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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NO. 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
Incorporation or Organization) Identification Number)
RENAISSANCE HOUSE, 8-12 EAST BROADWAY, PEMBROKE HM 19 BERMUDA
(Address of Principal Executive Offices)
(441) 295-4513
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
- --------------------------------------------------------------------------------
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
- --------------------------------------------------------------------------------
Common Shares, Par Value $1.00 per share New York Stock Exchange, Inc.
- --------------------------------------------------------------------------------
Series A 8.10% Preference Shares, Par New York Stock Exchange, Inc.
Value $1.00 per share
- --------------------------------------------------------------------------------
Series B 7.30% Preference Shares, Par New York Stock Exchange, Inc.
Value $1.00 per share
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes (X) No ( )
The aggregate market value of Common Shares held by nonaffiliates of the
registrant at June 30, 2003 was $3,200,948,556 based on the closing sale price
of the Common Shares on the New York Stock Exchange on that date.
The number of Common Shares outstanding at March 1, 2004 was 70,371,596.
The information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference to the registrant's Definitive Proxy
Statement to be filed in respect of our 2004 Annual General Meeting of
Shareholders.
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RENAISSANCERE HOLDINGS LTD.
TABLE OF CONTENTS
Page
Part I.........................................................................1
Item 1. BUSINESS............................................................2
Item 2. PROPERTIES.........................................................42
Item 3. LEGAL PROCEEDINGS..................................................42
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................42
Part II.......................................................................43
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS................................................43
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA...............................44
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................64
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................65
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................65
ITEM 9A. CONTROLS AND PROCEDURES............................................66
Part III......................................................................64
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF RENAISSANCERE..................67
Item 11. EXECUTIVE COMPENSATION.............................................67
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.....................67
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................67
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................67
Part IV.......................................................................68
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K................................................68
Signatures....................................................................69
PART I.
Unless the context otherwise requires, references in this Annual Report to
"RenaissanceRe" or the "Company" means RenaissanceRe Holdings Ltd. and its
subsidiaries, which principally include Renaissance Reinsurance Ltd.
("Renaissance Reinsurance"), Glencoe Group Holdings Ltd. ("Glencoe Group"),
Glencoe Insurance Ltd. ("Glencoe"), Lantana Insurance Ltd. ("Lantana"),
Stonington Insurance Company ("Stonington"), Renaissance Underwriting Managers,
Ltd. ("Renaissance Underwriting Managers"), Renaissance Reinsurance of Europe
("Renaissance Europe"), Glencoe U.S. Holdings Inc. ("Glencoe U.S."),
RenaissanceRe Capital Trust (the "Capital Trust"), and Renaissance Investment
Holdings Ltd. ("RIHL"). We also underwrite reinsurance on behalf of joint
ventures, principally including Top Layer Reinsurance Ltd. ("Top Layer Re") and
DaVinci Reinsurance Ltd. ("DaVinci"). DaVinci's financial results are
consolidated in our financial statements. Unless the context otherwise requires,
references to RenaissanceRe do not include any of the joint ventures for which
we provide underwriting services. Certain terms used below are defined in the
"Glossary of Selected Insurance Terms" appearing on page 37 of this Report.
NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K 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. 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," "intend," "believe," "predict," "potential," or words of
similar import generally involve forward-looking statements. For example, we
have included certain forward-looking statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" with regard to trends
in results, prices, volumes, operations, investment results, margins, combined
ratios, reserves, overall market trends, risk management and exchange rates.
This Form 10-K also contains forward-looking statements with respect to our
business and industry, such as those relating to our strategy and management
objectives, trends in market conditions, prices, market standing and product
volumes, investment results and pricing conditions in the reinsurance and
insurance industries.
In light of the risks and uncertainties inherent in all future projections, the
inclusion of forward-looking statements in this report should not be considered
as a representation by us or any other person that our objectives or plans will
be achieved. Numerous factors could cause our actual results to differ
materially from those in 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) risks associated with implementing our business strategies and initiatives
for organic growth, including risks relating to managing that growth;
(3) risks associated with the growth of our specialty reinsurance and
Individual Risk businesses, particularly the development of our
infrastructure to support this growth;
(4) risks relating to our strategy of relying on program managers, third party
administrators, and other vendors to support our Individual Risk
operations;
(5) other risks of doing business with program managers, including the risk we
might be bound to policyholder obligations beyond our underwriting intent,
and the risk that our program managers or agents may elect not to continue
or renew their programs with us;
1
(6) possible challenges in maintaining our fee-based operations, including
risks associated with retaining our existing partners and attracting
potential new partners;
(7) acts of terrorism, war or political unrest;
(8) the inherent uncertainties in our reserving process, which we believe are
increasing as we diversify into new product classes;
(9) emerging claim and coverage issues, which could expand our obligations
beyond the amount we intend to underwrite;
(10) a decrease in the level of demand for our reinsurance or insurance
business, or increased competition in the industry;
(11) changes in economic conditions, including interest rate, currency, equity
and credit conditions which could affect our investment portfolio;
(12) extraordinary events affecting our clients, such as bankruptcies and
liquidations, and the risk that we may not retain or replace our large
clients;
(13) a contention by the U.S. Internal Revenue Service that our Bermuda
subsidiaries, including Renaissance Reinsurance and Glencoe, are subject to
U.S. taxation;
(14) the lowering or loss of any of the financial or claims-paying ratings of
RenaissanceRe or of one or more of our subsidiaries or changes in the
policies or practices of the rating agencies;
(15) loss of services of any one of our key executive officers;
(16) 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;
(17) failures of our reinsurers, brokers or program managers to honor their
obligations, including their obligations to make third party payments for
which we might be liable;
(18) changes in insurance regulations in the United States ("U.S.") 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;
(19) the passage of federal or state legislation subjecting Renaissance
Reinsurance to supervision or regulation, including additional tax
regulation, in the U.S. or other jurisdictions in which we operate; and
(20) 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 in "Risk Factors" below. 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.
ITEM 1. BUSINESS
GENERAL
RenaissanceRe was established in Bermuda in 1993 to write property catastrophe
reinsurance. Through the use of sophisticated computer models to construct our
portfolio of reinsurance contracts, we have become one of the
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world's largest and most successful catastrophe reinsurers. We are seeking to
leverage our expertise to establish leading franchises in additional selected
areas of insurance and reinsurance.
We conduct our business through two reportable segments, Reinsurance and
Individual Risk. Those segments are more fully described as follows:
Reinsurance
Our Reinsurance segment has three main components:
1) Property 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 written for our own account covering certain targeted
classes of business where we believe we have a sound basis for underwriting
and pricing the risk that we assume; our portfolio in 2003 includes various
lines of business, such as catastrophe exposed workers' compensation,
surety, aviation 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) Through Renaissance Underwriting Managers, we pursue joint ventures and
other structured relationships. Our three principal business activities in
this area are: 1) catastrophe-oriented joint ventures which we manage, such
as Top Layer Re and DaVinci; and 2) specialized reinsurance transactions,
such as offering non-traditional participations in our catastrophe
portfolio; and 3) business development joint ventures directed at other
classes of risk, where we partner with other market participants, such as
our investments in ChannelRe Holdings Ltd. ("Channel Re") and Platinum
Underwriters Holdings, Ltd. ("Platinum"). Only business activities that
appear in our consolidated underwriting profit, such as DaVinci and certain
specialized reinsurance transactions, are included in our Reinsurance
segment results; Top Layer Re, Channel Re and Platinum are included in the
Other category of our segment results.
Individual Risk
We define our Individual Risk segment to include underwriting that involves
understanding the characteristics of the original underlying insurance policy.
Our principal products include: 1) commercial and homeowners property coverages,
including catastrophe-exposed lines; 2) commercial liability coverages,
including general, automobile, professional and various specialty lines; and 3)
reinsurance to other insurers on a quota share basis.
Our Individual Risk business is primarily produced through three distribution
channels: 1) Program Managers - where we write primary insurance through
specialized program managers, who produce business pursuant to agreed-upon
underwriting guidelines and provide related back-office functions; 2) Quota
Share Reinsurance - where we write quota share reinsurance with primary insurers
who, similar to our program managers, provide most of the back-office and
support functions; and 3) Brokers - where we write primary insurance through
brokers on a risk-by-risk basis.
Our Individual Risk business is written by the Glencoe Group through its
operating subsidiaries Glencoe and Lantana on an excess and surplus lines basis
and on an admitted basis by Stonington. As noted above, we rely on third parties
for services including the generation of premium, the issuance of policies and
the processing of claims. We actively oversee our third-party partners through
an operations review team at Glencoe Group Services Inc., which conducts initial
due diligence as well as ongoing monitoring.
New Business
3
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.
Since a substantial portion of the reinsurance and insurance we write provides
protection from damages relating to natural and man-made catastrophes, our
results depend to a large extent on the frequency and severity of such
catastrophic events, and the coverages we offer to clients impacted by these
events.
CORPORATE STRATEGY
We will seek to generate growth in book value per share plus cumulative
dividends for our shareholders by pursuing the following strategic objectives:
o Maintain our position as a leader in the property catastrophe reinsurance
business. Based on managed gross premiums written, we are among the largest
property catastrophe reinsurers in the world. Property catastrophe
reinsurance accounts for a significant portion of our business and has
historically generated among the most attractive returns in our industry.
We believe that our proprietary modeling technology and underwriting
expertise provide us with significant competitive advantages in managing
catastrophe risk.
o Enhance our position in the specialty reinsurance market. We have developed
a leadership position in certain specialty lines, and we intend to maintain
this as well as expand this franchise by pursuing new opportunities in
other classes of business, particularly where there has been a significant
market dislocation.
o Pursue additional joint venture opportunities. Building upon our
relationships and expertise in modeling, underwriting and capital
management, we intend to seek new joint venture opportunities, which may
include new partners and diversifying classes of business.
o Increase our position in the Individual Risk market. We plan to continue to
expand our Individual Risk business by increasing the number and size of
our programs and by using technology to help manage the business
effectively, while keeping our infrastructure small and leveraging our
modeling expertise and franchise value.
We believe we are positioned to fulfill these objectives by virtue of the
experience and skill of our management, our significant financial strength, and
our strong relationships with brokers and clients. In addition, we believe our
superior service, our proprietary modeling technology, and our extensive
business relationships which enabled us to become a leader in the property
catastrophe reinsurance market will be instrumental in allowing us to achieve
our strategy.
BUSINESS SEGMENTS
We currently conduct our business through two reportable segments, Reinsurance
and Individual Risk. Financial data relating to our two segments is included in
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations and in our Consolidated Financial Statements and Notes presented
under Item 8.
REINSURANCE SEGMENT
As described above, our Reinsurance operations are comprised of three
components: 1) property catastrophe reinsurance, primarily
4
written through Renaissance Reinsurance and DaVinci; 2) specialty reinsurance,
primarily written through Renaissance Reinsurance and DaVinci; and 3) certain
activities of Renaissance Underwriting Managers.
Our portfolio of business has continued to be increasingly characterized by a
number of large ceding companies with whom we do business. Accordingly, our
written premiums are subject to significant fluctuations depending on our
success in maintaining or expanding our relationships with these large
customers.
Property Catastrophe Reinsurance
Our property catastrophe reinsurance contracts are generally "all risk" in
nature. Our most significant exposure is to losses from earthquakes and
hurricanes, although we are also exposed to claims arising from other natural
and man-made catastrophes, such as winter storms, freezes, floods, fires,
explosions, tornadoes and terror events, in connection with the coverages we
provide. Our predominant exposure under such coverage is to property damage.
However, other risks, including business interruption and other non-property
losses, may also be covered under our property reinsurance contracts when
arising from a covered peril.
Because of the wide range of possible catastrophic events to which we are
exposed, and because of the potential for multiple events to occur in the same
time period, our catastrophe reinsurance business is volatile, and our results
of operations may reflect this volatility. Further, our financial condition may
be impacted by this volatility over time or at any point in time. The effects of
claims from one or a number of severe catastrophic events could have a material
adverse effect on us. We expect that increases in the values and concentrations
of insured property and the effects of inflation will increase the severity of
such occurrences in the future.
We seek to moderate the volatility described in the preceding paragraph through
the use of contract terms, portfolio selection methodology, diversification
criteria and probability analyses. Also, consistent with risk management
practices, we seek to purchase reinsurance protection for our own account and to
effect other risk spreading transactions to seek to further reduce the potential
volatility of our results.
Catastrophe Excess of Loss Reinsurance. We write catastrophe excess of loss
reinsurance, which provides coverage to primary insurers when aggregate claims
and claim expenses from a single occurrence of a covered peril exceed the
attachment point specified in a particular contract. Under these contracts we
indemnify an insurer for a portion of the losses on insurance policies in excess
of a specified loss amount, and up to an amount per loss specified in the
contract.
A portion of our property catastrophe excess of loss contracts limit coverage to
one occurrence in a contract year, but most such contracts provide for coverage
of a second occurrence after the payment of a reinstatement premium. The
coverage provided under excess of loss reinsurance contracts may be on a
worldwide basis or limited in scope to selected geographic areas. Coverage can
also vary from "all property" perils to limited coverage on selected perils,
such as "earthquake only" coverage.
Excess of Loss Retrocessional Reinsurance. We enter into retrocessional
contracts that provide property catastrophe coverage to other reinsurers or
retrocedants. In providing retrocessional reinsurance, we focus on property
catastrophe retrocessional reinsurance which covers the retrocedant on an excess
of loss basis when aggregate claims and claim expenses from a single occurrence
of a covered peril and from a multiple number of reinsureds exceed a specified
attachment point. The coverage provided under excess of loss retrocessional
contracts may be on a worldwide basis or limited in scope to selected geographic
areas. Coverage can also vary from "all property" perils to limited coverage on
selected perils, such as "earthquake only" coverage. Retrocessional coverage is
generally characterized by high volatility, principally because retrocessional
contracts expose a reinsurer to an aggregation of losses from a single
catastrophic event. In addition, the information available to retrocessional
underwriters concerning the original primary risk can be less precise than the
information received from primary companies directly. Moreover, exposures from
retrocessional business can change within a contract term as the underwriters of
a retrocedant alter their book of business after retrocessional coverage has
been bound.
Specialty Reinsurance
5
We write a number of other lines of reinsurance such as catastrophe exposed
workers' compensation, surety, aviation and terrorism, which we collectively
refer to as specialty reinsurance.
We believe that our underwriting and analytic capabilities have positioned us
well to manage and grow this business. Potential losses from many of these
coverages could be characterized as low frequency and high severity, similar to
our catastrophe reinsurance coverages. We also seek to manage the correlations
of this business with our property catastrophe reinsurance portfolio. In 2003 we
increased the professional staff of our specialty reinsurance operations to
support our growth in this unit.
Renaissance Underwriting Managers
We pursue a number of opportunities through Renaissance Underwriting Managers,
which has responsibility for managing our joint venture relationships and
executing highly specialized reinsurance transactions to assume or cede risk.
Our professionals have experience across a range of disciplines, including
accounting, investment banking and law, as well as insurance and reinsurance.
Property Catastrophe-Oriented Joint Ventures. We actively manage property
catastrophe-oriented joint ventures, which provide us with additional presence
in the market as well as fee income. They allow us to leverage our access to
business and our underwriting capabilities on a larger capital base. Currently,
our joint ventures are Top Layer Re and DaVinci. We are the exclusive
underwriting manager for each of Top Layer Re and DaVinci.
Top Layer Re writes high excess non-U.S. property catastrophe reinsurance. Top
Layer Re is owned 50% by State Farm Mutual Automobile Insurance Company ("State
Farm") and 50% by Renaissance Reinsurance. State Farm provides $3.9 billion of
stop loss reinsurance coverage to Top Layer Re.
DaVinci writes global reinsurance. In general, we seek to construct for DaVinci
a property catastrophe reinsurance portfolio with risk characteristics similar
to those of Renaissance Reinsurance's property catastrophe reinsurance
portfolio. We also write certain lines of specialty reinsurance for DaVinci. We
owned 25% of DaVinci's outstanding equity at December 31, 2003, but control a
majority of its outstanding voting power, and accordingly DaVinci's financial
results are consolidated in our financial statements.
In these joint ventures, we typically provide our partners with underwriting,
claims management, risk modeling, capital and investment management services,
marketing, reporting, remittances and payments processing and other services. We
work within agreed-upon underwriting guidelines, tailored to our partners'
requirements, using the same techniques and systems for the underwriting as we
apply to our own portfolio. These relationships create fees for services and
profit sharing income for Renaissance Underwriting Managers and Renaissance
Reinsurance. In turn, our joint ventures have increased the capital we can
commit to the catastrophe reinsurance market and have deepened our market
penetration.
The following table shows our total managed property catastrophe and specialty
reinsurance premiums written:
6
Year ended December 31, 2003 2002 2001
- ----------------------- ---------- ---------- ----------
(in millions)
Property catastrophe
- --------------------
Written for Renaissance Reinsurance (1) $ 488.1 $ 455.7 $ 373.9
Written for DaVinci 155.6 187.8 --
---------- ---------- ----------
Total property catastrophe (2) 643.7 643.5 373.9
Written for Top Layer Re 76.7 73.1 38.8
Written for OP Cat (1) -- -- 60.1
---------- ---------- ----------
Total managed catastrophe premium (3) 720.4 716.6 472.8
---------- ---------- ----------
Specialty
- ---------
Written for Renaissance Reinsurance 268.5 247.0 77.5
Written for DaVinci 23.3 -- --
---------- ---------- ----------
Total Specialty 291.8 247.0 77.5
---------- ---------- ----------
Total managed reinsurance premium (3) 1,012.2 963.6 550.3
Less: written for Top Layer Re (76.7) (73.1) (38.8)
Less: written for OP Cat -- -- (60.1)
---------- ---------- ----------
Total Reinsurance premiums written (2) $ 935.5 $ 890.5 $ 451.4
========== ========== ==========
(1) Includes gross premiums written through our subsidiary Overseas Partners
Cat Ltd. ("OP Cat"), which we purchased in 2002, of $1.5 million and $38.2
million for the years ended December 31, 2003 and 2002, respectively, and
consolidated into Renaissance Reinsurance's results.
(2) Excludes combined premium assumed from the Individual Risk segment of $20.8
million and $22.2 million for the years ended December 31, 2003 and 2002,
respectively.
(3) In addition to the GAAP financial measures set forth in this Form 10-K, we
have included certain non-GAAP financial measures in this Form 10-K within
the meaning of Regulation G. We have consistently provided these financial
measurements in previous filings and we believe that these measurements are
important to investors and other interested parties, and that investors and
other such persons benefit from having a consistent basis for comparison
with other companies within the industry. These measures may not, however,
be comparable to similarly titled measures used by companies outside the
insurance industry. Investors are cautioned not to place undue reliance on
these non-GAAP measures in assessing our overall financial performance.
We have included in this Form 10-K "managed catastrophe premium" and
"managed reinsurance premium". "Managed catastrophe premium" and "managed
reinsurance premium" are defined as gross catastrophe and gross reinsurance
premium, respectively, written by Renaissance Reinsurance and the joint
ventures. "Managed catastrophe premium" and "managed reinsurance premium"
differ from total catastrophe premium and total reinsurance premium,
respectively, which we believe are the most directly comparable GAAP
measures, due to the inclusion of catastrophe premium written on behalf of
our joint venture Top Layer Re which is accounted for under the equity
method of accounting, and additionally, in 2001 due to the inclusion of
catastrophe premium written on behalf of OP Cat.
Specialized Reinsurance Transactions. Renaissance Underwriting Managers works on
a range of other specialized reinsurance transactions. For example, we have
participated in the market for catastrophe-linked securities. We also offer
products through which we cede participations in the performance of our
catastrophe reinsurance portfolio. We believe our products contain a number of
customized features designed to fit the needs of our partners, as well as our
risk management goals.
7
Business Development Joint Ventures. Renaissance Underwriting Managers also
pursues other types of joint ventures where, rather than assuming exclusive
management responsibilities ourselves, we instead partner with other market
participants. The results of these joint ventures are not included in the
Reinsurance segment results, but instead are included in the Other segment of
our segment results. These joint ventures are directed at classes of risk other
than catastrophe, and at times may also be directed at non-insurance risks. We
find these joint ventures attractive both for their expected returns, and also
because they provide us diversification benefits and information and exposure to
other aspects of the market.
Examples of these joint ventures include:
o Channel Re - a newly formed Bermuda-based financial guaranty reinsurer. It
has received financial strength ratings of Aaa from Moody's Investors
Service Inc. ("Moody's") and AAA from Standard & Poor's Insurance Rating
Services ("S&P"). Channel Re was capitalized on February 12, 2004 with
equity capital of approximately $366 million, of which RenaissanceRe
contributed $120 million, or 32.7%. Channel Re assumed an approximate $27
billion portfolio of in-force business from MBIA Inc., and certain of its
affiliates, and will participate in its reinsurance treaty and provide
facultative reinsurance support. Following the assumption of the in-force
business, Channel Re will have total claims-paying resources of
approximately $700 million.
o Platinum - since its initial public offering in 2002 we have been an
investor and also provided modeling and referral services on a fee basis.
At December 31, 2003, the fair value of our common shares and warrants in
Platinum was $145.5 million.
INDIVIDUAL RISK SEGMENT
We define our Individual Risk segment to include underwriting that involves
understanding the characteristics of the original underlying insurance policy.
Our principal products include: 1) commercial and homeowners property coverages,
including catastrophe-exposed lines; 2) commercial liability coverages,
including general, automobile, professional and various specialty lines; and 3)
reinsurance to other insurers on a quota share basis.
We operate through the Glencoe Group of companies, whose principal operating
subsidiaries are Glencoe, Stonington and Lantana. Glencoe is a Bermuda-domiciled
excess and surplus lines insurance company and is currently eligible to do
business on an excess and surplus lines basis in 51 U.S. jurisdictions.
Stonington, a Texas domiciled insurance company, is licensed on an admitted
basis in all 50 states. Lantana is a Bermuda-domiciled insurance company
currently eligible as an excess and surplus lines carrier in 47 U.S.
jurisdictions.
Our Individual Risk business is produced primarily through three distribution
channels:
1) Program Managers - We write primary insurance through specialized program
managers, who produce business pursuant to agreed-upon underwriting
guidelines and provide related back-office functions;
2) Quota Share Reinsurance - We write quota share reinsurance with primary
insurers who, similar to our program managers, provide most of the
back-office functions. Business is written pursuant to agreed-upon
guidelines; and
3) Brokers - We write primary insurance through brokers on a risk-by-risk
basis; all underwriting and back office functions for this business are
based in our offices in Bermuda while claims handling is outsourced.
We oversee and monitor both our program managers and the third-party
administrators whom we have retained to manage our claims function. In 2003, we
expanded our operations review team at Glencoe Group Services Inc., by adding
experienced industry professionals with backgrounds in information technology,
claims administration and litigation, legal matters and financial controls. In
addition, we have retained underwriters who are based at the headquarters
facility of certain of our program managers.
RATINGS
8
Over the last five years, we have consistently received high claims-paying and
financial strength ratings from A.M. Best Company, Inc. ("A.M. Best"), S&P and
Moody's. These ratings represent independent opinions of an insurer's financial
strength and ability to meet policyholder obligations.
The ratings of our principal operating subsidiaries and joint ventures by
segment and the senior debt ratings of RenaissanceRe are as follows:
A.M. Best
Financial Size
At March 1, 2004 S&P A.M. Best Category Moody's
------- --------- -------------- -------
REINSURANCE SEGMENT (1)
Renaissance Reinsurance AA- * A+ XII A1
DaVinci A A X --
Top Layer Re AA A+ VII --
Renaissance Europe -- A+ XII --
INDIVIDUAL RISK SEGMENT (1)
Glencoe -- A IX --
Glencoe U.S. -- A IX --
Stonington -- A IX --
Lantana -- A IX --
RenaissanceRe (2) A * -- -- A3
* Upgraded in February 2004
(1) The A.M. Best, S&P and Moody's ratings for the companies in the Reinsurance
and Individual Risk segments reflect the insurer financial strength rating
(see explanation of the rating levels below).
(2) The S&P and Moody's ratings for RenaissanceRe represent the credit ratings
on its senior unsecured debt.
S&P. The "AA" range ("AA+", "AA", "AA-"), which has been assigned by S&P to
Renaissance Reinsurance and Top Layer Re, is the second highest rating assigned
by S&P, and indicates that S&P believes the insurer's capacity to meet its
financial commitment on the obligation is very strong, differing only slightly
from those rated higher. The "A" range ("A+", "A" and "A-") is the third highest
of four ratings ranges within what S&P considers the "secure" category. An
insurer rated "A" is believed by S&P to have strong financial security
characteristics, but to be somewhat more likely to be affected by business
conditions than are insurers with higher ratings.
A.M. Best. "A+" is the second highest designation of A.M. Best's sixteen rating
levels. "A+" rated insurance companies are defined as "Superior" companies and
are considered by A.M. Best to have a very strong ability to meet their
obligations to policyholders. "A" is the third highest designation assigned by
A.M. Best, representing A.M. Best's opinion that the insurer has an excellent
ability to meet its ongoing obligations to policyholders.
A.M. Best also assigns a financial size category to each of the insurance
companies rated. "VII" represents a company with $50-$100 million in capital,
"IX" represents a company with $250-$500 million in capital, "X" represents a
company with $500-$750 million in capital, and "XII" represents a company with
$1-$1.25 billion in capital.
Moody's. Moody's Insurance Financial Strength Ratings and Moody's Credit Ratings
represent its opinions of the ability of insurance companies to repay punctually
policyholder claims and obligations and senior unsecured debt instruments.
Moody's believes that insurance companies rated A1, such as Renaissance
Reinsurance, and companies rated A3, such as RenaissanceRe, offer good financial
security. However, Moody's believes that elements may be present which suggest a
susceptibility to impairment sometime in the future.
9
UNDERWRITING
REINSURANCE
Our primary underwriting goal is to construct a portfolio of reinsurance
contracts that maximizes our return on shareholders' equity subject to prudent
risk constraints. We assess each new reinsurance contract on the basis of the
expected incremental return relative to the incremental contribution to
portfolio risk.
We have developed a proprietary, computer-based pricing and exposure management
system, Renaissance Exposure Management System (REMS(C)). REMS(C) was initially
developed with consulting assistance from Tillinghast, an actuarial consulting
unit of Towers, Perrin, Forster & Crosby, and Applied Insurance Research, Inc.,
the developer of the CATMAP(TM) system. Since inception, we have continued to
invest in and improve REMS(C), incorporating our underwriting experience,
additional proprietary software and a significant amount of new industry data.
REMS(C) has analytic and modeling capabilities that help us to assess the risk
and return of each incremental reinsurance contract in relation to our overall
portfolio of reinsurance contracts. We combine the analyses generated by REMS(C)
with other information available to us, including our own knowledge of the
client submitting the proposed program, to assess the premium offered against
the risk of loss which the program presents. We have licensed and integrated
into REMS(C) a number of third party catastrophe computer models in addition to
our base model, which we use to validate and stress test our base REMS(C)
results. While REMS(C) is most developed in analyzing catastrophe risks, it is
also used for analyzing other classes of risk.
We believe that REMS(C) is a more robust underwriting and risk management system
than is currently available in the reinsurance industry. REMS(C) combines
computer-generated statistical simulations that estimate loss probabilities with
exposure and coverage information on each client's reinsurance contract to
produce expected claims for reinsurance programs submitted to us. Our models
employ simulation techniques to generate 40,000 years of activity, including
events causing in excess of $300 billion in insured industry losses. From this
simulation, we generate estimates of expected claims, expected profits and a
probability distribution of potential outcomes for each program in our portfolio
and for our total portfolio. REMS(C) allows us to score the contracts that we
write by comparing the expected profit of a contract with the amount of capital
that we allocate to the contract based on its marginal impact to the risk of our
portfolio. We have also customized REMS by including additional perils, risks
and geographic areas that are not captured in the commercially available models.
All of our reinsurance underwriters use REMS(C) in their pricing decisions,
which we believe provides them with several competitive advantages. These
include the ability:
o to simulate a greater number of years of catastrophic event activity
compared to a much smaller sample in generally available models, allowing
us to analyze exposure to a greater number and combination of potential
events;
o to analyze the incremental impact of an individual reinsurance contract on
our overall portfolio;
o to better assess the underlying exposures associated with assumed
retrocessional business;
o to price contracts within a short time frame;
o to capture various classes of risk, including catastrophe and other
insurance risks and counterparty credit risks;
o to assess risk across multiple entities (including our various joint
ventures) and across different components of our capital structure; and
o to provide consistent and accurate pricing information.
As part of our risk management process, we also use REMS(C) to assist us with
the purchase of reinsurance coverage for our own account.
10
We have developed underwriting guidelines, to be used in conjunction with
REMS(C), that limit the exposure to claims from any single catastrophic event
and the exposure to losses from a series of catastrophic events. As part of our
pricing and underwriting process, we also assess a variety of other factors,
including;
o the reputation of the proposed cedant and the likelihood of establishing a
long-term relationship with the cedant;
o the geographic area in which the cedant does business and its market share;
o historical loss data for the cedant and, where available, for the industry
as a whole in the relevant regions, in order to compare the cedant's
historical catastrophe loss experience to industry averages;
o the cedant's pricing strategies; and
o the perceived financial strength of the cedant.
In order to define the risk profile of each line of specialty reinsurance, we
establish probability distributions and assess the correlations with the rest of
our portfolio. In lines with catastrophe risk, such as excess workers'
compensation, we are leveraging directly off our skill in modeling for our
property catastrophe reinsurance risks, and it is important to understand the
correlations between these specialty lines and our catastrophe reinsurance
portfolio. For other classes of business, which have little or no natural
catastrophe exposure, and hence have significantly less correlation with our
property catastrophe reinsurance coverages, probability distributions are
derived from a variety of underlying information, including recent historical
experience, but with the application of judgment as appropriate. The nature of
some of these businesses lends itself less to the analysis that we use on our
property catastrophe reinsurance coverages, reflecting both the nature of
available exposure information, and the impact of human factors such as tort
exposure. We produce probability distributions to represent our underlying
risks, which we believe helps us to make consistent underwriting decisions, and
manage our total risk portfolio. Overall we seek conservative representations of
the risks.
