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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number: 34-0-26512
RENAISSANCERE HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 98-014-1974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
RENAISSANCE HOUSE HM 19
8-12 EAST BROADWAY (Zip Code)
PEMBROKE, BERMUDA
(Address of principal executive offices)
(441) 295-4513
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of outstanding shares of RenaissanceRe Holdings Ltd.'s
common stock, par value US $1.00 per share, as of September 30, 2003 was
70,323,752.
Total number of pages in this report: 35
RENAISSANCERE HOLDINGS LTD.
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as at September 30, 2003 3
(Unaudited) and December 31, 2002
Unaudited Consolidated Statements of Income for 4
the three and nine month periods ended
September 30, 2003 and 2002
Unaudited Consolidated Statements of Changes in 5
Shareholders' Equity for the nine month periods
ended September 30, 2003 and 2002
Unaudited Consolidated Statements of Cash Flows 6
for the nine month periods ended September 30, 2003
and 2002
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2-- Management's Discussion and Analysis of Results of 14
Operations and Financial Condition
ITEM 3-- Quantitative and Qualitative Disclosures About Market Risk 32
ITEM 4-- Disclosure Controls and Procedures 33
PART II-- OTHER INFORMATION 34
ITEM 1 -- Legal Proceedings
ITEM 2 -- Changes in Securities and Use of Proceeds
ITEM 3 -- Defaults Upon Senior Securities
ITEM 4 -- Submission of Matters to a Vote of Security Holders
ITEM 5 -- Other Information
ITEM 6 -- Exhibits and Reports on Form 8-K
Signature-- RenaissanceRe Holdings Ltd. 35
2
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of United States Dollars, except per share amounts)
AS AT
--------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(Unaudited) (Audited)
ASSETS
Fixed maturity investments available for sale, at fair value
(Amortized cost $2,640,852 and $2,153,715 at September 30, 2003 and
December 31, 2002, respectively) $ 2,698,720 $ 2,221,109
Short term investments 964,309 570,497
Other investments 224,699 129,918
Equity investment in reinsurance company at fair value
(Cost $84,199 at September 30, 2003 and December 31, 2002) 136,432 120,288
Cash and cash equivalents 84,029 87,067
----------- -----------
Total investments and cash 4,108,189 3,128,879
Premiums receivable 312,199 199,449
Ceded reinsurance balances 108,694 73,360
Losses recoverable 157,059 199,533
Accrued investment income 29,605 25,833
Deferred acquisition costs 95,376 55,853
Other assets 58,070 62,829
----------- -----------
TOTAL ASSETS $ 4,869,192 $ 3,745,736
=========== ===========
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for claims and claim expenses $ 981,687 $ 804,795
Reserve for unearned premiums 538,262 331,985
Debt 350,000 275,000
Reinsurance balances payable 198,413 146,732
Other 121,613 97,013
----------- -----------
TOTAL LIABILITIES 2,189,975 1,655,525
----------- -----------
Minority Interest - Company obligated, mandatorily redeemable capital securities
of a subsidiary trust holding solely junior subordinated
debentures of the Company 84,630 84,630
Minority Interest - DaVinci 416,942 363,546
SHAREHOLDERS' EQUITY
Preference Shares 250,000 150,000
Common shares and additional paid-in capital 310,094 320,936
Unearned stock grant compensation -- (18,468)
Accumulated other comprehensive income 110,101 95,234
Retained earnings 1,507,450 1,094,333
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 2,177,645 1,642,035
----------- -----------
TOTAL LIABILITIES, MINORITY INTERESTS, AND
SHAREHOLDERS' EQUITY $ 4,869,192 $ 3,745,736
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands of United States Dollars, except per share amounts)
(Unaudited)
QUARTERS ENDED NINE MONTHS ENDED
------------------------------- --------------------------------
SEPT. 30, 2003 SEPT. 30, 2002 SEPT. 30, 2003 SEPT. 30, 2002
------------- -------------- -------------- --------------
REVENUES
Gross premiums written $ 313,317 $ 282,597 $ 1,211,044 $ 1,013,725
============= ============== ============== ==============
Net premiums written $ 236,570 $ 192,687 $ 987,163 $ 770,300
Decrease (increase) in unearned premiums 40,794 (1,377) (170,790) (243,940)
------------- -------------- -------------- --------------
Net premiums earned 277,364 191,310 816,373 526,360
Net investment income 28,280 23,737 93,823 73,021
Net foreign exchange gains 252 888 11,843 2,588
Other income 7,979 7,951 20,722 24,227
Net realized gains on investments 1,172 10,219 71,944 13,736
------------- -------------- -------------- --------------
TOTAL REVENUES 315,047 234,105 1,014,705 639,932
------------- -------------- -------------- --------------
EXPENSES
Claims and claim expenses incurred 96,856 82,931 279,712 199,198
Acquisition expenses 56,317 23,802 139,154 62,719
Operational expenses 17,882 9,616 49,121 30,241
Corporate expenses 4,456 3,466 12,601 10,844
Interest expense 4,318 3,499 15,979 9,646
------------- -------------- -------------- --------------
TOTAL EXPENSES 179,829 123,314 496,567 312,648
------------- -------------- -------------- --------------
Income before minority interests and taxes and change
in accounting principle 135,218 110,791 518,138 325,525
Minority Interest - Company obligated, mandatorily
redeemable capital securities of a subsidiary trust
holding solely junior subordinated debentures of the
Company 1,827 1,759 3,282 3,664
Minority interest - DaVinci 15,211 17,689 56,246 40,636
------------- -------------- -------------- --------------
Income before taxes and change in accounting principle 118,180 91,343 458,610 281,225
Income tax benefit (expense) (37) (59) 18 (382)
Cumulative effect of a change in accounting
principle -- -- -- (9,187)
------------- -------------- -------------- --------------
NET INCOME 118,143 91,284 458,628 271,656
Dividends on Preference Shares 4,903 3,038 13,939 9,079
------------- -------------- -------------- --------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 113,240 $ 88,246 $ 444,689 $ 262,577
============= ============== ============== ==============
Earnings per Common Share - basic $ 1.63 $ 1.30 $ 6.45 $ 3.90
Earnings per Common Share - diluted $ 1.59 $ 1.26 $ 6.27 $ 3.75
The accompanying notes are an integral part of these financial statements.
4
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands of United States Dollars)
(Unaudited)
2003 2002
----------- -----------
Preference Shares
Balance -- January 1 $ 150,000 $ 150,000
Issuance of Preference Shares 100,000 --
----------- -----------
Balance -- September 30 250,000 150,000
----------- -----------
Common Stock & additonal paid-in capital
Balance -- January 1 320,936 264,623
Exercise of options, and issuance of stock and
restricted stock awards 10,776 12,780
Miscellaneous offering expenses (3,150) (73)
Cumulative effect of change in accounting for
unearned stock grant compensation (18,468) --
Stock dividend -- 45,711
Repurchase of capital securities -- 30
----------- -----------
Balance -- September 30 310,094 323,071
----------- -----------
Unearned stock grant compensation
Balance -- January 1 (18,468) (20,163)
Cumulative effect of change in accounting for
unearned stock grant compensation 18,468 --
Restricted stock grants awarded, net -- (7,710)
Amortization -- 7,403
----------- -----------
Balance -- September 30 -- (20,470)
----------- -----------
Accumulated other comprehensive income
Balance -- January 1 95,234 16,295
Net unrealized gains on securities, net of
adjustment (see disclosure) 14,867 22,214
----------- -----------
Balance -- September 30 110,101 38,509
----------- -----------
Retained earnings
Balance -- January 1 1,094,333 814,269
Net income 458,628 271,656
Dividends paid on Common Shares (31,572) (29,177)
Dividends paid on Preference Shares (13,939) (9,079)
Stock dividend -- (45,711)
----------- -----------
Balance -- September 30 1,507,450 1,001,958
----------- -----------
Total Shareholders' Equity $ 2,177,645 $ 1,493,068
=========== ===========
COMPREHENSIVE INCOME
Net income $ 458,628 $ 271,656
Other comprehensive income 14,867 22,214
----------- -----------
Comprehensive income $ 473,495 $ 293,870
=========== ===========
DISCLOSURE REGARDING NET UNREALIZED GAINS
Net unrealized holding gains arising during period $ 86,811 $ 35,950
Net realized gains included in net income (71,944) (13,736)
----------- -----------
Change in net unrealized gains on securities $ 14,867 $ 22,214
=========== ===========
(1) Comprehensive income for the quarters ended September 30, 2003 and 2002
was $115.3 million and $112.4 million, respectively.
The accompanying notes are an integral part of these financial statements.
5
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands of United States Dollars)
(Unaudited)
2003 2002
------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income $ 458,628 $ 271,656
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Amortization and depreciation 9,742 15,435
Unrealized (gains) losses included in net investment income (12,916) 2,191
Net realized investment gains (71,944) (13,736)
Minority interest - DaVinci 56,246 40,636
Change in:
Premiums receivable (112,750) (196,124)
Ceded reinsurance balances (35,334) (76,937)
Reserve for claims and claim expenses, net 219,366 157,520
Reserve for unearned premiums 206,277 318,532
Deferred acquisition costs (39,523) (43,104)
Reinsurance balances payable 51,681 37,002
Other 32,279 39,098
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 761,752 552,169
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of investments 9,730,227 4,722,476
Purchases of investments available for sale (10,144,823) (5,658,227)
Net purchases of short-term investments (393,812) 339,373
Net purchases of other investments (81,865) (60,804)
Acquisition of subsidiary, net of cash acquired -- (23,495)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (890,273) (680,677)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Issuance of senior debt, net of expenses 99,144 --
Sale of preference shares, net of expenses 96,850 --
Payment of bank loan - Glencoe U.S. (25,000) (8,500)
Dividends paid - Common Shares (31,572) (29,177)
Dividends paid - Preference Shares (13,939) (9,079)
Issuance of senior debt - DaVinci -- 100,000
Increase in minority interests -- 22,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 125,483 75,244
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,038) (53,264)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 87,067 139,715
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 84,029 $ 86,451
============ ============
The accompanying notes are an integral part of these financial statements.
