could be triggered by an industry
loss index or natural parameters. To date the Company has not experienced any
losses from such securities or derivatives although there can be no assurance
this performance will continue. In each of the fourth quarters of 1999 and 1998,
the Company recorded recoveries on non-indemnity catastrophe index transactions.
These recoveries are included in other income. In the future, the Company may
also utilize other derivative instruments.
MARKET SENSITIVE INSTRUMENTS
The Company's investment portfolio includes investments which are subject to
changes in market values 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 2.70 percent, which equates to a decrease in market value of approximately
$28.4 million on a portfolio valued at $1,052.6 million at December 31, 1999. As
of December 31, 1998, the decrease in total return would have been 3.20 percent,
which equates to a decrease in market value of approximately $28.1 million on a
portfolio valued at $877.0 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.
CURRENCY
The Company's functional currency is the United States ("U.S.") dollar. The
Company writes a substantial portion of its business in currencies other than
U.S. dollars and may, from time to time, experience significant exchange gains
and losses and incur underwriting losses in currencies other than U.S. dollars,
which will in turn affect the Company's financial statements. See Note 2 to the
Consolidated Financial Statements.
The Company's foreign currency policy is to hold foreign currency
assets, including cash and receivables, that approximate the net monetary
foreign currency liabilities, including loss reserves and reinsurance balances
payable. All changes in the exchange rates are recognized currently in the
Company's statement of income. As a result of the Company's exposure to foreign
currency fluctuations, it is possible that during periods in which the U.S.
dollar appreciates, the Company will recognize foreign exchange losses.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on the
Company are considered in the Company's catastrophe loss models. The effects of
inflation are also considered in pricing and in estimating reserves for unpaid
claims and claim expenses. The actual effects of inflation on the results of the
Company cannot be accurately known until claims are ultimately settled.
CURRENT OUTLOOK
The competitive pressures that have existed since 1995 continued in the property
catastrophe market through 1998. However, due to industry losses in 1999, and
the related con-
RenaissanceRe Holdings Ltd. 30 1999 Annual Report
traction of capacity in the market, the Company has seen price increases in
certain pockets of the property catastrophe market, which contributed to the
Company's increased gross written premiums during this past year.
Because of continued catastrophic loss activity, the Company anticipates that
additional price increases may occur in other pockets of the property
catastrophe market. At this time, the Company does not believe that there will
be a large upswing in pricing across all market segments, and believes that
there continues to be numerous transactions in the market that are under priced.
Identifying and avoiding such transactions requires significant underwriting
skill, which the Company believes it possesses.
The Company believes that because of its competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, it will continue to find additional opportunities in the property
catastrophe reinsurance business.
Because of recent loss activity, the Company believes that its aggregate cost
for reinsurance protection will continue to increase during the upcoming year.
It is also likely that a portion of the Company's reinsurance protection may
become uneconomical and that the Company would determine to purchase less of
such reinsurance. Accordingly it is possible that the Company will retain a
greater level of net risk in the upcoming year as compared with the previous
year.
Nobel has completed the sale and/or reinsurance of its principal operating
units, although Nobel continues to operate a portion of such businesses on a
transitional basis. Accordingly, the Company believes that its future
consolidated results will reflect a reduced impact from Nobel and its
affiliates. During 1999, the Company recorded $49.6 million of gross written
premiums, $19.9 million of net premiums earned and net income of $2.9 million
related to Nobel and its affiliates. The Company expects that Nobel and its
affiliates will continue to conduct certain functions on a transitional basis
and that the Company will continue to maintain ownership of Nobel along with its
licenses in the 50 U.S. states, although there can be no assurance that such
licenses can be successfully maintained.
The Company's financial strength has enabled it to pursue opportunities
outside of the property catastrophe reinsurance market into the catastrophe
exposed primary insurance market and the Company will continue to pursue other
opportunities in the upcoming year. There can be no assurance that the Company's
pursuit of such opportunities will materially impact the Company's financial
condition and results of operations.
During recent fiscal years there has been considerable consolidation among
leading brokerage firms and also among the Company's customers. Although
consolidations may continue to occur, the Company believes that its financial
strength, its position as one of the market leaders in the property catastrophe
reinsurance industry and its ability to provide innovative products to the
industry will minimize any adverse effect of such consolidation on the Company's
business.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 2000.
Currently, the Company does not expect the adoption of SFAS No. 133 to have a
material impact on its consolidated financial statements.
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 in the
following discussion and elsewhere in this Annual Report. Forward-looking
statements are necessarily based on estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which, with respect to future business
decisions, are subject to change. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. In particular, statements using verbs such as "expect", "anticipate",
"intends", "believe" or words of similar impact 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
RenaissanceRe Holdings Ltd. 31 1999 Annual Report
person that the objectives or plans of the Company will be achieved. Numerous
factors could cause the Company's actual results to differ materially from those
in the forward-looking statements, including the following: (i) the occurrence
of catastrophic events with a frequency or severity exceeding the Company's
estimates; (ii) a decrease in the level of demand for the Company's reinsurance
or insurance business, or increased competition in the industry; (iii) the
lowering or loss of one of the financial or claims-paying ratings of the Company
or one or more of its subsidiaries; (iv) risks associated with implementing
business strategies of the Company; (v) uncertainties in the Company's reserving
process; (vi) failure of the Company's reinsurers to honor their obligations;
(vii) actions of competitors including industry consolidation; (viii) loss of
services of any one of the Company's key executive officers; (ix) 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 the Company operates; (x) challenges by insurance
regulators in the United States to Renaissance Reinsurance's claim of exemption
from insurance regulation under the current laws; (xi) changes in economic
conditions, including currency rate conditions which could affect the Company's
investment portfolio; (xii) a contention by the United States Internal Rev-enue
Service that Renaissance Reinsurance is engaged in the conduct of a trade or
business within the U.S.; or (xiii) slower than anticipated growth in the
Company fee based operations. The foregoing review of important factors should
not be construed as exhaustive; the Company undertakes no obligation to release
publicly the results of any future revisions it may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
RenaissanceRe Holdings Ltd. 32 1999 Annual Report
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL STATEMENTS
Management is responsible for the integrity of the consolidated financial
statements and other financial information presented in this annual report. The
accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, applying certain
estimates and judgements as required.
The Company's internal controls are designed so that transactions are
authorized and executed in accordance with management's authorization, to
provide reasonable assurance as to the integrity and reliability of the
financial statements and to adequately safeguard the assets against unauthorized
use or disposition. Such controls are based on established policies and
procedures and are implemented by qualified personnel with an appropriate
segregation of duties.
Ernst & Young, independent auditors, are retained to audit the Company's
consolidated financial statements and express their opinion thereon. Their
accompanying report is based on audits conducted in accordance with auditing
standards generally accepted in the United States, which includes the
consideration of the Company's internal controls and an examination, on a test
basis, of evidence supporting the amounts and disclosures in the financial
statements. These procedures enable them to obtain a reasonable assurance about
whether the financial statements are free of material misstatement and provide a
reasonable basis for their opinion.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with the independent auditors, both privately and with management present, to
review accounting, auditing, internal controls and financial reporting matters.