INDIVIDUAL RISK
For our catastrophe exposed business in our Individual Risk segment, we utilize
proprietary modeling tools that have been developed in conjunction with the
modeling and other resources utilized in our Reinsurance operations, as
described above. We also combine these analyses with those of our Reinsurance
segment to monitor our aggregate group catastrophic exposures.
For the business produced through program managers, we seek to carefully
identify and evaluate potential program managers. When evaluating a potential
new program manager, we consider numerous factors including: (i) whether the
program manager can provide and help us analyze historic loss and other business
data; (ii) whether the program manager will bear profit sharing risk and provide
us with the other terms and conditions we require; (iii) the integrity and
experience of the program manager; (iv) the potential profitability of the
program to us; and (v) the availability of our internal resources to
appropriately conduct due diligence, negotiate and execute transaction terms,
and provide the ongoing monitoring we require. In considering pricing for the
products to be offered by the program manager, we evaluate the expected
frequency and severity of losses, the costs of providing the necessary coverage
(including the cost of administering policy benefits, sales and other
administrative and overhead costs) and a margin for profit.
We actively develop and maintain proprietary databases and models to support our
underwriting and provide value added services to our partners. These databases
and models enable us to better identify and estimate the expected loss
experience of particular products and are employed in the design of our products
and the establishment of rates. We also monitor pricing adequacy on our products
by region, risk and producer. Subject to regulatory considerations, we seek to
make timely premium and coverage modifications where we determine them to be
appropriate.
11
We provide our program managers with written underwriting guidelines and monitor
their compliance with our guidelines on a regular basis. Also, our contracts
provide that a portion of the commission payable to our program managers will be
on a retrospective basis, which is intended to permit us to adjust commissions
based on our profitability and claims experience. We rely on our program
managers to perform underwriting pursuant to these contractual guidelines, and
believe we benefit from their superior local information and expertise in niche
areas.
GEOGRAPHIC BREAKDOWN
Our exposures are generally diversified across geographic zones, but are also a
function of market conditions and opportunities. The following table sets forth
the percentage of our gross insurance and reinsurance premiums written allocated
to the territory of coverage exposure.
Year ended December 31, 2003 2002 2001
- ----------------------- ------------------------ ----------------------- -----------------------
(in millions)
Percentage Percentage Percentage
Gross of Gross Gross of Gross Gross of Gross
Premiums Premiums Premiums Premiums Premiums Premiums
Written Written Written Written Written Written
-------- ---------- -------- --------- -------- ---------
Property catastrophe reinsurance
United States and Caribbean $ 298.0 21.6% $ 310.1 26.4% $ 180.3 35.9%
Europe 156.2 11.3 86.5 7.4 20.4 4.1
Worldwide 126.5 9.2 169.8 14.5 93.5 18.7
Australia and New Zealand 26.6 1.9 2.1 0.2 12.2 2.4
Worldwide (excluding U.S) (1) 15.0 1.1 56.6 4.8 45.1 9.0
Other 21.4 1.5 18.4 1.6 22.4 4.5
Specialty reinsurance (2) 291.8 21.1 247.0 21.1 77.5 15.5
-------- -------- -------- -------- -------- --------
Total reinsurance (3) 935.5 67.7 890.5 76.0 451.4 90.1
Individual Risk (4) 446.7 32.3 282.5 24.0 49.9 9.9
-------- -------- -------- -------- -------- --------
Total gross premiums written $1,382.2 100.0% $1,173.0 100.0% $ 501.3 100.0%
======== ======== ======== ======== ======== ========
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross written premiums written to date is predominantly from
Europe and Japan.
(2) The category Specialty reinsurance consists of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks
being Worldwide.
(3) Excludes $20.8 million and $22.2 million of premium assumed from the
Individual Risk segment in 2003 and 2002, respectively.
(4) The category Individual Risk consists of contracts that are primarily
exposed to U.S. risks.
RESERVES FOR CLAIMS AND CLAIM EXPENSES
Reserves for claims and claim expenses represent estimates, including actuarial
and statistical projections at a given point in time, of an insurer's or
reinsurer's expectations of the ultimate settlement and administration costs of
claims incurred. Such estimates are not precise in that, among other things,
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. It is likely that our ultimate liability in respect of these reserves
will exceed or be less than our current estimates, possibly materially.
For our property catastrophe reinsurance operations, we initially set our
reserves for claims and claim expenses based on case reserves and other reserve
estimates reported by insureds and ceding companies. We then add to these claims
reserves, our estimates for additional case reserves, and an estimate for
incurred but not reported ("IBNR") reserves. These estimates are normally based
upon our experience with similar claims, our knowledge of potential industry
loss levels for each loss, and industry information which we gather and retain
in our REMS(C) modeling system. The estimation of claims resulting from
catastrophic events is inherently difficult because of the variability and
uncertainty associated with property catastrophe claims.
12
In reserving for our specialty reinsurance and Individual Risk coverages we
currently do not have the benefit of a significant amount of our own historical
experience in these lines. Currently we estimate our IBNR reserves for our
specialty reinsurance and Individual Risk coverages by utilizing an actuarial
method known as the Bornhuetter-Ferguson technique, a widely used method for
lines of business in which a company may have limited historical loss
experience. The utilization of the Bornhuetter-Ferguson technique requires a
company to estimate an ultimate claims and claim expense ratio and select an
estimated loss reporting pattern for each line of business that it offers. We
select our estimates of the ultimate claims and claim expense ratios and
estimated loss reporting patterns by reviewing industry standards and adjusting
these standards based upon the coverages and terms of coverages that we offer.
Because any reserve estimate is simply 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. Because of these
inherent uncertainties, we have developed a reserving philosophy which attempts
to incorporate prudent assumptions and estimates. In recent years, we have
experienced favorable adjustments to our reserves, principally relating to
catastrophe-exposed accounts. In future periods, 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, we may experience further reductions to our older
accident year reserves.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that adjustments to an earlier estimate are appropriate, such
adjustments are recorded in the quarter in which they are identified. Although
we believe that we are cautious in our assumptions, and in the application of
our methodologies, we cannot be certain that our ultimate payments will not
vary, perhaps materially, from the estimates we have made. Adjustments to our
claims reserves will increase current year net income if our current estimates
of prior year claims reserves are lower than the initial estimates or will
decrease net income if our current estimates of prior year claims reserves are
greater than the initial estimates.
We incurred claims of $367.7 million, $289.5 million and $149.9 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Our total gross
reserves for claims and claim expenses was $977.9 million and $804.8 million at
December 31, 2003 and 2002, respectively.
At December 31, 2003, our estimated IBNR reserves were $596.6 million, and a 5%
adjustment to our IBNR reserves, would equate to a $29.8 million adjustment to
claims and claim expenses incurred, which represents 4.8% of our 2003 net
income, and 1.3% of shareholders' equity at December 31, 2003.
The following table represents the development of generally accepted accounting
principles ("GAAP") balance sheet reserves for 1994 through December 31, 2003.
This table does not present accident or policy year development data. The top
line of the table shows the reserves for claims and claim expenses, net of
reinsurance recoverables, at the balance sheet date for each of the indicated
years. This represents the estimated amounts of net claims and claim expenses
arising in the current year and all prior years that are unpaid at the balance
sheet date, including IBNR reserves. The table also shows the reestimated amount
of the previously recorded reserve based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years. The "cumulative
redundancy (deficiency)" represents the aggregate change to date from the
original estimate on the top line of the table. The table also shows the
cumulative net paid amounts as of successive years with respect to the net
reserve liability.
With respect to the information in the table below, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. For
additional information on our reserves, including a reconciliation of claims and
claim expense reserves for the years ended December 31, 2003, 2002 and 2001,
please refer to Note 5 of the notes accompanying our consolidated financial
statements.
13
Years ended December 31, 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
- ------------------------ ------------------------------------------------------------------------------------
(in millions)
Reserve for claims and claim expenses,
net of losses recoverable $ 63.3 $ 100.4 $ 105.4 $ 110.0 $ 197.5 $ 174.9 $ 237.0 $ 355.3 $ 605.3 $ 828.7
1 Year Later 98.5 112.3 105.4 95.1 149.5 196.8 221.0 353.3 510.2 --
2 Years Later 98.9 112.9 109.4 61.8 149.9 168.4 168.4 318.2 -- --
3 Years Later 103.4 118.6 87.3 58.2 141.3 121.7 138.6 -- -- --
4 Years Later 107.9 110.1 90.0 56.8 118.6 111.1 -- -- -- --
5 Years Later 107.3 114.2 89.5 51.1 117.8 -- -- -- -- --
6 Years Later 111.9 113.6 83.8 48.2 -- -- -- -- -- --
7 Years Later 111.6 108.5 81.9 -- -- -- -- -- -- --
8 Years Later 106.5 107.3 -- -- -- -- -- -- -- --
9 Years Later 105.2 -- -- -- -- -- -- -- -- --
Cumulative redundancy (deficiency) (41.9) (6.9) 23.5 61.8 79.7 63.8 98.4 37.1 95.1 --
Cumulative Net Paid Losses
1 Year Later 47.7 55.2 40.7 16.9 54.8 24.6 1.6 53.1 76.4 --
2 Years Later 65.7 76.4 54.7 24.7 80.1 6.5 0.3 125.5 -- --
3 Years Later 84.6 86.4 60.6 28.4 69.6 1.2 3.2 -- -- --
4 Years Later 92.1 91.4 64.1 29.8 69.1 2.7 -- -- -- --
5 Years Later 95.1 94.3 65.3 31.0 69.5 -- -- -- -- --
6 Years Later 97.9 95.3 66.3 31.9 -- -- -- -- -- --
7 Years Later 98.3 95.9 67.1 -- -- -- -- -- -- --
8 Years Later 99.0 96.8 -- -- -- -- -- -- -- --
9 Years Later 99.8 -- -- -- -- -- -- -- -- --
INVESTMENTS
The table below shows our portfolio of invested assets:
At December 31, 2003 2002 2001
- --------------- -------- -------- --------
(in millions)
Type of investment
- ------------------
Fixed maturities available for sale
U.S. treasuries and agencies $ 799.3 $ 659.4 $ 275.9
Non-U.S. government 290.3 379.7 165.4
Corporate 846.4 561.3 342.7
Mortgage-backed 215.4 301.6 203.7
Asset-backed 796.4 319.1 294.8
-------- -------- --------
Subtotal 2,947.8 2,221.1 1,282.5
Short-term investments 660.6 570.5 733.9
Other investments 370.3 129.9 38.3
Equity investments in reinsurance company 145.5 120.3 --
Cash and cash equivalents 63.4 87.1 139.7
-------- -------- --------
Total investments and cash $4,187.6 $3,128.9 $2,194.4
======== ======== ========
At December 31, 2003, we held cash and investments totaling $4.2 billion,
compared to $3.1 billion at December 31, 2002, with net unrealized appreciation
of $113.4 million at December 31, 2003, compared to $95.2 million at December
31, 2002. Our investment guidelines, which are approved by our Board, stress
preservation of capital, market liquidity, and diversification of risk.
Notwithstanding the foregoing, our investments are subject to market-wide risks
and fluctuations, as well as to risks inherent in particular securities.
Over time we have increased our exposure to other investments, including hedge
funds and private equity funds. At December 31, 2002 these other investments
totaled $129.9 million or 4.2% of our total investments and cash, and at
December 31, 2003 these other investments totaled $370.3 million or 8.8% of our
total investments and cash.
14
It is likely that we may increase our holdings of other investments in the
future. Over time we have also increased our exposure to non-investment grade
fixed maturity investments. At December 31, 2002 these non-investment grade
fixed maturity investments totaled $195.4 million or 8.8% of our total fixed
maturity investments, and at December 31, 2003 these non-investment grade fixed
maturity investments totaled $309.5 million or 10.5% of our fixed maturity
investments. At December 31, 2003, our fixed maturities and short-term
investment portfolio had a dollar-weighted average credit quality rating of AA.
At December 31, 2003, our average yield to maturity was 2.7% before investment
expenses.
We currently have a target duration of 2.75 - 3.00 years for our fixed
maturities and short-term investments. Our duration at December 31, 2003 was 2.0
years, reflecting our view that the current level of rates affords inadequate
compensation for the assumption of additional interest rate risk. From time to
time, we may reevaluate the target duration in light of our liabilities and
market conditions.
As with other fixed income investments, the value of our fixed maturity
investments will fluctuate with changes in the interest rate environment and
when changes occur in the overall investment market and in overall economic
conditions. Additionally, our differing asset classes expose us to other risks
which could cause a reduction in the value of our investments. Examples of some
of these risks are:
o Changes in the overall interest rate environment can expose us to
"prepayment risk" on our mortgage-backed investments. When interest rates
decline, consumers will generally make prepayments on their mortgages and,
as a result, our investments in mortgage-backed securities will be repaid
to us more quickly than we might have originally anticipated. When we
receive these prepayments, our opportunities to reinvest these proceeds
back into the investment markets will normally be at reduced interest
rates.
o Our investments in debt securities of other corporations are exposed to
losses from insolvencies of these corporations, and our investment
portfolio can also deteriorate based on reduced credit quality of these
corporations.
o Our investments in asset-backed securities are subject to prepayment risks,
as noted above, and to the structural risks of these securities. The
structural risks primarily emanate from the priority of each security in
the issuer's overall capital structure.
The following table summarizes the fair value by contractual maturities of our
fixed maturity investment portfolio at the dates indicated. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalty.
At December 31, 2003 2002 2001
- --------------- -------- -------- --------
(in millions)
Due in less than one year $ 24.9 $ 23.2 $ 10.8
Due after one through five years 1,469.4 1,107.9 494.3
Due after five through ten years 296.8 350.3 185.5
Due after ten years 144.9 119.0 93.4
U.S. mortgage-backed securities 215.4 301.6 203.7
U.S. asset-backed securities 796.4 319.1 294.8
-------- -------- --------
Total $2,947.8 $2,221.1 $1,282.5
======== ======== ========
The following table summarizes the composition of the fair value of the fixed
maturity portfolio at the dates indicated by ratings as assigned by S&P and for
non-rated issues, each as estimated by our investment managers.
15
At December 31, 2003 2002 2001
- --------------- ----- ----- -----
AAA 69.0% 71.7% 69.9%
AA 8.8 9.9 7.6
A 5.8 4.4 6.3
BBB 5.9 5.2 7.3
BB 2.5 2.6 2.7
B 4.9 4.7 4.4
CCC 1.9 0.9 0.6
CC 0.5 0.1 0.2
D 0.1 -- 0.1
NR 0.6 0.5 0.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Under the terms of certain reinsurance contracts, we may be required to provide
letters of credit to reinsureds in respect of reported claims and/or unearned
premiums. Issued letters of credit are secured by a lien on a portion of our
investment portfolio. At December 31, 2003, we had outstanding letters of credit
aggregating $346.9 million. Also, in connection with our Top Layer Re joint
venture, we have committed $37.5 million of capital in the form of a letter of
credit. This letter of credit is also secured by a like amount of our
investments.
Other Investments. Included in other investments are investments in hedge funds
of $170.1 million (2002 - $61.4 million), a fund that invests in senior secured
bank loans of $77.2 million (2002 - $20.4 million), a European high yield credit
fund of $38.3 million (2002 - $nil) and private equity partnerships of $24.2
million (2002 - $14.6 million) (collectively "Investment Funds"). Also included
in other investments are investments in a medium term note, representing an
interest in a pool of European fixed income securities, of $30.0 million (2002 -
$nil), catastrophe bonds of $26.3 million (2002 - $33.5 million), and
miscellaneous investments of $4.2 million (2002 - $nil).
Fair values of Investment Funds are generally established on the basis of the
net valuation criteria established by the managers of such Investment Funds.
These net valuations are determined based upon the valuation criteria
established by the governing documents of the Investment Funds. Due to a lag in
the valuations reported by the fund managers the majority of our Investment
Funds are reported on a one month or one quarter lag. Such valuations may differ
significantly from the values that would have been used had ready markets
existed for the shares or partnership interests of the Investment Funds. Many of
the Investment Funds are subject to restrictions on redemptions and sale which
are determined by the governing documents and limit our ability to liquidate
these investments in the short term. Interest income, income distributions and
realized and unrealized gains and losses on other investments, including
Investment Funds, are included in net investment income and totaled $25.9
million (2002 - loss of $0.4 million) of which $21.2 million (2002 - loss of
$1.4 million) was related to net unrealized gains (losses).
We have committed capital to private equity partnerships of $109.1 million, of
which $20.3 million was contributed at December 31, 2003.
Equity Investments in Reinsurance Company. The equity investments in reinsurance
company relate to our November 1, 2002 purchase of 3,960,000 common shares of
Platinum in a private placement transaction. In addition, we received 10-year
warrants to purchase up to 2.5 million additional common shares of Platinum for
$27.00 per share. We purchased the common shares and warrants for an aggregate
price of $84.2 million. At December 31, 2003, we owned 9.2% of Platinum's
outstanding common shares. We have recorded our investment in Platinum at fair
value, and at December 31, 2003 the aggregate fair value was $145.5 million
(2002 - $120.3 million). The aggregate unrealized gain of $61.3 million (2002 -
$36.1 million) on the Platinum investment is included in accumulated other
comprehensive income in our consolidated financial statements, of which $26.7
million (2002 - $15.9 million) represents our estimate of the value of the
warrants using a Black-Scholes option pricing model.
Derivatives Related to Physical Variables and Credit Default Swaps. We have
assumed and ceded risk through securities and derivative instruments under which
losses or recoveries are triggered by an industry loss index or by geological or
physical variables. During 2003, 2002 and 2001, we recognized gains (losses) on
these contracts of $0.8 million, $7.2 million, and $(4.6) million, respectively,
which are included in other income in our consolidated financial statements. We
also invest in credit default swaps, under which payment is triggered by a
credit event, such as a default. During 2003, we had a portfolio of short credit
positions, under which we effectively cede credit risk, and we recognized losses
on these contracts of $4.2 million as a result of tightening credit spreads.
16
RIHL. In 2002, we commenced utilization of our subsidiary RIHL, a Bermuda
company we organized for the primary purpose of holding the investments in high
quality marketable securities of RenaissanceRe, our operating subsidiaries and
certain of our joint venture affiliates. RIHL permits us to consolidate and
substantially facilitate our investment management operations. RenaissanceRe and
each of our participating operating subsidiaries and affiliates has transferred
to RIHL marketable securities or other assets, in return for a subscription of
RIHL equity interests. Each RIHL share is redeemable for cash or in marketable
securities. Over time, the participants in RIHL are expected to both subscribe
for additional shares and redeem outstanding shares, as our and their respective
liquidity needs change.
As a result of the high quality of the assets transferred to and maintained by
it, RIHL has been rated AAAf/S2 by S&P. We have exclusive responsibility for
managing the day-to-day affairs of RIHL and have sole management responsibility
over its portfolio. Mellon Bank, N.A., provides RIHL with certain custodial
functions, including custody of its outstanding shares and valuation of its
assets.
As described below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Summary of Results of Operations for 2003,
2002 and 2001 - Capital Resources," we entered into a facility which, as of
January 2004, makes available to our operating subsidiaries and joint ventures
letters of credit having an aggregate face amount not to exceed $485 million. To
support the facility, our participating operating subsidiaries and joint
ventures have pledged RIHL shares owned by them as collateral. We have agreed
with our lenders to increase the size of this facility to $585 million.
COMPETITION
The insurance and reinsurance industries are highly competitive and, provided
that a company has sufficient capital and necessary management expertise, the
barriers to entry into the reinsurance markets are not significant.
With total managed catastrophe premiums written of $720.4 million for the year
ended December 31, 2003, we are one of the largest providers of property
catastrophe reinsurance in the world. Our principal competition in the industry
comes from major U.S. and non-U.S. insurers and reinsurers, including other
Bermuda-based reinsurers. Though these companies offer property catastrophe
reinsurance, in many cases it accounts for a relatively small percentage of
their total portfolio. Our competition with respect to our specialty reinsurance
business generally also comes from the same U.S. and non-U.S. insurers and
reinsurers.
In our Individual Risk business, we face competition from independent insurance
companies, subsidiaries or affiliates of major worldwide companies and others,
some of which have greater financial and other resources than we do. Primary
insurers compete on the basis of various factors including distribution
channels, product, price, service, financial strength and reputation.
Following the World Trade Center disaster, a number of new companies were formed
to compete in the reinsurance and specialty insurance markets. A number of these
new companies were formed in Bermuda. In addition, a number of existing market
participants raised new capital, thereby strengthening their ability to compete.
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We are also aware of many potential initiatives by capital market participants
to produce alternative products that may compete with the existing catastrophe
reinsurance markets. Among other matters, over the last several years capital
markets participants, including exchanges and financial intermediaries, have
developed financial products intended to compete with traditional reinsurance.
In addition, the tax policies of the countries where our clients operate can
affect demand for reinsurance. We are unable to predict the extent to which the
foregoing new, proposed or potential initiatives may affect the demand for our
products or the risks which may be available for us to consider offering
coverage.
INDUSTRY TRENDS
The reinsurance and insurance industries have been markedly cyclical,
characterized by periods of decreasing prices followed by periods of increasing
prices. The pricing environment is influenced by changes, sometimes substantial,
in the level of both demand and supply of insurance or reinsurance; often these
changes are the result of changes in the perception of risk following large
industry loss events. In particular, the catastrophe-exposed lines in which we
are a market leader are affected significantly by volatile and unpredictable
developments, including natural and man-made disasters, such as hurricanes,
windstorms, earthquakes, floods, fires, explosions, and acts of terrorism, such
as the World Trade Center disaster. The occurrence, or nonoccurrence, of
catastrophic events, the frequency and severity of which are inherently
unpredictable, affects both industry results and consequently prevailing market
prices of our products.
The following are certain industry trends that we are aware of:
o While pricing in the property markets generally increased significantly
after the World Trade Center disaster, the property markets are becoming
increasingly competitive, partially due to the lack of catastrophic losses
during 2002 and 2003 and partially due to the increase in the new capital
which entered the market subsequent to the World Trade Center disaster.
Accordingly, we are currently expecting prices in these markets to decline.
o Prices in the casualty markets are generally continuing to rise, but the
rate of increases are beginning to slow and in some cases there are price
decreases. However, as many companies continue to deal with legacy issues,
such as reserves for asbestos, environmental and casualty coverages of the
late 1990's, we believe segments of the market could stay firm for the near
future and offer us opportunities to grow our books of businesses.
o We believe that, even after the recent price increases, there are still
segments of the property and casualty markets that remain unattractive.
o The long term credit quality of insurance and reinsurance companies, and
the related credit ratings of those companies are becoming an increasing
concern of many insurance and reinsurance customers. We believe this will
offer opportunities to companies such as ours with strong credit ratings, a
seasoned management team, and a history of successful performance.
Subsequent to the World Trade Center disaster, a substantial amount of capital
entered the insurance and reinsurance markets both through investments in
established companies and through start-up ventures. It is possible that the new
capital in the market, and an environment with continued light catastrophe
losses, could cause further reductions in prices of our products. To the extent
that industry pricing of our products does not meet our hurdle rate, we would
plan to reduce our future underwriting activities thus resulting in reduced
premiums and a reduction in expected earnings.
MARKETING
REINSURANCE
We believe that our modeling and technical expertise, and the risk management
advice that we provide to our clients, has enabled us to become a provider of
first choice to our insurers and reinsurers worldwide. We market our Reinsurance
products worldwide exclusively through reinsurance brokers. We focus our
marketing efforts on targeted brokers and insurance and reinsurance companies.
We believe that our existing portfolio of business is a
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valuable asset and, therefore, we attempt to continually strengthen
relationships with our existing brokers and clients. We target prospects that
are capable of supplying detailed and accurate underwriting data and that
potentially add further diversification to our book of business.
We believe that primary insurers' and brokers' willingness to use a particular
reinsurer is based not just on pricing, but also on the financial security of
the reinsurer, its claim paying ability ratings, the quality of a reinsurer's
service, the reinsurer's willingness to design customized programs, its
long-term stability and its commitment to provide reinsurance capacity. We have
established a reputation with our brokers and clients for prompt response on
underwriting submissions, fast claims payments and a reputation for providing
creative solutions to our customers' needs. Since we selectively write large
lines on a limited number of property catastrophe reinsurance contracts, we can
establish reinsurance terms and conditions on those contracts that are
attractive in our judgment, make large commitments to the most attractive
programs and provide superior client responsiveness. We believe that our ability
to design customized programs and to provide advice on catastrophe risk
management has helped us to develop long-term relationships with brokers and
clients.
Our reinsurance brokers assess client needs and perform data collection,
contract preparation and other administrative tasks, enabling us to market our
reinsurance products cost effectively by maintaining a smaller staff. We believe
that by maintaining close relationships with brokers, we are able to obtain
access to a broad range of potential reinsureds. Subsidiaries and affiliates of
Marsh Inc., the Benfield Group Limited, the Willis Group and AON Corporation
accounted for approximately 24.7%, 24.4%, 15.7% and 15.6%, respectively, of our
gross reinsurance premiums written in 2003.
During 2003, our Reinsurance operations issued authorization for coverage on
programs submitted by 57 brokers worldwide. We received approximately 2,831
program submissions during 2003. Of these submissions, we issued authorizations
for coverage for 647 programs, or 22.9% of the program submissions received.
INDIVIDUAL RISK
Our Individual Risk products are offered through a select number of specialized
program managers and through brokered quota share relationships with other
insurance companies. Our Individual Risk products are also marketed through a
diverse group of surplus lines brokers operating primarily in
catastrophe-exposed states. Our financial security ratings, combined with our
reputation in the reinsurance marketplace, have enhanced our presence in the
Individual Risk markets. Our Individual Risk operations are structured to create
and maintain a comprehensive database of catastrophe-exposed property risks.
In program business opportunities, we establish relationships with program
managers, providing them with modeling expertise and risk analysis. We strive to
work closely with these program managers, with the goal of obtaining a long-term
competitive advantage in their respective niche markets.
We have also partnered with a limited number of insurance companies on a
quota-share reinsurance basis. In most cases, catastrophe risk is a substantial
component of the risk and we assist in evaluating and managing this risk.
EMPLOYEES
At December 31, 2003, we and our subsidiaries employed 135 people. We believe
that our strong employee relations are among our most significant strengths.
None of our employees are subject to collective bargaining agreements. We are
not aware of any current efforts to implement such agreements at any of our
subsidiaries.
A majority of our employees receive some form of equity-based incentive
compensation as part of their overall compensation package. At March 1, 2004,
our directors and executive officers beneficially owned approximately 9.2% of
our outstanding common shares. In addition, all of our directors and executive
officers are subject to stock ownership guidelines that require each to hold a
specified amount of stock.
Many of our Bermuda-based employees, including a majority of our senior
executives, are employed pursuant to work permits granted by the Bermuda
authorities. These permits expire at various times over the next few years.
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Bermuda government policy limits the duration of work permits to a total of six
years, which is subject to certain exemptions for key employees.
REGULATION
Bermuda Regulation
Registration. The Insurance Act 1978, as amended, and Related Regulations (the
"Insurance Act"), which regulates the business of our Bermuda insurance
subsidiaries, provides that no person may carry on an insurance business
(including the business of reinsurance) in or from within Bermuda unless
registered as an insurer under the Insurance Act by the Bermuda Monetary
Authority (the "BMA"). Renaissance Reinsurance and DaVinci are registered as
Class 4 insurers, and Glencoe is registered as a Class 3 insurer under the
Insurance Act. The BMA, in deciding whether to grant registration, has broad
discretion to act as it thinks fit in the public interest. The BMA is required
by the Insurance Act to determine whether the applicant is a fit and proper body
to be engaged in the insurance business and, in particular, whether it has, or
has available to it, adequate knowledge and expertise. In connection with the
applicant's registration, the BMA may impose conditions relating to the writing
of certain types of insurance. Further, the Insurance Act stipulates that no
person shall, in or from within Bermuda, act as an insurance manager, broker,
agent or salesman unless registered for the purpose by the BMA. Renaissance
Underwriting Managers is registered as an insurance manager under the Insurance
Act.
An Insurance Advisory Committee appointed by the Bermuda Minister of Finance
("the Minister") advises the BMA on matters connected with the discharge of its
functions, and sub-committees thereof supervise and review the law and practice
of insurance in Bermuda, including reviews of accounting and administrative
procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and liquidity
standards and auditing and reporting requirements and grants to the BMA powers
to supervise, investigate and intervene in the affairs of insurance companies.
Certain significant aspects of the Bermuda insurance regulatory framework are
set forth below.
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the BMA on certain grounds specified in the Insurance Act, including
failure of the insurer to comply with a requirement made of it under the
Insurance Act or, if in the opinion of the BMA, after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, both of
which, in the case of each of a Class 3 insurer and a Class 4 insurer, are
required to be filed annually with the BMA. The auditor must be approved by the
BMA as the independent auditor of the insurer. The approved auditor may be the
same person or firm which audits the insurer's financial statements and reports
for presentation to its shareholders.
Loss Reserve Specialist. Each Class 3 and Class 4 insurer is required to submit
an annual loss reserve opinion when filing the Annual Statutory Financial
Return. This opinion must be issued by the insurer's approved Loss Reserve
Specialist. The Loss Reserve Specialist, who will normally be a qualified
casualty actuary, must be approved by the BMA.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and surplus,
and detailed notes thereto). The insurer is required to give detailed
information and analyses regarding premiums, claims, reinsurance and
investments. The Statutory Financial Statements are not prepared in accordance
with GAAP and are distinct from the financial statements prepared for
presentation to the insurer's shareholders under the Companies Act 1981 of
Bermuda, which financial statements may be prepared in accordance with GAAP. The
insurer is required to submit the Annual Statutory Financial Statements as part
of the Annual Statutory Financial Return. The Statutory Financial Statements and
the Statutory Financial Return do not form part of the public records maintained
by the BMA.