6
RenaissanceRe Holdings Ltd. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Expressed in U.S. Dollars)
(Unaudited)
1. The consolidated financial statements have been prepared on the basis
of U.S. generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. This report on Form 10-Q should be read in conjunction with
the Company's Annual Report on Form 10-K. The consolidated financial
statements include the accounts of RenaissanceRe Holdings Ltd.
("RenaissanceRe") and its wholly-owned subsidiaries, including
Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"), Glencoe
Insurance Ltd. ("Glencoe"), Stonington Insurance Company
("Stonington"), Lantana Insurance Ltd. ("Lantana"), Glencoe U.S.
Holdings Inc. ("Glencoe U.S.", formerly known as Renaissance U.S.
Holdings, Inc.), RenaissanceRe Capital Trust (the "Trust"), Renaissance
Investment Holdings Limited ("RIHL") and Renaissance Underwriting
Managers, Ltd. ("Renaissance Managers"). DaVinciRe Holdings Ltd.
("DaVinciRe"), a partially-owned subsidiary, is also consolidated into
the Company's financial statements.
RenaissanceRe and its subsidiaries are collectively referred to herein
as the "Company," and references herein to "our", "we", or "us" refer
to the Company. All intercompany transactions and balances have been
eliminated on consolidation.
Our reinsurance operations write property catastrophe reinsurance and
specialty reinsurance, principally provided through Renaissance
Reinsurance. Our individual risk operations write direct insurance on
both an admitted basis through Stonington and an excess and surplus
lines basis through Glencoe and Lantana, and also provide reinsurance
coverage, principally on a quota share basis, which we analyze on an
individual risk basis. The Company also acts as underwriting manager
and underwrites worldwide property catastrophe reinsurance programs and
specialty reinsurance on behalf of joint ventures, including Top Layer
Reinsurance Ltd. ("Top Layer Re") and DaVinci Reinsurance Ltd.
("DaVinci"). DaVinciRe and DaVinci were formed in October 2001 with
other equity investors. The Company owns a minority equity interest in,
but controls a majority of the outstanding voting power of, DaVinciRe.
Minority interests represent the interests of external parties with
respect to net income and shareholders' equity of the Trust and
DaVinciRe. The Trust is the issuer of $100.0 million of outstanding
mandatorily redeemable preferred capital securities ("Capital
Securities"), of which $15.4 million have been repurchased by the
Company, and holds a like amount of junior subordinated debentures
issued by RenaissanceRe. RenaissanceRe's guarantee of the distributions
on the preferred securities issued by the Trust, when taken together
with RenaissanceRe's obligations under the expense reimbursement
agreement with the Trust, provides a full and unconditional guarantee
of amounts due on the Capital Securities issued by the Trust (See Note
12).
Certain comparative information has been reclassified to conform to the
current presentation. Because of the seasonality of the Company's
business, the results of operations and cash flows for any interim
period will not necessarily be indicative of results of operations and
cash flows for the full fiscal year or subsequent quarters.
2. The Company purchases reinsurance to reduce its exposure to large
losses. The Company currently has in place contracts that provide for
recovery of a portion of certain claims and claims expenses from
reinsurers in excess of various retentions and loss warranties. The
Company would remain liable to the extent that any third-party
reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $188.4 million and $160.8 million for
the nine month periods ended September 30, 2003 and 2002, respectively.
In addition to loss recoveries, certain of the Company's ceded
reinsurance contracts provide for recoveries of additional premiums,
reinstatement premiums and for unrecovered no claims bonuses which are
unrecoverable when losses are ceded to other reinsurance contracts.
Total recoveries netted against claims and claim expenses incurred for
the nine months ended September 30, 2003 were $20.1 million compared to
$73.2 million for the nine months ended September 30, 2002.
3. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). In the second quarter of 2002, the Company completed its initial
7
impairment review in compliance with the transition provisions of SFAS
142 and, as a result, the Company decided to record goodwill at zero
value, the low end of an estimated range of values, and record a
write-off of $9.2 million. In accordance with the provisions of SFAS
142, this is required to be recorded as a cumulative effect of a change
in accounting principle in the statement of income and is required to
be recorded as if this adjustment was recorded in the first quarter of
2002.
4. During 2002, the Company changed its policy regarding the
classification of certain investments previously recorded as cash and
cash equivalents. These investments were reclassified to short-term
investments to more appropriately reflect the Company's investment
strategy regarding those assets.
5. During the second quarter of 2003, the Company changed its policy
regarding the classification of equity appreciation on certain hedge
funds and private equity funds previously recorded as realized gains
and losses. The equity appreciation on these investments has been
reclassified to net investment income for all periods presented.
6. On August 8, 2003, the Company amended and restated its existing
revolving credit agreement with a syndicate of commercial banks to
increase the facility from $310 million to $400 million and to make
certain other changes. No balance was outstanding as of December 31,
2002, or September 30, 2003. As amended, the agreement contains certain
financial covenants. These covenants generally provide that
consolidated debt to capital shall not exceed the ratio (the "Debt to
Capital Ratio") of 0.35:1 and that consolidated shareholders' equity
plus outstanding Capital Securities of RenaissanceRe and Renaissance
Reinsurance shall equal or exceed $1.0 billion and $500 million,
respectively. The scheduled commitment termination date under the
amended agreement is August 8, 2006.
7. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options
and restricted stock grants. The following tables set forth the
computation of basic and diluted earnings per share:
- --------------------------------------------------------------------------------------------------------------------
Three months ended September 30,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars except share and per share data)
- --------------------------------------------------------------------------------------------------------------------
Numerator:
Net income available to common shareholders $ 113,240 $ 88,246
============== ==================
Denominator:
Denominator for basic earnings per common share -
Weighted average common shares 69,307,078 67,865,217
Per common share equivalents of employee stock
Options and restricted shares 1,879,549 2,406,866
-------------- ------------------
Denominator for diluted earnings per common share -
Adjusted weighted average common shares and
assumed conversions 71,186,627 70,272,083
============== ==================
Basic earnings per common share $ 1.63 $ 1.30
Diluted earnings per common share $ 1.59 $ 1.26
- --------------------------------------------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars except share and per share data)
- --------------------------------------------------------------------------------------------------------------------
Numerator:
Net income available to common shareholders $ 444,689 $ 262,577
============== ==================
Denominator:
Denominator for basic earnings per common share -
Weighted average common shares 68,938,026 67,326,314
Per common share equivalents of employee stock
Options and restricted shares 1,997,554 2,763,304
-------------- ------------------
Denominator for diluted earnings per common share -
Adjusted weighted average common shares and
assumed conversions 70,935,580 70,089,618
============== ==================
Basic earnings per common share $ 6.45 $ 3.90
Diluted earnings per common share $ 6.27 $ 3.75
- --------------------------------------------------------------------------------------------------------------------
8. The Board of Directors of the Company declared, and the Company paid, a
dividend of $0.15 per share to shareholders of record on each of March
3, 2003, June 2, 2003 and September 10, 2003. On November 13, 2003, the
Board of Directors declared a dividend of $0.15 per share payable on
December 15, 2003, to shareholders of record on December 5, 2003.
During the second quarter of 2002, RenaissanceRe effected a
three-for-one stock split through a stock dividend of two additional
common shares for each common share owned. All of the share and per
share information provided in this 10-Q is presented as if the stock
dividend had occurred for all periods presented.
On August 7, 2003, the Board of Directors authorized the Company to
purchase a portion of its outstanding common shares up to an aggregate
purchase price of $150 million. This authorization includes the
remaining amounts available under prior authorizations. The Company's
decision to repurchase common shares will depend on, among other
matters, the market price of the common shares and capital requirements
of the Company.
9. Effective January 1, 2003, the Company adopted, prospectively, the fair
value recognition provisions of SFAS 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), for all stock-based employee compensation
granted, modified or settled after January 1, 2003. Under the fair
value recognition provisions of SFAS 123, the Company estimates the
fair value of employee stock options and other stock-based compensation
on the date of grant and amortizes this value as an expense over the
vesting period. Prior to 2003, the Company followed Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its employee
stock compensation. No option related employee compensation cost was
recorded in net income prior to January 1, 2003 as all options granted
had an exercise price equal to the market value of the underlying
common stock on the date of grant.
Under the prospective method of adoption selected by the Company under
the provisions of SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," compensation cost recognized in 2003
includes all employee awards granted, modified, or settled after the
beginning of the fiscal year. Results for prior periods have not been
restated. The following table illustrates the effect on net income and
earnings per share as if the fair value based method had been applied
to all outstanding and unvested awards in each period.
9
- -------------------------------------------------------------------------------------------------------------
Three months ended September 30,
2003 2002
------------ ------------
Net income available to common shareholders, as reported $ 113,240 $ 88,246
add: stock based employee compensation cost included in
determination of net income 3,829 2,423
less: fair value compensation cost under SFAS 123 5,204 4,115
------------ ------------
Pro forma net income available to common shareholders $ 111,865 $ 86,554
============ ============
Earnings per share
Basic - as reported $ 1.63 $ 1.30
Basic - proforma $ 1.61 $ 1.28
Diluted - as reported $ 1.59 $ 1.26
Diluted - proforma $ 1.57 $ 1.23
- -------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
------------- ---------------
Net income available to common shareholders, as reported $ 444,689 $ 262,577
add: stock based employee compensation cost included in
determination of net income 9,030 6,539
less: fair value compensation cost under SFAS 123 12,866 12,679
------------- ---------------
Pro forma net income available to common shareholders $ 440,853 $ 256,437
============= ===============
Earnings per share
Basic - as reported $ 6.45 $ 3.90
Basic - proforma $ 6.39 $ 3.81
Diluted - as reported $ 6.27 $ 3.75
Diluted - proforma $ 6.21 $ 3.66
- --------------------------------------------------------------------------------------------------------------
10. The Company has two reportable segments: reinsurance operations and
individual risk operations. The reinsurance segment, which includes the
results of DaVinci, has three principal components, property
catastrophe reinsurance, specialty reinsurance and catastrophe
reinsurance written through our joint venture, DaVinci. During the
third quarter of 2002, we renamed our primary segment "individual risk"
to more accurately describe the risk characteristics of this business.