/s/ James N. Stanard /s/ John M. Lummis
- ----------------------- -----------------------
James N. Stanard John M. Lummis
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENAISSANCERE HOLDINGS LTD.:
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young
Hamilton, Bermuda
January 28, 2000
RenaissanceRe Holdings Ltd. 33 1999 Annual Report
CONSOLIDATED BALANCE SHEETS
RenaissanceRe Holdings Ltd. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------
At December 31, (in thousands of United States dollars, except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Investments and cash
Fixed maturity investments available for sale, at fair value $ 907,706 $ 799,995
(Amortized cost $926,176 and $804,968 at December 31, 1999
and 1998, respectively) (Note 3)
Short term investments, at cost 12,759 24,983
Other investments 22,204 1,630
Cash and cash equivalents 132,112 115,701
- ----------------------------------------------------------------------------------------------------------------
Total investments and cash 1,074,781 942,309
Reinsurance premiums receivable 80,455 96,761
Ceded reinsurance balances 50,237 41,370
Losses and premiums recoverable (Note 4) 328,627 200,379
Accrued investment income 13,456 9,968
Deferred acquisition costs 14,221 10,997
Other assets 55,466 54,380
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,617,243 $ 1,356,164
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities
Reserve for claims and claim expenses (Note 5) $ 478,601 $ 298,829
Reserve for unearned premiums 98,386 94,466
Bank loans (Note 6) 250,000 100,000
Reinsurance balances payable 50,157 94,058
Other liabilities 50,140 56,579
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 927,284 643,932
- ----------------------------------------------------------------------------------------------------------------
Minority interest - Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated
debentures of the Company (Note 7) 89,630 100,000
Commitments and contingencies (Note 18)
Shareholders' Equity (Note 9)
Common Shares and additional paid-in capital: $1 par value-authorized
225,000,000 shares; issued and outstanding at December 31, 1999
- 19,686,480 shares (1998 - 21,645,913 shares) 19,686 39,035
Unearned stock grant compensation (Note 16) (10,026) (8,183)
Accumulated other comprehensive income (18,470) (5,144)
Retained earnings 609,139 586,524
- ----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 600,329 612,232
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY $ 1,617,243 $ 1,356,164
- ----------------------------------------------------------------------------------------------------------------
BOOK VALUE PER COMMON SHARE $ 30.50 $ 28.28
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 34 1999 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
RenaissanceRe Holdings Ltd. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(in thousands of United States dollars, except per share amounts)
REVENUES
Gross premiums written $ 351,305 $ 270,460 $ 228,287
- --------------------------------------------------------------------------------------------------------------------------
Net premiums written $ 213,513 $ 195,019 $ 195,752
Decrease in unearned premiums 7,604 9,928 15,738
- --------------------------------------------------------------------------------------------------------------------------
Net premiums earned 221,117 204,947 211,490
Net investment income (Note 3) 60,334 52,834 49,573
Foreign exchange losses (411) (153) (3,442)
Other income 4,915 9,789 --
Net realized losses on investments (Note 3) (15,720) (6,890) (2,895)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 270,235 260,527 254,726
- --------------------------------------------------------------------------------------------------------------------------
EXPENSES
Claims and claim expenses incurred (Note 5) 77,141 112,752 50,015
Acquisition costs 25,500 26,506 25,227
Operational expenses 36,768 34,525 25,131
Corporate expenses 9,888 18,924 3,218
Interest expense 9,934 4,473 4,271
- --------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 159,231 197,180 107,862
- --------------------------------------------------------------------------------------------------------------------------
Income before minority interests and taxes 111,004 63,347 146,864
Minority interest - Company obligated, mandatorily redeemable capital securities
of a subsidiary trust holding solely junior subordinated debentures of
the Company (Note 7) (8,288) (8,540) (6,998)
Minority interest - Glencoe -- (705) (617)
- --------------------------------------------------------------------------------------------------------------------------
Income before taxes 102,716 54,102 139,249
Income tax benefit (Note 13) 1,525 20,475 --
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 104,241 $ 74,577 $ 139,249
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC $ 5.10 $ 3.39 $ 6.19
EARNINGS PER COMMON SHARE - DILUTED $ 5.05 $ 3.33 $ 6.06
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 35 1999 Annual Report
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RenaissanceRe Holdings Ltd. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
(in thousands of United States dollars, except per share amounts)
Common stock & additional paid-in capital
Balance-- January 1 $ 39,035 $ 74,922 $ 126,433
Exercise of stock options & restricted stock awards 6,461 6,837 3,247
Repurchase of shares (26,695) (42,724) (53,458)
Other 885 -- (1,300)
- -----------------------------------------------------------------------------------------------------------
Balance-- December 31 19,686 39,035 74,922
- -----------------------------------------------------------------------------------------------------------
Unearned stock grant compensation
Balance-- January 1 (8,183) (4,731) (3,868)
Stock grants awarded (5,382) (5,964) (4,731)
Amortization 3,539 2,512 3,868
- -----------------------------------------------------------------------------------------------------------
Balance-- December 31 (10,026) (8,183) (4,731)
- -----------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Balance-- January 1 (5,144) (10,155) 1,577
Net unrealized gains (losses) on securities, net of
adjustment (see disclosure below) (13,326) 5,011 (11,732)
- -----------------------------------------------------------------------------------------------------------
Balance-- December 31 (18,470) (5,144) (10,155)
- -----------------------------------------------------------------------------------------------------------
Retained earnings
Balance-- January 1 586,524 538,667 422,061
Net income 104,241 74,577 139,249
Dividends paid (28,885) (26,720) (22,643)
Repurchase of shares (53,403) -- --
Other 662 -- --
- -----------------------------------------------------------------------------------------------------------
Balance-- December 31 609,139 586,524 538,667
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 600,329 $ 612,232 $ 598,703
- -----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income $ 104,241 $ 74,577 $ 139,249
Other comprehensive income (13,326) 5,011 (11,732)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income $ 90,915 $ 79,588 $ 127,517
- -----------------------------------------------------------------------------------------------------------
DISCLOSURE REGARDING NET UNREALIZED GAINS (LOSSES)
Net unrealized holding losses arising during period $ (29,046) $ (1,879) $ (14,627)
Net realized losses included in net income 15,720 6,890 2,895
- -----------------------------------------------------------------------------------------------------------
Change in net unrealized gains (losses) on securities $ (13,326) $ 5,011 $ (11,732)
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 36 1999 Annual Report
STATEMENTS OF CASH FLOWS
RenaissanceRe Holdings Ltd. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31, (in thousands of United States dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 104,241 $ 74,577 $ 139,249
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 9,810 14,488 1,121
Net realized losses on investments 15,720 6,890 2,895
Reinsurance balances, net (27,595) 54,187 3,823
Ceded reinsurance balances (8,867) (34,245) 2,328
Accrued investment income (3,488) 3,572 1,151
Reserve for unearned premiums 3,920 5,132 (8,610)
Reserve for claims and claim expenses, net 51,524 (8,530) 4,617
Other, net (14,960) (13,579) 6,710
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 130,305 102,492 153,284
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS APPLIED TO INVESTING ACTIVITIES:
Proceeds from maturities and sales of investments 1,986,498 783,735 697,532
Purchase of investments available for sale (2,146,361) (828,299) (829,193)
Net sales (purchases) of short term investments 12,224 (2,189) --
Proceeds from sales of equities 1,319 30,550 57,958
Purchase of equities -- -- (81,452)
Purchase of minority interest in Glencoe -- (15,204) (5,185)
Acquisition of subsidiary, net of cash acquired -- (58,869) --
Proceeds from sale of minority interest in Glencoe -- -- 3,000
- -----------------------------------------------------------------------------------------------------------------
Net cash applied to investing activities (146,320) (90,276) (157,340)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (APPLIED TO) FINANCING ACTIVITIES:
Purchase of Common Shares (80,098) (42,724) (53,458)
Net proceeds from (repayment of) bank loan 150,000 50,000 (100,000)
Proceeds from issuance (purchase) of Capital Securities (8,591) -- 100,000
Dividends paid (28,885) (26,720) (22,643)
Repayments of officer loans -- -- 4,104
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (applied to) financing activities 32,426 (19,444) (71,997)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,411 (7,228) (76,053)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 115,701 122,929 198,982
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 132,112 $ 115,701 $ 122,929
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
RenaissanceRe Holdings Ltd. 37 1999 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in tables in thousands of dollars, except per share amounts)
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), was formed under the laws of
Bermuda on June 7, 1993 and serves as the holding company for its subsidiaries,
Renaissance Reinsurance Ltd., ("Renaissance Reinsurance"), Glencoe Insurance
Ltd., ("Glencoe"), Renaissance U.S. Holdings, Inc. ("Renaissance U.S."),
Renaissance Underwriting Managers, Ltd. ("Renaissance Managers"), and
RenaissanceRe Capital Trust (the "Trust").
o Renaissance Reinsurance commenced underwriting operations on June 15, 1993 and
provides property catastrophe and reinsurance coverage to insurers and
reinsurers on a worldwide basis.
o Glencoe commenced insurance underwriting operations in January 1996 and
provides catastrophe exposed property coverage on an insurance and reinsurance
basis.
o In January 1998, the Company began to provide personal lines coverages through
DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of Glencoe.