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Minimum Solvency Margin and Restrictions on Dividends and Distributions. The
Insurance Act provides that the statutory assets of an insurer must exceed its
statutory liabilities by an amount greater than the prescribed minimum solvency
margin which varies with the type of registration of the insurer under the
Insurance Act and the insurer's net premiums written and loss reserve level. The
minimum solvency margin for a Class 4 insurer is the greatest of $100.0 million,
50% of net premiums written (with a credit for reinsurance ceded not exceeding
25% of gross premiums) and 15% of loss and loss expense provisions and other
insurance reserves. The minimum solvency margin for a Class 3 insurer is the
greatest of $1.0 million, 20% of the first $6.0 million of net premiums written
plus 15% of net premiums written in excess of $6.0 million, and 15% of loss and
loss expense provisions and other insurance reserves.
The Insurance Act mandates certain actions and filings with the BMA if a Class 3
insurer or a Class 4 insurer fails to meet and/or maintain the required minimum
solvency margin. Both Class 3 insurers and Class 4 insurers are prohibited from
declaring or paying any dividends if in breach of the required minimum solvency
margin or minimum liquidity ratio (the relevant margins) or if the declaration
or payment of such dividend would cause the insurer to fail to meet the relevant
margins. Where an insurer fails to meet its relevant margins on the last day of
any financial year, it is prohibited from declaring or paying any dividends
during the next financial year without the approval of the BMA. Further, a Class
4 insurer is prohibited from declaring or paying in any financial year dividends
of more than 25% of its total statutory capital and surplus (as shown on its
previous financial year's statutory balance sheet) unless it files (at least
seven days before payment of such dividends) with the BMA an affidavit stating
that it will continue to meet its relevant margins. Class 3 insurers and Class 4
insurers must obtain the BMA's prior approval for a reduction by 15% or more of
the total statutory capital as set forth in its previous year's financial
statements. These restrictions on declaring or paying dividends and
distributions under the Insurance Act are in addition to those under the
Companies Act 1981 which apply to all Bermuda companies.
Annual Statutory Financial Return. Class 3 and Class 4 insurers are required to
file with the BMA a Statutory Financial Return no later than four months after
the insurer's financial year end (unless specifically extended). The Statutory
Financial Return includes, among other items, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the Statutory
Financial Statements themselves; the opinion of the approved Loss Reserve
Specialist in respect of the loss and loss expense provisions and, only in the
case of Class 4 insurers, certain details concerning ceded reinsurance. The
solvency certificate and the declaration of the statutory ratios must be signed
by the principal representative and at least two directors of the insurer, who
are required to state whether the minimum solvency margin and, in the case of
the solvency certificate, the minimum liquidity ratio, have been met, and the
independent approved auditor is required to state whether in its opinion it was
reasonable for them to so state and whether the declaration of the statutory
ratios complies with the requirements of the Insurance Act. Where an insurer's
accounts have been audited for any purpose other than compliance with the
Insurance Act, a statement to that effect must be filed with the Statutory
Financial Return.
Supervision, Investigation and Intervention. The BMA may appoint an inspector
with extensive powers to investigate the affairs of an insurer if the BMA
believes that an investigation is required in the interest of the insurer's
policyholders or persons who may become policyholders. In order to verify or
supplement information otherwise provided to them, the BMA may direct an insurer
to produce documents or information relating to matters connected with the
insurer's business. Moreover, the BMA has the power to appoint professional
persons to prepare reports about registered insurers, such as Renaissance
Reinsurance, DaVinci and Glencoe. If it appears to the BMA to be desirable in
the interests of policyholders, the BMA may also exercise these powers in
relation to subsidiaries, parents and other affiliates of registered insurers.
If it appears to the BMA that there is a risk of the insurer becoming insolvent,
or that the insurer is in breach of the Insurance Act or any conditions or its
registration under the Insurance Act, the BMA may direct the insurer not to take
on any new insurance business; not to vary any insurance contract if the effect
would be to increase the insurer's liabilities; not to make certain investments;
to realize or not to realize certain investments; to maintain in, or transfer to
the custody of a specified bank, certain assets; not to declare or pay any
dividends or other distributions or to restrict the making of such payments
and/or to limit its premium income.
In addition to powers under the Insurance Act to investigate the affairs of an
insurer, the BMA may require certain information from an insurer (or certain
other persons) to be produced to them. The BMA has the power to assist
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other regulatory authorities, including foreign insurance regulatory
authorities, with their investigations involving insurance and reinsurance
companies in Bermuda if the BMA is satisfied that the assistance being requested
is in connection with the discharge of regulatory responsibilities and that such
cooperation is in the public interest.
Under the Companies Act, the Minister has been given powers to assist a foreign
regulatory authority which has requested assistance in connection with inquiries
being carried out by it in the performance of its regulatory functions. The
Minister's powers include requiring a person to furnish him with information, to
produce documents to him, to attend and answer questions and to give assistance
in connection with enquiries. The Minister must be satisfied that the assistance
requested by the foreign regulatory authority is for the purpose of its
regulatory functions and that the request is in relation to information in
Bermuda which a person has in his possession or under his control. The Minister
must consider, amongst other things, whether it is in the public interest to
give the information sought.
An insurer is required to maintain a principal office in Bermuda and to appoint
and maintain a principal representative in Bermuda. For the purpose of the
Insurance Act, the principal office of each of Renaissance Reinsurance, DaVinci
and Glencoe is at our offices at Renaissance House, 8-12 East Broadway, Pembroke
HM 19 Bermuda. Without a reason acceptable to the BMA, an insurer may not
terminate the appointment of its principal representative, and the principal
representative may not cease to act as such, unless thirty days' notice in
writing to the BMA is given of the intention to do so. It is the duty of the
principal representative, within thirty days of his reaching the view that there
is a likelihood of the insurer for which he acts becoming insolvent or its
coming to his knowledge, or his having reason to believe, that a reportable
event has occurred, to make a report in writing to the BMA setting out all the
particulars of the case that are available to him. Examples of such an event
include failure by the insurer to comply substantially with a condition imposed
upon the insurer by the BMA relating to a solvency margin or a liquidity or
other ratio.
Certain Other Bermuda Law Considerations. As "exempted companies", we and our
Bermuda subsidiaries are exempt from certain Bermuda laws restricting the
percentage of share capital that may be held by non-Bermudians. However, as
exempted companies, we and our Bermuda subsidiaries may not participate in
certain business transactions, including (1) the acquisition or holding of land
in Bermuda (except that required for their business and held by way of lease or
tenancy for terms of not more than 50 years) without required authorization, (2)
the taking of mortgages on land in Bermuda to secure an amount in excess of
$50,000 without the consent of the Minister, (3) the acquisition of any bonds or
debentures secured by any land in Bermuda, other than certain types of Bermuda
government securities or securities issued by Bermuda public authorities or (4)
the carrying on of business of any kind in Bermuda, except in furtherance of our
business carried on outside Bermuda or under license granted by the Minister.
Generally it is not permitted without a special license granted by the Minister
to insure Bermuda domestic risks or risks of persons of, in or based in Bermuda.
We and our Bermuda subsidiaries must comply with the provisions of the Companies
Act regulating the payment of dividends and making distributions from
contributed surplus. A company may not declare or pay a dividend, or make a
distribution out of contributed surplus, if there are reasonable grounds for
believing that: (a) the company is, or would after the payment be, unable to pay
its liabilities as they become due; or (b) the realizable value of the company's
assets would thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts.
U.S. Regulation
Reinsurance Regulation. Our Bermuda operations consist of Renaissance
Reinsurance, DaVinci, Glencoe and Lantana. Renaissance Reinsurance and DaVinci
are Bermuda-based companies that operate as reinsurers. Although neither company
is admitted to transact the business of insurance in any jurisdiction except
Bermuda, the insurance laws of each state of the U.S. regulate the sale of
reinsurance to ceding insurers authorized in the state by non-admitted alien
reinsurers, such as Renaissance Reinsurance or DaVinci, acting from locations
outside the state. Rates, policy terms and conditions of reinsurance agreements
generally are not subject to regulation by any governmental authority. A primary
insurer ordinarily will enter into a reinsurance agreement, however, only if it
can obtain credit for the reinsurance ceded on its statutory financial
statements. In general, regulators permit ceding insurers to take credit for
reinsurance in the following circumstances:
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o if the reinsurer is licensed in the state in which the primary insurer is
domiciled or, in some instances, in certain states in which the primary
insurer is licensed;
o if the reinsurer is an "accredited" or otherwise approved reinsurer in
the state in which the primary insurer is domiciled or, in some instances,
in certain states in which the primary insurer is licensed;
o in some instances, if the reinsurer (a) is domiciled in a state that is
deemed to have substantially similar credit for reinsurance standards as
the state in which the primary insurer is domiciled and (b) meets certain
financial requirements; or
o if none of the above apply, to the extent that the reinsurance
obligations of the reinsurer are collateralized appropriately, typically
through the posting of a letter of credit for the benefit of the primary
insurer or the deposit of assets into a trust fund established for the
benefit of the primary insurer.
As alien companies, our Bermuda insurers collateralize their reinsurance
obligations to U.S. insurance companies. With some exceptions, the sale of
insurance or reinsurance from within a jurisdiction where the insurer is not
admitted to do business is prohibited. Neither Renaissance Reinsurance nor
DaVinci intend to maintain an office or to solicit, advertise, settle claims or
conduct other insurance activities in any jurisdiction other than Bermuda where
the conduct of such activities would require that each company be so admitted.
Excess and Surplus Lines Regulation. Glencoe and Lantana, both domiciled in
Bermuda, are not licensed in the U.S. but are eligible to offer coverage in the
U.S. exclusively in the surplus lines market. Glencoe is eligible to write
surplus lines primary insurance in 51 jurisdictions of the U.S. and is subject
to the surplus lines regulation and reporting requirements of those
jurisdictions. In accordance with certain provisions of the National Association
of Insurance Commissioners ("NAIC") Nonadmitted Insurance Model Act, which
provisions have been adopted by a number of states, Glencoe has established, and
is required to maintain, a trust funded with a minimum of $20.0 million as a
condition of its status as an eligible, non-admitted insurer in the U.S. Lantana
is currently eligible as a surplus lines insurer in 47 jurisdictions of the
U.S., and is subject to the surplus lines regulation and reporting requirements
of those jurisdictions.
The regulation of surplus lines insurance differs significantly from the
licensed or "admitted" market. The regulations governing the surplus lines
market have been designed to facilitate the procurement of coverage, through
specially licensed surplus lines brokers, for hard-to-place risks that do not
fit standard underwriting criteria and are otherwise eligible to be written on a
surplus lines basis. Most particularly, surplus lines regulation generally
provides for more flexible rules relating to insurance rates and forms. However,
strict regulations apply to surplus lines placements under the laws of every
state, and state insurance regulations generally require that a risk must be
declined by three admitted carriers before it may be placed in the surplus lines
market. Initial eligibility requirements and annual requalification standards
and filing obligations must also be met. In most states, surplus lines brokers
are responsible for collecting and remitting the surplus lines tax payable to
the state where the risk is located. Companies such as Glencoe and Lantana which
conduct business on a surplus lines basis in a particular state are generally
exempt from that state's guaranty fund laws.
Admitted Market Regulation. Our admitted U.S. operations consist of Stonington
and Stonington Lloyd's Insurance Company ("Stonington Lloyd's"), both Texas
domiciled insurers. As licensed insurers operating in the "admitted" market,
these companies are subject to extensive regulation under U.S. statutes. The
extent of regulation varies from state to state but generally has its source in
statutes that delegate regulatory, supervisory and administrative authority to a
department of insurance in each state. Among other things, state insurance
commissioners regulate insurer solvency standards, insurer licensing, authorized
investments, premium rates, restrictions on the size of risks that may be
insured under a single policy, loss and expense reserves and provisions for
unearned premiums, deposits of securities for the benefit of policyholders,
policy form approval, and market conduct regulation including both underwriting
and claims practices. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and quarterly financial reports. The Texas Department of Insurance
retains primary regulatory authority for Stonington and Stonington Lloyd's.
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In general, licensed U.S. insurers such as Stonington and Stonington Lloyd's
must file with the state departments of insurance where they insure risks all
rates for directly underwritten insurance. Licensed U.S. insurers are required
to participate in the guaranty associations of the states where they conduct
business. Such participation can result in assessments, up to prescribed limits,
for losses incurred by policyholders as a result of the impairment or insolvency
of unaffiliated insurance companies. Additionally, some states require licensed
insurers to participate in assigned risk plans which provide coverage for
automobile insurance and other lines for insureds that are unable to obtain
insurance in the open market. Participation in assigned risk pools may take the
form of reinsuring a portion of a pool of policies or directly issuing policies
to insureds. An insurer's participation in these plans is typically calculated
based on the amount of premium written by the insurer on a voluntary basis for
that line of coverage in a prior year. Assigned risk pools generally produce
losses which result in assessments to insurers writing the same lines on a
voluntary basis. We do not expect the amount of any such guaranty fund
assessments, if any, or other assessments to be paid by us in 2004 to be
material.
Holding Company Regulation. We and our U.S. insurance subsidiaries are subject
to regulation under the insurance holding company laws of various jurisdictions.
The insurance holding company laws and regulations vary from jurisdiction to
jurisdiction, but generally require an insurance holding company, and insurers
that are subsidiaries of insurance holding companies, to register with state
regulatory authorities and to file with those authorities certain reports,
including information concerning their capital structure, ownership, financial
condition, certain intercompany transactions and general business operations.
Further, in order to protect insurance company solvency, state insurance
statutes typically place limitations on the amount of dividends or other
distributions payable by insurance companies. Texas, Stonington's and Stonington
Lloyd's state of domicile, currently requires that dividends be paid only out of
earned statutory surplus and limits the annual amount of dividends payable
without the prior approval of the Texas Insurance Department to the greater of
10% of statutory capital and surplus at the end of the previous calendar year or
100% of statutory net income from operations for the previous calendar year. The
maximum dividend payable from Stonington in 2004 without the prior approval of
the Texas insurance department is $2.6 million. These insurance holding company
laws also impose prior approval requirements for certain transactions with
affiliates. In addition, as a result of our ownership of Stonington, under the
terms of applicable state statutes, any person or entity desiring to purchase
more than 10% of our outstanding voting securities is required to obtain prior
regulatory approval for the purchase.
Terrorism. On November 26, 2002, the President of the U.S. signed into law the
Terrorism Risk Insurance Act of 2002 ("TRIA"), providing that through 2005, the
federal government will share with the insurance industry the risk of loss from
future terrorist attacks. Each participating insurance company must pay covered
losses equal to a deductible based on a percentage of direct earned premiums for
commercial insurance lines from the previous calendar year. The deductible
ranges from 1.0% on the date of enactment to 15.0% in 2005. For losses in excess
of a company's deductible, the federal government will cover 90.0% of the excess
losses, while companies retain the remaining 10.0%. Losses covered by the
program will be capped annually at $100.0 billion.
Primary insurance companies providing commercial property and casualty insurance
in the U.S., such as Stonington, Stonington Lloyd's, Glencoe and Lantana, are
required to participate in the TRIA program. TRIA also requires that subject
insurers comply with mandatory offer requirements for terrorism coverage. These
offers may be rejected by insureds. The Secretary of the Department of the
Treasury has discretion to extend this offer requirement until December 31,
2005. TRIA generally does not purport to govern the obligations of reinsurers,
such as Renaissance Reinsurance and DaVinci, under reinsurance contracts. There
is substantial uncertainty as to whether Congress will extend the program beyond
its scheduled expiration in 2005, and it is possible that the non-renewal of
TRIA could adversely affect the industry.
NAIC Ratios. The NAIC has established 11 financial ratios to assist state
insurance departments in their oversight of the financial condition of licensed
U.S. insurance companies operating in their respective states. The NAIC's
Insurance Regulatory Information System ("IRIS") calculates these ratios based
on information submitted by insurers on an annual basis and shares the
information with the applicable state insurance departments. Generally, an
insurance company will be subject to regulatory scrutiny if it falls outside the
usual ranges with respect to four or more of the ratios.
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Codification of Statutory Accounting Principles. In their ongoing effort to
improve solvency regulations, the NAIC and individual states have enacted
certain laws and statutory financial statement reporting requirements. These
regulatory initiatives, and the overall focus on solvency, may intensify the
restructuring and consolidation of the insurance industry. We believe we will be
adequately positioned to compete in an environment of more stringent regulation.
Risk-Based Capital. The NAIC has implemented a risk-based capital ("RBC")
formula and model law applicable to all licensed U.S. property/casualty
insurance companies. The RBC formula is designed to measure the adequacy of an
insurer's statutory surplus in relation to the risks inherent in its business.
Such analysis permits regulators to identify inadequately capitalized insurers.
The RBC formula develops a risk adjusted target level of statutory capital by
applying certain factors to insurers' business risks such as asset risk,
underwriting risk, credit risk and off-balance sheet risk. The target level of
statutory surplus varies not only as a result of the insurer's size, but also on
the risk profile of the insurer's operations.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 ("GLBA") permits
mergers that combine commercial banks, insurers and securities firms under one
holding company, a "financial holding company." Until passage of the GLBA, the
Glass-Steagall Act of 1933, as amended, had limited the ability of banks to
engage in securities-related businesses, and the Bank Holding Company Act of
1956, as amended, had restricted banks from being affiliated with insurers. As a
result of GLBA, the ability of banks to affiliate with insurers may affect our
U.S. subsidiaries' product lines by substantially increasing the number, size
and financial strength of potential competitors. Privacy provisions of GLBA
became fully effective in 2001. These provisions established consumer
protections regarding the security and confidentiality of nonpublic personal
information and require full disclosure of the privacy policies of financial
institutions, including U.S. insurers, to their consumer customers.
Legislative and Regulatory Proposals. Government intervention in the insurance
and reinsurance markets, both in the U.S. and worldwide, continues to evolve.
Federal and state legislators have considered numerous government initiatives.
While we cannot predict the exact nature, timing, or scope of other such
proposals, if adopted they could adversely affect our business by:
o providing government supported insurance and reinsurance capacity in
markets and to consumers that we target;
o requiring our participation in pools and guaranty associations;
o regulating the terms of insurance and reinsurance policies; or
o disproportionately benefiting the companies of one country over those of
another.
In addition, the expansion of our primary insurance operations, together with
the potential of further expansion into additional insurance markets, could
expose us or our subsidiaries to increasing regulatory oversight. However, we
intend to continue to conduct our operations so as to minimize the likelihood
that Renaissance Reinsurance, DaVinci, Top Layer, Lantana or Glencoe will become
subject to U.S. regulation.
RISK FACTORS
Factors that could cause our actual results to differ materially from those in
the forward-looking statements contained in this Form 10-K and other documents
we file with the Securities and Exchange Commission include the following:
25
Our exposure to catastrophic events could cause our financial results to vary
significantly from one period to the next.
Our largest product is property catastrophe reinsurance. We also sell lines of
specialty reinsurance and certain individual risk products that are also exposed
to catastrophe risk. We therefore have a large overall exposure to natural and
man-made disasters, such as earthquakes, hurricanes, winter storms, freezes,
floods, fires, tornados and other natural or man-made disasters, such as acts of
terrorism. As a result, our operating results have historically been, and we
expect will continue to be, significantly affected by relatively few events of
high magnitude.
Claims from catastrophic events could cause substantial volatility in our
financial results for any fiscal quarter or year and adversely affect our
financial condition or results of operations. Our ability to write new business
could also be impacted. We believe that increases in the value and geographic
concentration of insured property and the effects of inflation will increase the
severity of claims from catastrophic events in the future.
From time to time, we may have greater exposures in some geographic areas than
our overall share of the worldwide market would suggest. Accordingly, if
catastrophes were to occur in these areas, we could experience worse results
than our competitors.
We may fail to execute our growth strategy, which would impair our future
financial results.
Historically, our principal product has been property catastrophe reinsurance.
Our growth in our specialty reinsurance and Individual Risk lines of business
presents us with new and expanded challenges and risks which we may not manage
successfully. We are not as experienced in these expanded lines of business as
we are in property catastrophe reinsurance; in particular, we lack a substantial
claim history. Businesses in initial or early stages of development present
substantial business, financial and operational risks and may suffer significant
losses. For example, in our newer businesses we are seeking to develop client
and customer relationships, build operating procedures, hire staff, install
management information and other systems, as well as taking numerous other steps
to implement our strategies. Our specialty reinsurance and Individual Risk
businesses will require us to develop new expertise in areas such as contract
and policy wordings and claims management.
If we fail to develop the necessary infrastructure, or otherwise fail to execute
our strategy, our results from these new lines of business will likely suffer,
perhaps substantially, and, our future financial results may be adversely
affected.
This recent and planned future expansion has placed increased demands on our
financial, managerial and human resources. For example, we may need to attract
additional professionals to, or expand our facilities in, Bermuda, a small
jurisdiction with limited resources. To the extent we are unable to attract
additional professionals, our financial, managerial and human resources may be
strained. The growth in our staff and infrastructure also creates more
managerial responsibilities for our current senior executives, potentially
diverting their attention from the underwriting and business origination
functions for which they are also responsible. Our future profitability depends
in part on our ability to further develop our resources and effectively manage
this expansion. Our inability to achieve such development or effective
management may impair our future financial results.
Our utilization of program managers and other third parties to support our
business exposes us to operational and financial risks.
Our Individual Risk operations rely on program managers, and other agents and
brokers participating in our programs, to produce and service a substantial
portion of our operations in this segment. In these arrangements, we typically
grant the program manager the right to bind us to newly issued insurance
policies, subject to underwriting guidelines we provide and other contractual
restrictions and obligations. Should our managers issue policies that contravene
these guidelines, restrictions or obligations, we could nonetheless be deemed
liable for such policies. Although we would intend to resist claims that exceed
or expand on our underwriting intention, it is possible that we would not
prevail in such an action, or that our program manager would be unable to
substantially indemnify us for their contractual breach. We also rely on our
managers, or other third parties we retain, to collect premiums and to pay valid
claims. This exposes us to their credit and operational risk, without
necessarily relieving us of our obligations to potential insureds. We could also
be exposed to potential liabilities relating to the claims practices of
26
the third party administrators we have retained to manage substantially all of
the claims activity that we expect to arise in our program operations. Although
we have implemented monitoring and other oversight protocols, we can not assure
you that these measures will be sufficient to alleviate all of these exposures.
We are also subject to the risk that our successful program managers will not
renew their programs with us. Our contracts are generally for defined terms of
as little as one year, and either party can cancel the contract in a relatively
short period of time. While we believe our arrangements offer numerous benefits
to our program participants, we cannot assure you we will retain the programs
that produce profitable business or that our insureds will renew with us.
Failure to retain or replace these producers would impair our ability to execute
our growth strategy, and our financial results could be adversely affected.
We could face unanticipated losses from war, terrorism and political unrest, and
these or other unanticipated losses could have a material adverse effect on our
financial condition and results of operations.
We may have substantial exposure to unexpected, large losses resulting from
future man-made catastrophic events, such as acts of war, acts of terrorism and
political instability, or from other perils. These risks are inherently
unpredictable, and future periods may evidence increased frequency and severity
of losses resulting from these catastrophic events. It is difficult to predict
the timing of such events with statistical certainty or to estimate the amount
of loss any given occurrence will generate. Although we believe our risk
management systems are effective in helping us to understand and manage our
aggregate risk portfolio, it is possible that our models have not adequately
captured some catastrophe risks or other risks. We believe it is impossible to
eliminate completely our exposure to unforeseen or unpredictable events.
With respect to our reinsurance operations we do not separately evaluate each of
the individual risks assumed under our reinsurance contracts and, accordingly,
like other reinsurers, are heavily dependent on the original underwriting
decisions made by our ceding companies. We are therefore subject to the risk
that our clients may not have adequately evaluated the risks to be reinsured, or
that the premiums ceded to us will not adequately compensate us for the risks we
assume. Likewise, in our individual risk operations we are dependent on
information provided by third parties, such as our program managers, claims
administrators, and quota share cedants.
Our claims and claim expense reserves are subject to inherent uncertainties.
Our claims and claim expense reserves reflect our estimates using actuarial and
statistical projections at a given point in time, and our expectations of the
ultimate settlement and administration costs of claims incurred. Although we use
actuarial and computer models as well as historical reinsurance and insurance
industry loss statistics, we also rely heavily on management's experience and
management's judgment to assist in the establishment of appropriate claim
reserves. However, because of the many assumptions and estimates involved in
establishing reserves, the reserving process is inherently uncertain.
Our growing casualty business is expected to produce claims which frequently can
only be resolved through lengthy and unpredictable litigation. The measures
required to resolve such claims, including the adjudication process, present
more reserve challenges than non-casualty property losses (the latter of which
tend to be reported comparatively more promptly and to be settled more often
within a relatively shorter period of time). For both our growing casualty
business, and our traditional property catastrophe business, actual claims and
claim expenses paid may deviate, perhaps substantially, from the reserve
estimates reflected in our financial statements.
We expect that some of our assumptions or estimates will prove to be inaccurate,
and our actual claims and claim expenses paid to differ, perhaps substantially,
from the reserve estimates reflected in our financial statements. To the extent
that our actual claims and claim expenses exceed our expectations, we would be
required to increase claims and claim expense reserves. This would reduce our
net income by a corresponding amount in the period in which the deficiency is
identified. In reserving for our specialty reinsurance and Individual Risk
coverages we do not have the benefit of a significant amount of our own
historical experience in these lines.
Unlike the claims and claim expense reserves of U.S. insurers, the claims and
claim expense reserves established by our Bermuda companies are not regularly
examined by insurance regulators.
27
Emerging claim and coverage issues could adversely affect our business.
Unanticipated developments in the law as well as changes in social and
environmental conditions could potentially result in unexpected claims for
coverage under our insurance and reinsurance contracts. These developments and
changes may adversely affect us, perhaps materially. For example, we could be
subject to developments that impose additional coverage obligations on us beyond
our underwriting intent, or to increases in the number or size of claims to
which we are subject. With respect to our casualty businesses, these legal,
social and environmental changes may not become apparent until some time after
their occurrence. Our exposure to these uncertainties could be exacerbated by
the increased willingness of some market participants to dispute insurance and
reinsurance contract and policy wordings.
The full effects of these and other unforeseen emerging claim and coverage
issues are extremely hard to predict. As a result, the full extent of our
liability under our coverages, and in particular our casualty reinsurance
contracts, may not be known for many years after a contract is issued. Our
exposure to this uncertainty will grow as our "long-tail" casualty businesses
grow, because in these lines claims can typically be made for many years, making
them more susceptible to these trends than our traditional catastrophe business,
which is more typically "short-tail." In addition, we could be adversely
affected by the growing trend of plaintiffs targeting participants in the
property-liability insurance industry in purported class action litigation
relating to claim handling and other practices. Although we are seeking to add
professional staff and systems to improve our contracts and claims capabilities,
we may fail to mitigate our exposure to these growing uncertainties.
Pricing and terms for our products may decline, which could affect our
profitability.
Supply and demand for reinsurance and insurance depends on numerous factors,
including the frequency and severity of catastrophic events, perceptions of
risk, levels of capacity, general economic conditions and underwriting results
of other insurers and reinsurers. All of these factors fluctuate and may
contribute to price declines generally in the reinsurance and insurance
industries. Our recent growth in 2002 and 2003 related in part to overall
industry pricing, as relatively more business met our hurdle rates. However, we
expect premium rates and other terms and conditions of trade to vary in the
future, and currently believe that overall industry pricing for many of our
products will not improve in 2004, and could decline in some areas. If demand
for our products falls or the supply of competing capacity rises, we expect our
growth to be adversely affected, and our profitability could be affected as
well. In particular, we might lose existing customers or decline new business,
which we might not regain when industry conditions improve.
We operate in a highly competitive environment.
The reinsurance industry is highly competitive. We compete, and will continue to
compete, with major U.S. and non-U.S. insurers and property catastrophe
reinsurers, including other Bermuda-based property catastrophe reinsurers.
Following the September 11th tragedy, a number of new companies were formed to
compete in the reinsurance markets. A number of these new companies were formed
in Bermuda. In addition, a number of existing market participants raised new
capital, thereby strengthening their ability to compete. In the future, capacity
levels and competition could contribute to declines in overall industry pricing
levels.
We believe that our principal competitors in the property catastrophe
reinsurance market include other companies active in the Bermuda market,
including Ace Limited, Everest Re Group Ltd., IPC Holdings, Ltd., PartnerRe Ltd.
and XL Capital Ltd. We also compete with certain Lloyd's syndicates active in
the London market, as well as with a number of other industry participants, such
as American International Group, Inc., Berkshire Hathaway, Munich Re Group and
Swiss Re. In addition, there are other new Bermuda reinsurers with whom we
compete, such as Allied World Assurance Company, Arch Capital Group, Axis
Capital Holdings, Endurance Specialty Holdings, Montpelier Re Holdings and
Platinum. As our business evolves over time we expect our competitors to change
as well.
Many of our competitors have greater financial, marketing and management
resources than we do. In addition, we may not be aware of other companies that
may be planning to enter the property catastrophe reinsurance market or of
existing companies which may be planning to raise additional capital. We also
have recently seen the creation of alternative products from capital market
participants that are intended to compete with reinsurance products and
28
which could impact the demand for traditional catastrophe reinsurance. We cannot
predict what effect any of these developments may have on our businesses.
The businesses in which our Individual Risk unit operates are also highly
competitive. Primary insurers compete on the basis of factors including
distribution channels, product, price, service and financial strength. Many of
our primary insurance competitors are larger and more established than we are
and have greater financial resources and consumer recognition. We seek primary
insurance pricing that will result in adequate returns on the capital allocated
to our primary insurance business. We may lose primary insurance business to
competitors offering competitive insurance products at lower prices.
Political, regulatory and industry initiatives could adversely affect our
business.