We define our individual risk segment to include underwriting that
involves understanding the characteristics of the original underlying
insurance policy. Our individual risk operations write direct insurance
on both an admitted basis through Stonington and an excess and surplus
lines basis through Glencoe and Lantana, and also provide reinsurance
coverage, principally on a quota share basis, which we analyze on an
individual risk basis. Data for the three and nine month periods ended
September 30, 2003 and 2002 are as follows:
10
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF U.S. DOLLARS)
REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL
-----------------------------------------------------------------------
Gross premiums written $ 139,645 $ 173,672 $ - $ 313,317
Net premiums written 113,033 123,537 - 236,570
Income 99,475 6,834 6,931 113,240
-----------------------------------------------------------------------
Claims and claim expense ratio 28.9% 49.3% - 34.9%
Expense ratio 20.7% 42.3% - 26.8%
-----------------------------------------------------------------------
Combined ratio 49.6% 91.6% - 61.7%
=======================================================================
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30, 2002
(IN THOUSANDS OF U.S. DOLLARS)
REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL
-----------------------------------------------------------------------
Gross premiums written $ 201,351 $ 81,246 $ - $ 282,597
Net premiums written 133,317 59,370 - 192,687
Income 66,316 8,645 13,285 88,246
-----------------------------------------------------------------------
Claims and claim expense ratio 44.4% 38.0% - 43.3%
Expense ratio 14.3% 33.9% - 17.5%
-----------------------------------------------------------------------
Combined ratio 58.7% 71.9% - 60.8%
=======================================================================
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF U.S. DOLLARS)
REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL
-----------------------------------------------------------------------
Gross premiums written $ 875,841 $ 335,203 $ 1,211,044
Net premiums written 736,309 250,854 987,163
Income 320,549 27,837 96,303 444,689
-----------------------------------------------------------------------
Claims and claim expense ratio 28.9% 49.7% - 34.3%
Expense ratio 18.3% 37.1% - 23.0%
-----------------------------------------------------------------------
Combined ratio 47.2% 86.8% - 57.3%
=======================================================================
- --------------------------------------------------------------------------------------------------------------------
11
- --------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS OF U.S. DOLLARS)
REINSURANCE (1) INDIVIDUAL RISK (1) OTHER (2) TOTAL
-----------------------------------------------------------------------
Gross premiums written $ 828,716 $ 185,009 $ - $ 1,013,725
Net premiums written 617,336 152,964 - 770,300
Income 223,352 10,850 28,375 262,577
-----------------------------------------------------------------------
Claims and claim expense ratio 37.3% 42.5% - 37.8%
Expense ratio 15.4% 37.5% - 17.7%
-----------------------------------------------------------------------
Combined ratio 52.7% 80.0% - 55.5%
=======================================================================
- --------------------------------------------------------------------------------------------------------------------
(1) Income for the reinsurance and individual risk segments represents
net underwriting income. Net underwriting income consists of net
premiums earned less claims and claims expenses incurred, acquisition
costs, and operational expenses.
(2) Income for the other segment consists of net investment income, net
foreign exchange gains, other income and net realized gains on
investments, partially offset by corporate expenses, interest expense,
minority interest expenses, cumulative effect of change in accounting
principle, income tax benefit (expense), and dividends on preference
shares.
11. The provision for income taxes is based on income recognized for
financial statement purposes and includes the effects of temporary
differences between financial and tax reporting. Deferred tax assets
and liabilities are determined based on the difference between the
financial statement bases and tax bases of assets and liabilities using
enacted tax rates.
RenaissanceRe's U.S. subsidiaries and Lantana are subject to U.S. tax.
The net deferred tax asset of $4.0 million is net of a $30.1 million
valuation allowance. Net operating loss carryforwards and future tax
deductions will be available to offset regular taxable U.S. income
during the carryforward period (which expires during the period ranging
from 2018 through 2022), subject to certain limitations.
12. In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" ("SFAS 150"). The provisions of SFAS 150 required the
Company's Capital Securities to be classified on the balance sheet as
liabilities with effect from July 1, 2003, and for the related minority
interest to be recorded as interest expense. On November 7, 2003, the
FASB issued FASB Staff Position 150-3, which, among other matters,
deferred indefinitely the effective date of SFAS 150 with respect to
the classification of certain mandatorily redeemable noncontrolling
interests under SFAS 150, and therefore required the reversal of any
effects of the adoption of SFAS 150 regarding the Company's Capital
Securities. As a result, the Company continues to classify the Capital
Securities as minority interest on the consolidated balance sheet and
continues to classify the related dividends as minority interest
expense in the consolidated income statement.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB
No. 51" ("FIN 46"), which requires consolidation of all Variable
Interest Entities ("VIE") by the investor that will absorb a majority
of the VIE's expected losses or residual returns if they occur. FIN 46
is effective immediately for VIEs created after January 31, 2003 and is
expected to become effective in the Company's fourth quarter of 2003
for all other existing transactions. We do not expect, based on the
authoritative literature currently available, that the adoption of FIN
46 will have a material impact on our financial condition and results
of operations.
13. Subsequent Events
12
The Company is in the process of negotiating a long-term strategic
investment, along with three partners, MBIA Inc. ("MBIA"), Partner Re
and Koch Financial, to form a new financial guaranty reinsurer, Channel
Re. The Company anticipates that Channel Re will be a stable, long-term
financial guaranty reinsurer, and will benefit from a strong alignment
of interests with MBIA. Channel Re is expected to have a senior
management team comprised of seasoned industry professionals. Upon
inception, Channel Re would assume a portfolio of in-force business
from MBIA, participate in MBIA's reinsurance treaty and provide
facultative reinsurance support to MBIA. The Company's total financial
commitment is expected to be in the range of $115 - $125 million, and
Channel Re is expected to produce attractive financial returns for its
shareholders. The consummation of the transaction remains subject to
final documentation, numerous closing conditions, regulatory approval
and the completion of the process to obtain appropriate financial
strength ratings.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of our results of operations for the
three and nine month periods ended September 30, 2003 and 2002 and financial
condition as of September 30, 2003. This discussion and analysis should be read
in conjunction with the attached unaudited consolidated financial statements and
notes thereto and the audited consolidated financial statements and notes
thereto contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002. We also caution readers regarding certain forward-looking
statements made in this 10-Q and direct readers to the Safe Harbor disclosures
included in this 10-Q.
GENERAL
RenaissanceRe Holdings Ltd. was formed in 1993 to provide reinsurance to cover
the risk of natural and man-made catastrophes. Since our formation, we have
become one of the largest writers of catastrophe reinsurance and we are
recognized as a leader in the utilization of sophisticated computer models to
construct a superior portfolio of these coverages. Over the past two years,
there have been significant market dislocations across the worldwide insurance
and reinsurance markets and a substantial increase in the amount of premium that
meets our hurdle rates. Currently, we conduct our business through two
reportable segments, Reinsurance and Individual Risk.
Reinsurance
Our reinsurance segment has three main components:
1) Catastrophe reinsurance written for our own account - our traditional core
business. Our subsidiary, Renaissance Reinsurance, is one of the world's
premier providers of this coverage. This coverage protects against large
natural catastrophes, such as earthquakes and hurricanes, as well as claims
arising from other natural and man-made catastrophes such as winter storms,
freezes, floods, fires, tornadoes and explosions. We offer this coverage to
insurance companies and other reinsurers primarily on an excess of loss
basis. This means that we begin paying when our customers' claims from a
catastrophe exceed a certain retained amount.
2) Specialty reinsurance covering certain targeted classes of non-catastrophe
business where we believe we have a sound basis for underwriting and pricing
the risk that we assume: our portfolio of these lines currently includes
catastrophe exposed workers' compensation and personal accident, aviation,
property per risk, surety, finite and terrorism. We believe that we are seen
as a market leader in certain of these classes of business and that we have
a growing reputation as a "first call" market in these lines.
3) Catastrophe and specialty reinsurance written for the account of joint
ventures we have established to expand our access to capital and leverage
our catastrophe underwriting skill to produce fee income. In 1999, we formed
Top Layer Re with State Farm to provide high layer coverage for non-U.S.
risks. Renaissance Reinsurance and State Farm each own 50% of Top Layer Re.
We formed DaVinciRe in 2001 with State Farm and other private investors to
write property catastrophe reinsurance side-by-side with Renaissance
Reinsurance. We own a minority of DaVinciRe's outstanding equity but control
a majority of its outstanding voting power, and accordingly, DaVinciRe's
financial results are consolidated in our financial statements. We act as
the exclusive underwriting manager for these joint ventures in return for
management fees and a profit participation (such fees earned from DaVinciRe
are eliminated in consolidation). We actively consider additional joint
venture opportunities which may write various classes of risk. We cannot
assure you we will complete such new ventures or that they will contribute
materially to our results.
Individual Risk
Our individual risk business, which is written on an excess and surplus lines
basis by Glencoe and Lantana and on an admitted basis by Stonington, has also
experienced substantial growth in 2003. We define our individual risk segment to
include underwriting that involves understanding the characteristics of the
original underlying insurance policy. Our individual risk segment provides
insurance both on a direct and on a surplus lines basis and also provides
reinsurance on a quota share basis. During the third quarter of 2003, our
individual risk segment has begun writing certain types of casualty insurance.
We are in the process of building our infrastructure to address the additional
management and operational risks associated with these coverages.
14
The individual risk business which Glencoe writes is primarily produced through
three distribution channels: 1) Brokers - where Glencoe writes primary insurance
through brokers on a risk-by-risk basis; 2) Program Managers - where Glencoe
writes primary insurance through a small number of high quality, specialized
program managers, who produce business under well-defined underwriting
guidelines, and provide related back-office functions; and 3) Quota Share
Reinsurance - where Glencoe writes quota share reinsurance with primary insurers
who, similar to our program managers, provide most of the back-office and
support functions.