DeSoto is a special purpose Florida homeowners insurance company that is
licensed to assume and renew homeowners policies from the Florida Joint
Underwriting Association, a state sponsored insurance company.
o In June 1998, Renaissance U.S. completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel Limited"),
for $56.1 million. See Note 8.
o In October 1998, Renaissance Reinsurance of Europe ("Renaissance Europe") was
incorporated under the laws of Ireland as a wholly owned subsidiary of
Renaissance Reinsurance to provide certain property catastrophe and reinsurance
coverage in Europe.
o Effective January 6, 1999, Top Layer Reinsurance Ltd., ("Top Layer Re") was
formed as a joint venture between Renaissance Reinsurance and State Farm Mutual
Automobile Insurance Company to provide property catastrophe reinsurance for
high layer, non-U.S. risks. In connection with this joint venture, the Company
has provided capital of $13.0 million and has provided a $37.5 million letter of
credit.
o On November 27, 1999, Renaissance Managers was incorporated under the laws of
Bermuda as a wholly owned subsidiary of RenaissanceRe to provide underwriting
management services to non-related parties.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared on the basis of United
States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe and its subsidiaries, which are collectively referred
to herein as the "Company". All intercompany transactions and balances have been
eliminated on consolidation. Minority interests represent the interests of
external parties in respect of net income and shareholders' equity of Glencoe
and the Trust (See Note 7). Certain comparative information has been
reclassified to conform with the current year presentation.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported and
disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The significant estimates reflected in the
Company's financial statements, include, but are not limited to, the reserve for
claims and claim expenses and the related losses and premiums recoverable.
PREMIUMS AND RELATED EXPENSES
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on policy and contract terms and include estimates based on informa-
RenaissanceRe Holdings Ltd. 38 1999 Annual Report
tion received from both insureds and ceding companies. Subsequent differences
arising on such estimates are recorded in the period in which they are
determined. Reserve for unearned premiums represents the portion of premiums
written that relate to the unexpired terms of contracts and policies in force.
Such reserves are computed by pro-rata methods based on statistical data or
reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage
expenses incurred at the time a contract or policy is issued, are deferred and
amortized over the period in which the related premiums are earned. Deferred
policy acquisition costs are limited to their estimated realizable value based
on the related unearned premiums. Anticipated claims and claim expenses, based
on historical and current experience, and anticipated investment income related
to those premiums are considered in determining the recoverability of deferred
acquisition costs.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management. For retroactive reinsurance contracts, the amount by which
liabilities associated with the reinsured policies exceed the amount paid for
reinsurance coverage is deferred and amortized into income using the recovery
method.
CLAIMS AND CLAIM EXPENSES
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in the consolidated statement
of income in the period in which they become known and are accounted for as
changes in estimates.
INVESTMENTS AND CASH
Investments are considered available for sale and are reported at fair value.
The net unrealized appreciation or depreciation on investments is included in
accumulated other comprehensive income. Investment transactions are recorded on
the trade date with balances pending settlement reflected in the balance sheet
as a component of other assets or other liabilities.
Realized gains or losses on the sale of investments are determined on the
basis of the specific identification method and include adjustments to the net
realizable value of investments for declines in value that are considered to be
other-than-temporary. Net investment income includes interest and dividend
income together with amortization of market premiums and discounts and is net of
investment management and custody fees. The amortization of premium and
accretion of discount for fixed maturity securities is computed utilizing the
interest method. The effective yield utilized in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when such prices are not available, by reference to broker or underwriter bid
indications.
Short term investments, which have a maturity of one year or less when
purchased, are carried at cost which approximates fair value. For the purposes
of the statements of cash flows, cash equivalents include money market
instruments with a maturity of ninety days or less when purchased.
GOODWILL
The Company amortizes goodwill recorded in connection with its business
combinations on a straight-line basis over the expected recovery period,
principally twenty years. Goodwill is periodically reviewed for impairment and
amounts deemed unrecoverable are adjusted accordingly. Goodwill is included in
other assets on the consolidated balance sheet and is expensed through corporate
expenses in the consolidated statement of income.
RenaissanceRe Holdings Ltd. 39 1999 Annual Report
EARNINGS PER SHARE
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.
See Note 10.
FOREIGN EXCHANGE
The Company's functional currency is the United States dollar. Revenues and
expenses denominated in foreign currencies are translated at the prevailing
exchange rate at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates in effect at
the balance sheet date, which may result in the recognition of exchange gains or
losses which are included in the determination of net income.
STOCK INCENTIVE COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under SFAS No. 123 requires the use of option
valuation models that were not necessarily developed for use in valuing employee
stock options. It is the opinion of management that disclosure of the pro-forma
impact of fair values provides a more relevant and informative presentation of
the impact of stock options issued to employees than financial statement
recognition of such amounts. Under APB 25, the Company recognizes compensation
expense for stock option grants to the extent that the fair value of the stock
exceeds the stock option exercise price at the measurement date.
TAXATION
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal years beginning after
June 15, 2000. Currently, the Company does not expect the adoption of SFAS No.
133 to have a material impact on its consolidated financial statements.
RenaissanceRe Holdings Ltd. 40 1999 Annual Report
Notes to Consolidated Financial Statements
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Government bonds $298,748 $ 115 $ (3,135) $295,728
Non-U.S. government bonds 55,308 - (835) 54,473
U.S. corporate bonds 371,631 895 (15,954) 356,572
Non-U.S. corporate bonds 50,456 3,540 (36) 53,960
U.S. mortgage backed securities 150,033 35 (3,095) 146,973
-----------------------------------------------------------------
$926,176 $ 4,585 $ (23,055) $907,706
-----------------------------------------------------------------
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Government bonds $560,068 $ 5,183 $ (641) $564,610
Non-U.S. government bonds 34,694 - (4,067) 30,627
Non-U.S. corporate bonds 73,192 1,822 (8,044) 66,970
U.S. corporate bonds 137,014 1,599 (825) 137,788
-----------------------------------------------------------------
$804,968 $ 8,604 $ (13,577) $799,995
-----------------------------------------------------------------
Contractual maturities of fixed maturity securities are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1999 Amortized Fair
Cost Value
--------------------------------
Due within one year $ 2,801 $ 2,787
Due after one through five years 460,462 456,408
Due after five through ten years 232,751 226,073
Due after ten years 80,129 75,465
U.S. mortgage backed securities 150,033 146,973
--------------------------------
$ 926,176 $ 907,706
--------------------------------
RenaissanceRe Holdings Ltd. 41 1999 Annual Report
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by ratings assigned by rating agencies (e.g. Standard &
Poor's Corporation) or, with respect to non-rated issues, as estimated by the
Company's investment managers.