The insurance and reinsurance regulatory framework is subject to heavy scrutiny
by the U.S. and individual state governments as well as an increasing number of
international authorities. Government regulators are generally concerned with
the protection of policyholders to the exclusion of other constituencies,
including shareholders. Increasingly, governmental authorities in both the U.S.
and worldwide seem to us to be interested in the potential risks posed by the
reinsurance industry as a whole, and to commercial and financial systems in
general. While we do not believe these inquiries have identified meaningful new
risks posed by the reinsurance industry to the financial system or to
policyholders, and we cannot predict the exact nature, timing or scope of
possible governmental initiatives, we believe it is likely there will be
increased regulatory intervention in our industry in the future.
For example, we could be adversely affected by proposals to:
o provide insurance and reinsurance capacity in markets and to consumers that
we target;
o require our participation in industry pools and guaranty associations;
o increasingly mandate the terms of insurance and reinsurance policies; or
o disproportionately benefit the companies of one country over those of
another.
The growth of our primary insurance business, which is regulated more
comprehensively than reinsurance, increases our exposure to adverse political,
judicial and legal developments. Moreover, our exposure to potential regulatory
initiatives could be heightened by the fact that our principal operating
companies are domiciled in, and operate exclusively from, Bermuda. For example,
Bermuda, a small jurisdiction, may be disadvantaged in participating in
global or gross border regulatory matters as compared with larger jurisdictions
such as the U.S. or the leading European Union countries. In addition, Bermuda,
which is currently an overseas territory of the United Kingdom ("U.K."), may
consider changes to its relationship with the U.K. in the future. These changes
could adversely affect Bermuda's position in respect of future regulatory
initiatives, which could impact us commercially.
A decline in our investment performance could reduce our profitability.
We derive a significant portion of our income from our invested assets. As a
result, our financial results depend in part on the performance of our
investment portfolio, which contains fixed maturity securities, such as bonds
and mortgage-backed securities. Our operating results are subject to a variety
of investment risks, including risks relating to general economic conditions,
market volatility, interest rate fluctuations, foreign currency risk, liquidity
risk and credit and default risk. Additionally, with respect to certain of our
investments, we are subject to pre-payment or reinvestment risk.
The market value of our fixed maturity investments will be subject to
fluctuation depending on changes in various factors, including prevailing
interest rates. As a result of large reinsurance or insurance losses, we may be
forced to liquidate our investments at times and prices that are not optimal,
which could have a material adverse effect on the performance of our investment
portfolio.
29
Increases in interest rates could cause the market value of our investment
portfolio to decrease, perhaps substantially. Conversely, a decline in interest
rates could reduce our investment yield, which would reduce our overall
profitability. Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. Any measures we take
that are intended to manage the risks of operating in a changing interest rate
environment may not effectively mitigate such interest rate sensitivity.
In recent years we have increased our allocation to other investments which have
different risk characteristics than our traditional fixed maturity securities
and short-term investment portfolios. These other investments include hedge fund
investments, a fund that invests in senior secured bank loans, a European high
yield credit fund and private equity partnerships (collectively "Investment
Funds"). Also included in other investments are investments in a medium term
note, representing an interest in a pool of European fixed income securities,
catastrophe bonds and miscellaneous other investments. Our percentage allocation
to these other investments will likely increase. The performance of these other
investments had a positive impact on the performance of our investment portfolio
in 2003.
These other investments are recorded on our consolidated balance sheet at fair
value. The fair value of the Investment Funds is generally established on the
basis of the net valuation criteria established by the managers of such
Investment Funds. These net valuations are determined based upon the valuation
criteria established by the governing documents of the Investment Funds. Due to
a lag in the valuations reported by the fund mangers the majority of our
Investment Funds are reported on a one month or one quarter lag. Such valuations
may differ significantly from the values that would have been used had ready
markets existed for the shares or partnership interests of the Investment Funds.
Many of the Investment Funds are subject to restrictions on redemptions which
are determined by the governing documents and limit our ability to liquidate
these investments in the short term. These Investments Funds expose us to market
risks including interest rate risk, foreign currency risk, equity price risk and
credit risk. We are unable to quantify these risks as we do not have timely
access to the investments underlying each Investment Fund. To the extent these
risks move against us it will result in a material adverse change to our
investment performance. The performance of these Investment Funds is also
dependent on the individual investment managers and the Investment Fund's
investment strategies. It is possible that the investment managers will leave
and/or the investment strategies become ineffective. The result of either of the
foregoing would be a material adverse change to our investment performance.
U.S. taxing authorities could contend that our Bermuda subsidiaries are
subject to U.S. corporate income tax.
If the U.S. Internal Revenue Service (the "IRS") were to contend successfully
that Renaissance Reinsurance, Glencoe, DaVinci or Top Layer Re is engaged in a
trade or business in the U.S., Renaissance Reinsurance, Glencoe, DaVinci or Top
Layer Re would, to the extent not exempted from tax by the U.S.-Bermuda income
tax treaty, be subject to U.S. corporate income tax on that portion of its net
income treated as effectively connected with a U.S. trade or business, as well
as the U.S. corporate branch profits tax. Although we would vigorously resist
the imposition of any such tax, if we were ultimately held to be subject to this
taxation, our earnings would correspondingly decline.
In addition, benefits of the U.S.-Bermuda income tax treaty which may limit any
such tax to income attributable to a permanent establishment maintained by
Renaissance Reinsurance, Glencoe, DaVinci or Top Layer Re in the U.S. are only
available to any of Renaissance Reinsurance, Glencoe, DaVinci or Top Layer Re if
more than 50% of its shares are beneficially owned, directly or indirectly, by
individuals who are Bermuda residents or U.S. citizens or residents. Renaissance
Reinsurance, Glencoe, DaVinci or Top Layer Re may not be able to continually
satisfy such beneficial ownership test or be able to establish its satisfaction
to the IRS. Finally, it should be noted that it is unclear whether the income
tax treaty (assuming satisfaction of the beneficial ownership test) applies to
income other than premium income, such as investment income.
Because we depend on a few reinsurance brokers for a large portion of revenue,
loss of business provided by them could adversely affect us.
We market our reinsurance products worldwide exclusively through reinsurance
brokers. Four brokerage firms accounted for 80.4%, 71.1%, and 76.9% of our net
premiums written for the years ended December 31, 2003, 2002
30
and 2001, respectively. Subsidiaries and affiliates of Marsh Inc., the Benfield
Group Limited, the Willis Group and AON Corporation accounted for approximately
24.7%, 24.4%, 15.7% and 15.6%, respectively, of our Reinsurance segment gross
written premiums in 2003. The loss of all or a substantial portion of the
business provided by these brokers could have a material adverse effect on us.
Our ability to market our products could decline as a result of any loss of the
business provided by these brokers and it is possible that our premiums written
would decrease.
Our reliance on reinsurance brokers exposes us to their credit risk.
In accordance with industry practice, we frequently pay amounts owed on claims
under our policies to reinsurance brokers, and these brokers, in turn, pay these
amounts over to the insurers that have reinsured a portion of their liabilities
with us (we refer to these insurers as ceding insurers). In some jurisdictions,
if a broker were to fail to make such a payment, we might remain liable to the
ceding insurer for the deficiency. Conversely, in certain jurisdictions, when
the ceding insurer pays premiums for these policies to reinsurance brokers for
payment over to us, these premiums are considered to have been paid and the
ceding insurer will no longer be liable to us for those amounts, whether or not
we have actually received the premiums. Consequently, in connection with the
settlement of reinsurance balances, we assume a degree of credit risk associated
with brokers around the world.
A decline in the ratings assigned to our claims-paying ability would adversely
impact our business.
Third party rating agencies assess and rate the claims-paying ability of
reinsurers and insurers, such as Renaissance Reinsurance, our Glencoe Group
carriers, Top Layer Re and DaVinci. These ratings are based upon criteria
established by the rating agencies. Periodically the rating agencies evaluate us
to confirm that we continue to meet the criteria of the ratings previously
assigned to us. The claims-paying ability ratings assigned by rating agencies to
reinsurance or insurance companies are based upon factors relevant to
policyholders and are not directed toward the protection of investors.
The rating agencies may downgrade or withdraw their claims-paying ability
ratings in the future if we do not continue to meet the criteria of the ratings
previously assigned to us. Our ability to compete with other reinsurers and
insurers, and our results of operations, could be materially adversely affected
by any such ratings downgrade. For example, following a ratings downgrade we
might lose clients to more highly rated competitors or retain a lower share of
the business of our clients. The rating of Top Layer Re is dependent in large
part upon the rating of State Farm, who provides Top Layer Re with $3.9 billion
of stop loss reinsurance.
As is customary in our industry, a portion of our reinsurance policies provide
our clients with the right to cancel or not renew our policies in the event our
claims-paying ability ratings are downgraded. We cannot precisely estimate the
amount of premium that would be at risk to this development, as this amount
depends on the particular facts and circumstances at the time, including the
degree of the downgrade, the time elapsed on the impacted in-force policies, and
the effects of any related catastrophic event on the industry generally. In the
event any of these provisions are triggered, we will vigorously seek to retain
our clients. However, we cannot assure you that our premiums would not decline,
perhaps materially, following a ratings downgrade.
We could be adversely affected if TRIA is not renewed.
In response to the tightening of supply in certain insurance and reinsurance
markets resulting from, among other things, the September 11th tragedy, TRIA was
enacted to ensure the availability of commercial insurance coverage for
terrorist acts in the U.S. This law established a federal assistance program
through the end of 2005 to help the commercial property and casualty insurance
industry cover claims related to future terrorism related losses and required
that coverage for terrorist acts be offered by insurers. It is possible that
TRIA will not be renewed following 2005, or could be adversely amended, which
could adversely affect the insurance industry if a material subsequent event
occurred. Given these uncertainties, we are currently unable to determine with
certainty the impact that TRIA's non-renewal could have on us.
The covenants in our debt agreements limit our financial and operational
flexibility, which could have an adverse effect on our financial condition.
31
We have incurred indebtedness, and may incur additional indebtedness in the
future. At December 31, 2003, we had an aggregate of approximately $350 million
of indebtedness outstanding, consisting of $100 million of 5.875% Senior Notes
due 2013, $150 million of 7.0% Senior Notes due 2008 and a $100 million bank
loan incurred and fully drawn by our consolidated subsidiary, DaVinciRe Holdings
Ltd. ("DaVinciRe"). RenaissanceRe is also party to a $400 million syndicated
revolving credit agreement, none of which was drawn at December 31, 2003.
In addition, we have issued $100 million aggregate liquidation amount of
mandatorily redeemable capital securities ("Capital Securities") through the
Capital Trust holding solely $103.1 million of the Company's 8.54% junior
subordinated debentures due March 1, 2027. Because we hold $15.4 million of
these securities and also hold $3.1 million of equity interest in the Capital
Trust, our net obligation is $84.6 million.
Our insurance and reinsurance subsidiaries maintain letter of credit facilities
in connection with their insurance and reinsurance business. The largest of
these is a secured letter of credit facility established under a reimbursement
agreement entered into in December 2002 by certain of RenaissanceRe's
subsidiaries and affiliates. The obligations of each of RenaissanceRe's
subsidiaries and affiliates party to the reimbursement agreement are secured by
certain collateral, including cash, eligible high-quality marketable securities
and redeemable preference shares of RIHL. The facility was initially in the
amount of $385 million and scheduled to expire on November 15, 2003 but was
increased to $485 million in January 2004 and extended to March 31, 2004 prior
to its expiration date. On March 12, 2004, we accepted a commitment letter from
Wachovia Bank, National Association ("Wachovia") and Wachovia Securities, Inc.
("Wachovia Securities") in which Wachovia confirmed its commitment to provide up
to $150 million of an amended facility in the amount of $585 million and having
a term of 365 days from closing. Wachovia Securities also agreed to use its
reasonable best efforts to arrange for a syndicate of lenders to provide the
balance of the increased facility. The syndication and closing of the facility
are subject to customary terms and conditions for letter of credit facilities of
this type and size and Wachovia's commitment is also subject to the receipt of
commitments from other lenders for the balance of the increased facility. At
December 31, 2003, the aggregate face amount of letters of credit outstanding
under the reimbursement agreement was $281.5 million and under all the letter of
credit facilities was $346.9 million.
The agreements covering our indebtedness, particularly our bank loans, contain
numerous covenants that limit our ability, among other things, to borrow money,
make particular types of investments or other restricted payments, sell assets,
merge or consolidate. These agreements also require us to maintain specific
financial ratios. If we fail to comply with these covenants or meet these
financial ratios, the lenders under our credit facility could declare a default
and demand immediate repayment of all amounts owed to them.
In addition, if we are in default under the junior subordinated debentures,
discussed above, or if we have given notice of our intention to defer our
related payment obligations, the terms of our indebtedness would, among other
things, restrict our ability to:
o declare or pay any dividends on our capital shares;
o redeem, purchase or acquire any capital shares; or
o make a liquidation payment with respect to our capital shares.
Because we are a holding company, we are dependent on dividends and payments
from our subsidiaries.
As a holding company with no direct operations, we rely on investment income,
cash dividends and other permitted payments from our subsidiaries to make
principal and interest payments on our debt and to pay dividends to our
shareholders. RenaissanceRe does not have any operations and often has no
significant liquid assets. If our subsidiaries are restricted from paying
dividends to us, we may be unable to pay dividends or to repay our indebtedness.
Bermuda law and regulations require our subsidiaries which are registered in
Bermuda as insurers to maintain a minimum solvency margin and minimum liquidity
ratio, and prohibit dividends that would result in a breach of these
requirements. Further, Renaissance Reinsurance and DaVinci, as Class 4 insurers
in Bermuda, may not pay
32
dividends which would exceed 25% of their respective capital and surplus, unless
they first make filings confirming that they meet the required margins. As Class
3 insurers, Glencoe and Lantana may not declare or pay dividends during any
financial year that would cause Glencoe or Lantana (as the case may be) to fail
to meet its minimum solvency margin and minimum liquidity ratio.
Generally, our U.S. insurance subsidiary may only pay dividends out of earned
surplus. Further, the amount payable without the prior approval of the
applicable state insurance department is generally limited to the greater of 10%
of policyholders' surplus or statutory capital, or 100% of the subsidiary's
prior year statutory net income.
The loss of one or more key executive officers could adversely affect us.
Our success has depended, and will continue to depend, in substantial part upon
our ability to attract and retain our executive officers. If we were to lose the
services of members of our senior management team, our business could be
adversely affected. For example, we might lose clients whose relationship
depends in part on the service of a departing executive. In addition, the loss
of services of members of our management team would strain our ability to
execute our growth initiatives, as described above.
Our ability to execute our business strategy is dependent on our ability to
attract and retain a staff of qualified underwriters and service personnel. The
location of our global headquarters in Bermuda may impede our ability to recruit
and retain highly skilled employees. We do not currently maintain key man life
insurance policies with respect to any of our employees.
Under Bermuda law, non-Bermudians may not engage in any gainful occupation in
Bermuda without the specific permission of the appropriate government authority.
The Bermuda government will issue a work permit for a specific period of time,
which may be extended upon showing that, after proper public advertisement, no
Bermudian (or spouse of a Bermudian) is available who meets the minimum
standards for the advertised position. Substantially all of our officers are
working in Bermuda under work permits that will expire over the next three
years. The Bermuda government could refuse to extend these work permits. In
addition, a Bermuda government policy limits the duration of work permits to a
total of six years, which is subject to certain exemptions only for key
employees. If any of our senior executive officers were not permitted to remain
in Bermuda, our operations could be disrupted and our financial performance
could be adversely affected as a result.
Regulatory challenges in the U.S. or elsewhere to our Bermuda operations' claims
of exemption from insurance regulation could restrict our ability to operate,
increase our costs, or otherwise adversely impact us.
Renaissance Reinsurance, DaVinci and Top Layer Re are not licensed or admitted
in any jurisdiction except Bermuda. Renaissance Reinsurance, Glencoe, DaVinci
and Top Layer Re each conduct business only from their principal offices in
Bermuda and do not maintain an office in the U.S. Recently, the insurance and
reinsurance regulatory framework has been subject to increased scrutiny in many
jurisdictions, including the U.S. and various states within the U.S. If our
Bermuda insurance or reinsurance operations become subject to the insurance laws
of any state in the U.S., we could face inquiries or challenges to the future
operations of these companies.
Moreover, we could be put at a competitive disadvantage in the future with
respect to competitors that are licensed and admitted in U.S. jurisdictions.
Among other things, jurisdictions in the U.S. do not permit insurance companies
to take credit for reinsurance obtained from unlicensed or non-admitted insurers
on their statutory financial statements unless security is posted. Our contracts
generally require us to post a letter of credit or provide other security after
a reinsured reports a claim. In order to post these letters of credit, issuing
banks generally require collateral. It is possible that European Union or other
countries might adopt a similar regime in the future, or that the U.S. rules
could be altered in a way that treats Bermuda disproportionately. Any such
development could adversely affect us.
Glencoe and Lantana are currently eligible, non-admitted excess and surplus
lines insurers in, respectively, 51 and 47 states and territories of the U.S.
and are each subject to certain regulatory and reporting requirements of these
states. However, neither Glencoe nor Lantana is admitted or licensed in any U.S.
jurisdiction; moreover, Glencoe
33
only conducts business from Bermuda. Accordingly, the scope of Glencoe's and
Lantana's activities in the U.S. is limited, which could adversely affect their
ability to compete.
In addition, Stonington, which writes insurance in all 50 states on an admitted
basis, is subject to extensive regulation under state statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. Such regulation generally is designed to protect policyholders
rather than investors, and relates to such matters as: rate setting; limitations
on dividends and transactions with affiliates; solvency standards which must be
met and maintained; the licensing of insurers and their agents; the examination
of the affairs of insurance companies, which includes periodic market conduct
examinations by the regulatory authorities; annual and other reports, prepared
on a statutory accounting basis; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding numerous other matters.
We could be required to allocate considerable time and resources to comply with
these requirements, and could be adversely affected if a regulatory authority
believed we had failed to comply with applicable law or regulation. We plan to
grow Stonington's business and, accordingly, expect our regulatory burden to
increase.
Our growth plans could cause one or more of our subsidiaries to become subject
to additional regulation in more numerous jurisdictions. Any failure to comply
with applicable laws could result in the imposition of significant restrictions
on our ability to do business, and could also result in fines and other
sanctions, any or all of which could adversely affect our financial results and
operations.
Retrocessional reinsurance may become unavailable on acceptable terms.
In order to limit the effect of large and multiple losses upon our financial
condition, we buy reinsurance for our own account. This type of insurance is
known as "retrocessional reinsurance." Our primary insurance companies also buy
reinsurance from third parties. A reinsurer's insolvency or inability to make
payments under the terms of its reinsurance treaty with us could have a material
adverse effect on us.
From time to time, market conditions have limited, and in some cases have
prevented, insurers and reinsurers from obtaining the types and amounts of
reinsurance, which they consider adequate for their business needs. Accordingly,
we may not be able to obtain our desired amounts of retrocessional reinsurance.
In addition, even if we are able to obtain such retrocessional reinsurance, we
may not be able to negotiate terms as favorable to us as in the past. This could
limit the amount of business we are willing to write, or decrease the protection
available to us as a result of large loss events.
We may be adversely affected by foreign currency fluctuations.
Our functional currency is the U.S. dollar. A portion of our premium is written
in currencies other than the U.S. dollar and a portion of our claims and claim
expense reserves are also in non-dollar currencies. Moreover, we maintain a
portion of our cash equivalent investments in currencies other than the U.S.
dollar. Although we generally seek to hedge significant non-U.S. dollar
positions, we may, from time to time, experience losses resulting solely from
fluctuations in the values of these foreign currencies, which could cause our
consolidated earnings to decrease. In addition, failure to manage our foreign
currency exposures could cause our results to be more volatile.
Consolidation in our insurance industry could adversely impact us.
We believe that many insurance industry participants are seeking to consolidate.
These consolidated entities may try to use their enhanced market power to
negotiate price reductions for our products and services. If competitive
pressures compel us to reduce our prices, our operating margins would decrease.
As the insurance industry consolidates, competition for customers will become
more intense and the importance of acquiring and properly servicing each
customer will become greater. We could incur greater expenses relating to
customer acquisition and retention, further reducing our operating margins. In
addition, insurance companies that merge may be able to spread their risks
across a consolidated, larger capital base so that they require less
reinsurance. We could also experience more robust competition from larger,
better capitalized competitors.
We may encounter difficulties in maintaining the information technology systems
necessary to run our business.
34
We believe our modeling, underwriting and information technology systems are
critical to our business. Moreover, our proprietary technology has been an
important part of our underwriting process and our ability to compete
successfully. We have also licensed certain systems and data from third parties.
We cannot be certain that we will also have access to these, or comparable,
service providers, or that our proprietary technology will continue to operate
as intended. Our business growth strategy will require further development of
our technology infrastructure, and any defect or error in our information
technology systems could result in reduced or delayed revenue growth, higher
than expected losses, management distraction, or harm to our reputation.
Some aspects of our corporate structure may discourage third party takeovers and
other transactions or prevent the removal of our current board of directors and
management.
Some provisions of our Memorandum of Association and of our Amended and Restated
Bye-Laws have the effect of making more difficult or discouraging unsolicited
takeover bids from third parties or preventing the removal of our current board
of directors and management. In particular, our Bye-Laws prohibit transfers of
our capital shares if the transfer would result in a person owning or
controlling shares that constitute 9.9% or more of any class or series of our
shares. The primary purpose of this restriction is to reduce the likelihood that
we will be deemed a "controlled foreign corporation" within the meaning of the
Internal Revenue Code for U.S. federal tax purposes. However, this limit may
also have the effect of deterring purchases of large blocks of common shares or
proposals to acquire us, even if some or a majority of our shareholders might
deem these purchases or acquisition proposals to be in their best interests.
In addition, our Bye-Laws provide for:
o a classified Board, whose size is fixed and whose members may be
removed by the shareholders only for cause upon a 66 2/3% vote;
o restrictions on the ability of shareholders to nominate persons to
serve as directors, submit resolutions to a shareholder vote and
requisition special general meetings;
o a large number of authorized but unissued shares which may be issued
by the Board without further shareholder action; and
o a 66 2/3% shareholder vote to amend, repeal or adopt any provision
inconsistent with several provisions of the Bye-Laws.
These Bye-Law provisions make it more difficult to acquire control of us by
means of a tender offer, open market purchase, proxy contest or otherwise. These
provisions are designed to encourage persons seeking to acquire control of us to
negotiate with our directors, which we believe would generally best serve the
interests of our shareholders. However, these provisions could have the effect
of discouraging a prospective acquirer from making a tender offer or otherwise
attempting to obtain control of us. In addition, these Bye-Law provisions could
prevent the removal of our current board of directors and management. To the
extent these provisions discourage takeover attempts, they could deprive
shareholders of opportunities to realize takeover premiums for their shares or
could depress the market price of the shares.
RenaissanceRe indirectly owns Stonington. Our ownership of a U.S. insurance
company such as Stonington can, under applicable state insurance company laws
and regulations, delay or impede a change of control of RenaissanceRe. Under
applicable Texas insurance regulations, any proposed purchase of 10% or more of
our voting securities would require the prior approval of the Texas insurance
regulatory authorities.
35
Investors may have difficulties in serving process or enforcing judgments
against us in the U.S.
We are a Bermuda company. In addition, certain of our officers and directors
reside in countries outside the U.S. All or a substantial portion of our assets
and the assets of these officers and directors are or may be located outside the
U.S. Investors may have difficulty effecting service of process within the U.S.
on our directors and officers who reside outside the U.S. or to recover against
us or these directors and officers on judgments of U.S. courts based on civil
liabilities provisions of the U.S. federal securities laws whether or not we
appoint an agent in the U.S. to receive service of process.
36
GLOSSARY OF SELECTED INSURANCE AND REINSURANCE TERMS
Acquisition expenses The aggregate expenses incurred by a company
acquiring new business, including commissions,
underwriting expenses and administrative expenses.
Attachment point The dollar amount of loss (per occurrence or in the
aggregate, as the case may be) above which excess
of loss reinsurance becomes operative.
Broker An intermediary who negotiates contracts of
insurance or reinsurance, receiving a commission
for placement and other services rendered, between
(1) a policy holder and a primary insurer, on
behalf of the insured party, (2) a primary insurer
and reinsurer, on behalf of the primary insurer, or
(3) a reinsurer and a retrocessionaire, on behalf
of the reinsurer.
Capacity The percentage of surplus, or the dollar amount of
exposure, that an insurer or reinsurer is willing
or able to place at risk. Capacity may apply to a
single risk, a program, a line of business or an
entire book of business. Capacity may be
constrained by legal restrictions, corporate
restrictions or indirect restrictions.
Case reserves Loss reserves, established with respect to
specific, individual reported claims.
Casualty insurance or
reinsurance Insurance or reinsurance that is primarily
concerned with the losses caused by injuries to
third persons and their property (in other words,
persons other than the policyholder) and the legal
liability imposed on the insured resulting
therefrom. Also referred to as liability insurance.
Catastrophe A severe loss, typically involving multiple
claimants. Common perils include earthquakes,
hurricanes, hailstorms, severe winter weather,
floods, fires, tornadoes, explosions and other
natural or man-made disasters. Catastrophe losses
may also arise from acts of war, acts of terrorism
and political instability.
Catastrophe excess of loss
reinsurance A form of excess of loss reinsurance that, subject
to a specified limit, indemnifies the ceding
company for the amount of loss in excess of a
specified retention with respect to an accumulation
of losses resulting from a "catastrophe."
Cede; cedant;
ceding company When a party reinsures its liability with another,
it "cedes" business and is referred to as the
"cedant" or "ceding company."
Claim Request by an insured or reinsured for
indemnification by an insurance company or a
reinsurance company for loss incurred from an
insured peril or event.
Claims and claim expense
ratio The ratio of claims and claim expenses to net
premiums earned determined in accordance with
either SAP or GAAP.
Claim expenses The expenses of settling claims, including legal
and other fees and the portion of general expenses
allocated to claim settlement costs (also known as
claim adjustment expenses) plus losses incurred
with respect to claims.
Claim reserves Liabilities established by insurers and reinsurers
to reflect the estimated costs of claim payments
and the related expenses that the insurer or
reinsurer will ultimately be required
37
to pay in respect of insurance or reinsurance
policies it has issued. Claims reserves consist of
case reserves, established with respect to
individual reported claims, and "IBNR" reserves.
For reinsurers, loss expense reserves are generally
not significant because substantially all of the
loss expenses associated with particular claims are
incurred by the primary insurer and reported to
reinsurers as losses.
Combined ratio The combined ratio is the sum of the claims and
claim expense ratio and the underwriting expense
ratio. A combined ratio below 100% generally
indicates profitable underwriting prior to the
consideration of investment income. A combined
ratio over 100% generally indicates unprofitable
underwriting prior to the consideration of
investment income.
Earned Premium (1) That part of the premium applicable to the
expired part of the policy period, including the
short-rate premium on cancellation, the entire
premium on the amount of loss paid under some
contracts, and the entire premium on the contract
on the expiration of the policy, which is
recognized as income during the period.
(2) That portion of the reinsurance premium
calculated on a monthly, quarterly or annual basis
which is to be retained by the reinsurer and
recognized as income in the period should their
cession be canceled.
(3) When a premium is paid in advance for a certain
time, the company is said to "earn" the premium as
the time advances. For example, a policy written
for three years and paid for in advance would be
one-third earned at the end of the first year.
Excess and surplus
lines reinsurance Any type of coverage that cannot be placed with an
insurer admitted to do business in a certain
jurisdiction. Risks placed in excess and surplus
lines markets are often substandard as respects
adverse loss experience, unusual, or unable to be
placed in conventional markets due to a shortage of
capacity.
Excess of loss Reinsurance or insurance that indemnifies the
reinsured or insured against all or a specified
portion of losses on underlying insurance policies
in excess of a specified amount, which is called a
"level" or "retention." Also known as
non-proportional reinsurance. Excess of loss
reinsurance is written in layers. A reinsurer or
group of reinsurers accepts a layer of coverage up
to a specified amount. The total coverage purchased
by the cedant is referred to as a "program" and
will typically be placed with predetermined
reinsurers in pre-negotiated layers. Any liability
exceeding the outer limit of the program reverts to
the ceding company, which also bears the credit
risk of a reinsurer's insolvency.
Exclusions Those risk, perils, or classes of insurance with
respect to which the reinsurer will not pay loss or
provide reinsurance, notwithstanding the other
terms and conditions of reinsurance.
Frequency The number of claims occurring during a given
coverage period.
Generally accepted
accounting principles
("GAAP") Accounting principles as set forth in opinions of
the Accounting Principles Board of the American
Institute of Certified Public Accountants and/or
statements of the Financial Accounting Standards
Board and/or their respective successors and which
are applicable in the circumstances as of the date
in question. Also referred to as GAAP.
Gross premiums written Total premiums for insurance written and assumed
reinsurance during a given period.
38
Incurred but not
reported ("IBNR") Reserves for estimated losses that have been
incurred by insureds and reinsureds but not yet
reported to the insurer or reinsurer including
unknown future developments on losses which are
known to the insurer or reinsurer.
Layer The interval between the retention or attachment
point and the maximum limit of indemnity for which
a reinsurer is responsible.
Line of Business The general classification of insurance written by
insurers, i.e., fire, allied lines, homeowners,
among others.
Loss; losses An occurrence that is the basis for submission
and/or payment of a claim. Whether losses are
covered, limited or excluded from coverage is
dependant on the terms of the policy.
Loss ratio Claims incurred expressed as a percentage of net
earned premiums.
Loss reserve For an individual loss, an estimate of the amount
the insurer expects to pay for the reported claim.
For total losses, estimates of expected payments
for reported and unreported claims. May include
amounts for claims expenses.
Net premiums earned The portion of net premiums written during or prior
to a given period that was actually recognized as
income during such period.
Net premiums written Gross premiums written for a given period less
premiums ceded to reinsurers and retrocessionaires
during such period.
No claims bonus A reduction of premiums assumed or ceded if no
claims have been made within a specified period.
Perils This term refers to the causes of possible loss in
the property field, such as fire, windstorm,
collision, hail, etc. In the casualty field, the
term "hazard" is more frequently used.