In addition to the reinsurance and insurance coverages discussed above, from
time to time, we consider opportunistic diversification into new ventures,
either through organic growth, the formation of new joint ventures, or the
acquisition of other companies or books of business of other companies. This
potential diversification includes opportunities to write targeted classes of
non-catastrophe business, both directly for our own account and through possible
new joint venture opportunities. In evaluating such new ventures, we seek an
attractive return on equity, the ability to develop or capitalize on a
competitive advantage, and opportunities that will not detract from our core
reinsurance and individual risk operations. Accordingly, we regularly review
strategic opportunities and periodically engage in discussions regarding
possible transactions, although there can be no assurance that we will complete
any such transactions or that any such transaction would contribute materially
to our results of operations or financial condition.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
CLAIMS AND CLAIM EXPENSE RESERVES
We believe that the most significant judgment made by management is our estimate
of the claims and claim expense reserves. Claim reserves represent estimates,
including actuarial and statistical projections at a given point in time, of the
ultimate settlement and administration costs of claims incurred, and it is
possible that the ultimate liability may materially exceed or be materially less
than such estimates. Such estimates are not precise in that, among other
matters, they are based on predictions of future developments and estimates of
future trends in claim severity and frequency and other variable factors such as
inflation.
Adjustments to our prior year estimated claims reserves will impact our current
year net income by increasing our net income if the prior year estimated claims
reserves prove to be overstated, or by reducing our net income if the prior year
estimated claims reserves prove to be insufficient. Changes to prior year
estimated claims reserves had the following impact on our net income: during the
first nine months of 2003, we reduced prior year estimated claims reserves by
$50.0 million and accordingly, our net income was increased by $50.0 million;
during the first nine months of 2002, we increased prior year estimated claims
reserves by $4.9 million, and accordingly our net income was decreased by $4.9
million. Also see Financial Condition - Reserves for Claims and Claims Expenses.
For our property catastrophe reinsurance operations, we initially set our case
reserves based on case reserves and other reserve estimates reported by insureds
and ceding companies. We then add to these case reserves, our estimates for
additional case reserves, and an estimate for incurred but not reported ("IBNR")
reserves. These estimates are generally based upon our experience with similar
claims, our knowledge of potential industry loss levels for each loss, and
industry information which we gather and retain in our REMS(C) modeling system.
Our estimates of claims resulting from catastrophic events is inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims.
In reserving for our individual risk and specialty reinsurance coverages we do
not have the benefit of a significant amount of our own historical experience in
these lines, which we believe further increases the uncertainty of these
estimates. We utilize the Bornhuetter-Ferguson actuarial method to estimate our
IBNR for our specialty reinsurance and individual risk coverages. The
utilization of the Bornhuetter-Ferguson technique requires a company to estimate
an ultimate claims and claim expense ratio for each line of business. We select
our estimates of the ultimate claims and claim expense ratios by reviewing
industry standards, and adjusting these standards based upon the type and terms
of the coverages we offer and the terms of the coverages we offer. We intend to
establish our estimates for these classes of business prudently, but we cannot
assure you we will succeed in this.
Because any reserve estimate is an insurer's estimate of its ultimate liability,
and because there are numerous factors which affect reserves but cannot be
determined with certainty in advance, our ultimate payments will vary, perhaps
materially, from our initial estimate of reserves. Therefore, because of these
inherent uncertainties, we have developed a reserving philosophy that attempts
to incorporate prudent assumptions and estimates.
15
During the first, second and third quarters of 2003, we reduced prior year net
accident year reserves by $11.8 million, $12.7 million and $25.5 million,
respectively. For the remainder of the year, assuming future reported and paid
claims activity is consistent with that of recent quarters, and barring
unforeseen circumstances, we believe that as our reserves on older accident
years continue to age, it is likely that we will again experience a net
reduction to our older accident year reserves.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that our estimates need adjusting, such adjustments are recorded in
the quarter in which they are identified. Although we believe we are cautious in
our assumptions, and in the application of these methodologies, we cannot be
certain that our ultimate payments will not vary, perhaps materially, from the
estimates we have made. As of September 30, 2003, our IBNR reserves were $612.3
million, and a 5% change in these IBNR reserves would equate to a $30.6 million
adjustment to claims and claim expenses incurred, which would represent 6.7% of
our net income earned in the first nine months of 2003, and 0.6% of
shareholders' equity as at September 30, 2003.
PREMIUMS
We recognize premiums as income over the terms of the related contracts and
policies. Our written premiums are based on policy and contract terms and
include estimates based on information received from both insureds and ceding
companies. We record adjustment premiums in the period in which they occur.
We book premiums on non-proportional contracts in accordance with the contract
terms. Premiums written on losses occurring contracts are typically earned over
the contract period. Premiums on risks attaching contracts are generally earned
as reported by the cedants, which typically is over double the contract period.
Management makes estimates based on judgment and historical experience for
periods during which no information has yet been received. Such estimates are
subject to adjustment in subsequent periods when actual figures are recorded.
The minimum and deposit premium on excess policies are usually determined by the
contract wording. In the absence of defined amounts in the contract, management
estimates written premium on these contracts based on historical experience and
judgment.
In our individual risk business, it is often necessary to estimate portions of
premiums written by program managers. Management estimates this premium based on
discussions with program managers and also based on historical experience and
judgment.
Total premiums estimated as of September 30, 2003 and 2002 were $97.0 million
and $60.7 million, respectively.
We record ceded premiums on the same basis as assumed premiums. Reinstatement
premiums are estimated by management, based on the contract terms, at the time
of the loss occurrence giving rise to the reinstatement.
SUMMARY OF RESULTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE QUARTER ENDED SEPTEMBER
30, 2002
A summary of the significant components of our revenues and expenses is as
follows:
16
- ------------------------------------------------------------------------------------------------------------------
SUMMARY OF RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
Quarter ended September 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Net underwriting income - Renaissance $ 73,386 $ 44,232
Net underwriting income - DaVinci 26,089 22,084
---------------------------
Total underwriting income - Reinsurance (1) 99,475 66,316
Net underwriting income - Individual Risk (1) 6,834 8,645
Other income 7,979 7,951
Net investment income 28,280 23,737
Interest and preferred share dividends (11,048) (8,296)
Corporate expenses, taxes, foreign exchange gains and other (4,241) (2,637)
Minority Interest - DaVinci (15,211) (17,689)
---------------------------
Net income before realized gains 112,068 78,027
Net realized gains on investments 1,172 10,219
---------------------------
Net income available to common shareholders $ 113,240 $ 88,246
===========================
Net income per common share - diluted $ 1.59 $ 1.26
Net income before realized gains on investments per common share - diluted $ 1.57 $ 1.11
(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses. See
table on page 19 for a reconciliation of underwriting income.
- ------------------------------------------------------------------------------------------------------------------
The $25.0 million increase in net income in the quarter ended September 30,
2003, compared to the quarter ended September 30, 2002, was primarily the result
of the following items:
o a $29.2 million increase in underwriting income from our Renaissance
reinsurance operations due primarily to an increase in net earned
premiums to $145.7 million from $118.2 million, primarily as a result
of our success in capitalizing on market opportunities during 2003 and
2002, resulting in higher earned premiums in 2003 compared to 2002.
Also, during the third quarter of 2003, we recorded reductions to prior
years' loss reserves which were partially offset by an increase in
underwriting expenses, plus
o a $4.0 million increase in underwriting income from DaVinci due
primarily to an increase in net earned premiums to $49.8 million from
$42.3 million, primarily due to our ability to capitalize on market
opportunities as discussed above, offset by an increase in the losses
incurred to $13.8 from $11.2 million as a result of the specialty
premiums written by DaVinci in 2003 which typically have a higher loss
ratio than our property catastrophe book, less
o a $1.8 million decrease in underwriting income from our individual risk
operations which resulted from an increase in premiums earned which was
offset by an increase in incurred losses to $40.3 million from $11.7
million and an increase in acquisition costs to $31.4 million from $8.0
million. Also, the losses for the individual risk business benefited
from a reduction of prior years' loss reserves. Such reduction was
partially offset by an increase to the current quarter loss ratio to
reflect early reported losses on an incepting program, as well as to
reflect additional case reserves, and incurred but not reported losses.
The increase in our net earned premiums in our individual risk segment
to $81.8 million in 2003 from $30.8 million in 2002, which was
primarily the result of positive market conditions and our efforts to
continue to increase premiums in this segment of our business and also
the assumption of $50 million of premium from an in-force book of
business; plus
o a $4.5 million increase in net investment income, primarily due to an
increase in our invested assets due to our strong cash flow from
operations and the $196 million of net proceeds from our Series B
Preference Shares and 5.875% Senior Notes sold in the first quarter of
2003 and equity appreciation during this period on our hedge funds and
private equity funds of $3.5 million (a loss of $2.3 million in the
third quarter of 2002), partially offset by a reduction in investment
returns due to lower interest rates, less
17
o a $2.8 million increase in interest and preference share dividends,
which was primarily due to the additional dividends and interest
accrued on the Series B Preference Shares and 5.875% Senior Notes sold
in the first quarter of 2003, plus
o a $2.5 million decrease related to the interests owned by other
investors in DaVinci (Minority Interests), less
o a $9.0 million decrease in net realized gains on investments, which
is simply produced as a result of our ongoing management of our
portfolio investments and the existing investment market conditions
at that time.
Gross Premiums Written
Gross Premiums Written for the third quarter of 2003 and 2002 were as follows:
- -------------------------------------------------------------------------
Quarter ended September 30, 2003 2002
--------------------------------
Cat Premium
Renaissance $ 84,780 $ 114,756
DaVinci 22,735 38,491
--------------------------------
Total Cat Premium 107,515 153,247
Renaissance Specialty Reinsurance 29,806 48,104
DaVinci Specialty Reinsurance 2,324 -
--------------------------------
Total Reinsurance 139,645 201,351
Individual risk premiums 173,672 81,246
--------------------------------
Total gross premiums written $ 313,317 $ 282,597
================================
- -------------------------------------------------------------------------
Our reinsurance premiums will fluctuate from quarter to quarter depending on the
movement of large reinsurance programs in and out of our portfolio. The decrease
during the third quarter was primarily the result of a loss of programs where we
chose not to renew the coverages due to decreasing economic terms of the
contracts.
The increase in our Individual Risk premiums was the result of the assumption of
a $50 million in-force book of business as well as our efforts to continue to
increase premiums in this segment of our business.
Underwriting Results
- --------------------
The underwriting results of an insurance or reinsurance company are discussed
frequently by reference to its claims ratio, expense ratio, and combined ratio.
The claims ratio is the result of dividing claims and claim expenses incurred by
net premiums earned. The expense ratio is the result of dividing underwriting
expenses (acquisition costs and operational expenses) by net premiums earned.