At December 31, 1999 1998
-------------------------
AAA 72.9% 70.9%
AA 5.0 4.3
A 5.9 9.2
BBB 4.8 3.7
BB 3.7 5.2
B 5.3 2.2
NR 2.4 4.5
-------------------------
100.0% 100.0%
-------------------------
INVESTMENT INCOME
The components of net investment income are as follows:
Year Ended December 31, 1999 1998 1997
------------------------------
Fixed
maturities $52,470 $45,392 $42,183
Short term
investments 6,200 2,354 -
Cash and cash
equivalents 2,898 6,831 9,338
------------------------------
61,568 54,577 51,521
Investment
expenses 1,234 1,743 1,948
------------------------------
Net investment
income $60,334 $52,834 $49,573
------------------------------
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
Year Ended December 31,
1999 1998 1997
----------------------------------------
Gross realized gains $ 4,619 $ 13,192 $ 4,741
Gross realized losses (20,339) (20,082) (7,636)
----------------------------------------
Net realized losses
on investments (15,720) (6,890) (2,895)
Unrealized gains
(losses) (13,326) 5,011 (11,732)
----------------------------------------
Total realized and
unrealized losses
on investments $(29,046) $ (1,879) $(14,627)
----------------------------------------
Proceeds from maturities and sales of fixed maturity investments were $1,986.5
million, $783.7 million and $697.5 million for the years ended December 31,
1999, 1998 and 1997, respectively. At December 31, 1999 and 1998 approximately
$15.0 million of cash and investments were on deposit with various regulatory
authorities as required by law.
Other investments include the investment in Top Layer Re of $14.9
million. Top Layer Re, which is 50% owned by Renaissance Reinsurance, is carried
using the equity method. Undistributed earnings from Top Layer Re of $1.9
million are included in other income. The carrying value approximates fair
value. Other investments also include available for sale equity securities
reported at fair value.
DERIVATIVE INSTRUMENTS
The Company has assumed and ceded risk through catastrophe and weather linked
securities and derivative instruments under which losses or recoveries are
triggered by an industry loss index or geological or physical variables. Net
related fees and risk premiums assumed and ceded are not material to the
Company's operations. During 1999 and 1998, the Company recognized gains on
non-indemnity catastrophe index transactions, which are included as a component
of other income.
RenaissanceRe Holdings Ltd. 42 1999 Annual Report
NOTE 4. CEDED REINSURANCE
The Company utilizes reinsurance to reduce its exposure to large losses. The
Company currently has in place contracts that provide for recovery of a portion
of certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. The Company would remain liable to the extent
that any reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $128.1 million, $68.1 million and $25.1 million
for 1999, 1998 and 1997, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance
contracts also provide for recoveries of additional premiums, reinstatement
premiums and lost no claims bonuses which are incurred when losses are ceded to
reinsurance contracts. Total recoveries netted against premiums and claims and
claim expenses incurred for the year ended December 31, 1999 were $255.3 million
and $110.1 million in 1998.
Included in losses and premiums recoverable as of December 31, 1999, are
recoverables of $37.8 million (1998 - $50.4 million) which relate to a
retroactive reinsurance contract entered into by Nobel. This contract provides
Nobel with $38.0 million of protection from adverse development on its pre
October 1, 1997 casualty book of business plus $22.0 million of capacity on
transferred reserves. SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", requires that adverse development
of the reserves covered by this contract be reflected in the Company's statement
of income when the adverse development becomes known. However, the offsetting
recovery under the contract is required to be deferred and recognized into
income as payments are received from the reinsurer. During 1998, Nobel in its
statement of income recognized $27.6 million of adverse development on the
business covered by this contract with the offsetting recovery reflected on the
balance sheet as a deferred gain. During 1999 and in future years, as payments
are received from the reinsurer, the gain will be pro-rated and reflected in the
statement of income as a reduction to claims and claim expenses.
NOTE 5. RESERVE FOR CLAIMS
AND CLAIM EXPENSES
For the Company's reinsurance operations, estimates of claims and claim expenses
are based in part upon the estimation of claims resulting from catastrophic
events. Estimation by the Company of claims resulting from catastrophic events
based upon its own historical claim experience is inherently difficult because
of the Company's short operating history and the potential severity of property
catastrophe claims. Therefore, the Company utilizes both proprietary and
commercially available models, as well as historical reinsurance industry
property catastrophe claims experience, for purposes of evaluating future trends
and providing an estimate of ultimate claims costs.
On both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to reasonably estimate ultimate expected
claims and claim expenses. The period of time from the reporting of a loss to
the Company, and the settlement of the Company's liability may be several years.
During this period, additional facts and trends will be revealed. As these
factors become apparent, case reserves will be adjusted, sometimes requiring an
increase in the overall reserves of the Company, and at other times requiring a
reallocation of IBNR reserves to specific case reserves. These estimates are
reviewed regularly, and such adjustments, if any, are reflected in results of
operations in the period in which they become known and are accounted for as
changes in estimates.
RenaissanceRe Holdings Ltd. 43 1999 Annual Report
Activity in the liability for unpaid claims and claim expenses is summarized
as follows:
Year Ended December 31, 1999 1998 1997
-----------------------------------------
Net reserves as of January 1 $197,512 $110,037 $105,421
Net reserves assumed in respect of acquired company - 55,317 -
Net incurred related to:
Current year 111,720 96,431 50,015
Prior years (34,579) 16,321 -
-----------------------------------------
Total net incurred 77,141 112,752 50,015
-----------------------------------------
Net paid related to:
Current year 44,701 49,671 3,740
Prior years 55,039 30,923 41,659
-----------------------------------------
Total net paid 99,740 80,594 45,399
-----------------------------------------
Total net reserves as of December 31 174,913 197,512 110,037
Losses recoverable as of December 31 303,688 101,317 -
-----------------------------------------
Total gross reserves as of December 31 $478,601 $298,829 $110,037
-----------------------------------------
The prior year development in 1999 was due primarily to favorable development on
property catastrophe reserves for 1998 and prior. The prior year development in
1998 was due primarily to adverse development of Nobel's surety and casualty
businesses, partially offset by favorable development on property catastrophe
reserves for 1997 and prior years. The Company's total gross reserve for
incurred but not reported claims was $293.2 million as of December 31, 1999
(1998- $135.4 million).
NOTE 6. BANK LOANS
The Company has a revolving credit and term loan agreement with a syndicate of
commercial banks. During 1999, the Company re-negotiated its revolving credit
facility and among other things, increased the commitment to $300.0 million from
$200.0 million. The Company also increased its borrowings under the facility to
$200.0 million as of December 31, 1999 from $50.0 million as of December 31,
1998. The additional funds drawn during the year have increased the liquidity at
the holding company, RenaissanceRe, and are available if necessary, to be
contributed to the operating subsidiaries following a large catastrophic event.
Interest rates on the facility are based on a spread above LIBOR and have
averaged 5.76 percent during 1999 (6.12 percent in 1998). The credit agreement
contains certain financial covenants including requirements that consolidated
debt to capital does not exceed a ratio of 0.35:1; consolidated net worth must
exceed the greater of $100.0 million or 125 percent of consolidated debt; and 80
percent of invested assets must be rated BBB- by S&P or Baa3 by Moody's Investor
Service or better. Under the terms of the agreement, and if the Company is in
compliance with the covenants thereunder, the Company has access to an
additional $100.0 million should the need arise. The Company was in compliance
with all the covenants of this revolving credit and term loan agreement as at
December 31, 1999. Renaissance U.S. has a $35.0 million term loan and $15
million revolving loan facility with a syndicate of commercial banks. Interest
rates on the facility are based upon a spread above LIBOR, and averaged 5.91
percent during 1999 (6.03 percent in 1998). The Credit Agreement contains
certain
RenaissanceRe Holdings Ltd. 44 1999 Annual Report
financial covenants, the primary one being that, RenaissanceRe, being its
principal guarantor, maintain a ratio of liquid assets to debt service of 4:1.