Premiums; written, earned
and unearned The amount charged during the term on policies and
contracts issued, renewed or reinsured by an
insurance company or reinsurance company. Written
premium is premium registered on the books of an
issuer or reinsurer at the time a policy is issued
and paid for. Unearned premium is premium for a
future exposure period. Earned premium is written
premium minus unearned premium for an individual
policy.
Property insurance
or reinsurance Insurance or reinsurance that provides coverage to
a person with an insurable interest in tangible
property for that person's property loss, damage or
loss of use.
Property per risk treaty
reinsurance Reinsurance on a treaty basis of individual
property risks insured by a ceding company.
Proportional
reinsurance A generic term describing all forms of reinsurance
in which the reinsurer shares a proportional part
of the original premiums and losses of the
reinsured. (Also known as pro rata reinsurance,
quota share reinsurance or participating
reinsurance.) In proportional reinsurance the
reinsurer generally pays the ceding company a
ceding commission. The ceding commission generally
is based on the ceding company's cost of acquiring
the business being reinsured (including
commissions, premium taxes, assessments and
miscellaneous administrative expense) and also may
include a profit factor. See also "Quota Share
Reinsurance" and "Surplus Share Reinsurance."
39
Quota Share Reinsurance A form of proportional reinsurance in which the
reinsurer assumes an agreed percentage of each
insurance being reinsured and shares all premiums
and losses according with the reinsured. See also
"Proportional Reinsurance" and "Surplus Share
Reinsurance."
Reinstatement premium The premium charged for the restoration of the
reinsurance limit of a catastrophe contract to its
full amount after payment by the reinsurer of
losses as a result of an occurrence.
Reinsurance An arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance or
reinsurance company, the ceding company, against
all or a portion of the insurance or reinsurance
risks underwritten by the ceding company under one
or more policies. Reinsurance can provide a ceding
company with several benefits, including a
reduction in net liability on individual risks and
catastrophe protection from large or multiple
losses. Reinsurance also provides a ceding company
with additional underwriting capacity by permitting
it to accept larger risks and write more business
than would be possible without a concomitant
increase in capital and surplus, and facilitates
the maintenance of acceptable financial ratios by
the ceding company. Reinsurance does not legally
discharge the primary insurer from its liability
with respect to its obligations to the insured.
Retention The amount or portion of risk that an insurer
retains for its own account. Losses in excess of
the retention level are paid by the reinsurer. In
proportional treaties, the retention may be a
percentage of the original policy's limit. In
excess of loss business, the retention is a dollar
amount of loss, a loss ratio or a percentage.
Retrocessional reinsurance;
retrocessionaire A transaction whereby a reinsurer cedes to another
reinsurer, the retrocessionaire, all or part of the
reinsurance that the first reinsurer has assumed.
Retrocessional reinsurance does not legally
discharge the ceding reinsurer from its liability
with respect to its obligations to the reinsured.
Reinsurance companies cede risks to
retrocessionaires for reasons similar to those that
cause primary insurers to purchase reinsurance: to
reduce net liability on individual risks, to
protect against catastrophic losses, to stabilize
financial ratios and to obtain additional
underwriting capacity.
Risk excess of loss
reinsurance A form of excess of loss reinsurance that covers a
loss of the reinsured on a single "risk" in excess
of its retention level of the type reinsured,
rather than to aggregate losses for all covered
risks, as does catastrophe excess of loss
reinsurance. A "risk" in this context might mean
the insurance coverage on one building or a group
of buildings or the insurance coverage under a
single policy, which the reinsured treats as a
single risk.
Risks A term used to denote the physical units of
property at risk or the object of insurance
protection that are not perils or hazards. Also
defined as chance of loss or uncertainty of loss.
Specialty lines Lines of insurance and reinsurance that provide
coverage for risks that are often unusual or
difficult to place and do not fit the underwriting
criteria of standard commercial products carriers.
Statutory accounting
principles ("SAP") Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by Bermuda
and/or the U.S. state insurance regulatory
authorities including the NAIC, which in general
reflect a liquidating, rather than going concern,
concept of accounting.
40
Stop Loss A form of reinsurance under which the reinsurer
pays some or all of a cedant's aggregate retained
losses in excess of a predetermined dollar amount
or in excess of a percentage of premium.
Submission An unprocessed application for (i) insurance
coverage forwarded to a primary insurer by a
prospective policyholder or by a broker on behalf
of such prospective policyholder, (ii) reinsurance
coverage forwarded to a reinsurer by a prospective
ceding insurer or by a broker or intermediary on
behalf of such prospective ceding insurer or (iii)
retrocessional coverage forwarded to a
retrocessionaire by a prospective ceding reinsurer
or by a broker or intermediary on behalf of such
prospective ceding reinsurer.
Surplus share reinsurance A form of pro rata reinsurance (proportional)
indemnifying the ceding company against loss to the
extent of the surplus insurance liability ceded, on
a share basis similar to quota share. See also
"Proportional Reinsurance" and "Quota Share
Reinsurance."
Total Managed Cat
Premium The total catastrophe reinsurance premiums written
on a gross basis by our managed catastrophe joint
ventures as well as by our wholly owned
subsidiaries.
Treaty A reinsurance agreement covering a book or class of
business that is automatically accepted on a bulk
basis by a reinsurer. A treaty contains common
contract terms along with a specific risk
definition, data on limit and retention, and
provisions for premium and duration.
Underwriting The insurer's or reinsurer's process of reviewing
applications submitted for insurance coverage,
deciding whether to accept all or part of the
coverage requested and determining the applicable
premiums.
Underwriting capacity The maximum amount that an insurance company can
underwrite. The limit is generally determined by
the company's retained earnings and investment
capital. Reinsurance serves to increase a company's
underwriting capacity by reducing its exposure from
particular risks.
Underwriting expense
ratio The ratio of the sum of the acquisition expenses
and operational expenses to net premiums earned,
determined in accordance with U.S. GAAP.
Underwriting expenses The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
Unearned premium The portion of premiums written representing the
unexpired portions of the policies or contracts
which the insurer or reinsurer has on its books as
of a certain date.
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AVAILABLE INFORMATION
We maintain a website at http://www.renre.com. The information on our website is
not incorporated by reference in this Annual Report on Form 10-K and the
Internet address is included as an inactive textual reference only.
We make available, free of charge through our website, our financial
information, including the information contained in our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish such material to, the Securities and Exchange
Commission. We also make available, free of charge from our website, our Audit
Committee Charter, Compensation/Governance Committee Charter, Corporate
Governance Guidelines and Statement of Policies and Code of Ethics and Conduct
("Code of Ethics"). Such information is also available in print from any
shareholder who sends a request to the Investor Relations Department of:
RenaissanceRe Holdings Ltd., P.O. Box HM 2527, Hamilton, HMGX, Bermuda. Reports
filed with the Securities and Exchange Commission may also be viewed or obtained
at the SEC Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Information on the operation of the SEC Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.
ITEM 2. PROPERTIES
We lease office space in Bermuda, where our executive offices are located. In
addition, Stonington leases office space in Addison, Texas, and our other U.S.
based subsidiaries lease space in Richmond, Virginia and Raleigh, North
Carolina. We also lease office space in Dublin, Ireland. As we anticipate
additional growth in our businesses, it is likely that we will need to expand
into additional facilities to accommodate this growth.
ITEM 3. LEGAL PROCEEDINGS
Our insurance and reinsurance subsidiaries are subject in the course of their
business to claims litigation involving, among other things, disputed
interpretations of policy coverages. These lawsuits involving claims on policies
issued by our subsidiaries which are typical to the insurance industry in
general and in the normal course of business are considered in our claims and
claim expense reserves which are addressed in the reserve for claims and claim
expenses discussion.
In addition to claims litigation, we and our subsidiaries may be subject from
time to time to lawsuits or regulatory actions that do not arise from or
directly relate to claims on insurance policies. This type of potential
litigation could include, for example, allegations of underwriting errors or
misconduct, employment claims, regulatory activity or disputes arising from our
business ventures. We are not currently subject to any litigation of this type
whose impact is likely to be material to us. We believe that over the next few
years the ultimate outcomes of matters in this category of business litigation
should not have a material adverse effect on our financial condition, future
operating results or liquidity, although we believe that litigation of this
nature will increase in the future, and it is possible that an adverse
resolution of a number of these matters could have a material adverse effect on
our results of operations in a particular quarter or fiscal year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of RenaissanceRe's shareholders during the
fourth quarter of 2003.
42
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON SHARES
Our common shares began publicly trading on June 27, 1995. Our New York Stock
Exchange symbol is "RNR". The following table sets forth, for the periods
indicated, the high and low prices per share of our common shares as reported in
composite New York Stock Exchange trading.
Price Range
of Common Shares
-------------------------
Period High Low
- ------ ---- ---
2001
- ----
First Quarter $ 27.95 $ 21.18
Second Quarter 25.23 20.83
Third Quarter 29.64 22.87
Fourth Quarter 34.57 30.47
2002
- ----
First Quarter 36.35 28.90
Second Quarter 39.65 33.85
Third Quarter 39.40 31.30
Fourth Quarter 43.24 37.49
2003
- ----
First Quarter 40.78 34.40
Second Quarter 46.93 40.07
Third Quarter 48.69 41.15
Fourth Quarter 49.35 44.45
2004
- ----
First Quarter (through March 1, 2004) 54.32 48.51
At March 1, 2004 the last reported sale price for our common shares was $54.32
per share. At March 1, 2004 there were 124 holders of record of our common
shares and approximately 21,000 beneficial holders.
DIVIDEND POLICY
Historically, we have paid dividends on our common shares every quarter, and
have increased our dividend during each of the nine years since our initial
public offering. The Board of Directors of RenaissanceRe declared regular
quarterly dividends of $0.15 per share on March 3, June 2, September 10 and
December 5, 2003. The Board of Directors declared regular quarterly dividends of
$0.14 per share on February 5, May 2, August 8 and November 7, 2002. Most
recently, our Board declared a dividend of $0.19 per share payable on March 15,
2004 to shareholders of record on March 9, 2004. The declaration and payment of
dividends are subject to the discretion of the Board and depend on, among other
things, our financial condition, general business conditions, legal, contractual
and regulatory restrictions regarding the payment of dividends by us and our
subsidiaries and other factors which the Board may in the future consider to be
relevant. See Item 12 for Equity Compensation Plan information.
43
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected financial data and other financial
information at the end of and for each of the years in the five-year period
ended December 31, 2003. The historical financial information was prepared in
accordance with U.S. GAAP. The statement of income data for the years ended
December 31, 2003, 2002, 2001, 2000 and 1999 and the balance sheet data at
December 31, 2003, 2002, 2001, 2000 and 1999 were derived from our audited
consolidated financial statements, which have been audited by Ernst & Young, our
independent auditors. You should read the selected financial data in conjunction
with our consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this filing and all other information appearing
elsewhere or incorporated into this filing by reference.
Year ended December 31,
- -----------------------
(in thousands, except per share data) 2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- -----------
Statement of Income Data:
- ------------------------
Gross premiums written $1,382,209 $1,173,049 $ 501,321 $ 433,002 $ 351,305
Net premiums written 1,152,523 923,711 339,547 293,303 213,513
Net premiums earned 1,115,743 760,905 333,065 267,681 221,117
Net investment income 129,542 102,686 75,156 77,868 60,334
Net realized gains (losses) on sales of investments 80,504 10,177 18,096 (7,151) (15,720)
Claims and claim expenses incurred 367,744 289,525 149,917 108,604 77,141
Acquisition costs 194,140 95,644 45,359 38,530 25,500
Operational expenses 67,397 49,159 38,603 37,954 36,768
Income before taxes and change in accounting principle 623,430 386,070 180,046 131,876 102,716
Net income available to common shareholders 604,647 364,814 164,366 127,228 104,241
Earnings per common share - diluted (1) 8.52 5.20 2.63 2.17 1.68
Dividends per common share 0.60 0.57 0.53 0.50 0.47
Weighted average common shares outstanding 71,002 70,211 62,391 58,728 61,884
At December 31,
- ---------------
Balance Sheet Data:
- ------------------
Total investments and cash $4,187,617 $3,128,879 $2,194,430 $ 1,074,876 $ 1,059,790
Total assets 4,729,702 3,745,736 2,643,652 1,468,989 1,617,243
Reserve for claims and claim expenses 977,892 804,795 572,877 403,611 478,601
Reserve for unearned premiums 349,824 331,985 125,053 112,541 98,386
Debt 350,000 275,000 183,500 50,000 250,000
Subordinated obligation to capital trust 103,093 -- -- -- --
Company obligated mandatorily redeemable
capital securities of a subsidiary trust holding
solely junior subordinated debentures of
RenaissanceRe -- 84,630 87,630 87,630 89,630
Preferred shares 250,000 150,000 150,000 -- --
Total shareholders' equity attributable to common
shareholders 2,084,643 1,492,035 1,075,024 700,818 600,329
Common shares outstanding 70,399 69,750 67,893 58,863 59,058
(1) Earnings per common share -- diluted was calculated by dividing net income
available to common shareholders by the number of weighted average common
shares and common share equivalents outstanding. Common share equivalents
are calculated on the basis of the treasury stock method.
44
Years ended December 31,
- ------------------------
(in thousands, except ratios) 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Segment Information:
- --------------------
Reinsurance
- -----------
Gross premiums written (1) $ 935,485 $ 890,470 $ 451,364 $ 382,816 $ 282,345
Net premiums written 789,769 696,610 326,680 287,941 205,192
Income (2) 454,432 308,648 100,655 150,003 117,408
Claims and claim expense ratio 25.8% 37.3% 46.8% 40.4% 32.7%
Underwriting expense ratio 18.0% 16.5% 22.2% 26.8% 26.3%
------------ ------------ ------------ ------------ ------------
Combined ratio 43.8% 53.8% 69.0% 67.2% 59.0%
============ ============ ============ ============ ============
Individual Risk
- ---------------
Gross premiums written $ 446,724 $ 282,579 $ 49,957 $ 50,186 $ 68,960
Net premiums written 362,754 227,101 12,867 5,362 8,321
Income (loss) (2) 32,030 17,929 (1,469) (4,406) 8,926
Claims and claim expense ratio 51.7% 43.2% (30.9%) 47.0% 52.2%
Underwriting expense ratio 37.8% 37.5% 149.6% 98.1% 42.9%
------------ ------------ ------------ ------------ ------------
Combined ratio 89.5% 80.7% 118.7% 145.1% 95.1%
============ ============ ============ ============ ============
(1) Excludes $20.8 million and $22.2 million of premium assumed from the
Individual Risk segment in the years ended December 31, 2003 and 2002,
respectively.
(2) Income (loss) for the Reinsurance and Individual Risk segments represents
net underwriting income. Net underwriting income consists of net premiums
earned less claims and claim expenses, acquisition costs and operational
expenses.
ITEM 7. 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
year ended December 31, 2003 compared with the years ended December 31, 2002 and
December 31, 2001. The following also includes a discussion of our financial
condition at December 31, 2003. This discussion and analysis should be read in
conjunction with the audited consolidated financial statements and related notes
included in this filing. This filing contains forward-looking statements that
involve risks and uncertainties. Actual results may differ materially from the
results described or implied by these forward-looking statements (see "Note on
Forward-Looking Statements").
OVERVIEW
RenaissanceRe was established in 1993 to write property catastrophe reinsurance.
By pioneering the use of sophisticated computer models to construct our
portfolio, we have become one of the world's largest and most successful
catastrophe reinsurers. We are seeking to leverage our expertise to establish
leading franchises in additional selected areas of insurance and reinsurance.
Since a substantial portion of the reinsurance and insurance we write provides
protection from damages relating to natural and man-made catastrophes, our
results depend to a large extent on the frequency and severity of such
catastrophic events, and the coverages we offer to clients impacted by these
events. Currently, we conduct our business through two reportable segments,
Reinsurance and Individual Risk.
Our revenues are principally derived from three sources: 1) net premiums earned
from the reinsurance and insurance policies we sell; 2) net investment income
and realized gains and losses from the investment of our capital funds and the
investment of the cash we receive on the policies which we sell; and 3) other
income received from our joint ventures and other structured products.
Our expenses primarily consist of: 1) claims and claim expenses incurred on the
policies of reinsurance and insurance we sell; 2) acquisition costs which
typically represent a percentage of the premiums we write; 3) operational
expenses which primarily consist of personnel expenses, rent and other operating
expenses; and 4) interest and dividend costs related to our debt, preference
shares and subordinated obligation to capital trust.
45
The operational results, also known as the underwriting results, of an insurance
or reinsurance company are discussed frequently by reference to its claims and
claim expense ratio, underwriting expense ratio, and combined ratio. The claims
and claim expense ratio is the result of dividing claims and claim expenses
incurred by net premiums earned. The underwriting expense ratio is the result of
dividing underwriting expenses (acquisition expenses and operational expenses)
by net premiums earned. The combined ratio is the sum of the claims and claim
expense ratio and the underwriting expense ratio. A combined ratio below 100%
generally indicates profitable underwriting prior to the consideration of
investment income. A combined ratio over 100% generally indicates unprofitable
underwriting prior to the consideration of investment income.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
CLAIMS AND CLAIM EXPENSE RESERVES
We believe that the most significant accounting 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 likely that the ultimate liability will exceed or be less than such
estimates. It is also possible that the ultimate liability may materially exceed
or be materially less than such estimates. Such estimates are not precise in
that, among other things, 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 ultimate claims reserves will impact our
current year net income by increasing our net income if the prior year estimated
ultimate claims reserves are determined to be overstated, or by reducing our net
income if the prior year estimated ultimate claims reserves prove to be
insufficient. During the years ended December 31, 2003, 2002 and 2001, changes
to prior year estimated ultimate claims reserves had the following impact on our
net income; during 2003, prior years estimated ultimate claims reserves were
reduced by $95.1 million and accordingly, our 2003 net income was increased by
$95.1 million; during 2002, prior years estimated ultimate claims reserves were
reduced by $2.0 million, and our 2002 net income was increased by $2.0 million;
and during 2001, prior years estimated ultimate claims reserves were reduced by
$16.0 million, and our 2001 net income was increased by $16.0 million. (also see
Reserves for Claims and Claim Expenses.)
For our property catastrophe reinsurance operations, we initially set our claims
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 reserves
("IBNR"). 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.
The estimation of claims resulting from catastrophic events is inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims. During 2003, with the accumulation of ten years of
historical information on our claims and claim expenses, we adopted a new system
to reassess our property catastrophe reserves on our older accident years.
In reserving for our specialty reinsurance and Individual Risk coverages we do
not have the benefit of a significant amount of our own historical experience in
these lines, and therefore we estimate our IBNR for our specialty reinsurance
and Individual Risk coverages by utilizing an actuarial method known as the
Bornhuetter-Ferguson technique, a widely used method for lines of business in
which a company may have limited historical loss experience. The utilization of
the Bornhuetter-Ferguson technique requires a company to estimate an ultimate
claims and claim expense ratio and select an estimated loss reporting pattern
for each line of business that it offers. The expected loss ratio is modified to
the extent that reported losses to date differ from what would be expected based
on the selected loss reporting pattern. This method gives more weight to the
actual reported loss experience as the underwriting period matures. We select
our estimates of the ultimate claims and claim expense ratios and estimated loss
reporting patterns by reviewing industry standards and adjusting these standards
based upon the coverages and terms of the coverages we offer.
Because any reserve estimate is simply an insurer's estimate of its ultimate
liability, and because there are numerous factors which affect reserves but can
not be determined with certainty in advance, our ultimate payments will vary,
perhaps materially, from our initial estimate of reserves. Therefore, because of
these inherent uncertainties, we have
46
developed a reserving philosophy which attempts to incorporate prudent
assumptions and estimates. In future periods, 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, we may experience further 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 an adjustment to an earlier estimate is appropriate, 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 our
methodologies, we cannot be certain that our ultimate payments will not vary,
perhaps materially, from the estimates we have made.
At December 31, 2003, our total gross reserves for claims and claim expenses was
$977.9 million and our estimated IBNR reserves were $596.6 million. A 5% change
in such IBNR reserves would equate to a $29.8 million adjustment to claims and
claim expenses incurred, which would represent 4.9% of our 2003 net income and
1.3% of shareholders' equity at December 31, 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 information has not 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. Actual amounts are determined in subsequent periods based on actual
exposures and any adjustments are recorded in the period in which they occur.
In our Individual Risk business, it is often necessary to estimate portions of
premiums written from quota-share contracts and by program managers. Management
estimates this premium based on discussions with ceding companies and program
managers and also based on historical experience and judgment. Total premiums
estimated at December 31, 2003 and 2002 were $103.7 million and $74.6 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.
47
SUMMARY OF RESULTS OF OPERATIONS FOR 2003, 2002 AND 2001
The following table presents our consolidated results by segment.
Year ended December 31, 2003 Reinsurance Individual Risk Eliminations (1) Other Total
- ------------------------------ ------------ ---------------- ----------------- ------------- -----------
(in thousands)
Gross premiums written $ 956,257 $ 446,724 $ (20,772) $ - $ 1,382,209
============ ============= ============= ============
Net premiums written $ 789,769 $ 362,754 - $ 1,152,523
============ ============= ============
Net premiums earned $ 809,360 $ 306,383 - $ 1,115,743
Claims and claim expenses incurred 209,197 158,547 - 367,744
Acquisition expenses 93,227 100,913 - 194,140
Operational expenses 52,504 14,893 - 67,397
------------ ------------- ----------- ------------
Underwriting income $ 454,432 $ 32,030 - 486,462
============ ============= ----------- ------------
Net investment income 129,542 129,542
Other income 27,070 27,070
Other items, net (2,394) (2,394)
Interest, preferred share dividends, Capital Securities minority interest (44,523) (44,523)
Minority interest - DaVinciRe (72,014) (72,014)
Net realized gains on investments 80,504 80,504
----------- ------------
Net income available to common shareholders $ 118,185 $ 604,647
=========== ============
Claims and claim expense ratio 25.8% 51.7% 33.0%
Underwriting expense ratio 18.0% 37.8% 23.4%
------------ ------------- ------------
Combined ratio 43.8% 89.5% 56.4%
============ ============= ============
(1) Represents premium ceded from the Individual Risk segment to the
Reinsurance segment.
Year ended December 31, 2002 Reinsurance Individual Risk Eliminations (1) Other Total
---------------------------- ----------- --------------- ---------------- ---------- ------------
(in thousands)
Gross premiums written $ 912,695 $ 282,579 $ (22,225) $ - $ 1,173,049
=========== ============ ============== ============
Net premiums written $ 696,610 $ 227,101 - $ 923,711
=========== ============ ============
Net premiums earned $ 667,926 $ 92,979 - $ 760,905
Claims and claim expenses incurred 249,316 40,209 - 289,525
Acquisition expenses 70,698 24,946 - 95,644
Operational expenses 39,264 9,895 - 49,159
----------- ------------ ---------- ------------
Underwriting income $ 308,648 $ 17,929 - 326,577
=========== ============ ---------- ------------
Net investment income 102,686 102,686
Other income 32,821 32,821
Other items, net (10,351) (10,351)
Interest, preferred share dividends, Capital Securities minority interest (32,858) (32,858)
Minority interest - DaVinciRe (55,051) (55,051)
Cumulative effect of a change in accounting principle (9,187) (9,187)
Net realized gains on investments 10,177 10,177
---------- ------------
Net income available to common shareholders $ 38,237 $ 364,814
========== ============
Claims and claim expense ratio 37.3% 43.2% 38.1%
Underwriting expense ratio 16.5% 37.5% 19.0%
----------- ------------ ------------
Combined ratio 53.8% 80.7% 57.1%
=========== ============ ============
(1) Represents premium ceded from the Individual Risk segment to the
Reinsurance segment.
48
Year ended December 31, 2001 Reinsurance Individual Risk Other Total
- ------------------------------ ------------- --------------- ------------ ------------
(in thousands)
Gross premiums written $ 451,364 $ 49,957 $ - $ 501,321
============ ========== ============
Net premiums written $ 326,680 $ 12,867 - $ 339,547
============ ========== ============
Net premiums earned $ 325,223 $ 7,842 - $ 333,065
Claims and claim expenses incurred 152,341 (2,424) - 149,917
Acquisition expenses 44,029 1,330 - 45,359
Operational expenses 28,198 10,405 - 38,603
------------ ---------- ---------- ------------
Underwriting income $ 100,655 $ (1,469) - 99,186
============ ========== ---------- ------------
Net investment income 75,156 75,156
Other income 16,244 16,244
Other items, net (27,414) (27,414)
Interest, preferred share dividends, Capital Securities
minority interest (16,151) (16,151)
Minority interest - DaVinciRe (751) (751)
Net realized gains on investments 18,096 18,096
---------- ------------
Net income available to common shareholders $ 65,180 $ 164,366
========== ============
Claims and claim expense ratio 46.8% (30.9)% 45.0%
Underwriting expense ratio 22.2% 149.6% 25.2%
------------ ---------- ------------
Combined ratio 69.0% 118.7% 70.2%
============ ========== ============
SUMMARY OVERVIEW
For the years ended December 31, 2003 and 2002 our net premiums earned increased
by $354.8 million and $427.8 million, respectively, or 47% and 128%,
respectively. These increases were primarily due to the market dislocation which
occurred after the World Trade Center disaster, and the significant losses
stemming from this event. These losses caused an imbalance in the supply and
demand for our insurance and reinsurance products, and as a result, we increased
our written premiums, in both our established property catastrophe line and our
specialty reinsurance line, and also increased our premiums in our Individual
Risk operations. Contributing to the increase in Individual Risk operations
during 2003 was the continued growth of: 1) our Program Manager distribution
channel, where we write primary insurance through specialized program managers;
and 2) our Quota Share Reinsurance distribution channel, where we write quota
share reinsurance with primary insurers (see below for underwriting results by
segment).
With our increase in premiums written, we generally have also experienced
related increases in: 1) claims and claim expenses incurred; 2) acquisition
expenses; 3) operational expenses; and 4) net income. However, during 2003, we
produced a claims and claim expense ratio of 33.0%, which was aided by
reductions of prior years estimated ultimate claims reserves of $95 million, and
by an estimate of approximately $40 million of reduced losses due to a reduced
level of catastrophe loss events occurring in 2003.
NET INVESTMENT INCOME
Year ended December 31, 2003 2002 2001
- ----------------------- --------- --------- --------
(in thousands)
Net investment income $ 129,542 $ 102,686 $ 75,156
During 2003 we increased the amount of investments allocated to other
investments. These investments are carried at fair value, with interest,
dividend income, realized gains (losses) and unrealized gains (losses) included
in investment income. During 2003, we recorded $25.9 million of net investment
income from these other investments (2002 - $0.4 million loss), which were
largely responsible for the increase in net investment income during 2003 (see
Investments). The increase in our net investment income in 2002 as compared with
2001 was due to the significant increase in our invested assets from $2.2
billion at December 31, 2001 to $3.1 billion at December 31, 2002, which was
generated primarily from strong cash flows from operations of $778 million.
Also, in the latter
49
half of 2001 we raised $785 million from financing activities which was
available for us for investment purposes for the full year of 2002.
OTHER INCOME
Year ended December 31, 2003 2002 2001
- ----------------------- --------- --------- --------
(in thousands)
Property catastrophe business - fee income $ 7,655 $ 3,882 $ 8,643
Property catastrophe business - equity earnings - Top Layer Re 21,167 22,339 9,663
Other items (1,752) 6,600 (2,062)
-------- -------- --------
Total other income $ 27,070 $ 32,821 $ 16,244
======== ======== ========
The majority of our other income is generated from our 50% equity ownership in
Top Layer Re. The increase in property catastrophe business - fee income during
2003 was primarily due to the $4 million annual fee we receive related to
services provided to Platinum. The reduction in other items is primarily related
to the derivative income we received in 2002 (as noted below), which did not
repeat in 2003.
During 2002, the significant increase in our equity earnings from Top Layer Re
was due to the increase in the premiums written by Top Layer Re, from $38.8
million in 2001 to $73.0 million in 2002, and the resultant net income from
those premiums. Also in 2002, income from other items increased due primarily to
$7.2 million of income related to derivative instruments under which recoveries
are triggered by an industry loss index or geological or physical variables.
CORPORATE EXPENSES
Year ended December 31, 2003 2002 2001
- ----------------------- -------- -------- --------
(in thousands)
Corporate expenses $ 16,043 $ 14,327 $ 11,485
Corporate expenses include expenses related to legal and certain consulting
expenses, costs for research and development, and other miscellaneous costs
associated with operating as a publicly traded company. The increase in
corporate expenses during 2003 primarily related to an increase in the cost for
directors' and officers' insurance and increases in fees to comply with recently
adopted regulations of the Securities and Exchange Commission, including those
related to complying with the Sarbanes-Oxley Act of 2002. The majority of the
increase in corporate expenses in 2002 primarily related to $1.9 million
increase in legal costs and $1.2 million of costs related to accelerated vesting
of equity compensation.
50
INTEREST, CAPITAL SECURITIES AND PREFERRED SHARE DIVIDENDS
Year ended December 31, 2003 2002 2001
- ----------------------- ------- ------- -------
(in thousands)
Interest - revolving credit facilities $ 2,318 $ 2,569 $ 2,378
Interest - $150 million 7.0% Senior Notes 10,500 10,500 4,871
Interest - $100 million 5.875% Senior Notes 5,434 -- --
Dividends - $103.1 million Capital Securities 7,470 7,605 7,484
Dividends - $150 million 8.1% Series A - Preference Shares 12,150 12,184 1,418
Dividends - $100 million 7.3% Series B - Preference Shares 6,651 -- --
------- ------- -------
Total interest and Capital Securities and preferred share dividends $44,523 $32,858 $16,151
======= ======= =======
Our interest payments and preferred dividends increased during 2003, primarily
as a result of the issuance of $100 million 5.875% Senior Notes and the issuance
of $100 million 7.3% Series B Preference Shares. This capital was raised to
support the growth in our insurance and reinsurance operations.
Our interest payments and preferred dividends increased during 2002, primarily
as a result of the timing of our capital raising activities, which occurred in
the latter half of 2001. Accordingly, during 2002, the balance of the 7.0%
Senior Notes and the 8.1% Series A - Preference Shares were outstanding for the
entire year, and we incurred a full year of charges related to these securities
during 2002 as compared to a partial year of charges during 2001.