The combined ratio is the sum of the claims ratio and the expense ratio.
The table below sets forth our net premiums earned, claims and claim expenses
and underwriting expenses by segment and their corresponding claims, expense and
combined ratios:
18
- ---------------------------------------------------------------------------------------
Quarter ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------
Reinsurance net earned premiums $ 195,578 $ 160,542
Individual risk net earned premiums 81,786 30,768
------------ ------------
Total net earned premiums $ 277,364 $ 191,310
============ ============
Reinsurance claims and claim expenses $ 56,527 $ 71,233
Individual risk claims and claim expenses 40,329 11,698
------------ ------------
Total claims and claim expenses $ 96,856 $ 82,931
============ ============
Reinsurance underwriting expenses $ 39,576 $ 22,993
Individual risk underwriting expenses 34,623 10,425
------------ ------------
Total underwriting expenses $ 74,199 $ 33,418
============ ============
Reinsurance net underwriting income $ 99,475 $ 66,316
Individual risk net underwriting income 6,834 8,645
------------ ------------
Total net underwriting income $ 106,309 $ 74,961
============ ============
Reinsurance claims and claim expense ratio 28.9% 44.4%
Individual risk claims and claim expense ratio 49.3% 38.0%
Total claims and claim expense ratio 34.9% 43.3%
Reinsurance underwriting expense ratio 20.7% 14.3%
Individual risk underwriting expense ratio 42.3% 33.9%
Total underwriting expense ratio 26.8% 17.5%
Reinsurance combined ratio 49.6% 58.7%
Individual risk combined ratio 91.6% 71.9%
Total combined ratio 61.7% 60.8%
- ---------------------------------------------------------------------------------------
The reduction in our reinsurance claims and claims expense ratio was partially
due to the increase in earned premiums related to our property catastrophe
business, including DaVinci, which increased from $104.4 million for the third
quarter of 2002 to $141.6 million for the third quarter of 2003, which typically
have a lower claims and claims expense ratio compared to our specialty
reinsurance business. Also, during the third quarter of 2003, due to favorable
loss development on prior years' loss reserves, we recorded reductions to prior
year reinsurance loss.
The increase in our claims and claims expense ratio for our individual risk
business primarily relates to an increase to the current quarter claims and
claims expense ratio to reflect early reported losses on an incepting program,
as well as to reflect additional case reserves, and incurred but not reported
losses. Additionally, partially offsetting this increase was a reduction in
prior years' loss reserves related to losses reported on prior year programs
which were lower than our original estimates on such programs.
Our underwriting expenses consist of acquisition costs and operational expenses.
Acquisition costs consist of costs to acquire premiums and are principally
comprised of broker commissions and excise taxes. Acquisition costs are driven
by contract terms and are normally a set percentage of premiums. Operational
expenses consist of salaries and other general and administrative expenses. The
increase in the expense ratio is due to a higher volume of individual risk and
specialty reinsurance premiums in the third quarter of 2003 compared to the
third quarter of 2002. These types of business generate higher underwriting
expenses relative to premium volume than traditional catastrophe reinsurance.
Other Income
19
Our other income is principally generated from our equity pick-up from our 50%
ownership of Top Layer Re, the annual management fee we receive from Platinum
Underwriters Holdings Ltd. ("Platinum"), the underwriting of contracts related
to physical variables, and other miscellaneous activities.
We also generate fees from our joint venture with DaVinci; however, because
DaVinci is consolidated in our financial statements, these fees are not recorded
in other income, but are instead recorded in our consolidated underwriting
results. We also receive fees from certain placements of structured quota share
reinsurance agreements for participations in our property catastrophe book of
business. These fees are also not recorded in other income, but instead are
recorded as reductions to acquisition costs and underwriting expenses.
The fee income, equity pick up and other items as reported in other income are
detailed below. Also provided is a summary of all fees from joint venture
relationships, including fee income, our profits earned on our capital at risk
in the joint ventures and other items.
- --------------------------------------------------------------------------------------------------------------------------------
QUARTERS ENDED
----------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
---------------------- ----------------------
As Reported
Fee income $ 3,530 $ 941
Equity pick up 5,272 4,923
Other items (823) 2,087
---------------------- ----------------------
Total other income - as reported $ 7,979 $ 7,951
====================== ======================
Summary of all income from joint venture relationships (1)
----------------------------------------------------------
Fee income (2) $ 19,312 $ 14,106
Profits earned from capital at risk in joint ventures 14,112 13,622
Other items (823) 2,087
---------------------- ----------------------
Total $ 32,601 $ 29,815
====================== ======================
(1) Reported GAAP presentation adjusted to reflect:
- fee income and our interest in DaVinci as if DaVinci were accounted for under the equity method
- other fee income on managed cat business which is reflected on the income statement as a reduction of
acquisition and operational expenses
(2) Excludes fee income received on capital invested by RenaissanceRe.
- --------------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
A summary of the significant components of our revenues and expenses are as
follows:
20
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Net underwriting income - Renaissance $ 241,819 $ 166,900
Net underwriting income - DaVinci 78,730 56,452
-------------------------------
Total underwriting income - Reinsurance (1) 320,549 223,352
Net underwriting income - Individual Risk (1) 27,837 10,850
Other income 20,722 24,227
Net investment income 93,823 73,021
Interest and preferred share dividends (33,200) (24,148)
Corporate expenses, taxes, foreign exchange gains and other (740) (8,638)
Minority Interest - DaVinci (56,246) (40,636)
-------------------------------
Net income before realized gains and change in accounting principle 372,745 258,028
Net realized gains on investments 71,944 13,736
Cumulative effect of a change in accounting principle - (9,187)
-------------------------------
Net income available to common shareholders $ 444,689 $ 262,577
===============================
Net income per common share - diluted $ 6.27 $ 3.75
Net income before realized gains on investments and change in accounting principle
per common share - diluted $ 5.25 $ 3.68
(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses. See
table on page 23 for a reconciliation of underwriting income.
- -------------------------------------------------------------------------------------------------------------------------------
The $182.1 million increase in net income for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002, was primarily the
result of the following items:
o a $74.9 million increase in underwriting income from our Renaissance
reinsurance operations due primarily to an increase in net earned
premiums to $459.2 million from $372.1 million, primarily due to our
ability to capitalize on market opportunities during 2003 and 2002,
particularly our success with a number of large property catastrophe
programs and our success in continuing to gain market share in our
specialty reinsurance business. Also, during the first nine months of
2003, we recorded reductions to prior years' loss reserves, plus
o the $22.3 million increase in underwriting income from DaVinci due
primarily to an increase in net earned premiums to $145.7 million from
$100.1 million, primarily due to our ability to capitalize on market
opportunities as discussed above. Also, during the first nine months of
2003, we recorded a reduction in prior years' loss reserves, plus
o a $17.0 million increase in underwriting income from our individual
risk operations which resulted from the increase in our net earned
premiums in our individual risk segment to $211.5 million in 2003 from
$54.1 million in 2002, which was again the result of positive market
conditions and our efforts to continue to increase premiums in this
segment of our business. The increase in net premiums earned was
partially offset by an increase in the loss ratio for the individual
risk segment to reflect early reported losses on incepting programs, as
well as to reflect additional case reserves, and IBNR losses.
Also the losses for the individual risk business benefited from
reductions to prior years' loss reserves, plus
o a $20.8 million increase in net investment income, primarily due to an
increase in our invested assets due to our strong cash flow from
operations and the $196 million of net proceeds from the Series B
Preference Shares and 5.875% Senior Notes sold in the first quarter of
2003 and equity appreciation on our hedge funds and private equity
funds of $12.9 million ($2.2 million in the first nine months of 2002),
partially offset by a reduction in investment returns due to lower
interest rates, plus
o a net $7.9 million reduction in corporate expenses, taxes and other,
which was primarily due to an increase in foreign exchange gains of
$9.3 million, less
21
o a $9.1 million increase in interest and preferred share dividends,
which was primarily due to the additional dividends and interest
accrued on the Series B Preference Shares and 5.875% Senior Notes
issued in the first quarter of 2003, less
o a $3.5 million decrease in other income, primarily due to a decrease in
income from contracts related to physical variables, partially offset
by an increase in fee income related to our managed catastrophe
business and an increase in our equity pick up from our joint venture,
Top Layer Re, less
o an $15.6 million increase related to the interests owned by other
investors in DaVinci, plus
o a $58.2 increase in net realized gains on investments, which was
primarily a consequence of a general repositioning of the invested
asset portfolio in response to changing market conditions. In addition,
we substantially reduced our holdings in our mortgage backed securities
portfolio during the second quarter, which also contributed to realized
gains.
Gross Premiums Written
Gross Premiums Written for the first nine months of 2003 and 2002 were as
follows:
- ---------------------------------------------------------------------
Nine months ended September 30, 2003 2002
-------------------------------
Cat Premium
Renaissance $ 457,710 $ 439,403
DaVinci 145,953 168,554
-------------------------------
Total Cat Premium 603,663 607,957
Renaissance Specialty Reinsurance 249,445 220,759
DaVinci Specialty Reinsurance 22,733 -
-------------------------------
Total Reinsurance 875,841 828,716
Individual risk premiums 335,203 185,009
-------------------------------
Total gross premiums written $ 1,211,044 $ 1,013,725
===============================
- ---------------------------------------------------------------------
The changes in our gross premiums written for the nine months ended September
30, 2003 were primarily due to the following:
1) Our total Specialty Reinsurance premiums for Renaissance and DaVinci
for the nine month period ended September 30, 2003 increased to $272.2
million from $220.8 million for the nine months ended September 30,
2002. This increase of $51.4 million, or 23%, is primarily due to our
increased focus and success on building our book of specialty
reinsurance premiums and the increase is relatively in line with our
expectations; and
2) Our continuing build-out of our individual risk operations, and our
continued success in utilizing selected producers to assist us in
growing this book of business.