This five year term loan has mandatory repayment provisions approximating 25
percent in each of years 2000 through 2003. The Company was in compliance with
all the covenants of this term loan and revolving loan facility as at December
31, 1999.
Interest payments on the above loans totaled $8.3 million, $4.4 million and
$4.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Fair value of bank loans approximate the carrying values, because such loans
reprice frequently.
NOTE 7. CAPITAL SECURITIES
On March 7, 1997, the Company issued $100.0 million of "Company Obligated,
Mandatorily Redeemable Capital Securities of a Subsidiary Trust holding solely
$103,092,783 of the Company's 8.54 percent Junior Subordinated Debentures due
March 1, 2027" ("Capital Securities") issued by the Trust. The Capital
Securities pay cumulative cash distributions at an annual rate of 8.54 percent,
payable semi-annually. Proceeds from the offering were used to repay a portion
of the Company's outstanding indebtedness. Effective September 11, 1997, the
Trust exchanged the Capital Securities for substantially the same securities
registered under the Securities Act of 1933. The Trust is a wholly owned
subsidiary of the Company and is consolidated into the Company's consolidated
financial statements. The Capital Securities and the related accrued dividends,
are reflected in the consolidated financial statements as a minority interest.
During 1999 the Company repurchased $10.4 million of the Capital Securities
recognizing a gain of $1.8 million, which was reflected in shareholders' equity.
NOTE 8. ACQUISITION
On June 25, 1998, the Company completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel Limited"),
for $56.1 million. The Company issued no shares as part of the purchase and
accounted for this acquisition using the purchase method of accounting.
During the fourth quarter of 1998, the Company recorded an after tax charge of
$40.1 million, consisting of $29.6 million of adverse development on Nobel's
casualty and surety books of business, a goodwill write-down of $6.6 million,
and other related costs of $3.9 million. Consequently, at the end of 1998,
RenaissanceRe adopted a plan to exit each of Nobel's business units. During
1999, Nobel completed the reinsurance of the casualty and surety books of
business and signed agreements under which its bail and low-value dwelling books
of business have been assumed by third parties, with obligations to make certain
future payments to Nobel based on future revenues and/or profitability of these
businesses. Also, Nobel has completed the sale of its IAS/Cat Crew subsidiary to
its management team in an earn-out transaction.
During 1999, in conjunction with the sale and reinsurance of the principal
business units of Nobel, the Company wrote off $6.7 million of goodwill which
was reflected in corporate expenses in the statement of income.
The Company expects that Nobel and its affiliates will continue to conduct
certain functions of the casualty, surety, low-value dwelling and bail
businesses on a transitional basis. Renaissance U.S. expects to retain ownership
of Nobel along with its licenses in the 50 U.S. states, although there can be no
assurance that such licenses can be successfully maintained following the
disposition of the business units.
Primarily as a result of the losses from Nobel, Renaissance U.S. has recorded
a deferred tax asset, the balance of which is $23.5 million as of December 31,
1999.
In connection with the Nobel acquisition, Renaissance U.S. borrowed $35.0
million from a syndicate of banks. In addition, the banks provided a $15.0
million revolving loan facility which has been fully utilized as of December 31,
1999. RenaissanceRe has guaranteed these arrangements. See Note 6.
Contemporaneously with the Nobel acquisition, Nobel entered into a retroactive
reinsurance contract. This contract provides Nobel with $38.0 million of
protection from adverse development on its pre October 1, 1997 casualty book of
business. See Note 4.
RenaissanceRe Holdings Ltd. 45 1999 Annual Report
NOTE 9. SHAREHOLDERS' EQUITY
On May 5, 1998, the shareholders voted to increase the authorized capital to an
aggregate of 325,000,000 shares consisting of 225,000,000 Common Shares and
100,000,000 Preference Shares. The Company's 225,000,000 authorized $1.00 par
value Common Shares consist of three separate series with differing voting
rights as follows:
December 31, 1999 Issued and
Authorized Outstanding
-----------------------------------
Full Voting Common
Shares (the
Common Shares) 209,775,379 17,237,976
(includes all shares
registered and
available to the public)
Diluted Voting Class I
Common Shares 15,039,089 2,448,504
(the Diluted Voting
I Shares)
Diluted Voting Class II
Common Shares 185,532 -
(the Diluted Voting -----------------------------------
II Shares)
225,000,000 19,686,480
-----------------------------------
The Diluted Voting I Shares and the Diluted Voting II Shares (together the
Diluted Voting Shares) were authorized at a special general meeting of
shareholders on December 23, 1996 and subsequent to the authorization,
affiliates of General Electric Investment Corporation exchanged 5.7 million
Common Shares for 4.2 million Diluted Voting I Shares and 1.5 million Diluted
Voting II Shares, and as such are the sole holders of such diluted voting
securities.
The Diluted Voting Shareholders vote together with the common shareholders.
The Diluted Voting I Shares are limited to a fixed voting interest in the
Company of up to 9.9 percent on most corporate matters. Each Diluted Voting II
Share has a one-third vote on most corporate matters. The Diluted Voting
Shareholders are entitled to the same rights, including receipt of dividends and
the right to vote on certain significant corporate matters, and are subject to
the same restrictions as the common shareholders. The Company currently does not
intend to register or list the Diluted Voting Shares on the New York Stock
Exchange.
In each of February, May and November of 1999, the Company announced share
repurchase programs of $25.0 million. For the year ended December 31, 1999, the
Company repurchased a total of 2,226,700 Common Shares of the Company for an
aggregate price of $80.1 million. During 1998, the Company repurchased a total
of 1,020,670 Common Shares of the Company for an aggregate price of $42.7
million.
On November 17, 1999, the Company purchased and cancelled 700,000 Common
Shares at $38.00 per share for an aggregate purchase price of $26.6 million from
one of the Company's founding institutional shareholders.
On December 1, 1999, one of the Company's founding institutional shareholders
sold 318,213 Diluted Voting Class II Common Shares into the public market, where
they were subsequently converted into Full Voting Common Shares.
On June 23, 1997, concurrent with a secondary offering, the Company purchased
for cancellation 700,000 Common Shares at $36.29 per share for an aggregate
price of $25.4 million from the Company's founding institutional shareholders or
their successors.
In November 1997, June 1997 and February 1996, the Company paid for the costs
of secondary offerings of the Company's Common Shares sold by the founding
institutional investors. The Company incurred costs of $0.6, $0.7 and $0.5
million, respectively, with respect to the registrations which are reflected as
a reduction to additional paid-in capital on the consolidated balance sheet.
RenaissanceRe Holdings Ltd. 46 1999 Annual Report
NOTE 10. EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share" to account for its
weighted average shares. The numerator in both the Company's basic and diluted
earnings per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares
outstanding (in thousands of per share amounts):
Year Ended December 31, 1999 1998 1997
----------------------------------------
Weighted average
shares - basic 20,444 22,021 22,496
Per share equivalents
of employee stock
options and
restricted shares 184 407 471
----------------------------------------
Weighted average
shares - diluted 20,628 22,428 22,967
----------------------------------------
NOTE 11. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
The Company has in force treaties with subsidiaries of The St. Paul Companies,
and affiliates of General Electric Investments ("GEI") covering property
catastrophe risks. The terms of these treaties were determined in arms length
negotiations and the Company believes that such terms are comparable to terms
the Company would expect to negotiate in similar transactions with unrelated
parties. For the years ended December 31, 1999, 1998 and 1997, the Company
received $11.1 million, $13.7 million and $19.2 million in reinsurance premiums
and deposits related to these treaties, respectively.