INCOME TAX EXPENSE (BENEFIT)
Year ended December 31, 2003 2002 2001
- ----------------------- ------- ------- -------
(in thousands)
Income tax expense (benefit) $ (18) $ (115) $ 14,262
During 2003 and 2002, we wrote a limited amount of business in our U.S.
operations, and, therefore, our U.S. net income was minimal and the related
tax impact for 2003 and 2002 was also minimal.
During 2001, we also had little or no net income in the U.S., however, at
December 31, 2001 we had accumulated a $26.9 million deferred tax asset. As a
result of the limited number of attractive opportunities in the U.S. primary
insurance market at that time, we decided to increase our valuation allowance by
$14.0 million. At December 31, 2003, the gross and net balance of the deferred
tax asset was $33.3 million and $4.0 million, respectively.
We currently plan to continue to increase the business written by our U.S.
insurance subsidiary. If, as a result, our U.S. operations begin to generate
taxable income, the appropriateness of the valuation allowance will be
reassessed and, accordingly, potential profits from our U.S. operations would
possibly not have a corresponding offset for tax expenses, up to the $29.3
million valuation allowance recorded at December 31, 2003.
NET REALIZED GAINS ON INVESTMENTS
Year ended December 31, 2003 2002 2001
- ----------------------- ------- ------- -------
(in thousands)
Net realized gains on investments $ 80,504 $ 10,177 $ 18,096
51
Because our investment portfolio is structured to preserve capital and provide
us with a high level of liquidity, a large majority of our investments are
invested in the fixed income markets and, therefore, our realized holding gains
and losses on investments are highly correlated to fluctuations in interest
rates. Therefore, as interest rates decline, as occurred in 2003, 2002 and 2001,
we will tend to have realized gains from the turn-over of our investment
portfolio, and as interest rates increase, we will tend to have realized losses
from the turnover of our investment portfolio, although the actual amount of
realized gains (losses) on sales of investments can be reduced depending on
which specific securities we choose to sell.
The amount of the realized gains or realized losses that will be recorded in the
future will be dependent upon the level of our investments, the changes in the
interest rate environment and how quickly or slowly we choose to turn over our
investment portfolio.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("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 is required to be recorded as a cumulative effect of a change
in accounting principle in the consolidated statement of income and is required
to be recorded retroactive to January 1, 2002.
UNDERWRITING RESULTS BY SEGMENT
We conduct our business through two reportable segments, Reinsurance and
Individual Risk. Our Reinsurance segment provides reinsurance through our
catastrophe reinsurance and specialty reinsurance business units and through
Renaissance Underwriting Managers. Our Individual Risk segment provides primary
insurance and quota share reinsurance.
Our underwriting results by segment are provided below:
REINSURANCE SEGMENT
Our Reinsurance operations are comprised of three business units: 1) property
catastrophe reinsurance, primarily written through Renaissance Reinsurance and
DaVinci; 2) specialty reinsurance, primarily written through Renaissance
Reinsurance and DaVinci; and 3) certain activities of Renaissance Underwriting
Managers.
The following table summarizes the underwriting results and ratios for the
Reinsurance segment for the years ended December 31, 2003, 2002 and 2001:
52
Year ended December 31, 2003 2002 2001
- ----------------------- ------- ------- -------
(in thousands)
Property catastrophe premium (1)
Renaissance $488,124 $455,628 $373,896
DaVinci 155,541 187,822 --
-------- -------- --------
Total property catastrophe premium 643,665 643,450 373,896
Specialty premium
Renaissance 268,506 247,020 77,468
DaVinci 23,314 -- --
-------- -------- --------
Total specialty premium 291,820 247,020 77,468
-------- -------- --------
Total Reinsurance gross premium written $935,485 $890,470 $451,364
======== ======== ========
Net premium written $789,769 $696,610 $326,680
======== ======== ========
Net premium earned - property catastrophe $498,747 $462,471 $261,054
Net premium earned - specialty 310,613 205,455 64,169
-------- -------- --------
Total net premium earned 809,360 667,926 325,223
Claims and claim expenses incurred 209,197 249,316 152,341
Acquisition expenses 93,227 70,698 44,029
Operational expenses 52,504 39,264 28,198
-------- -------- --------
Underwriting income $454,432 $308,648 $100,655
======== ======== ========
Claims and claim expense ratio 25.8% 37.3% 46.8%
Underwriting expense ratio 18.0 16.5 22.2
-------- -------- --------
Combined ratio 43.8% 53.8% 69.0%
======== ======== ========
(1) Excludes combined premium assumed from the Individual Risk segment of $20.8
million and $22.2 million for the years ended December 31, 2003 and 2002,
respectively.
Premiums
Property catastrophe - During 2003 our consolidated property catastrophe
premiums remained relatively flat, primarily due to increased competition and
due to some softening of prices in the market, where we accordingly chose not to
renew certain policies.
The increase in our property catastrophe premiums during 2002 was primarily due
to an improving market following 1) the World Trade Center disaster in 2001 and
2) insured losses from nine significant worldwide catastrophic events in 1999.
Because of these events, as with many large losses, two changes occurred in
2002: 1) many reinsurers recorded significant losses and were forced to, or
chose to, withdraw their underwriting capacity from these regions; and 2) these
losses raised the awareness of the severity of the losses which could impact
these geographic locations. As a result of these factors, prices for reinsurance
coverages in these and other geographic locations increased, in some cases
significantly. Accordingly, our 2002 reinsurance premiums also increased,
firstly from the increased prices on renewing policies and secondly by enabling
us to write new business which was previously priced at an uneconomical rate of
return.
During 2004 we expect this market to remain relatively competitive which would
cause a corresponding reduction in pricing. Accordingly, we expect that the
level of our property catastrophe premiums will decrease in 2004.
Specialty reinsurance - During 2003 our consolidated specialty reinsurance
premiums increased by $45 million or 18%. This increase was primarily due to our
continued focus on a few targeted areas of this market where we believe we can
leverage our expertise. The markets representing the majority of the increase
were the catastrophe exposed workers' compensation market and the market for
terrorism-specific reinsurance.
53
During 2002, the factors that caused the improved market conditions in the
property catastrophe market also contributed to improving market conditions in
the lines of specialty reinsurance which we write, and subsequent to the World
Trade Center disaster, we significantly increased our participation in this
market. We categorize our specialty reinsurance premiums as reinsurance
coverages that are not specifically property catastrophe coverages. Examples of
specialty lines of reinsurance coverages provided by us include catastrophe
exposed workers' compensation, surety, aviation and terrorism.
Gross Premiums Written by Geographic Region
The following is a summary of our reinsurance premiums by geographic region.
Year ended December 31, 2003 2002 2001
- ----------------------- ------- ------- -------
(in thousands)
Property catastrophe
United States and Caribbean $297,954 $310,090 $180,305
Europe 156,156 86,461 20,414
Worldwide 126,541 169,790 93,474
Australia and New Zealand 26,588 2,127 12,159
Worldwide (excluding U.S) (1) 14,968 56,628 45,111
Other 21,458 18,354 22,433
Specialty reinsurance (2) 291,820 247,020 77,468
-------- -------- --------
Total reinsurance gross premiums written (3) $935,485 $890,470 $451,364
======== ======== ========
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross written premiums written to date is predominantly from
Europe and Japan.
(2) The category specialty reinsurance consists of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks
being Worldwide.
(3) Excludes $20.8 million and $22.2 million of total premium assumed by the
Reinsurance segment from the Individual Risk segment in 2003 and 2002,
respectively.
Ceded Premiums Written
Year ended December 31, 2003 2002 2001
- ----------------------- --------- --------- ---------
(in thousands)
Ceded premiums written $ 166,488 $ 216,085 $ 124,684
Because of the potential volatility of the property catastrophe reinsurance
business, we purchase reinsurance to reduce our exposure to large losses. We use
our REMS(C) modeling system to evaluate how each purchase interacts with our
portfolio of reinsurance contracts we write, and with the other ceded
reinsurance contracts we purchase, to determine the appropriateness of the
pricing of each contract. During 2003, we reduced the level of reinsurance
purchased because of the reduction in the availability of appropriately priced
opportunities.
During 2002, the majority of the increase in our ceded reinsurance premiums was
from placements of quota share reinsurance agreements for participations in our
property catastrophe book of business. In accordance with these
54
agreements we retain fees and have the right to receive profit commissions
associated with these cessions. The fees and profit commissions are reflected as
a reduction to operating expenses and acquisition expenses, respectively.
Although we would remain liable to the extent that any of our reinsurers fail to
pay our claims, before placing reinsurance we evaluate the financial condition
of our reinsurers. At December 31, 2003, the majority of the $149.2 million of
net losses recoverable relates to outstanding claims reserves on our books, and,
in accordance with the terms of the policies, we generally must wait to collect
from our reinsurers until we pay the underlying claims. We expect to fully
collect the recorded net balance of the losses recoverable.
To the extent that appropriately priced coverage is available, we anticipate
continued use of reinsurance to reduce the potential volatility of our results.
Underwriting Results
The increase in our 2003 net underwriting income from our Reinsurance segment
was primarily the result of three factors: 1) the comparably low level of
property catastrophe losses during 2003 which contributed approximately $40
million of a reduction in claims and claim expenses; 2) favorable development on
prior period reserves which contributed $70 million of a reduction in claims and
claim expenses; and 3) the increase in our net reinsurance premiums earned
during 2003, as a result of our increase in gross written property catastrophe
premiums in 2002 and the increase in our gross written specialty reinsurance
premiums in 2002 and 2003 (see "Premiums" above).
The increase in our 2002 net underwriting income from our Reinsurance segment
was primarily the result of three factors: 1) the low level of property
catastrophe losses during 2002; 2) the increase in our net reinsurance premiums
earned during 2002, a result of our increase in gross written property
catastrophe and specialty reinsurance premiums; and 3) the inception of
DaVinci's operations during 2002.
Losses from our property catastrophe reinsurance and specialty reinsurance
policies can be infrequent, but severe; however during periods with benign
property catastrophe loss activity, such as 2003 and 2002, we have the potential
to produce a low level of losses and a related increase in underwriting income.
Although this occurred during 2003 and 2002, there can be no guarantee that this
reduced level of losses will occur in 2004 or beyond.
Also during 2003 and 2002, as discussed in the "Premiums" section above, we
significantly increased our specialty reinsurance premiums written. Although
specialty reinsurance premiums will normally produce higher claims and claim
expenses than the property catastrophe reinsurance business, the reduction in
our losses resulting from the low level of catastrophe losses during 2003 and
2002 and the reductions in prior year property catastrophe reserves during 2003
more than offset the increased level of loss activity arising from our specialty
reinsurance premiums.
Our underwriting expenses consist of acquisition expenses and operational
expenses. Acquisition expenses consist of costs to acquire premiums and are
principally comprised of broker commissions and excise taxes. Acquisition
expenses are driven by contract terms and are normally a set percentage of
premiums and, accordingly, these costs will normally fluctuate in line with the
fluctuation in premiums. Operational expenses consist of salaries and other
general and administrative expenses. Our reinsurance business operates with a
limited number of employees and we were able to grow our written premiums
without proportionally increasing our operating expenses during 2002. The
increase in underwriting expenses during 2003 was primarily due to an increase
in acquisition costs on our specialty reinsurance business, which is
attributable to commission costs related to certain quota share premiums written
in 2003 which typically carry higher acquisition costs than our excess of loss
contracts.
Recently, we have entered into joint ventures and specialized quota share
cessions of our book of business. In accordance with the joint venture and quota
share agreements, we are entitled to certain fee income and profit commissions.
We record these fees and profit commissions as a reduction in acquisition
expenses or operating expenses and accordingly these fees have also contributed
to the reduction in our expense ratio.
55
INDIVIDUAL RISK SEGMENT
We define our Individual Risk segment to include underwriting that involves
understanding the characteristics of the original underlying insurance policy.
Our principal products include: 1) commercial and homeowners property coverages,
including catastrophe-exposed lines; 2) commercial liability coverages,
including general, automobile, professional and various specialty lines; and 3)
reinsurance to other insurers on a quota share basis. We operate through the
Glencoe Group of companies, whose principal operating subsidiaries are Glencoe,
Stonington and Lantana.
The following table summarizes the underwriting results and ratios for the
Individual Risk segment for the years ended December 31, 2003, 2002, and 2001:
Year ended December 31, 2003 2002 2001
- ----------------------- --------- --------- --------
(in thousands)
Gross premium written $446,724 $282,579 $ 49,957
======== ======== ========
Net premium written $362,754 $227,101 $ 12,867
======== ======== ========
Net premium earned $306,383 $ 92,979 $ 7,842
Claims and claim expenses incurred 158,547 40,209 (2,424)
Acquisition expenses 100,913 24,946 1,330
Operational expenses 14,893 9,895 10,405
-------- -------- --------
Underwriting income $ 32,030 $ 17,929 $ (1,469)
======== ======== ========
Claims and claim expense ratio 51.7% 43.2% (30.9)%
Underwriting expense ratio 37.8 37.5 149.6
-------- -------- --------
Combined ratio 89.5% 80.7% 118.7%
======== ======== ========
Premiums
The increase in our premiums from our Individual Risk operations was as a result
of an improving market environment due primarily to: 1) the increase in demand
for insurance and reinsurance protection, and the withdrawal of supply, as a
result of the substantial losses stemming from the World Trade Center disaster
in 2001; 2) the ongoing increase to prior year reserves for many companies with
asbestos and environmental liabilities; and 3) the continuing increases to prior
year reserves for companies who participated in the casualty market of the late
1990's. As a result of these items, many insurance companies in the U.S. have
withdrawn from the U.S. insurance market, and many insurance companies have had
their credit ratings substantially reduced. In response to these dislocations,
we received numerous opportunities to partner with program managers who were
looking for high quality, stable companies with which to do business. Also,
because of our financial strength and our strong credit ratings, we received
increasing opportunities to work with existing insurance companies on a quota
share basis.
Ceded Premiums Written
Year ended December 31, 2003 2002 2001
- ----------------------- -------- -------- --------
(in thousands)
Ceded premiums written (1) $ 63,198 $ 33,253 $ 37,090
(1) Excludes $20.8 million and $22.2 million of premium ceded to Renaissance
Reinsurance and DaVinci in 2003 and 2002, respectively.
56
We purchase reinsurance to reduce our exposure to large losses. With the
continued growth in the gross written premiums of our Individual Risk segment,
we continued to look for and were able to find opportunities to purchase
appropriately priced reinsurance coverage. To the extent that appropriately
priced coverage is available, we anticipate continued use of reinsurance to
reduce the potential volatility of our results.
Underwriting Results
The increases in the 2003 and 2002 net underwriting income of our Individual
Risk segment were primarily due to the growth in net earned premiums by $213.4
million and $85.1 million, respectively (as discussed above). In the future, the
combined ratio in our Individual Risk segment could fluctuate due to catastrophe
losses, adverse development or losses from other coverages that we write. During
2003 we began issuing insurance policies for certain commercial liability
coverages, including general, automobile and professional liability risks. The
claim reporting and claim development periods of these risks are longer than the
reporting and development periods for our property risks, and accordingly there
is normally greater uncertainty in the estimation of the reserves associated
with these policies.
FINANCIAL CONDITION
RenaissanceRe is a holding company, and we therefore rely on dividends from our
subsidiaries and investment income to make principal and interest payments on
our debt and capital securities, and to make dividend payments to our preference
and common shareholders.
The payment of dividends by our Bermuda subsidiaries is, under certain
circumstances, limited under U.S. statutory regulations and Bermuda insurance
law, which require our Bermuda insurance subsidiaries to maintain certain
measures of solvency and liquidity. At December 31, 2003, the statutory capital
and surplus of our Bermuda insurance subsidiaries was $2.4 billion, and the
amount of capital and surplus required to be maintained was $457.5 million.
During 2003, Renaissance Reinsurance, DaVinci and Glencoe declared aggregate
cash dividends of $322.3 million, $81.6 million and $18.0 million, respectively,
compared with $224.3 million, $3.5 million and $nil, respectively, in 2002.
Our U.S. insurance subsidiary, Stonington, is also required to maintain certain
measures of solvency and liquidity. These are calculated using risk based
capital tests, which tests determine the threshold that constitutes the
authorized control level. If Stonington's statutory capital and surplus falls
below the authorized control level, the commissioner is authorized to take
whatever regulatory actions are considered necessary to protect policyholders
and creditors. At December 31, 2003, the statutory capital and surplus of
Stonington was $28.8 million and the maximum dividend we can pay in 2004 without
prior approval is $2.6 million.
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 additional liquidity for extraordinary claims payments should the need
arise. Additionally, we maintain a $400 million credit facility to meet
additional liquidity and capital requirements, if necessary.
CASH FLOWS
Cash flows from operating activities for 2003 were $820.4 million, which
principally consisted of net income of $623.4 million (prior to dividends on
preference shares), plus $223.4 million for increases to net reserves for claims
and claim expenses. The 2003 cash flows from operations were primarily used to
increase the investment portfolio, including fixed income securities and other
investments.
We have generated cash flows from operations in 2003, 2002 and 2001
significantly in excess of our operating commitments. 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.
57
RESERVES FOR CLAIMS AND CLAIM EXPENSES
As discussed in the Summary of Critical Accounting Policies and Estimates, for
insurance and reinsurance companies, the most significant accounting 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 2003 we increased our specialty reinsurance and Individual Risk
gross written premiums (see "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.
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 reserve 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. (Also see "Summary of Critical Accounting Policies and Estimates".)
CAPITAL RESOURCES
Our total capital resources at December 31, 2003 and 2002 were as follows:
At December 31, 2003 2002
- --------------- ---------- ----------
(in thousands)
Common shareholders' equity $2,084,643 $1,492,035
Preference shares 250,000 150,000
---------- ----------
Total shareholders' equity 2,334,643 1,642,035
7.0% Senior Notes 150,000 150,000
8.54% subordinated obligation to Capital Trust 103,093 84,630
5.875% Senior Notes 100,000 --
DaVinci revolving credit facility - borrowed 100,000 100,000
Revolving credit facility - unborrowed 400,000 310,000
Term and revolving loan facility -- 25,000
---------- ----------
Total capital resources $3,187,736 $2,311,665
========== ==========
During 2003, our capital resources increased primarily as a result of three
items: 1) our net income available to common shareholders of $604.6 million; 2)
the issuance of $100.0 million of 5.875% Senior Notes; and 3) the issuance of
$100.0 million of Series B preference shares.
In February 2003, we raised $100 million through the issuance of 4,000,000
Series B preference shares, and in November 2001, we raised $150 million through
the issuance of 6,000,000 Series A Preference Shares. The Series B and Series A
preference shares may be redeemed at $25 per share at our option on or after
February 4, 2008 and
58
November 19, 2006, respectively; however we have no current intentions to redeem
the shares. Dividends on the Series B and Series A preference shares are
cumulative from the date of original issuance and are payable quarterly in
arrears at 7.3% and 8.1%, respectively, 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 our preference shares to vote as a
single class, we may redeem the Series B and Series A preference shares prior to
February 4, 2008 and November 19, 2006, respectively, at $26 per share. The
preference shares have no stated maturity and are not convertible into any other
of our securities.
In January 2003, we issued $100 million of 5.875% Senior Notes due February 15,
2013, with interest on the notes payable on February 15 and August 15 of each
year, commencing August 15, 2003. In July 2001, we issued $150 million of 7.0%
Senior Notes due July 15, 2008 with interest on the notes payable on January 15
and July 15 of each year. The notes can be redeemed by us prior to maturity
subject to payment of a "make-whole" premium; however, we have no current
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. RenaissanceRe was
in compliance with the related covenants at December 31, 2003 and 2002.
Our Capital Trust has issued Capital Securities which pay cumulative cash
distributions at an annual rate of 8.54%, payable semi-annually. During 2003,
RenaissanceRe did not purchase any of the Capital Securities (2002 - $3.0
million purchased). RenaissanceRe has purchased an aggregate $15.4 million of
the Capital Securities since their issuance in 1997. The sole asset of the
Capital Trust consists of our junior subordinated debentures. 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, 2003. The Capital Securities mature on March 1,
2027.
Effective December 31, 2003, we adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 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. As further discussed in Note 7 to the Consolidated
Financial Statements, the Capital Trust was determined to be a VIE under FIN 46
and the Company has been determined not to be the primary beneficiary of the
Capital Trust. Accordingly, the Capital Trust has been deconsolidated effective
December 31, 2003. As a result, the accounts of the Capital Trust, principally
the Capital Securities previously classified as minority interest, are not
included in our consolidated balance sheet at December 31, 2003. Our $103.1
million subordinated obligation to the Capital Trust, previously eliminated in
consolidation, is recorded on our consolidated balance sheet at December 31,
2003 as a liability.
On April 19, 2002, DaVinciRe entered into a credit agreement providing for a
$100 million committed revolving credit facility. On May 10, 2002, DaVinciRe
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 DaVinciRe and its subsidiary
under the DaVinciRe facility. Pursuant to the terms of the $400 million facility
maintained by RenaissanceRe, a default by DaVinciRe in its obligations will not
result in a default under the RenaissanceRe facility. At December 31, 2003, the
full amount was outstanding under this facility. Interest rates on the facility
are based on a spread above LIBOR, and averaged approximately 2.09% during 2003
(2002 - 2.63%). The credit agreement contains certain covenants requiring
DaVinciRe to maintain a debt to capital ratio of 30% or below and a minimum net
worth of $230 million. At December 31, 2003, DaVinciRe was in compliance with
the covenants of this agreement.
Under the terms of certain reinsurance contracts, we may be required to provide
letters of credit to reinsureds in respect of reported claims and/or unearned
premiums. At December 31, 2003, we had outstanding letters of credit aggregating
$346.9 million. Also, in connection with our Top Layer Re joint venture we have
committed $37.5 million of collateral to support a letter of credit.
Our principal letter of credit facility is a $485 million syndicated secured
facility which accepts as collateral shares issued by our subsidiary RIHL. Our
participating operating subsidiaries and our managed joint ventures have pledged
(and must maintain) RIHL shares issued to them with a sufficient collateral
value to support their respective
59
obligations under the facility, including reimbursement obligations for
outstanding letters of credit. The participating subsidiaries and joint ventures
also have the option to post alternative forms of collateral. In addition, for
liquidity purposes, each participating subsidiary and joint venture must
maintain additional unpledged RIHL shares that have a net asset value at least
equal to 15% of its facility usage, and in the aggregate the net asset value of
all unpledged RIHL shares must be maintained at least equal to 15% of all of the
outstanding RIHL shares. In the case of a default under the facility, or in
other circumstances in which the rights of our lenders to collect on their
collateral may be impaired, the lenders may exercise certain remedies under the
facility agreement, in accordance with and subject to its terms, including
redemption of pledged shares and conversion of the collateral into cash or
eligible marketable securities. The redemption of shares by the collateral agent
takes priority over any pending redemption of unpledged shares by us or other
holders. In November 2003, the term of this facility was extended through March
31, 2004, and in January 2004, this facility was increased to $485 million from
$385 million. On March 12, 2004, we accepted a commitment letter from Wachovia
and Wachovia Securities in which Wachovia confirmed its commitment to provide up
to $150 million of an amended facility in the amount of $585 million and having
a term of 365 days from closing. Wachovia Securities also agreed to use its
reasonable best efforts to arrange for a syndicate of lenders to provide the
balance of the increased facility. The syndication and closing of the facility
are subject to customary terms and conditions for letter of credit facilities of
this type and size and Wachovia's commitment is also subject to the receipt of
commitments from other lenders for the balance of the increased facility.
On August 8, 2003, we amended and restated our committed revolving credit
agreement to increase the facility from $310 million to $400 million and to make
certain other changes. The interest rates on this facility are based on a spread
above LIBOR. No balance was outstanding at December 31, 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 the consolidated net worth (the "Net Worth
Requirements") of RenaissanceRe and Renaissance Reinsurance shall equal or
exceed $1 billion and $500 million, respectively, subject to certain adjustments
under certain circumstances in the case of the Debt to Capital Ratio and certain
grace periods in the case of the Net Worth Requirements, all as more fully set
forth in the agreement. 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. The term loan and
revolving credit facility were repaid in full in June 2003 in accordance with
the mandatory repayment provisions and the facility was terminated.
SHAREHOLDERS' EQUITY
During 2003, shareholders' equity increased by $692.6 million to $2.3 billion at
December 31, 2003, from $1.6 billion at December 31, 2002. The significant
components of the change in shareholders' equity included net income available
to common shareholders of $604.6 million and the issuance of $100 million Series
B preference shares.
From time to time, we have returned capital to our shareholders through share
repurchases. In August 2003, the Board authorized a share repurchase program of
$150 million. This authorization includes the remaining amounts available under
prior authorizations. No shares were repurchased during 2003 or 2002. In the
future, we may purchase shares under our current authorization, or increase the
size of our repurchase program. Any such determination will be subject to market
conditions and numerous other factors.
INVESTMENTS
At December 31, 2003, we held investments and cash totaling $4.2 billion,
compared to $3.1 billion in 2002.
60
The table below shows the aggregate amounts of our invested assets:
At December 31, 2003 2002 2001
- --------------- ---------- ---------- ----------
(in thousands)
Fixed maturities investments available for sale, at fair value $2,947,841 $2,221,109 $1,282,483
Short-term investments, at cost 660,564 570,497 733,925
Other investments, at fair value 370,280 129,918 38,307
Equity investments in reinsurance company, at fair value 145,535 120,288 --
Cash and cash equivalents 63,397 87,067 139,715
---------- ---------- ----------
Total investments and cash $4,187,617 $3,128,879 $2,194,430
========== ========== ==========
The $1.1 billion growth in our portfolio of invested assets for the year ended
December 31, 2003 resulted primarily from net cash provided by operating
activities of $820.4 million, the issuance of $100 million of 5.875% Senior
Notes and the issuance of $100 million Series B preference shares.
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 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, highly-rated sovereign and supranational
securities, high-grade corporate securities and mortgage-backed and asset-backed
securities. At December 31, 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 2.7%.
The equity investments in reinsurance company relate to our November 1, 2002
purchase of 3,960,000 common shares of Platinum in a private placement
transaction. In addition, we received ten-year warrants to purchase up to 2.5
million additional common shares of Platinum for $27.00 per share. We purchased
the common shares and warrants for an aggregate price of $84.2 million. At
December 31, 2003, we owned 9.2% of Platinum's outstanding common shares. We
have recorded our investment in Platinum at fair value, and at December 31, 2003
the aggregate fair value was $145.5 million. The aggregate unrealized gain of
$61.3 million on the Platinum investment is included in accumulated other
comprehensive income, of which $26.7 million represents our best estimate of the
value of the warrants.
At December 31, 2003, $56.4 million of cash and cash equivalents and investments
were invested in currencies other than the U.S. dollar, which represented 1.3%
of our invested assets.
A portion of our investment assets are directly held by our subsidiary 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 which 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 S&P.
Other Investments
Included in other investments are investments in hedge funds of $170.1 million
(2002 - $61.4 million), a fund that invests in senior secured bank loans of
$77.2 million (2002 - $20.4 million), a European high yield credit fund of $38.3
million (2002 - $nil) and private equity partnerships of $24.2 million (2002 -
$14.6 million) (collectively "Investment Funds"). Also included in other
investments are investments in a medium term note, representing an interest in a
pool of European fixed income securities, of $30.0 million (2002 - $nil),
catastrophe bonds of $26.3 million (2002 - $33.5 million) and miscellaneous
investments of $4.2 million (2002 - $nil).
61
Fair values of Investment Funds noted above are generally established on the
basis of the net valuation criteria established by the managers of the
Investment Funds. These net valuations are determined based upon the valuation
criteria established by the governing documents of such Investment Funds. Due to
a lag in the valuations reported by the fund managers the majority of our
Investment Funds are reported on a one month or one quarter lag. Such valuations
may differ significantly from the values that would have been used had ready
markets existed for the shares, partnership interests or notes of the Investment
Funds. Many of the Investment Funds are subject to restrictions on redemptions
which are determined by the governing documents and limit the Company's ability
to liquidate these investments in the short term. Interest income, income
distributions and realized and unrealized gains and losses on other investments,
including Investment Funds, are included in net investment income and totaled
$25.9 million (2002 - loss of $0.4 million) of which $21.2 million (2002 - loss
of $1.4 million) was related to net unrealized gains (losses).
The hedge funds are engaged in various investment strategies, including event
driven, diversified arbitrage, distressed, US long/short, global long/short and
sector long/short with original capital contributed by us, generally in the
range of $5 million to $15 million per fund. The loan fund primarily invests in
senior secured floating rate loans. The medium term note is issued by an
investment company which invests predominantly in investment-grade European
fixed income securities and passes through a variable U.S. dollar return on the
note based on the performance of the underlying securities. The European high
yield credit fund is denominated in Euros and primarily invests in unlisted and
listed fixed and floating rate debt securities issued by entities that are
domiciled in or have a substantial portion of their total assets or operations
in a European country. The private equity funds are primarily engaged in U.S.
private equity, real estate, distressed securities and secondary investment
strategies with initial capital commitments ranging from $1.5 million to $15
million. Catastrophe bonds generally include variable rate notes where the
return is contingent upon climatical or geological events.
We have committed capital to private equity partnerships of $109.1 million, of
which $20.3 million has been contributed at December 31, 2003.
NON-INDEMNITY INDEX TRANSACTIONS
We have assumed risk through catastrophe and derivative instruments under which
losses could be triggered by an industry loss index or geological or physical
variables. During 2003, 2002 and 2001 we recorded income (loss) on non-indemnity
catastrophe index transactions of $0.8 million, $7.2 million, and ($4.6
million). We report income (loss) from these transactions in other income.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on us are
considered in our catastrophe loss models. The effects of inflation are also
considered in pricing and in estimating reserves for unpaid claims and claim
expenses. The actual effects of this post-event inflation on our results cannot
be accurately known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At December 31, 2003, we have not entered into any off-balance sheet
arrangements, as defined by Item 303 (a)(4) of Regulation S-K.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible
Assets." (see Cumulative Effect of a Change in Accounting Principle - Goodwill.)