Underwriting Results
The table below sets forth our net premiums earned, claims and claim expenses
and underwriting expenses by segment and their corresponding claims,
underwriting expense and combined ratios:
22
- --------------------------------------------------------------------------------------------------
Nine months ended September 30, 2003 2002
- --------------------------------------------------------------------------------------------------
Reinsurance net earned premiums $ 604,916 $ 472,211
Individual risk net earned premiums 211,457 54,149
----------------- -----------------
Total net earned premiums $ 816,373 $ 526,360
================= =================
Reinsurance claims and claim expenses $ 174,523 $ 176,204
Individual risk claims and claim expenses 105,189 22,994
----------------- -----------------
Total claims and claim expenses $ 279,712 $ 199,198
================= =================
Reinsurance underwriting expenses $ 109,844 $ 72,655
Individual risk underwriting expenses 78,431 20,305
----------------- -----------------
Total underwriting expenses $ 188,275 $ 92,960
================= =================
Reinsurance net underwriting income $ 320,549 $ 223,352
Individual risk net underwriting income 27,837 10,850
----------------- -----------------
Total net underwriting income $ 348,386 $ 234,202
================= =================
Reinsurance claims and claim expense ratio 28.9% 37.3%
Individual risk claims and claim expense ratio 49.7% 42.5%
Total claims and claim expense ratio 34.3% 37.8%
Reinsurance underwriting expense ratio 18.3% 15.4%
Individual risk underwriting expense ratio 37.1% 37.5%
Total underwriting expense ratio 23.0% 17.7%
Reinsurance combined ratio 47.2% 52.7%
Individual risk combined ratio 86.8% 80.0%
Total combined ratio 57.3% 55.5%
- --------------------------------------------------------------------------------------------------
The reduction in our reinsurance claims and claims expense ratio was primarily
due to reductions in prior year reserves we recorded for the nine months ended
September 30, 2003 due to favorable loss development on prior years' loss
reserves.
The increase in the claims and claims expense ratio for the individual risk
segment is primarily due to early reported losses on incepting programs, as well
as to reflect additional case reserves, and IBNR losses. The individual risk
segment also benefited from reductions to prior years' loss reserves as the
losses reported to date on the prior year programs are lower than our original
estimates on such programs.
Our underwriting expenses consist of acquisition costs and operational expenses.
Acquisition costs consist of costs to acquire premiums and are principally
comprised of broker commissions and excise taxes. Acquisition costs are driven
by contract terms and are normally a set percentage of premiums. Operational
expenses consist of salaries and other general and administrative expenses. The
increase in the expense ratio is due to a higher volume of individual risk and
specialty reinsurance premiums in the first nine months of 2003 compared to the
first nine months of 2002. These types of business generate higher underwriting
expenses relative to premium volume than traditional catastrophe reinsurance.
Other Income
The fee income, equity pick up and other items as reported in other income (as
described in more detail on page 20) for the nine month period ending September
30, 2003 and 2002 are set forth below. Also provided is a summary of all fees
from joint venture relationships, including fee income, our profits earned on
our capital at risk in the joint ventures and other items.
23
- -----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
----------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
---------------------- ----------------------
As Reported
Fee income $ 6,008 $ 2,941
Equity pick up 17,833 16,059
Other items (3,119) 5,227
---------------------- ----------------------
Total other income - as reported $ 20,722 $ 24,227
====================== ======================
Summary of all income from joint venture relationships (1)
----------------------------------------------------------
Fee income (2) $ 55,132 $ 38,295
Profits earned from capital at risk in joint ventures 48,336 37,478
Other items (3,119) 5,227
---------------------- ----------------------
Total $ 100,349 $ 81,000
====================== ======================
(1) Reported GAAP presentation adjusted to reflect:
- fee income and our interest in DaVinci as if DaVinci were accounted for under the equity method
- other fee income on managed cat business which is reflected on the income statement as a reduction of
acquisition and operational expenses
(2) Excludes fee income received on capital invested by RenaissanceRe.
- -----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets." In the second quarter of 2002, the Company completed its
initial impairment review in compliance with the transition provisions of SFAS
142 and, as a result, the Company decided to record goodwill at zero value, the
low end of an estimated range of values, and wrote off the balance of its
goodwill during the second quarter of 2002, which totaled $9.2 million. In
accordance with the provisions of SFAS 142, this was required to be recorded as
a cumulative effect of a change in accounting principle in the consolidated
statement of income and was required to be recorded retroactive to January 1,
2002.
FINANCIAL CONDITION
RenaissanceRe is a holding company, and we therefore rely on dividends from our
subsidiaries and investment income to make principal, interest and dividend
payments on our debt and capital securities, and to make dividend payments to
our preference shareholders and common shareholders.
The payment of dividends by our Bermuda subsidiaries is, under certain
circumstances, limited under Bermuda insurance law, which require our Bermuda
insurance subsidiaries to maintain certain measures of solvency and liquidity.
At September 30, 2003, the statutory capital and surplus of our Bermuda
insurance subsidiaries was $2,286.2 million, and the amount of capital and
surplus required to be maintained was $430.9 million. Our U.S. insurance
subsidiary, Stonington, is also required to maintain certain measures of
solvency and liquidity. At September 30, 2003, the statutory capital and surplus
of Stonington was $21.4 million and the amount of capital and surplus required
to be maintained was $8.6 million. For the nine months ended September 30, 2003,
Renaissance Reinsurance declared dividends to RenaissanceRe of $289.9 million
compared to $224.3 million for the same period in 2002.
CASH FLOWS
Our operating subsidiaries have historically produced sufficient cash flows to
meet their own expected claims payments and operational expenses and to provide
dividend payments to us. Our subsidiaries also maintain a concentration of
investments in high quality liquid securities, which management believes will
provide sufficient liquidity to meet extraordinary claims payments should the
need arise. Additionally, we maintain a $400.0 million revolving credit facility
to meet additional capital requirements, if necessary.
24
Cash flows from operations in the first nine months of 2003 were $761.8 million,
which principally consisted of net income of $458.6 million, plus $206.3 million
for increases in reserves for unearned premiums, plus $219.4 million for
increases to net reserves for claims and claim expenses, partially offset by an
increase of $112.8 million in premiums receivable.
Because a large portion of the coverages we provide typically can produce losses
of high severity and low frequency, it is not possible to accurately predict our
future cash flows from operating activities. As a consequence, cash flows from
operating activities may fluctuate, perhaps significantly, between individual
quarters and years.
We have generated cash flows from operations in 2002 and the first nine months
of 2003, significantly in excess of our operating commitments. To the extent
that capital is not utilized in our reinsurance or individual risk segments, we
will consider using such capital to invest in new opportunities. We would also
consider returning capital to shareholders in the form of share repurchases
under certain circumstances. We are currently authorized by our Board to
repurchase up to $150.0 million of our shares.
RESERVES FOR CLAIMS AND CLAIMS EXPENSES
As discussed in the Summary of Critical Accounting Policies and Estimates, the
most significant judgment made by management is the estimation of the claims and
claim expense reserves. Because of the variability and uncertainty associated
with loss estimation, it is possible that our individual case reserves are
incorrect, possibly materially.
A large portion of our coverages provide protection from natural and man-made
catastrophes which are generally infrequent, but can be significant, such as
losses from hurricanes and earthquakes. Our claims and claim expense reserves
will generally fluctuate, sometimes materially, based upon the occurrence of a
significant natural or man-made catastrophic loss for which we provide
reinsurance. Our claims reserves will also fluctuate based on the payments we
make for these large loss events. The timing of our payments on loss events can
be affected by the event causing the loss, the location of the loss, and whether
our losses are from policies with insurers or reinsurers.
During 2002 and continuing in the first nine months of 2003, we increased our
specialty reinsurance and individual risk gross written premiums (See - "Gross
Written Premiums"). The addition of these lines of business adds complexity to
our claims reserving process and therefore adds uncertainty to our claims
reserve estimates, as the reporting of information, the setting of initial
reserves and the loss settlement process for these lines of business vary from
our traditional property catastrophe line of business.
- ---------------------------------------------------------------------------
As at September 30, As at December 31,
2003 2002
----------------------------------------
Gross reserves $ 981,687 $ 804,795
Recoverables 157,059 199,533
----------------------------------------
Net reserves $ 824,628 $ 605,262
========================================
Shareholders' equity 2,177,645 1,642,035
Gross reserves as a % of equity 45.1% 49.0%
Net reserves as a % of equity 37.9% 36.9%
- ---------------------------------------------------------------------------
For our reinsurance and individual risk operations, our estimates of claims
reserves include case reserves reported to us as well as our estimate of IBNR
losses to us. Our case reserves and our estimates for IBNR reserves are based on
1) claims reports from insureds and program managers, 2) our underwriters'
experience in setting claims reserves, 3) the use of computer models where
applicable and 4) historical industry claims experience. For some classes of
business we also use statistical and actuarial methods to estimate ultimate
expected claims and claim expenses. We review our claims reserves on a regular
basis.
During the nine months ended September 30, 2003 our net incurred claims and
claim expenses were $279.7 million and our net paid losses were $59.3 million.
IBNR reserves at September 30, 2003 were $612.3 million compared to $462.9
million at December 31, 2002 (See Summary of Critical Accounting Policies and
Estimates).
25
CAPITAL RESOURCES
Our total capital resources as at September 30, 2003 and December 31, 2002 were
as follows:
- -----------------------------------------------------------------------------------------------------------------------
September 30, December 31,
(in thousands of U.S. dollars) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Common shareholders' equity $ 1,927,645 $ 1,492,035
Preference Shares 250,000 150,000
------------------ ------------------
Total shareholders' equity 2,177,645 1,642,035
7% senior notes - due 2008 150,000 150,000
5.875% senior notes - due 2013 100,000 -
Term loan and borrowed revolving credit facility payable (Glencoe U.S.) - 25,000
DaVinci revolving credit facility - borrowed 100,000 100,000
Revolving Credit Facility - unborrowed (RenaissanceRe) 400,000 310,000
Company obligated mandatorily redeemable
capital securities of a subsidiary trust 84,630 84,630
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL RESOURCES $ 3,012,275 $ 2,311,665
================== ==================
- -----------------------------------------------------------------------------------------------------------------------
During the first nine months of 2003, our capital resources increased primarily
as a result of three items: 1) our net income of $458.6 million; 2) the issuance
of $100 million of Series B Preference Shares; and 3) the issuance of $100
million of 5.875% Senior Notes.