During 1999, the Company had in place an investment advisory agreement with GE
Investment Management, an affiliate of GEI. GE Investment Management managed
approximately 15.0 percent of the Company's portfolio, subject to the Company's
investment guidelines. The terms of the investment advisory agreement were
determined in arms length negotiations. The performance of, and the fees paid to
GE Investment Management were reviewed periodically by the Board of Directors.
Such fees paid to GE advisors aggregated to $0.2 million, $0.4 million, $1.2
million for the years ended December 31, 1999, 1998 and 1997. This agreement
expired on December 31, 1999, and was not renewed.
During the years ended December 31, 1999, 1998 and 1997, the Company received
78.8%, 64.2%, and 70.1%, respectively, of its premium assumed from its five
largest reinsurance brokers. Subsidiaries and affiliates of J&H Marsh &
McLennan, Inc., AON Re Group, E. W. Blanch & Co., Greig Fester, and Willis Faber
accounted for approximately 24.5%, 20.5%, 20.3%, 7.1% and 6.4%, respectively, of
the Company's premiums written in 1999.
NOTE 12. DIVIDENDS
During 1999, four regular quarterly dividends of $0.35 per share were paid to
shareholders of record as of February 18, May 28, August 19, and November 18.
During 1998, four regular quarterly dividends of $0.30 per share were paid to
shareholders of record as of February 18, May 20, August 19, and November 19.
During 1997, four regular quarterly dividends of $0.25 per share were paid to
shareholders of record as of February 19, May 22, August 20, and November 20.
The total amount of dividends paid to Common Shareholders during 1999, 1998 and
1997 was $28.9 million, $26.7 million and $22.6 million, respectively.
NOTE 13. TAXATION
Under current Bermuda law, neither RenaissanceRe, Renaissance Reinsurance, nor
Glencoe are required to pay taxes in Bermuda on either income or capital gains.
Income from U.S. company operations is subject to taxes imposed by U.S.
authorities. Renaissance Reinsurance of Europe is subject to the taxation laws
of Ireland.
The U.S. companies have a net operating loss carryforward of $42.8 million which
will be available to offset regular taxable U.S. income during the carryforward
period (through 2019). As of December 31, 1999, a deferred tax
RenaissanceRe Holdings Ltd. 47 1999 Annual Report
asset of $23.5 million is included in other assets on the consolidated balance
sheet.
The income tax expense (benefit) consists of:
Year Ended December 31, 1999
Current Deferred Total
----------------------------------
U.S. federal $ 487 $ - $ 487
U.S. state and local (61) (1,951) (2,012)
----------------------------------
$ 426 $(1,951) $(1,525)
----------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 are
presented below:
1999
---------
Deferred tax assets:
Allowance for doubtful accounts $ 127
Unearned premiums 288
Claims reserves, principally due
to discounting for tax 2,474
Retroactive reinsurance gain 4,613
Net operating loss carryforwards 14,553
Other 4,167
---------
26,222
---------
Deferred tax liabilities:
Deferred policy acquisition costs (848)
Other (1,871)
---------
Net deferred tax asset $23,503
---------
NOTE 14. GEOGRAPHIC INFORMATION
Financial information relating to gross premiums by geographic region is as
follows:
Year Ended
December 31, 1999 1998 1997
-------------------------------------
United States $229,156 $191,658 $123,717
Worldwide 49,482 20,584 27,930
Worldwide
(excluding U.S.) 27,276 26,380 32,005
Europe (including
the United
Kingdom) 26,437 18,532 21,007
Other 15,742 9,374 16,738
Australia and
New Zealand 3,212 3,932 6,890
-------------------------------------
Total Gross
Premiums
Written $351,305 $270,460 $228,287
-------------------------------------
The category "Worldwide (excluding U.S.)" consists of contracts that cover more
than one geographic region (other than the U.S.). The exposure in this category
for gross premiums written to date is predominantly from Europe and Japan.
NOTE 15. SEGMENT REPORTING
The Company has two reportable segments: reinsurance operations and primary
operations. The reinsurance segment provides property catastrophe reinsurance as
well as other reinsurance to selected insurers and reinsurers on a worldwide
basis. The primary segment provides insurance both on a direct and on a surplus
lines basis for commercial and homeowners catastrophe exposed property business.
Also included in the primary segment are coverages written by Nobel for
commercial auto and general liability as well as surety business which provides
coverage to small and mid-size contractors. The majority of the Nobel business
has been substantially reinsured, and is expected to diminish in future years
based on the sale of the Nobel business units. See Note 8.
The activities of the Company's Bermuda and U.S. hold-
RenaissanceRe Holdings Ltd. 48 1999 Annual Report
ing companies are the primary contributors to the results reflected in the other
category. The pre-tax loss of the holding companies primarily consisted of
interest expense on bank loans, the minority interest on the Capital Securities,
and realized investment losses on the sales of investments, partially offset by
investment income on the assets of the holding companies. Data for the three
years ended December 31, 1999 , 1998 and 1997 is as follows:
Year Ended December 31, 1999 Reinsurance Primary Other Total
------------------------------------------------------
Gross premiums written $ 282,345 $ 68,960 $ -- $ 351,305
Total revenues 232,715 31,377 6,143 270,235
Pre-tax profit (loss) 117,408 8,926 (23,618) 102,716
Assets 1,112,692 274,401 230,150 1,617,243
------------------------------------------------------
Claims and claim expense ratio 32.7% 52.2% -- 34.9%
Underwriting expense ratio 25.8% 12.4% -- 28.1%
------------------------------------------------------
Combined ratio 58.5% 64.6% -- 63.0%
------------------------------------------------------
Year Ended December 31, 1998
------------------------------------------------------
Gross premiums written $ 207,189 $ 63,271 $ -- $ 270,460
Total revenues 216,976 42,229 1,322 260,527
Pre-tax profit (loss) 126,768 (51,438) (21,228) 54,102
Assets 897,656 369,801 88,707 1,356,164
------------------------------------------------------
Claims and claim expense ratio 25.0% 200.2% -- 55.0%
Underwriting expense ratio 28.1% 37.1% -- 29.8%
------------------------------------------------------
Combined ratio 53.1% 237.3% -- 84.8%
------------------------------------------------------
Year Ended December 31, 1997
------------------------------------------------------
Gross premiums written $ 221,246 $ 7,041 $ -- $ 228,287
Total revenues 242,076 6,909 5,741 254,726
Pre-tax profit (loss) 146,209 2,421 (9,381) 139,249
Assets 795,043 84,211 81,495 960,749
------------------------------------------------------
Claims and claim expense ratio 23.6% 25.0% -- 23.7%
Underwriting expense ratio 22.6% 86.1% -- 23.8%
------------------------------------------------------
Combined ratio 46.2% 111.1% -- 47.5%
------------------------------------------------------
RenaissanceRe Holdings Ltd. 49 1999 Annual Report
NOTE 16. STOCK INCENTIVE COMPENSATION
AND EMPLOYEE BENEFIT PLANS
The Company has a stock incentive plan under which all employees of the Company
and its subsidiaries may be granted stock options and restricted stock awards. A
stock option award under the Company's stock incentive plan allows for the
purchase of the Company's Common Shares at a price that is generally equal to
the five day average closing price of the Common Shares immediately prior to the
date of grant. Options to purchase Common Shares are granted periodically by the
Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The Company adopted the disclosure-only method under SFAS No. 123,
"Accounting for Stock Based Compensation", as of December 31, 1996, and
continues to account for stock-based compensation plans under Accounting
Principles Board Opinion No. 25. In accordance with SFAS No. 123, the fair value
of option grants is estimated on the date of grant using the Black-Scholes
option pricing model for pro-forma footnote purposes with the following weighted
average assumptions used for grants in 1999, 1998 and 1997, respectively;
dividend yield of 3.4, 2.7 and 2.5 percent, expected option life of five years
for all years, and expected volatility of 27.41, 25.09 and 25.09 percent. The
risk-free interest rate was assumed to be 6.3 percent in 1999, 5.5 percent in
1998 and 6.0 percent in 1997. If the compensation cost had been determined based