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and provides transitional
disclosure requirements. For the years ended December 31, 2002 and for the prior
years, we followed Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25")
62
and related interpretations in accounting for its employee stock compensation.
Effective January 1, 2003, we adopted, prospectively, the fair value recognition
provisions of 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, we estimate the fair value of employee stock options and
other stock-based compensation on the date of grant and amortize this value as
an expense over the vesting period.
In accordance with the transitional disclosure provisions of SFAS 148, the
following table sets out the effect on our net income and earnings per share for
all reported periods had the compensation cost been calculated based upon the
fair value method recommended in SFAS 123:
Year ended December 31, 2003 2002 2001
- ----------------------- ----------- ----------- -----------
(in thousands except per share data)
Net income available to common shareholders, as reported $ 604,647 $ 364,814 $ 164,366
add: stock-based employee compensation cost included in
determination of net income 13,892 8,243 6,561
less: fair value compensation cost under SFAS 123 19,151 22,307 22,116
----------- ----------- -----------
Pro forma net income available to common shareholders $ 599,388 $ 350,750 $ 148,811
=========== =========== ===========
Earnings per share
Basic - as reported $ 8.76 $ 5.40 $ 2.76
Basic - pro forma $ 8.68 $ 5.19 $ 2.50
Diluted - as reported $ 8.52 $ 5.20 $ 2.63
Diluted - pro forma $ 8.44 $ 5.00 $ 2.39
Effective December 31, 2003, we adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 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. As further discussed in Note 7 to the consolidated
financial statements, the Capital Trust was determined to be a VIE under FIN 46
and has been deconsolidated effective December 31, 2003. This has resulted in
reclassifying certain balances. The adoption of FIN 46 did not have a material
impact on our financial condition and results of operations.
CURRENT OUTLOOK
Although prices in the property insurance and reinsurance markets are beginning
to decline, and the rate of increase in prices of the casualty insurance and
reinsurance markets are also beginning to decline, we believe that the principal
components of our operations continue to display strong fundamentals.
(see Item 1. Business - "Industry Trends" for additional commentary about the
overallc market environment.) We currently anticipate the following developments
in our business:
Reinsurance segment
We expect that our property catastrophe reinsurance premium will decline because
a declining price environment will result in fewer transactions that meet our
hurdle rate. We expect that specialty reinsurance premium will continue to
increase both as a function of increasing prices and additions to our specialty
underwriting staff. In addition, we believe that our position in the reinsurance
market is increasingly strong as a result of our reputation for service, prompt
claims payments, proprietary analytic tools and financial strength.
63
Individual Risk segment
We expect prices in the property insurance markets to decrease in 2004, and
prices in certain specialty casualty insurance markets to continue to increase
in 2004. Accordingly, in 2004 we expect our property insurance premiums to
decrease and our premiums from the casualty insurance market to increase. Also,
we believe that our strong infrastructure, our strong credit ratings and our
financial strength will enable us to attract additional program managers who
control attractive books of business and who are currently concerned with the
credit ratings of their current insurance carriers. Because of these
opportunities, we believe that our premiums in our Individual Risk segment for
the full year 2004 will increase as compared with the total Individual Risk
premiums for 2003.
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.
New Business
The current market environment is also providing us with increased opportunities
for our joint venture and structured product initiatives. In evaluating these
initiatives, we may consider opportunities in other areas of the insurance and
reinsurance markets, or in other financial markets, either through organic
growth, the formation of new joint ventures, or the acquisition of other
companies or books of business of other companies. We are currently in the
process of reviewing certain opportunities and periodically engage in
discussions regarding possible transactions, although there can be no assurance
that we will complete any such transactions or that any such transaction would
contribute materially to our results of operations or financial condition.
CONTRACTUAL OBLIGATIONS
At December 31,
- ---------------
(in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years
----------- ---------------- ----------- ---------- -----------------
Long-term debt obligations (1)
7.0% senior notes $ 202,500 $ 10,500 $ 21,000 $ 171,000 $ -
5.875% senior notes 153,615 5,875 11,750 11,750 124,240
Capital securities 297,800 8,540 17,080 17,080 255,100
DaVinciRe revolving credit facility (2) 102,586 1,950 100,636 - -
Private equity commitments 88,800 88,800 - - -
Operating lease obligations 40,091 3,363 7,192 7,580 21,956
Obligations under derivative contracts 7,146 1,553 3,104 2,489 -
----------- ---------------- ----------- ---------- -----------------
Total Contractual Obligations $ 892,538 $ 120,581 $ 160,762 $ 209,899 $ 401,296
=========== ================ =========== ========== =================
(1) Includes contractual interest and dividend payments.
(2) The interest on this facility is based on a spread above LIBOR. We have
reflected the interest due in 2004 and 2005 based upon the current interest
rate on the facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are principally exposed to four types of market risk: interest rate risk;
foreign currency risk; equity risk; and credit risk. The Company's investment
guidelines permit, subject to specific approval, investments in derivative
instruments such as futures, options, foreign currency forward contracts and
swap agreements, which may be used to assume risks or for hedging purposes.
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 $72.2 million on a portfolio valued at $3,608.4 million
at December 31, 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
64
million. The foregoing reflects the use of an immediate time horizon, since this
presents the worst-case scenario. Credit spreads are assumed to remain constant
in these hypothetical examples.
FOREIGN CURRENCY RISK
Our functional currency is the U.S. dollar. We write a substantial portion of
our business in currencies other than U.S. dollars and may, from time to time,
experience exchange gains and losses and incur underwriting losses in currencies
other than U.S. dollars, which will in turn affect our consolidated financial
statements.
Our 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 hedge its foreign exchange positions. The
Company had no investments in these foreign currency derivative instruments at
December 31, 2003 and 2002.
EQUITY RISK
We are exposed to equity price risk principally due to our investment in the
common shares and warrants to purchase additional common shares of Platinum (see
Summary of Results of Operations for 2003, 2002 and 2001 - Other Investments),
which we carry on our balance sheet at fair value. The risk is the potential for
loss in fair value resulting from adverse changes in the price of Platinum's
common stock. The aggregate fair value of this investment in Platinum was $145.5
million at December 31, 2003 compared to $120.3 million 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 $17.4 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. We are also
indirectly exposed to equity market risk through our investments in: 1) some
hedge funds that have net long equity positions; and 2) private equity funds
whose exit strategies often depend on the equity markets.
CREDIT RISK
Our exposure to credit risk is primarily due to our fixed maturity investments
available for sale and short term investments, and to a lesser extent,
reinsurance premiums receivable and ceded reinsurance balances. At December 31,
2003, our invested asset portfolio had a dollar weighted average rating of AA.
From time to time we purchase credit default swaps to hedge our exposures in the
insurance industry and to assist in managing the credit risk associated with
ceded reinsurance. At December 31, 2003, the maximum payments we were obligated
to make under these credit default swaps was $7.1 million. We account for these
credit derivatives at fair value and record them on our consolidated balance
sheet as other assets or other liabilities depending on the rights or
obligations. The fair value of these credit derivatives, as recognized in other
liabilities in our balance sheet, at December 31, 2003 was a liability of $3.5
million. During 2003, we recorded losses of $4.2 million in our consolidated
statement of income, including the $3.5 million liability on the balance sheet
at December 31, 2003. The fair value of the credit derivatives are determined
using industry valuation models. The fair value of these credit derivatives can
change based on a variety of factors including changes in credit spreads,
default rates and recovery rates, the correlation of credit risk between the
referenced credit and the counterparty, and market rate inputs such as interest
rates. The Company had no investments in credit derivatives at December 31,
2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Item 15(a) of this Report for the Consolidated Financial
Statements of RenaissanceRe and the Notes thereto, as well as the Schedules to
the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
65
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Internal Controls: We have designed various controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange
Act to help ensure that information required to be disclosed in our periodic
Exchange Act reports, such as this annual report, is recorded, 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 Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the issuer; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are
being made only in accordance with authorizations of management and directors of
the issuer; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the issuer's assets
that could have a material effect on financial statements.
Limitations on the effectiveness of controls: Our Board of Directors and
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls 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.
Evaluation: An evaluation was performed under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as required by Rule 13a-15(b)
and 15d-15(b) of the Exchange Act. Based upon that evaluation, the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
concluded, subject to the limitations noted above, that at December 31, 2003,
the Company's disclosure controls and procedures are effective in ensuring that
all material information required to be filed in this Report has been made known
to them in a timely fashion. There has been no change in the Company's internal
controls over financial reporting during the fiscal quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RENAISSANCERE
The information required by this item is included under the caption "Directors
and Executive Officers of the Company" in our Definitive Proxy Statement to be
filed in respect of our 2004 Annual General Meeting of Shareholders (the "Proxy
Statement") and is hereby incorporated in this Annual Report by reference.
RenaissanceRe has adopted a Code of Ethics that applies to its directors and
executive officers. The Code of Ethics is available free of charge on our
website http://www.renre.com. We intend to disclose any amendments to our
waivers of our Code of Ethics by posting such information on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Officer and Director Compensation" in our Proxy Statement and is hereby
incorporated in this Annual Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by this item is included under the caption "Security
Ownership of Certain Beneficial Owners, Management and Directors" in our Proxy
Statement and is hereby incorporated in this Annual Report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Relationships and Related Transactions" in our Proxy Statement and is hereby
incorporated in this Annual Report by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is included under the caption "Proposal 2"
in our Proxy Statement and is hereby incorporated in this Annual Report by
reference.
67
PART 1V
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. The Consolidated Financial Statements of RenaissanceRe Holdings Ltd.
and related Notes thereto are listed in the accompanying Index to
Consolidated Financial Statements and are filed as part of this
Report.
2. The Schedules to the Consolidated Financial Statements of
RenaissanceRe Holdings Ltd. are listed in the accompanying Index to
Schedules to Consolidated Financial Statements and are filed as part
of this Report.
3.1 Memorandum of Association.(1)
3.2 Amended and Restated Bye-Laws.(14)
3.3 Memorandum of Increase in Share Capital of RenaissanceRe Holdings
Ltd.(11)
4.1 Specimen Common Share certificate.(1)
10.1 RenaissanceRe Holdings Ltd. Restricted Stock Plan.(1)
10.2 Fifth Amended and Restated Employment Agreement, dated as of November
8, 2002, between RenaissanceRe Holdings Ltd. and James N. Stanard.(18)
10.3 Amended and Restated Employment Agreement, dated as of June 30, 2003,
between RenaissanceRe Holdings Ltd. and John M. Lummis.(15)
10.4 Employment Agreement, dated as of June 30, 2003, between RenaissanceRe
Holdings Ltd. and William I. Riker.(15)
10.5 Employment Agreement, dated as of June 30, 2003, between RenaissanceRe
Holdings Ltd. and David Eklund.(15)
10.6 Amended and Restated Employment Agreement, dated as of June 30, 2003,
between Renaissance Reinsurance Ltd. and John D. Nichols, Jr.(15)
10.7 Amended and Restated Credit Agreement, dated as of August 8, 2003,
among RenaissanceRe Holdings Ltd., the Lenders named therein, Deutsche
Bank AG New York Branch, as LC Issuer and Co-Documentation Agent,
Citibank, N.A., as Syndication Agent, Bank of America, N.A., as
Administrative Agent and Bank of America Securities LLC, as Sole Lead
Arranger and Sole Book Manager.(15)
10.8 Fourth Amendment Agreement, dated as of March 22, 2002, to the Credit
Agreement, among RenaissanceRe Holdings Ltd., the Lenders listed on
the signature pages thereto, Deutsche Bank AG, as LC Issuer and Bank
of America, National Association, as Administrative Agent for the
Lenders.(18)
68
10.9 Credit Agreement, dated as of April 19, 2002, among DaVinciRe Holdings
Ltd. the Lenders named therein and Citibank, N.A., as agent for the
Lenders.(13)
10.10 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan. (4)
10.11 RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan.(3)
10.12 Amended and Restated RenaissanceRe Holdings Ltd. Non-Employee Director
Stock Plan.(2)
10.13 Amended and Restated Declaration of Trust of RenaissanceRe Capital
Trust, dated as of March 7, 1997, among RenaissanceRe Holdings Ltd.,
as Sponsor, The Bank of New York, as Property Trustee, The Bank of New
York (Delaware), as Delaware Trustee, and the Administrative Trustees
named therein.(5)
10.14 Indenture, dated as of March 7, 1997, among RenaissanceRe Holdings
Ltd., as Sponsor, and The Bank of New York, as Debenture Trustee.(5)
10.15 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between RenaissanceRe Holdings Ltd. and The Bank of New York, as
Trustee.(5)
10.16 Master Standby Letter of Credit Reimbursement Agreement, dated as of
November 2, 2001, between Renaissance Reinsurance Ltd. and Fleet
National Bank. Glencoe Insurance Ltd. and Timicuan Reinsurance Ltd.
have each become a party to this agreement pursuant to an accession
agreement, and DaVinci Reinsurance Ltd. has entered in a substantially
similar agreement with Fleet National Bank.(17)
10.17 Certificate of Designation, Preferences and Rights of 8.10% Series A
Preference Shares.(6)
10.18 Certificate of Designation, Preferences and Rights of 7.30% Series B
Preference Shares.(10)
10.19 Senior Indenture, dated as of July 1, 2001, between RenaissanceRe
Holdings Ltd., as Issuer, and Bankers Trust Company, as Trustee.(7)
10.20 First Supplemental Indenture, dated as of July 17, 2001, to the
Indenture, dated as of July 1, 2001, between RenaissanceRe Holdings
Ltd., as Issuer, and Bankers Trust Company, as Trustee.(7)
10.21 Second Supplemental Indenture, by and between RenaissanceRe Holdings
Ltd. and Deutsche Bank Trust Company Americas (f/k/a Bankers Trust
Company), dated as of January 31, 2003.(9)
10.22 Investment Agreement, dated as of September 20, 2002, by and among
RenaissanceRe Holdings Ltd., Platinum Underwriters Holdings, Ltd. and
The St. Paul Companies, Inc.(2)
10.23 First Amendment to the Investment Agreement by and among Platinum
Holdings Ltd., The St. Paul Companies, and RenaissanceRe Holdings
Ltd., dated as of November 1, 2002.(8)
10.24 Option Agreement, between Platinum Underwriters Holdings, Ltd. and
RenaissanceRe Holdings Ltd., dated as of November 1, 2002.(8)
10.25 Transfer Restrictions, Registration Rights and Standstill Agreement
between Platinum Underwriters Holdings, Ltd. and RenaissanceRe
Holdings Ltd., dated as of November 1, 2002.(8)
10.26 Services and Capacity Reservation Agreement between Platinum
Underwriters Holdings, Ltd. and RenaissanceRe Holdings Ltd., dated as
of November 1, 2002.(8)
69
10.27 Reimbursement Agreement, dated as of December 20, 2002, among
Renaissance Reinsurance Ltd., Renaissance Reinsurance of Europe,
Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., Timicuan Reinsurance
Ltd., RenaissanceRe Holdings Ltd., the Lenders named therein, Wachovia
Bank, National Association, National Australia Bank, Ltd., ING Bank
N.V., London Branch, and Barclays Bank PLC.(18)
10.28 First Amendment to Reimbursement Agreement, dated as of November 14,
2003, among Renaissance Reinsurance Ltd., Renaissance Reinsurance of
Europe, Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., Timicuan
Reinsurance Ltd., RenaissanceRe Holdings Ltd., the Lenders named
therein, Wachovia Bank, National Association, National Australia Bank,
Ltd., ING Bank N.V., London Branch, and Barclays Bank PLC.
10.29 Form of Director Retention Agreement, dated as of November 8, 2002,
entered into by each of the non-employee directors of RenaissanceRe
Holdings Ltd.(8)
10.30 Agreement to Increase Commitment, dated as of January 30, 2004, among
Renaissance Reinsurance Ltd., Renaissance Reinsurance of Europe,
Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., Timicuan Reinsurance
Ltd., RenaissanceRe Holdings Ltd. and Wachovia Bank, National
Association.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
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) Reports on Form 8-K.
On October 22, 2003, the Company furnished a report on Form 8-K containing the
Company's press release, issued on October 21, 2003, reporting its preliminary
results for its third quarter ended September 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.
- ----------
(1) Incorporated by reference to the Registration Statement on Form S-1 of
RenaissanceRe Holdings Ltd. (Registration No. 33-70008) which was
declared effective by the Commission on July 26, 1995.
(2) Incorporated by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 (Registration No. 333-90758) dated July 19,
2002.
70
(3) Incorporated by reference to Exhibit 99.2 to the Registration
Statement on Form S-8 (Registration No. 333-90758) dated June 19,
2002.
(4) Incorporated by reference to Exhibit 99.3 to the Registration
Statement on Form S-8 (Registration No. 333-90758) dated June 19,
2002.
(5) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on March 19, 1997,
relating to certain events which occurred on March 7, 1997 (SEC File
Number 000-26512).
(6) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on November 16, 2001,
relating to certain events which occurred on November 14, 2001.
(7) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on July 17, 2001,
relating to certain events which occurred on July 12, 2001.
(8) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on November 6, 2002,
relating to certain events which occurred on November 1, 2002.
(9) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on January 31, 2003,
relating to certain events which occurred on January 28, 2003.
(10) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on February 2, 2003,
relating to certain events which occurred on January 30, 2003.
(11) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended March 31, 1998, filed with
the Commission on May 14, 1998 (SEC File Number 000-26512).
(12) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 1998, filed with the
Commission on August 14, 1998 (SEC File Number 000-26512).
(13) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended March 31, 2002, filed with
the Commission on May 15, 2002.
(14) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 2002, filed with the
Commission on August 14, 2002.
(15) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 2003, filed with the
Commission on August 14, 2003.
(16) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 1998, filed with
the Commission on March 31, 1999 (SEC File Number 000-26512).
(17) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 2001 filed with
the Commission on April 1, 2002.
71
(18) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 2002 filed with
the Commission on March 31, 2003.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Hamilton, Bermuda on
March 15, 2004.
RENAISSANCERE HOLDINGS LTD.
/s/ James N. Stanard
James N. Stanard
Chief Executive Officer and
Chairman of the Board of Directors
Signature Title Date
/s/ James N. Stanard Chief Executive Officer and March 15, 2004
- -------------------- Chairman of the Board of
James N. Stanard Directors
/s/ William I. Riker President and Chief Operating March 15, 2004
- -------------------- Officer, Director
William I. Riker
/s/ John M. Lummis Executive Vice President and March 15, 2004
- ------------------ Chief Financial Officer
John M. Lummis (Principal Accounting Officer)
/s/ Thomas A. Cooper Director March 15, 2004
- --------------------
Thomas A. Cooper
/s/ Edmund B. Greene Director March 15, 2004
- --------------------
Edmund B. Greene
/s/ Brian R. Hall Director March 15, 2004
- -----------------
Brian R. Hall
/s/ William F. Hecht Director March 15, 2004
- --------------------
William F. Hecht
/s/ W. James MacGinnitie Director March 15, 2004
- ------------------------
W. James MacGinnitie
/s/ Scott E. Pardee Director March 15, 2004
- -------------------
Scott E. Pardee
73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors................................... F-2
Consolidated Balance Sheets at December 31, 2003 and 2002........ F-3
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001............................ F-4
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2003, 2002 and 2001............ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001............................ F-6
Notes to Consolidated Financial Statements....................... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENAISSANCERE HOLDINGS LTD.
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 2003 the
Company changed its method of accounting for stock compensation and in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young
Hamilton, Bermuda
January 30, 2004
F-2
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003 AND 2002
(in thousands of United States Dollars, except per share amounts)
AT
------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
ASSETS
Fixed maturity investments available for sale, at fair value (Amortized cost
$2,895,795 and $2,153,715 at December 31, 2003 and
December 31, 2002, respectively) (Note 3) $ 2,947,841 $ 2,221,109
Short term investments, at cost 660,564 570,497
Other investments, at fair value 370,280 129,918
Equity investments in reinsurance company, at fair value
(Cost $84,199 at December 31, 2003 and 2002) 145,535 120,288
Cash and cash equivalents 63,397 87,067
----------- -----------
Total investments and cash 4,187,617 3,128,879
Premiums receivable 167,996 199,449
Ceded reinsurance balances 56,852 73,360
Losses recoverable (Note 4) 149,201 199,533
Accrued investment income 22,793 25,833
Deferred acquisition costs 75,261 55,853
Other assets 69,982 62,829
----------- -----------
TOTAL ASSETS $ 4,729,702 $ 3,745,736
=========== ===========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for claims and claim expenses (Note 5) $ 977,892 $ 804,795
Reserve for unearned premiums 349,824 331,985
Debt (Note 6) 350,000 275,000
Subordinated obligation to capital trust (Note 7) 103,093 --
Reinsurance balances payable 131,629 146,732
Other liabilities 52,123 97,013
----------- -----------
TOTAL LIABILITIES 1,964,561 1,655,525
----------- -----------
Minority Interest - mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures
of the Company (Note 7) -- 84,630
Minority Interest - DaVinci (Note 8) 430,498 363,546
SHAREHOLDERS' EQUITY (Note 9)
Preference Shares: $1.00 par value - 10,000,000 shares issued and
outstanding at December 31, 2003 (2002 - 6,000,000) 250,000 150,000
Common shares and additional paid-in capital: $1.00 par value - 314,414 320,936
70,398,699 shares issued and outstanding at December 31, 2003 -
(2002 - 69,749,826 shares)
Unearned stock grant compensation -- (18,468)
Accumulated other comprehensive income 113,382 95,234
Retained earnings 1,656,847 1,094,333
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 2,334,643 1,642,035
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY $ 4,729,702 $ 3,745,736
=========== ===========
See accompanying notes to the consolidated financial statements
F-3
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2003, 2002 and 2001
(in thousands of United States Dollars, except per share amounts)
2003 2002 2001
----------- ----------- -----------
REVENUES
Gross premiums written $ 1,382,209 $ 1,173,049 $ 501,321
=========== =========== ===========
Net premiums written $ 1,152,523 $ 923,711 $ 339,547
Increase in unearned premiums (36,780) (162,806) (6,482)
----------- ----------- -----------
Net premiums earned 1,115,743 760,905 333,065
Net investment income (Note 3) 129,542 102,686 75,156
Net foreign exchange gains (losses) 13,631 3,861 (1,667)
Other income 27,070 32,821 16,244
Net realized gains on investments (Note 3) 80,504 10,177 18,096
----------- ----------- -----------
TOTAL REVENUES 1,366,490 910,450 440,894
----------- ----------- -----------
EXPENSES
Claims and claim expenses incurred (Note 5) 367,744 289,525 149,917
Acquisition expenses 194,140 95,644 45,359
Operational expenses 67,397 49,159 38,603
Corporate expenses 16,043 14,327 11,485
Interest expense 18,252 13,069 7,249
----------- ----------- -----------
TOTAL EXPENSES 663,576 461,724 252,613
----------- ----------- -----------
Income before minority interest, taxes and change
in accounting principle 702,914 448,726 188,281
Minority interest - mandatorily redeemable capital securities
of a subsidiary trust holding solely junior subordinated
debentures of the Company (Note 7) (7,470) (7,605) (7,484)
Minority interest - DaVinci (Note 8) (72,014) (55,051) (751)
----------- ----------- -----------
Income before taxes and change in accounting principle 623,430 386,070 180,046
Income tax benefit (expense) (Note 14) 18 115 (14,262)
Cumulative effect of a change in accounting principle -- (9,187) --
----------- ----------- -----------
NET INCOME 623,448 376,998 165,784
Dividends on preference shares (18,801) (12,184) (1,418)
----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 604,647 $ 364,814 $ 164,366
=========== =========== ===========
Earnings per Common Share - basic $ 8.76 $ 5.40 $ 2.76
Earnings per Common Share - diluted $ 8.52 $ 5.20 $ 2.63
See accompanying notes to the consolidated financial statements
F-4
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(in thousands of United States Dollars)
2003 2002 2001
----------- ----------- -----------
PREFERENCE SHARES
Balance - January 1 $ 150,000 $ 150,000 $ --
Issuance of shares 100,000 -- 150,000
----------- ----------- -----------
Balance - December 31 250,000 150,000 150,000
----------- ----------- -----------
COMMON SHARES AND ADDITIONAL PAID-IN CAPITAL
Balance - January 1 320,936 264,623 22,999
Issuance of common shares -- -- 232,525
Exercise of options, and issuance of restricted
stock awards (Note 17) 15,096 10,675 14,652
Offering expenses (3,150) (73) (5,553)
Cumulative effect of change in accounting for
unearned stock grant compensation (Note 17) (18,468) -- --
Stock dividend -- 45,711 --
----------- ----------- -----------
Balance - December 31 314,414 320,936 264,623
----------- ----------- -----------
UNEARNED STOCK GRANT COMPENSATION
Balance - January 1 (18,468) (20,163) (11,716)
Cumulative effect of change in accounting for
unearned stock grant compensation (Note 17) 18,468 -- --
Net stock grants awarded, cancelled -- (7,607) (15,653)
Amortization -- 9,302 7,206
----------- ----------- -----------
Balance - December 31 -- (18,468) (20,163)
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance - January 1 95,234 16,295 6,831
Net unrealized gains on securities, net of
adjustment (see disclosure below) 18,148 78,939 9,464
----------- ----------- -----------
Balance - December 31 113,382 95,234 16,295
----------- ----------- -----------
RETAINED EARNINGS
Balance - January 1 1,094,333 814,269 682,704
Net income 623,448 376,998 165,784
Dividends paid on common shares (42,133) (39,039) (32,801)
Dividends paid on preference shares (18,801) (12,184) (1,418)
Stock dividend -- (45,711) --
----------- ----------- -----------
Balance - December 31 1,656,847 1,094,333 814,269
----------- ----------- -----------
Total Shareholders' Equity $ 2,334,643 $ 1,642,035 $ 1,225,024
=========== =========== ===========
COMPREHENSIVE INCOME
Net income $ 623,448 $ 376,998 $ 165,784
Other comprehensive income 18,148 78,939 9,464
----------- ----------- -----------
Comprehensive income $ 641,596 $ 455,937 $ 175,248
=========== =========== ===========
DISCLOSURE REGARDING NET UNREALIZED GAINS
Net unrealized holding gains arising during the year $ 98,652 $ 89,116 $ 27,560
Net realized gains included in net income (80,504) (10,177) (18,096)
----------- ----------- -----------
Net unrealized gains on securities $ 18,148 $ 78,939 $ 9,464
=========== =========== ===========
See accompanying notes to the consolidated financial statements
F-5
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(in thousands of United States Dollars)
2003 2002 2001
------------ ------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income $ 623,448 $ 376,998 $ 165,784
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and depreciation 13,091 19,041 3,190
Unrealized losses (gains) included in net investment income (21,230) 1,412 --
Net realized investment gains (80,504) (10,177) (18,096)
Minority interest in undistributed net income of DaVinci 72,014 55,051 751
Change in:
Premiums receivable 31,453 (97,247) (6,780)
Ceded reinsurance balances 16,508 (21,780) (4,169)
Reserve for claims and claim expenses, net 223,429 231,236 119,314
Reserve for unearned premiums 17,839 186,124 12,513
Deferred acquisition costs (19,408) (50,015) (4,215)
Reinsurance balances payable (15,103) 30,765 65,188
Other (41,128) 57,018 8,002
------------ ------------ ------------
Net cash provided by operating activities 820,409 778,426 341,482
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of investments available for sale 12,507,381 5,775,865 3,290,264
Purchases of investments available for sale (13,155,414) (6,727,950) (3,633,332)
Net purchases of short-term investments (90,067) 166,428 (720,170)
Net purchases of other investments (216,039) -- --
Equity investments in reinsurance company -- (84,199)
Acquisition of subsidiary, net of cash acquired -- (23,495) --
------------ ------------ ------------
Net cash used in investing activities (954,139) (893,351) (1,063,238)
------------ ------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Issuance of debt, net of expenses 99,144 100,000 148,868
Issuance of preference shares, net of expenses 96,850 -- 145,275
Payment of bank loan (25,000) (8,500) (16,500)
Dividends paid - Common Shares (42,133) (39,039) (32,801)
Dividends paid - Preference Shares (18,801) (12,184) (1,418)
Net increase in minority interests -- 22,000 274,951
Issuance of common shares, net of expenses -- -- 232,525
------------ ------------ ------------
Net cash provided by financing activities 110,060 62,277 750,900
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (23,670) (52,648) 29,144
Cash and cash equivalents, beginning of year 87,067 139,715 110,571
------------ ------------ ------------
Cash and cash equivalents, end of year $ 63,397 $ 87,067 $ 139,715
============ ============ ============
See accompanying notes to the consolidated financial statements
F-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 (amounts in tables expressed in thousands of United States
dollars, except per share amounts)
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe", or the "Company"), was formed
under the laws of Bermuda on June 7, 1993. Through its subsidiaries, the Company
provides reinsurance and insurance to a broad range of customers.
- Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") is the Company's
principal subsidiary and provides property catastrophe and specialty
reinsurance coverage to insurers and reinsurers on a worldwide basis.
- The Company also manages property catastrophe reinsurance written on
behalf of joint ventures, principally including Top Layer Reinsurance Ltd.
("Top Layer Re") and DaVinci Reinsurance Ltd. ("DaVinci"). The results of
DaVinci, and the results of DaVinci's parent, DaVinciRe Holdings Ltd.
("DaVinciRe"), are consolidated in the Company's financial statements (Note
8). Renaissance Underwriting Managers, Ltd., a wholly-owned subsidiary,
acts as exclusive underwriting manager for these joint ventures in return
for fee-based income and profit participation.