On April 19, 2002, DaVinci entered into a credit agreement providing for a $100
million committed revolving credit facility. On May 10, 2002, DaVinci borrowed
the full $100 million available under this facility to repay $100 million of
bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor
Renaissance Reinsurance is a guarantor of this facility and the lenders have no
recourse against us or our subsidiaries other than DaVinci under this facility.
Pursuant to the terms of the $400.0 million facility maintained by
RenaissanceRe, a default by DaVinci in its obligations will not result in a
default under the RenaissanceRe facility.
As of September 30, 2003, the full amount was outstanding under this facility.
Interest rates on the facility are based on a spread above LIBOR, and averaged
approximately 2.2% during the first nine months of 2003, compared to 2.7% for
the same period in 2002. The credit agreement contains certain covenants
requiring DaVinci to maintain a debt to capital ratio of 30% or below and a
minimum net worth of $230 million. As at September 30, 2003, DaVinci was in
compliance with the covenants of this agreement.
With the increased opportunities to grow our business at the beginning of 2003,
we decided to increase our capital resources through the following activities:
1. In January 2003, we issued $100 million of 5.875% Senior Notes due February
15, 2013. Interest on the notes is payable on February 15 and August 15 of
each year, commencing August 15, 2003. The notes can be redeemed by us prior
to maturity subject to payment of a "make-whole" premium; however, we have
no current intentions of calling the notes. The notes, which are senior
obligations, contain various covenants, including limitations on mergers and
consolidations, restriction as to the disposition of stock of designated
subsidiaries and limitations on liens on the stock of designated
subsidiaries.
2. In February 2003, we issued 4,000,000 $1.00 par value Series B preference
shares at $25 per share. The shares may be redeemed at $25 per share at our
option on or after February 4, 2008. Dividends are cumulative from the date
of original issuance and are payable quarterly in arrears at 7.3%,
commencing June 1, 2003 when, if, and as declared by the Board of Directors.
If we submit a proposal to our shareholders concerning an amalgamation or
submit any proposal that, as a result of any changes to Bermuda law,
requires approval of the holders of these preference shares to vote as a
single class, we may redeem the shares prior to February 4, 2008 at $26 per
share. The preference shares have no stated maturity and are not convertible
into any other securities of the Company.
26
Our subsidiary, RenaissanceRe Capital Trust, has issued capital securities which
pay cumulative cash distributions at an annual rate of 8.54%, payable
semi-annually. During 2002, RenaissanceRe repurchased $3.0 million of the
Capital Securities. The sole asset of the Trust consists of our junior
subordinated debentures in an amount equal to the outstanding capital
securities. The Indenture relating to these junior subordinated debentures
contains certain covenants, including a covenant prohibiting us from the payment
of dividends if we are in default under the Indenture. We were in compliance
with all of the covenants of the Indenture at December 31, 2002 and September
30, 2003. The capital trust securities mature on March 1, 2027. Generally
Accepted Accounting Principles do not allow these securities to be classified as
a component of shareholders' equity (See Note 12).
On August 8, 2003, we amended and restated our existing revolving credit
agreement with a syndicate of commercial banks to increase the facility from
$310 million to $400 million and to make certain other changes. No balance was
outstanding as of December 31, 2002 or at September 30, 2003. As amended, the
agreement contains certain financial covenants. These covenants generally
provide that the Debt to Capital Ratio shall not exceed 0.35:1 and that
consolidated shareholders' equity plus outstanding Capital Securities of
RenaissanceRe and Renaissance Reinsurance shall equal or exceed $1.0 billion and
$500 million, respectively. The scheduled commitment termination date under the
amended agreement is August 8, 2006.
Our subsidiary, Glencoe U.S., had a $10.0 million term loan and $15.0 million
revolving loan facility with a syndicate of commercial banks. Interest rates on
the facility were based upon a spread above LIBOR, and averaged 1.8% during the
first nine months of 2003, compared to 2.4% during the same period in 2002. The
term loan and revolving credit facility were repaid in full in June 2003 in
accordance with the mandatory repayment provisions and terminated.
SHAREHOLDERS' EQUITY
During the first nine months of 2003, our consolidated shareholders' equity
increased by $535.6 million to $2.2 billion as of September 30, 2003, from $1.6
billion as of December 31, 2002. The significant components of the change in
shareholders' equity included net income of $458.6 million, the issuance of $100
million of Series B Preference Shares and an increase in net unrealized gains on
investments of $14.9 million, partially offset by dividends to common and
preference shareholders of $45.5 million.
INVESTMENTS
At September 30, 2003, we held investments and cash totaling $4.1 billion
(compared to $3.1 billion at December 31, 2002). Our investment portfolio is
subject to the risk of declines in realizable value. We attempt to mitigate this
risk through diversification and active management of our portfolio.
The table below shows the aggregate amounts of our invested assets:
- ------------------------------------------------------------------------------------------------------------
(in thousands of U.S. dollars) September 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------------
Fixed maturity investments available for sale, at fair value $2,698,720 $2,221,109
Other investments 224,699 129,918
Short term investments 964,309 570,497
Equity investment in reinsurance company 136,432 120,288
Cash and cash equivalents 84,029 87,067
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTED ASSETS $4,108,189 $3,128,879
- ------------------------------------------------------------------------------------------------------------
The $979.3 million growth in our portfolio of invested assets for the nine
months ended September 30, 2003 resulted primarily from net cash provided by
operating activities of $761.8 million, the proceeds from our sale of $100
million of 5.875% Senior Notes and the proceeds from our sale of $100 million of
Series B Preference Shares.
27
The equity investment in reinsurance company relates to our November 1, 2002
purchase of 3,960,000 common shares of Platinum in a private placement
transaction. In addition, we received a ten-year warrant to purchase up to 2.5
million additional common shares of Platinum for $27.00 per share. We purchased
the common shares and warrant for an aggregate price of $84.2 million. As at
September 30, 2003, we own 9.2% of Platinum's outstanding common shares. We have
recorded our investments in Platinum at fair value, and at September 30, 2003
the aggregate fair value was $136.4 million, compared to $120.3 million as at
December 31, 2002. The aggregate unrealized gain of $52.2 million on the
Platinum investment is included in accumulated other comprehensive income, of
which $25.2 million represents our estimate of the value of the warrant.
Because our coverages include substantial protection for damages resulting from
natural and man-made catastrophes, we may become liable for substantial claim
payments on short-term notice. Accordingly, our investment portfolio is
structured to preserve capital and provide a high level of liquidity which means
that the large majority of our investment portfolio consists of highly rated
fixed income securities, including U.S. Treasuries, Aaa-rated sovereign ,
supranational, mortgage backed and asset backed securities. At September 30,
2003, our invested asset portfolio of fixed maturities and short term
investments had a dollar weighted average rating of AA, an average duration of
2.0 years and an average yield to maturity of 2.5%.
At September 30, 2003, $18.3 million of cash and cash equivalents were invested
in currencies other than the U.S. dollar, which represented less than 1% of our
invested assets.
For the first nine months of 2003, we recorded an increase of $58.2 million in
net realized gains on investments to $71.9 million from $13.7 million for the
same period in 2002. The increase was primarily a consequence of a general
repositioning of the invested asset portfolio in response to changing market
conditions. In addition, we substantially reduced our holdings in our mortgage
backed securities portfolio during the second quarter, which also contributed to
realized gains.
A portion of our investment assets are directly held by our subsidiary
Renaissance Investment Holdings Ltd. ("RIHL"), a Bermuda company we organized
for the primary purpose of holding the investments in high quality marketable
securities for RenaissanceRe, our operating subsidiaries and certain of our
joint venture affiliates. We believe that RIHL permits us to consolidate and
substantially facilitate our investment management operations. RenaissanceRe and
each of our participating operating subsidiaries and affiliates have transferred
to RIHL marketable securities or other assets, in return for a subscription of
RIHL equity interests. Each RIHL share is redeemable by the subscribing
companies for cash or in marketable securities. Over time, the subsidiaries and
joint ventures who participate in RIHL are expected to both subscribe for
additional shares and redeem outstanding shares, as our and their respective
liquidity needs change. RIHL is currently rated AAAf/S2 by Standards & Poor's
Ratings Group.
NON-INDEMNITY INDEX TRANSACTIONS
We have assumed risk through derivative instruments under which losses could be
triggered by an industry loss index or geological or physical variables. During
the first nine months of 2003, we recorded a loss on non-indemnity index
transactions of $2.4 million, compared to gains of $3.2 million for the same
period in 2002. We report these gains or losses in other income.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on us are considered in our catastrophe loss models. The effects of inflation
are also considered in pricing and in estimating reserves for unpaid claims and
claim expenses. The actual effects of this post-event inflation on our results
cannot be accurately known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
As of September 30, 2003, we have not entered into any off-balance sheet
arrangements, as defined by Item 303(a)(4) of Regulation S-K.
28
CURRENT OUTLOOK
We believe that the principal components of our operations - property
catastrophe reinsurance, specialty reinsurance, including the fees and profits
we earn as the exclusive underwriting manager of the property catastrophe and
specialty reinsurance premiums of our joint ventures, and individual risk,
continue to display strong fundamentals.
Currently, we believe that prices in certain specialty casualty insurance
markets have risen to levels that offer us additional opportunities to deploy
our capital and accordingly, during the third quarter, we have begun writing
casualty insurance premiums in certain niche markets. Because of these
opportunities, and continued opportunities in the primary property markets, we
believe that our premiums in our individual risk segment for the full year 2003
will grow substantially as compared with the total individual risk premiums for
2002. Recognizing that there are many segments of the casualty market that
remain unattractive even after recent price increases, we intend to be selective
and write business only in those segments that we believe can produce an
acceptable return on capital. We are hiring staff, and building systems, to
support our entry into the specialty casualty business. We expect to supplement
our internal resources with external service providers, including, most
importantly, a select number of leading program managers and third party claims
administrators. We have assembled a team of professionals in our U.S. operations
to support this initiative, which will include internal auditing and oversight
of these external service providers.
In our reinsurance segment, we believe that the specialty reinsurance markets in
which we operate continue to present attractive opportunities. We believe that,
as a result of factors including our reputation for superior service, prompt
claims payment and financial strength, and our investment in modeling and other
analytic tools, we have developed a leadership position in certain segments of
this market, and we will continue to see opportunities for overall growth in our
2003 consolidated specialty reinsurance premiums.