upon the fair value method recommended in SFAS No. 123, the Company's net income
would have been $100.9 million, $71.8 million and $135.4 million for each of
1999, 1998 and 1997, respectively, and the Company's earnings per share on a
diluted basis would have been $4.89, $3.20 and $5.89 for each of 1999, 1998 and
1997, respectively. The following is a table of the changes in options
outstanding for 1999, 1998 and 1997, respectively:
Awards Weighted
available Options average exercise Fair value Range of exercise
for grant outstanding price of options prices
--------------------------------------------------------------------------
Balance, December 31, 1996 1,574,001 1,297,261 $ 18.74
Authorized 1,000,000
Options granted (705,949) 705,949 $ 37.49 $ 9.67 $34.18 - $44.61
Options forfeited 144,436 (144,436) $ 28.91
Options exercised (571,967) $ 15.23
Shares turned in or withheld 114,287
Restricted stock issued (174,704)
Restricted stock forfeited 8,249
--------------------------------------------------------------------------
Balance, December 31, 1997 1,960,320 1,286,807 $ 26.67
Options granted (486,079) 486,079 $ 45.05 $10.84 $34.97 - $48.00
Options forfeited 16,225 (16,225) $ 33.45
Options exercised (136,891) $ 17.69
Shares turned in or withheld 59,928
Restricted stock issued (136,313)
Restricted stock forfeited 461
--------------------------------------------------------------------------
Balance, December 31, 1998 1,414,542 1,619,770 $ 35.62
Options granted (363,139) 364,899 $ 36.42 $12.24 $33.19 - $41.29
Options forfeited 247,537 (247,537) $ 38.46
Options exercised (150,264) $ 16.41
Shares turned in or withheld 82,811
Restricted stock issued (186,625)
Restricted stock forfeited 16,335
--------------------------------------------------------------------------
Balance, December 31, 1999 1,211,461 1,586,868 $ 37.22
--------------------------------------------------------------------------
Total options exercisable at
December 31, 1999 750,482
RenaissanceRe Holdings Ltd. 50 1999 Annual Report
During 1997, the shareholders approved an increase of 1,000,000 shares under the
Company's 1993 Amended Stock Incentive Plan. The total number of shares
available under the plan is 4,000,000 shares. The shareholders also approved the
issuance of share-based awards, the issuance of restricted Common Shares under
the plan and an adjustment in the calculation of shares available for issuance
thereunder by deeming the number of shares tendered to, or withheld by the
Company in connection with certain option exercises and in satisfaction of tax
withholding liabilities to be so available.
The Company has also established a Non-Employee Director Stock Incentive Plan
to issue stock options and shares of restricted stock. In 1997, the shareholders
approved an increase of authorized shares available for issuance thereunder from
100,000 Common Shares to 200,000 Common Shares. In 1999, 12,000 options to
purchase Common shares and 1,665 restricted Common Shares were granted. In 1998,
6,000 options to purchase Common Shares and 939 restricted Common Shares were
granted. In 1997, 24,000 options to purchase Common Shares and 1,870 restricted
Common Shares were issued. The options and restricted Common Shares vest ratably
over three years.
The Company has also established an employee stock bonus plan. Under the plan,
eligible employees may elect to receive a grant of Common Shares of up to 50
percent of their bonus in lieu of cash, with an associated grant from the
Company of an equal number of restricted shares. The restricted Common Shares
vest ratably over a three or four year period. During the restricted period, the
employee receives dividends and votes the restricted Common Shares, but the
restricted shares may not be sold, transferred or assigned. In 1999, 1998 and
1997 the Company issued 56,430, 33,036, and 46,424 restricted shares under this
plan, respectively, with values of $2.0, $1.5, and $1.7 million, respectively.
Additionally, in 1999, 1998 and 1997 the Board of Directors granted 130,195,
103,277 and 128,279 restricted shares with a value of $4.6, $4.5, and $4.9
million to certain employees. The shares granted to these employees vest ratably
over a four to five year period. At the time of grant, the market value of the
shares awarded under these plans is recorded as unearned stock grant
compensation and is presented as a separate component of shareholders' equity.
The unearned compensation is charged to operations over the vesting period.
Compensation expense related to these plans was $3.4, $2.5, and $0.7 million in
1999, 1998 and 1997, respectively.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 17. STATUTORY REQUIREMENTS
Under the Insurance Act, 1978, amendments thereto and related regulations of
Bermuda ("The Act"), Renaissance Reinsurance and Glencoe are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires Renaissance Reinsurance and Glencoe to maintain
certain measures of solvency and liquidity. As at December 31, 1999 the
statutory capital and surplus of the Bermuda subsidiaries was $653.9 million and
the amount required to be maintained under Bermuda law was $103.1 million.
Under the Act, Renaissance Reinsurance is classified as a Class 4 insurer, and
is therefore restricted as to the payment of dividends in the amount of 25
percent of the prior year's statutory capital and surplus, unless at least two
members of the Board of Directors attest that a dividend in excess of this
amount would not cause Renaissance Reinsurance to fail to meet its relevant
margins. During 1999, Renaissance Reinsurance paid aggregate cash dividends of
$95.1 million to RenaissanceRe.
Glencoe is also eligible as an excess and surplus lines insurer in a number of
states in America. There are various capital and surplus requirements in these
states, with the most onerous requiring the Company to maintain a minimum of
$15.0 million in capital and surplus. In this regard the declaration of
dividends from retained earnings and distributions from additional paid-in
capital are limited to the extent that the above requirements are met.
The Company's U.S. insurance subsidiaries are subject to various statutory and
regulatory restrictions regarding the payment of dividends. The restrictions are
primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amount-
RenaissanceRe Holdings Ltd. 51 1999 Annual Report
ed to $28.4 million at December 31, 1999 and the amount required to be
maintained was $25.0 million.
NOTE 18. COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and except for U.S. Government bonds, none of the Company's
investments exceeded 10 percent of shareholders' equity at December 31, 1999.
Concentrations of credit risk with respect to reinsurance balances are limited
due to their dispersion across various companies and geographies.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Except for the derivatives discussed in
Note 3, as of December 31, 1999 the Company was not a party to any financial
instruments that exposed the Company to any off-balance sheet risks.
LETTERS OF CREDIT
As of December 31, 1999 the Company's bankers have issued letters of credit of
approximately $73.2 million in favor of certain ceding companies. The letters of
credit are secured by cash and investments of similar amounts.
EMPLOYMENT AGREEMENTS
The Board of Directors has authorized the execution of employment agreements
between the Company and certain officers. These agreements provide for severance
payments under certain circumstances, as well as accelerated vesting of options
and restricted stock grants, under a change in control, as defined therein and
by the Company's stock option plan.
EMPLOYEE CREDIT FACILITY
In June of 1997, the Company executed a credit facility in order to encourage
direct, long-term ownership of the Company's stock, and to facilitate purchases
of the Company's stock by officers of the Company. Under the terms of the
facility, the purchases are financed by personal loans to the officers from the
bank. Such loans are collateralized by the stock purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. At December 31, 1999, the bank loans guaranteed by the
Company totaled $24.1 million. At December 31, 1999, the common stock that
collateralizes the loans had a fair value of $51.9 million.
LITIGATION
The Company is party to various lawsuits arising in the normal course of
business. The Company does not believe that any of the litigation will have a
material impact on its consolidated financial statements.
RenaissanceRe Holdings Ltd. 52 1999 Annual Report
NOTE 19. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30,
1999 1998 1999 1998 1999 1998
------------------------------------------------------------------------
Net premiums earned $ 57,988 $ 46,097 $ 57,668 $ 47,041 $ 54,123 $ 58,666
Net investment income 13,106 13,629 14,039 12,629 15,714 13,305
Net foreign exchange
gains (losses) (666) (24) 394 (827) 107 49
Other income (269) -- 460 347 882 642
Net realized investment
gains (losses) (497) 1,236 (5,030) (2,163) (6,020) (5,833)
-------- -------- -------- -------- -------- --------
Total revenue $ 69,662 $ 60,938 $ 67,531 $ 57,027 $ 64,806 $ 66,829
-------- -------- -------- -------- -------- --------
Claims and claim
expenses incurred $ 15,695 $ 7,876 $ 21,005 $ 10,294 $ 19,420 $ 26,696
Net income (loss) $ 30,018 $ 35,674 $ 24,049 $ 28,538 $ 23,974 $ 20,372
Earnings (loss) per share-basic $ 1.42 $ 1.60 $ 1.17 $ 1.28 $ 1.18 $ 0.93
Earnings (loss) per share-diluted $ 1.41 $ 1.57 $ 1.16 $ 1.26 $ 1.17 $ 0.91
Weighted average shares-basic 21,138 22,298 20,524 22,237 20,356 21,962
Weighted average shares-diluted 21,323 22,708 20,703 22,728 20,536 22,393
Claims and claim expense ratio 27.1% 17.1% 36.4% 21.9% 35.9% 45.5%
Underwriting expense ratio 28.1% 27.7% 26.2% 28.2% 30.1% 29.2%
-------- -------- -------- -------- -------- --------
Combined ratio 55.2% 44.8% 62.6% 50.1% 66.0% 74.7%
-------- -------- -------- -------- -------- --------
Quarter Ended
December 31,
1999 1998*
-------------------------
Net premiums earned $ 51,338 $ 53,143
Net investment income 17,475 13,271
Net foreign exchange
gains (losses) (246) 649
Other income 3,842 8,800
Net realized investment
gains (losses) (4,173) (130)
-------- --------
Total revenue $ 68,236 $ 75,733
-------- --------
Claims and claim
expenses incurred $ 21,021 $ 67,886
Net income (loss) $ 26,200 $(10,007)
Earnings (loss) per share-basic $ 1.33 $ (0.46)
Earnings (loss) per share-diluted $ 1.31 $ (0.46)
Weighted average shares-basic 19,759 21,568
Weighted average shares-diluted 19,949 21,874
Claims and claim expense ratio 41.0% 127.7%
Underwriting expense ratio 28.3% 33.7%
-------- --------
Combined ratio 69.3% 161.4%
-------- --------
* Loss in fourth quarter of 1998 was principally from Nobel operations.
See Note 8.
RenaissanceRe Holdings Ltd. 53 1999 Annual Report
NOTE 20. CONSOLIDATED UNAUDITED
PRO FORMA STATEMENTS
Operating results of Nobel and its affiliates acquired by the Company have been
included in the consolidated financial statements from their date of
acquisition. As required by Accounting Principles Board Opinion No. 16, the
following selected unaudited pro forma information is being provided to present
a summary of the combined results of the Company and Nobel and its affiliates
assuming the acquisition of Nobel and its affiliates had occurred as of January
1 of each year. The pro forma data is for informational purposes only and does
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above.
Pro Forma Statements:
(in thousands except per share data)
Years Ended December 31, 1998 1997
-------------------------
Total revenues $ 294,239 $ 305,239
Net income 60,320 142,426
Earnings per
Common Share-basic $ 2.74 $ 6.33
Earnings per
Common Share-diluted $ 2.69 $ 6.20
RenaissanceRe Holdings Ltd. 54 1999 Annual Report
DIRECTORS AND OFFICERS
(as of March 1, 2000)
BOARD OF DIRECTORS OFFICERS OF RENAISSANCERE W. Preston Hutchings
James N. Stanard (4) HOLDINGS LTD. AND Vice President
Chairman of the Board SUBSIDIARIES Chief Investment Officer
RenaissanceRe Holdings Ltd.
Arthur S. Bahr (2) James N. Stanard
Retired Chairman of the Board Martin J. Merritt
General Electric Investment Corporation President Vice President
Chief Executive Officer Controller
Thomas A. Cooper (2), (4) RenaissanceRe Holdings Ltd. Company Secretary
TAC Associates RenaissanceRe Holdings Ltd.
William I. Riker
Edmund B. Greene (1) President Craig W. Tillman
Retired Chief Operating Officer Vice President
General Electric Company Renaissance Reinsurance Ltd. Glencoe Insurance Ltd.
Brian R. Hall (1) David A. Eklund Jonathan D. Paradine
Retired Executive Vice President Assistant Vice President
Johnson & Higgins (Bermuda) Ltd. Chief Underwriting Officer Renaissance Services Ltd.
Renaissance Reinsurance Ltd.
Gerald L. Igou (3) Diana R. Petty
General Electric Investment Corporation John M. Lummis Assistant Vice President
Senior Vice President RenaissanceRe Holdings Ltd.
Kewsong Lee (1) Chief Financial Officer
E.M. Warburg, Pincus & Co., L.L.C. RenaissanceRe Holdings Ltd. J. Alex Richards
Assistant Vice President
Paul J. Liska (2), (4) Robert E. Hykes Renaissance Services Ltd.
The St. Paul Companies, Inc. Senior Vice President
Renaissance Services Ltd. John R. Wineinger
W. James MacGinnitie (3), (4) Assistant Vice President
Independent Consultant John D. Nichols, Jr. Renaissance Services Ltd.
Senior Vice President
Howard H. Newman Renaissance Reinsurance Ltd. Mark Rickey
E.M. Warburg, Pincus & Co., L.L.C. Chief Executive Officer
Kevin J. O'Donnell Renaissance U.S. Holdings, Inc.
Scott E. Pardee (3) Senior Vice President
Middlebury College Renaissance Reinsurance Ltd. Robert L. Ricker
Department of Economics President
Russell M. Smith DeSoto Insurance Company
William I. Riker (3) Senior Vice President
Renaissance Reinsurance Ltd. Renaissance Reinsurance Ltd. Ian D. Branagan
Divisional Director
Committees of the Board: Renaissance Reinsurance of Europe
(1) Audit
(2) Compensation
(3) Investment
(4) Transaction
RenaissanceRe Holdings Ltd. 55 1999 Annual Report
For general information about the Company or for copies of the annual report,
quarterly earnings releases and Forms 10-K and 10-Q, please contact:
Martin J. Merritt
Vice President, Controller and Company Secretary
Tel. 441-299-7230
Internet: mjm@renre.com
STOCK INFORMATION
The Company's stock is listed on The New York Stock Exchange under the symbol
RNR.
The following table sets forth the high and low closing sales prices per
share, as reported on The New York Stock Exchange Composite Tape for the four
fiscal quarters of 1999 and 1998:
1999 Price Range 1998 Price Range
High Low High Low
----------------------------------------------
First Quarter 36.81 31.69 50.06 40.00
Second Quarter 38.13 30.94 50.25 43.25
Third Quarter 37.31 34.69 47.63 41.50
Fourth Quarter 42.13 33.50 42.88 34.81
INDEPENDENT AUDITORS
Ernst & Young
Hamilton, Bermuda
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
USA
Tel. 1-800-756-3353
All requests should be directed to:
The Company Secretary
RenaissanceRe Holdings Ltd.
Renaissance House
8-12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
Tel. 441-295-4513
Fax 441-292-9453
RenaissanceRe Holdings Ltd. 56 1999 Annual Report