For our property catastrophe reinsurance operations, we believe that as a result
of the additional capacity provided by the new capital entering the market
subsequent to the World Trade Center tragedy, combined with comparably light
catastrophe losses thus far in 2003, pricing in the property catastrophe market
has leveled off and we have started to see initial indications of reduced
pricing in select instances. As a consequence of the current pricing
environment, we currently expect gross managed catastrophe premium in 2003 to be
approximately in line with gross managed catastrophe premiums for 2002. To the
extent that industry pricing of our products does not meet our hurdle rate, we
would expect to reduce our catastrophe premiums.
The current market environment is also providing us with increased opportunities
for our joint venture and structured product initiatives. In evaluating these
initiatives, we are not only considering alternatives in the property
catastrophe markets, but are also considering opportunities in other areas of
the insurance and reinsurance markets, either through organic growth, the
formation of new joint ventures, or the acquisition of other companies or books
of business of other companies. The potential Channel Re transaction, as
described in Note 13, is an example of such an opportunity. In evaluating such
new ventures, we seek an attractive return on equity, the ability to develop or
capitalize on a competitive advantage, and opportunities that will not detract
from our core reinsurance and individual risk operations. This diversification
may include new opportunities to write additional targeted classes of
non-catastrophe business, both directly for our own account and through possible
new joint ventures. We are currently in the process of reviewing certain
opportunities and periodically engage in discussions regarding possible
transactions, although there can be no assurance that we will complete any such
transactions or that any such transaction would contribute materially to our
results of operations or financial condition.
29
SAFE HARBOR DISCLOSURE
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements contained
in this report.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 (the "Exchange Act"). Forward-looking statements are necessarily based
on estimates and assumptions that are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which, with respect to future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, us.
In particular, statements using words such as "may", "should", "estimate",
"expect", "anticipate", "intends", "believe", "predict" or words of similar
import generally involve forward-looking statements. In light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be considered as a
representation by the Company or any other person that its objectives or plans
will be achieved. Numerous factors could cause the Company's actual results to
differ materially from those addressed by the forward-looking statements,
including the following:
1. the occurrence of natural or man-made catastrophic events with a
frequency or severity exceeding our estimates;
2. a decrease in the level of demand for our reinsurance or insurance
business, or increased competition in the industry;
3. the lowering or loss of one of the financial or claims-paying ratings
of ours or one of more of our subsidiaries;
4. risks associated with implementing our business strategies and
initiatives for organic growth, including risks relating to managing
that growth;
5. acts of terrorism or acts of war;
6. slower than anticipated growth in our fee-based operations, including
risks associated with retaining our existing partners and attracting
potential new partners;
7. uncertainties in our reserving process, which we believe are increasing
as we diversify into new product classes;
8. failures of our brokers or program managers to honor their obligations,
including their obligations to make third party payments for which we
might be liable;
9. risks relating to the collectibility of our reinsurance, including both
our reinsurance and individual risk operations, as well as risks
relating to the availability of coverage from creditworthy providers.
10. extraordinary events affecting our clients, such as bankruptcies and
liquidations, and the risk that we may not retain or replace our large
clients in all future periods;
11. loss of services of any one of our key executive officers;
12. the passage of federal or state legislation subjecting Renaissance
Reinsurance to supervision or regulation, including additional tax
regulation, in the United States or other jurisdictions in which we
operate;
13. changes in economic conditions, including interest rate, currency,
equity and credit conditions which could affect our investment
portfolio;
14. changes in insurance regulations in the United States or other
jurisdictions in which we operate, including potential challenges to
Renaissance Reinsurance's claim of exemption from insurance regulation
under current laws, and the risk of increased global regulation of the
insurance and reinsurance industry;
30
15. a contention by the United States Internal Revenue Service that our
Bermuda subsidiaries, including Renaissance Reinsurance, are subject to
U.S. taxation; and
16. actions of competitors, including industry consolidation, the launch of
new entrants and the development of competing financial products.
The factors listed above should not be construed as exhaustive. Certain of these
factors are described in more detail from time to time in our filings with the
Securities and Exchange Commission. We undertake no obligation to release
publicly the results of any future revisions we may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
31
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are principally exposed to three types of market risk: interest rate risk,
equity risk and foreign currency risk. The Company's investment guidelines
permit, subject to specific approval, investments in derivative instruments such
as futures, options and foreign currency forward contracts for purposes other
than trading. The Company anticipates that any such investments would be limited
to duration management, foreign currency exposure management or to obtain an
exposure to a particular financial market.
INTEREST RATE RISK
Our investment portfolio includes fixed maturity investments available for sale
and short-term investments, whose market values will fluctuate with changes in
interest rates. The aggregate hypothetical loss generated from an immediate
adverse parallel shift in the treasury yield curve of 100 basis points would
cause a decrease in total return of 2.0%, which equated to a decrease in market
value of approximately $73.3 million on a portfolio valued at $3,663.0 million
at September 30, 2003. At December 31, 2002, the decrease in total return would
have been 2.25%, which equated to a decrease in market value of approximately
$62.8 million on a portfolio valued at $2,791.6 million. The foregoing reflects
the use of an immediate time horizon, since this presents the worst-case
scenario. Credit spreads are assumed to remain constant in these hypothetical
examples.
EQUITY RISK
We are exposed to equity price risk due to our investment in the common shares
and warrant to purchase additional common shares of Platinum (see Investments),
which we carry on our balance sheet at fair value. The risk is the potential for
loss in fair value resulting from the adverse changes in Platinum's common
stock. The aggregate fair value of this investment in Platinum was $136.4
million as at September 30, 2003 compared to $120.3 million as at December 31,
2002. A hypothetical 10 percent decline in the price of Platinum stock, holding
all other factors constant, would have resulted in a $15.5 million decline in
fair value, which would be recorded in net unrealized gains (losses) on
securities and included in other comprehensive income in shareholders' equity.
FOREIGN CURRENCY RISK
Our functional currency is the U.S. dollar. We write a substantial portion of
our business in currencies other than U.S. dollars and may, from time to time,
experience exchange gains and losses and incur underwriting losses in currencies
other than U.S. dollars, which will in turn affect our consolidated financial
statements.
Our foreign currency policy is generally to hold foreign currency assets,
including cash, investments and receivables, that approximate the net monetary
foreign currency liabilities, including claims and claim expense reserves and
reinsurance balances payable. We may have short-term accumulations of non-dollar
assets or liabilities. All changes in exchange rates are recognized currently in
our statements of income. When necessary, the Company will use foreign currency
forward and option contracts to minimize the effect of fluctuating foreign
currencies on the value of non-U.S. dollar denominated assets and liabilities.
As of September 30, 2003, the Company had notional exposure of $26.9 million
related to foreign currency forward and option contracts. These contracts are
recorded at fair value which is determined principally by obtaining quotes from
independent dealers and counterparties. The fair value of these contracts as of
September 30, 2003 was a loss of $0.4 million. The Company had no investments in
these foreign currency derivative instruments as of December 31, 2002.
32
Item 4. DISCLOSURE CONTROLS AND PROCEDURES
Disclosure Controls and Internal Controls: We have designed various controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act to help ensure
that information required to be disclosed in our periodic Exchange Act reports,
such as this quarterly report, is captured, processed, summarized and reported
on a timely and accurate basis. Our disclosure controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our senior management, including our Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with the generally accepted accounting principles and includes those policies
and procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the issuer; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the issuer are being made only in accordance with
authorizations of management and directors of the issuer; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the issuer's assets that could have a
material effect on financial statements.
Limitations on the effectiveness of controls: Our Board of Directors and
management, including our Chief Executive Officer and our Chief Financial
Officer, do not expect that our disclosure controls or internal controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, we believe that the design of
any prudent control system must reflect appropriate resource constraints, such
that the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, there can be no
absolute assurance that all control issues and instances of fraud, if any,
applicable to us have been or will be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some individuals, by
collusion of more than one person, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
An evaluation was performed under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Exchange Act. Based upon that evaluation, the Company's management, including
our Chief Executive Officer and Chief Financial Officer, concluded, subject to
the limitations noted above, that the Company's disclosure controls and
procedures as of September 30, 2003 are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There has been no change in the Company's internal
control over financial reporting that occurred during the fiscal quarter ended
September 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
33
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
We are, from time to time, a party to litigation and arbitration that
arises in the normal course of our business operations. While any
proceeding contains an element of uncertainty, we believe that we are not
presently a party to any such litigation or arbitration that is likely to
have a material adverse effect on our business or operations.
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
31.1 Certification of James N. Stanard, Chief Executive Officer of
RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of John M. Lummis, Chief Financial Officer of
RenaissanceRe Holdings Ltd., pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certification of James N. Stanard, Chief Executive Officer of
RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of John M. Lummis, Chief Financial Officer of
RenaissanceRe Holdings Ltd., pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
b. Current Reports on Form 8-K:
On July 24, 2003, the Company furnished a report on Form 8-K
containing the Company's press release, issued on July 22, 2003,
reporting its preliminary results for its second quarter ended June
30, 2003. In accordance with Item 12 of Form 8-K, the Form 8-K and the
press release attached as an exhibit thereto were furnished and not
filed with the Securities Exchange Commission.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
RENAISSANCERE HOLDINGS LTD.
By: /s/ John M. Lummis
------------------
John M. Lummis
Chief Financial Officer
Date: November 14, 2003
Exhibit 31.1
CERTIFICATIONS
I, James N. Stanard, Chief Executive Officer of RenaissanceRe Holdings Ltd.,
(the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 14, 2003
/s/ James N. Stanard
--------------------
James N. Stanard
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, John M. Lummis, Chief Financial Officer of RenaissanceRe Holdings Ltd., (the
"registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 14, 2003
/s/ John M. Lummis
------------------
John M. Lummis
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RenaissanceRe Holdings Ltd.
(the "Company") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, James N. Stanard, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ James N. Stanard
- --------------------
James N. Stanard
Chief Executive Officer
November 14, 2003
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RenaissanceRe Holdings Ltd.
(the "Company") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, John M. Lummis, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ John M. Lummis
- ------------------
John M. Lummis
Chief Financial Officer
November 14, 2003