- The Company's Individual Risk operations include direct insurance written
on both an admitted basis through Stonington Insurance Company
("Stonington") and on an excess and surplus lines basis through Glencoe
Insurance Ltd. ("Glencoe") and Lantana Insurance Ltd. ("Lantana"), and also
provide reinsurance coverage, principally on a quota share basis, which is
analyzed on an individual risk basis.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP") and
include the accounts of RenaissanceRe and its wholly-owned and majority-owned
subsidiaries and DaVinciRe, which are collectively referred to herein as the
"Company." All intercompany transactions and balances have been eliminated on
consolidation. Certain prior year comparatives have been reclassified to conform
to current presentations. Minority interest represents the interests of external
parties in respect of net income and shareholders' equity of DaVinciRe, and, for
periods prior to December 31, 2003, the interests of external parties in respect
of net income and shareholders' equity of RenaissanceRe Capital Trust (the
"Capital Trust") (Note 7).
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported and
disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ materially from those estimates. The most significant accounting judgment
made by management is the estimation of reserves for claims and claim expense.
Other material accounting judgments made by management include the estimation of
certain written premiums.
PREMIUMS AND RELATED EXPENSES
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on contract and policy terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserves for unearned premiums represents the portion of
premiums written that relate to the unexpired terms of contracts and policies in
force. Such reserves are computed by pro-rata methods based on statistical data
or reports received from ceding companies.
F-7
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim expenses, based on
historical and current experience, and anticipated investment income related to
those premiums are considered in determining the recoverability of deferred
acquisition costs.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management.
CLAIMS AND CLAIM EXPENSES
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Also, the Company has
recently increased its specialty reinsurance and Individual Risk premiums, but
does not have the benefit of a significant amount of its own historical
experience in these lines of business. Accordingly, the setting and reserving
for incurred losses in these lines of business could be subject to greater
variability.
Ultimate losses may vary materially from the amounts provided in the
consolidated financial statements. These estimates are reviewed regularly and,
as experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in the
consolidated statement of income in the period in which they become known and
are accounted for as changes in estimates.
INVESTMENTS AND CASH
Investments in fixed maturities and the equity investments in reinsurance
company are classified as available for sale and are reported at fair value. The
net unrealized appreciation or depreciation on these investments is included in
accumulated other comprehensive income. Investment transactions are recorded on
the trade date with balances pending settlement reflected in the balance sheet
as a component of other assets or other liabilities.
Realized gains or losses on the sale of investments are determined on the basis
of the specific identification method and include adjustments to the cost basis
of investments for declines in value that are considered to be
other-than-temporary. Net investment income includes interest and dividend
income together with amortization of market premiums and discounts and is net of
investment management and custody fees. The amortization of premium and
accretion of discount for fixed maturity securities is computed using the
interest method. The effective yield used in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when such prices are not available, by reference to broker or underwriter bid
indications and/or internal pricing valuation techniques.
Short term investments, which are managed as part of the Company's investment
portfolio and have a maturity of one year or less when purchased, are carried at
cost which approximates fair value. Cash equivalents include money market
instruments with a maturity of ninety days or less when purchased.
Other investments are carried at fair value with interest and dividend income,
income distributions and realized and unrealized gains and losses included in
net investment income.
During 2003, the Company changed 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.
GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In the
second quarter of 2002, the Company completed its initial
F-8
impairment review in compliance with the transition provisions of SFAS 142 and,
as a result, the Company decided to reflect goodwill at zero value, the low end
of an estimated range of values. In accordance with the provisions of SFAS 142,
this is required to be reflected as a cumulative effect of a change in
accounting principle in the statement of income and is required to be reflected
as if this adjustment was recorded in the first quarter of 2002.
EARNINGS PER SHARE
Basic earnings per share is based on weighted average common shares and excludes
any dilutive effects of options and restricted stock. Diluted earnings per share
assumes the exercise of all dilutive stock options and restricted stock grants.
FOREIGN EXCHANGE
The Company's functional currency is the United States dollar. Revenues and
expenses denominated in foreign currencies are translated at the prevailing
exchange rate at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates in effect at
the balance sheet date, which may result in the recognition of exchange gains or
losses which are included in the determination of net income.
VARIABLE INTEREST ENTITIES
Effective December 31, 2003, the Company adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 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. As further discussed in Note 7, the Capital Trust was
determined to be a VIE under FIN 46 and has been deconsolidated effective
December 31, 2003. This has resulted in reclassifying certain balances. The
adoption of FIN 46 did not have a material impact on the Company's financial
condition and results of operations.
STOCK INCENTIVE COMPENSATION PLANS
For the year ended December 31, 2002 and for the prior years, the Company
followed Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting for
its employee stock compensation. 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 (see Note
17).
During 2003, as a result of the Company's adoption of SFAS 123, the value of the
restricted stock grants awarded are no longer reflected as unearned stock grant
compensation as a separate component of shareholders' equity. Accordingly the
balance of unearned stock grant compensation of $18.5 million at January 1, 2003
has been reclassified from its separate account in shareholders' equity and
reflected as a reduction in additional paid-in capital.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS 123
and provides transitional disclosure requirements. In accordance with the
transitional disclosure provisions of SFAS 148, the following table sets out the
effect on the Company's net income and earnings per share for all reported
periods had the compensation cost been calculated based upon the fair value
method recommended in SFAS 123:
F-9
Year ended December 31, 2003 2002 2001
- -----------------------
---------------- --------------- --------------
Net income available to common shareholders, as reported $ 604,647 $ 364,814 $ 164,366
add: stock-based employee compensation cost included in
determination of net income 13,892 8,243 6,561
less: fair value compensation cost under SFAS 123 19,151 22,307 22,116
---------------- --------------- --------------
Pro forma net income available to common shareholders $ 599,388 $ 350,750 $ 148,811
================ =============== ==============
Earnings per share
Basic - as reported $ 8.76 $ 5.40 $ 2.76
Basic - pro forma $ 8.68 $ 5.19 $ 2.50
Diluted - as reported $ 8.52 $ 5.20 $ 2.63
Diluted - pro forma $ 8.44 $ 5.00 $ 2.39
TAXATION
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance against the deferred tax asset is provided for if and when the Company
believes that a portion of the deferred tax asset may not be realized in the
near term.
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
Gross Gross
unrealized unrealized
At December 31, 2003 Amortized cost gains losses Fair value
-------------------- --------------- ----------- ------------- -------------
U.S. treasuries and agencies $ 797,229 $ 2,385 $ (303) $ 799,311
Non-U.S. government 281,231 9,726 (600) 290,357
Corporate 810,078 39,027 (2,729) 846,376
Mortgage-backed 213,491 2,350 (478) 215,363
Asset-backed 793,766 3,556 (888) 796,434
------------ --------- ---------- ------------
$ 2,895,795 $ 57,044 $ (4,998) $ 2,947,841
============ ========= ========== ============
Gross Gross
unrealized unrealized
At December 31, 2002 Amortized cost gains losses Fair value
- -------------------- -------------- ---------- ----------- ----------
U.S. treasuries and agencies $ 644,826 $ 14,647 $ (122) $ 659,351
Non-U.S. government 367,638 13,507 (1,473) 379,672
Corporate 536,053 29,235 (3,943) 561,345
Mortgage-backed 292,551 9,106 (25) 301,632
Asset-backed 312,647 6,567 (105) 319,109
----------- ----------- ----------- -----------
$ 2,153,715 $ 73,062 $ (5,668) $ 2,221,109
=========== =========== =========== ===========
F-10
Contractual maturities of fixed maturity securities are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
At December 31, 2003 Amortized cost Fair value
- -------------------- -------------- ----------
Due in less than one year $ 24,248 $ 24,912
Due after one through five years 1,456,758 1,469,428
Due after five through ten years 276,117 296,796
Due after ten years 131,415 144,908
Mortgage-backed 213,491 215,363
Asset-backed 793,766 796,434
---------- ----------
Total $2,895,795 $2,947,841
========== ==========
Net Investment Income
The components of net investment income are as follows:
Year ended December 31, 2003 2002 2001
- ----------------------- --------- --------- ---------
Fixed maturities $ 100,666 $ 91,784 $ 65,168
Short term investments 8,158 11,137 7,785
Cash and cash equivalents 1,852 3,238 3,285
Dividends on equity investments in reinsurance company 950 -- --
Other investments 25,920 (383) 955
--------- --------- ---------
137,546 105,776 77,193
Investment expenses 8,004 3,090 2,037
--------- --------- ---------
Net investment income $ 129,542 $ 102,686 $ 75,156
========= ========= =========
The analysis of realized gains (losses) and the change in unrealized gains on
investments is as follows:
Year ended December 31, 2003 2003 2002 2001
----------------------------------- --------- --------- ---------
Gross realized gains $ 114,834 $ 67,294 $ 78,247
Gross realized losses (34,330) (57,117) (60,151)
--------- --------- ---------
Net realized gains on investments 80,504 10,177 18,096
Change in unrealized gains 18,148 78,939 9,464
--------- --------- ---------
Total realized and change in unrealized gains on investments $ 98,652 $ 89,116 $ 27,560
========= ========= =========
At December 31, 2003 $36.8 million of cash and investments at fair value were on
deposit with, or in trust accounts for the benefit of, various regulatory
authorities as required by law (2002 - $29.7 million).
Other Investments
Included in other investments are investments in hedge funds of $170.1 million
(2002 - $61.4 million), a fund that invests in senior secured bank loans of
$77.2 million (2002 - $20.4 million), a European high yield credit fund of $38.3
million (2002 - $nil) and private equity partnerships of $24.2 million (2002 -
$14.6 million) (collectively
F-11
"Investment Funds"). Also included in other investments are investments in a
medium term note, representing an interest in a pool of European fixed income
securities, of $30.0 million (2002 - $nil), catastrophe bonds of $26.3 million
(2002 - $33.5 million), and miscellaneous investments of $4.2 million (2002 -
$nil).
Fair values of Investment Funds are generally established on the basis of the
net valuation criteria established by the managers of the Investment Funds.
These net valuations are determined based upon the valuation criteria
established by the governing documents of such Investment Funds. Due to a lag in
the valuations reported by the fund managers the majority of our Investment
Funds are reported on a one month or one quarter lag. Such valuations may differ
significantly from the values that would have been used had ready markets
existed for the shares, partnership interests or notes of the Investment Funds.
Many of the Investment Funds are subject to restrictions on redemptions which
are determined by the governing documents and limit the Company's ability to
liquidate these investments in the short term. Interest income, income
distributions and realized and unrealized gains and losses on other investments,
including Investment Funds, are included in net investment income and totaled
$25.9 million (2002 - a loss of $0.4 million) of which $21.2 million (2002 -
loss of $1.4 million) was related to net unrealized gains (losses).
The Company has committed capital to private equity partnerships of $109.1
million, of which $20.3 million has been contributed at December 31, 2003.
Equity Investments in Reinsurance Company
On November 1, 2002, the Company purchased 3,960,000 common shares of Platinum
Underwriters Holdings, Ltd. ("Platinum") in a private placement transaction and
received ten-year warrants to purchase up to 2.5 million additional common
shares of Platinum for $27.00 per share. The Company purchased the common shares
and warrants for an aggregate price of $84.2 million. At December 31, 2003, the
Company owns 9.2% of Platinum's outstanding common shares. The Company records
its investments in Platinum at fair value, and at December 31, 2003 the
aggregate fair value was $145.5 million (2002 - $120.3 million). The aggregate
unrealized gain of $61.3 million (2002 - $36.1 million) is included in
accumulated other comprehensive income and includes $26.7 million (2002 - $15.9
million) of value estimated for the warrants using the Black-Scholes option
pricing model.
Derivatives Related to Physical Variables
The Company has assumed and ceded risk through catastrophe linked securities and
derivative instruments under which losses or recoveries are triggered by an
industry loss index or geological or physical variables. During 2003, 2002 and
2001, the Company recognized gains on these contracts of $0.8 million, $7.2
million, and a loss of $4.6 million, respectively, which are included in other
income.
Credit Default Swaps
From time to time the Company invests in credit default swaps. The Company
accounts for these credit derivatives at fair value and records them on its
consolidated balance sheet as other assets or other liabilities depending on the
rights or obligations. The fair value of these credit derivatives, as recognized
in other liabilities in our balance sheet, at December 31, 2003 was a liability
of $3.5 million. During 2003, we recorded losses of $4.2 million in our
consolidated statement of income, including the $3.5 million liability on the
balance sheet at December 31, 2003.
NOTE 4. CEDED REINSURANCE
The Company uses reinsurance to reduce its exposure to large losses. The Company
currently has in place contracts that provide for recovery of a portion of
certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. The Company would remain liable to the extent
that any reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $246.0 million, $218.0 million and $155.7
million for 2003, 2002 and 2001, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance contracts
also provide for recoveries of additional premiums, reinstatement premiums and
lost no claims bonuses, which are incurred when losses are ceded
F-12
to reinsurance contracts. Total recoveries netted against premiums and claims
and claim expenses incurred were $21.6 million, $63.0 million and $160.4 million
for 2003, 2002 and 2001, respectively. At December 31, 2003, the Company has
recorded a $11.6 million valuation allowance against losses recoverable (2002 -
$7.8 million).
NOTE 5. RESERVE FOR CLAIMS AND CLAIM EXPENSES
For the Company's Reinsurance operations, estimates of claims and claim expenses
are based in part upon the estimation of claims resulting from catastrophic
events. Estimation by the Company of claims resulting from catastrophic events
is inherently difficult because of the potential severity of property
catastrophe claims. Additionally, the Company has recently increased its
Individual Risk and specialty reinsurance premiums but does not have the benefit
of a significant amount of its own historical experience in these lines.
Therefore, the Company uses both proprietary and commercially available models,
as well as historical reinsurance industry property catastrophe claims
experience, for purposes of evaluating future trends and providing an estimate
of ultimate claims costs.
For both the Company's Reinsurance and Individual Risk operations, the Company
uses statistical and actuarial methods to estimate ultimate expected claims and
claim expenses. The period of time from the reporting of a loss to the Company
and the settlement of the Company's liability may be several years. During this
period, additional facts and trends will be revealed. As these factors become
apparent, case reserves will be adjusted, sometimes requiring an increase or
decrease in the overall reserves of the Company, and at other times requiring a
reallocation of incurred but not reported ("IBNR") reserves to specific case
reserves. These estimates are reviewed regularly, and such adjustments, if any,
are reflected in results of operations in the period in which they become known
and are accounted for as changes in estimates. Adjustments to the Company's
claims and claim expense reserves can impact current year net income by either
increasing net income if the estimates of prior year claims and claim expense
reserves prove to be overstated or by decreasing net income if the estimates of
prior year claims and claim expense reserves prove to be insufficient.
Activity in the liability for unpaid claims and claim expenses is summarized as
follows:
Year ended December 31, 2003 2002 2001
- ----------------------- --------- --------- ---------
Net reserves as of January 1 $ 605,262 $ 355,321 $ 237,014
Net reserves assumed (released) in acquisition (sale)
of subsidiary (2,090) 33,579 --
Net incurred related to:
Current year 462,816 291,520 165,914
Prior years (95,072) (1,995) (15,997)
--------- --------- ---------
Total net incurred 367,744 289,525 149,917
--------- --------- ---------
Net paid related to:
Current year 61,770 10,017 20,470
Prior years 80,455 63,146 11,140
--------- --------- ---------
Total net paid 142,225 73,163 31,610
--------- --------- ---------
Total net reserves as of December 31 828,691 605,262 355,321
Losses recoverable as of December 31 149,201 199,533 217,556
--------- --------- ---------
Total gross reserves as of December 31 $ 977,892 $ 804,795 $ 572,877
========= ========= =========
F-13
The prior year favorable development in 2003 was due primarily to the reduced
level of payment and loss activity associated with our property catastrophe
reserves from older accident years. The prior year favorable development in 2001
was due primarily to net additional recoveries on 1999 property catastrophe loss
events. The Company's total gross reserve for IBNR claims was $596.6 million at
December 31, 2003 (2002 - $462.9 million).
Claims and claim expenses incurred were reduced by $23.0 million during 2003
(2002 - $15.0 million) related to income earned on an assumed reinsurance
contract that is classified as an underwriting-risk only deposit contract. A
deposit liability of $80.0 million is included in reinsurance balances payable
at December 31, 2003 (2002 - $103.0 million).
NOTE 6. DEBT
In January 2003, the Company issued $100 million of 5.875% Senior Notes due
February 15, 2013, with interest on the notes payable on February 15 and August
15 of each year, commencing August 15, 2003. In July 2001, the Company issued
$150 million of 7.0% Senior Notes due July 15, 2008 with interest on the notes
payable on January 15 and July 15 of each year. The notes can be redeemed by the
Company prior to maturity subject to payment of a "make-whole" premium; however,
the Company has 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.
The Company was in compliance with the related covenants at December 31, 2003
and 2002. At December 31, 2003, the fair value of the 5.875% Senior Notes was
$103.1 million and the fair value of the 7.0% Senior Notes was $167.7 million
(2002 - $164.0 million).
In April 2002, DaVinciRe entered into a credit agreement providing for a $100
million committed revolving credit facility. In May 2002, DaVinciRe borrowed the
full $100 million available under this facility to repay $100 million bridge
financing provided by RenaissanceRe. Neither RenaissanceRe nor Renaissance
Reinsurance is a guarantor of this facility and the lenders have no recourse
against RenaissanceRe or its subsidiaries other than DaVinciRe under this
facility. Pursuant to the terms of the $400 million credit facility maintained
by RenaissanceRe, a default by DaVinciRe on its obligations will not result in a
default under the RenaissanceRe facility (see below). At December 31, 2003, the
full amount was outstanding under the DaVinciRe facility and the fair value
approximated the carrying value. Interest rates on the facility are based on a
spread above LIBOR, and averaged approximately 2.09% during 2003 (2002 - 2.63%).
The credit agreement contains certain covenants requiring DaVinciRe to maintain
a debt to capital ratio of 30% or below and a minimum net worth of $230 million.
At December 31, 2003, DaVinciRe was in compliance with the covenants of this
agreement.
On August 8, 2003, RenaissanceRe amended and restated its committed revolving
credit agreement to increase the facility from $310 million to $400 million and
to make certain other changes. The interest rates on this facility are based on
a spread above LIBOR. No balance was outstanding at December 31, 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 the consolidated net worth (the
"Net Worth Requirements") of RenaissanceRe and Renaissance Reinsurance shall
equal or exceed $1 billion and $500 million, respectively, subject to certain
adjustments under certain circumstances in the case of the Debt to Capital Ratio
and certain grace periods in the case of the Net Worth Requirements, all as more
fully set forth in the agreement. The scheduled commitment termination date
under the amended agreement is August 8, 2006.
Glencoe U.S. had a $10 million term loan and a $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
were based upon a spread above LIBOR, and averaged 1.85% during 2003 (2002 -
2.35%). The outstanding balances of the term loan and revolving credit facility,
totaling $25 million, were repaid in full in June 2003 and the term loan and
revolving loan facility were terminated.
Aggregate interest payments on the above debt totaled $15.9 million, $12.9
million and $1.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
NOTE 7. SUBORDINATED OBLIGATION TO CAPITAL TRUST (CAPITAL SECURITIES)
F-14
In March 1997, the Company issued $100 million aggregate liquidation amount of
mandatorily redeemable capital securities ("Capital Securities") through a
subsidiary trust holding solely $103.1 million of the Company's 8.54% junior
subordinated debentures due March 1, 2027. The Capital Securities pay cumulative
cash distributions at an annual rate of 8.54%, payable semi-annually. The
Capital Trust is a wholly-owned subsidiary of the Company and was consolidated
into the Company's consolidated financial statements up until the Company's
adoption of FIN 46 at December 31, 2003. For periods prior to the adoption of
FIN 46, the Capital Securities and the related dividends are reflected in the
consolidated financial statements as a minority interest. The Company's
guarantee of the distributions on the Capital Securities issued by the Capital
Trust, when taken together with the Company's obligations under an expense
reimbursement agreement with the Capital Trust, provides full and unconditional
guarantee of amounts due on the Capital Securities issued by the Capital Trust.
Upon the adoption of FIN 46 at December 31, 2003, the Capital Trust was
determined to be a variable interest entity and the Company was determined not
to be the primary beneficiary of the Capital Trust. Accordingly the Capital
Trust was deconsolidated from the Company's consolidated financial statements at
December 31, 2003. As a result, the balance of the Capital Securities,
previously classified as minority interest, has been reclassified in the
Company's consolidated balance sheet at December 31, 2003 and the $103.1 million
subordinated obligation to the Capital Trust is recognized on the Company's
consolidated balance sheet at December 31, 2003 as a liability. In addition,
equity interests in the Capital Trust and purchased Capital Securities held by
the Company are included in investments at December 31, 2003. These investments
include $15.4 million of Capital Securities purchased by the Company and $3.1
million of common stock issued by the Capital Trust to the Company in March
1997, both of which are eliminated on consolidation for periods prior to the
adoption of FIN 46 on December 31, 2003. The adjustments required to
deconsolidate the Capital Trust represent reclassifications and there was no
impact on consolidated net income.
During 2003, the Company did not purchase any Capital Securities (2002 - $3.0
million). The Company has purchased an aggregate $15.4 million of the Capital
Securities since their issuance in 1997.
NOTE 8. MINORITY INTEREST
In October 2001, the Company formed DaVinciRe and DaVinci with other equity
investors. RenaissanceRe owns a minority economic interest in DaVinciRe;
however, because RenaissanceRe controls a majority of DaVinciRe's outstanding
voting rights, the consolidated financial statements of DaVinciRe are included
in the consolidated financial statements of the Company. The 75% portion of
DaVinciRe's earnings and shareholders' equity held by third parties is recorded
in the consolidated financial statements as minority interest.
NOTE 9. SHAREHOLDERS' EQUITY
The aggregate authorized capital of the Company is 325,000,000 shares consisting
of 225,000,000 common shares and 100,000,000 preference shares. The Company's
225,000,000 authorized $1.00 par value common shares consist of three separate
series with differing voting rights as follows:
At December 31, 2003 Remaining authorized Outstanding
- -------------------- -------------------- -----------
Full Voting Common Shares
(includes all shares registered and available to the public) 127,971,133 66,849,099
Diluted Voting Class I Common Shares 10,224,185 3,549,600
Diluted Voting Class II Common Shares 185,532 --
----------- ----------
138,380,850 70,398,699
=========== ==========
In October 2001, the Company issued 7.5 million common shares for proceeds, net
of fees, discounts and commissions, of $232.5 million. Costs associated with the
sale of the shares of $3.2 million were deducted from the
F-15
related proceeds. The net amount received in excess of common share par value
was recorded in additional paid-in capital.
In February 2003, the Company raised $100 million through the issuance of
4,000,000 Series B preference shares at $25 per share, and in November 2001, the
Company raised $150 million through the issuance of 6,000,000 Series A
preference shares at $25 per share. The Series B and Series A preference shares
may be redeemed at $25 per share at the Company's option on or after February 4,
2008 and November 19, 2006, respectively. Dividends on the Series B and Series A
preference shares are cumulative from the date of original issuance and are
payable quarterly in arrears at 7.3% and 8.1%, respectively, when, if, and as
declared by the Board of Directors. If the Company submits a proposal to its
shareholders concerning an amalgamation or submits any proposal that, as a
result of any changes to Bermuda law, requires approval of the holders of these
preference shares to vote as a single class, the Company may redeem the Series B
and Series A preference shares prior to February 4, 2008 and November 19, 2006,
respectively, at $26 per share. The preference shares have no stated maturity
and are not convertible into any other securities of the Company.
The Diluted Voting shareholders vote together with the common shareholders. The
Diluted Voting I Shares are limited to a fixed voting interest in the Company of
up to 9.9% on most corporate matters. The Diluted Voting shareholders are
entitled to the same rights, including receipt of dividends and the right to
vote on certain significant corporate matters, and are subject to the same
restrictions as the common shareholders. During 2001, $0.9 million of the
Diluted Voting I Shares were sold pursuant to shelf registrations on Form S-3.
The Diluted Voting I Shares sold were subsequently converted into common shares.
The Company currently does not intend to register or list the Diluted Voting
Shares on the New York Stock Exchange.
In August 2003, the Board authorized a share repurchase program 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 the capital
requirements of the Company. No shares were repurchased during 2003, 2002 or
2001. Common shares repurchased by the Company are normally cancelled and
retired.
NOTE 10. EARNINGS PER SHARE
The Company uses SFAS 128, "Earnings per Share" to account for its weighted
average shares. The numerator in both the Company's basic and diluted earnings
per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares
outstanding (in thousands of per share amounts):
Year ended December 31, 2003 2002 2001
- ----------------------- ------ ------ ------
(thousands of shares)
Weighted average shares - basic 69,039 67,555 59,490
Per share equivalents of employee stock
options and restricted shares 1,963 2,656 2,901
------ ------ ------
Weighted average shares - diluted 71,002 70,211 62,391
====== ====== ======
NOTE 11. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Other assets include the Company's investment in Top Layer Re of $34.9 million
(2002 - $36.1 million), which is 50% owned by Renaissance Reinsurance and is
carried using the equity method. The Company's earnings from Top Layer Re
totaled $21.2 million for the year ended December 31, 2003 (2002 - $22.3
million) and are included in other income. During 2003, the Company also
received distributions from Top Layer Re of $22.4 million (2002 - $9.7 million),
and a management fee of $3.0 million (2002 - $2.9 million).
F-16
During the years ended December 31, 2003, 2002 and 2001, the Company received
80.4%, 71.1% and 76.9%, respectively, of its reinsurance premium assumed from
four reinsurance brokers. Subsidiaries and affiliates of Marsh Inc., the
Benfield Group Limited, the Willis Group and AON Corporation accounted for
approximately 24.7%, 24.4%, 15.7% and 15.6%, respectively, of the Reinsurance
segment's gross premiums written in 2003.
NOTE 12. GOODWILL
In connection with the Company's adoption of SFAS 142, the Company wrote-off the
balance of its goodwill during the second quarter of 2002, which totaled $9.2
million. As required by SFAS 142, this charge has been reflected in the
statement of income as a cumulative effect of a change in accounting principle.
The following table sets forth the effect of goodwill amortization on
comparative period earnings:
Year ended December 31, 2001
- ----------------------- --------
Net income available to common shareholders, as reported $164,366
Add back: goodwill amortization expense 557
--------
Adjusted net income available to common shareholders $164,923
========
Average common shares outstanding - basic 59,490
Average common shares outstanding - diluted 62,391
Adjusted per common share data
Earnings per common share - basic $ 2.77
Earnings per common share - diluted $ 2.64
NOTE 13. DIVIDENDS
Dividends declared and paid on Common Shares amounted to $0.60, $0.57 and $0.53
per common share for the years ended December 31, 2003, 2002, and 2001,
respectively.
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 common share and per common share information provided
in these financial statements is presented as if the stock dividend had occurred
for all periods.
The total amount of dividends paid to holders of the common shares during 2003,
2002 and 2001 was $42.1 million, $39.0 million and $32.8 million, respectively.
NOTE 14. TAXATION
Under current Bermuda law, the Company is not required to pay taxes in Bermuda
on either income or capital gains. Income from the Company's U.S.-based
subsidiaries is subject to taxes imposed by U.S. authorities. Renaissance
Reinsurance of Europe is subject to the taxation laws of Ireland.
Income tax expense (benefit) for 2003, 2002 and 2001 is comprised as follows:
F-17
Year ended December 31, 2003 Current Deferred Total
- ---------------------------- -------- -------- --------
U.S. federal $ -- $ (18) $ (18)
U.S. state and local -- -- --
-------- -------- --------
$ -- $ (18) $ (18)
======== ======== ========
Year ended December 31, 2002
- ----------------------------
U.S. federal $ -- $ (115) $ (115)
U.S. state and local -- -- --
-------- -------- --------
$ -- $ (115) $ (115)
======== ======== ========
Year ended December 31, 2001
- ----------------------------
U.S. federal $ 2,369 $ 11,872 $ 14,241
U.S. state and local 21 -- 21
-------- -------- --------
$ 2,390 $ 11,872 $ 14,262
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
At December 31, 2003 2002
- --------------- -------- --------
Deferred tax assets
Allowance for doubtful accounts $ 533 $ 1,683
Unearned premium adjustment 1,215 330
Claims reserves, principally due to discounting for tax 1,641 1,409
Retroactive reinsurance gain 1,492 1,892
Net operating loss carryforwards 24,775 22,392
Goodwill 3,542 3,924
Others 568 1,509
-------- --------
$ 33,766 $ 33,139
-------- --------
Deferred tax liabilities
Other (419) (1,428)
-------- --------
Net deferred tax asset before valuation allowance $ 33,347 $ 31,711
Valuation allowance (29,342) (27,724)
-------- --------
Net deferred tax asset $ 4,005 $ 3,987
======== ========
The net deferred tax asset is included in other assets in the consolidated
balance sheet. Net operating loss carryforwards of $72.9 million (2002 - $65.9
million) are available to offset regular taxable U.S. income during the
carryforward period (through 2023).
F-18
During 2003, the Company recorded additions to the valuation allowance of $1.6
million. The Company's deferred tax asset relates primarily to net operating
loss carryforwards that are available to offset future taxes payable by the
Company's U.S. subsidiaries. Although the net operating losses, which gave rise
to a deferred tax asset have a carryforward period through 2023, the Company's
U.S. operations did not generate taxable income during the year ended December
31, 2003 or during prior years. Accordingly, under the circumstances, and until
the Company's U.S. operations begin to generate significant taxable income, the
Company believes that it is necessary to establish and maintain a valuation
allowance against a significant portion of the net deferred tax asset.
The Company was not liable for and accordingly paid no income taxes in the years
ended December 31, 2003 and 2002.
NOTE 15. GEOGRAPHIC INFORMATION
Financial information relating to gross premiums written by geographic region is
as follows:
Year ended December 31, 2003 2002 2001
- ------------------------- ---------- ---------- --------
Property catastrophe
United States and Caribbean $ 297,954 $ 310,090 $180,305
Europe 156,156 86,461 20,414
Worldwide 126,541 169,790 93,474
Australia and New Zealand 26,588 2,127 12,159
Worldwide (excluding U.S.) (1) 14,968 56,628 45,111
Other 21,458 18,354 22,433
Specialty reinsurance (2) 291,820 247,020 77,468
---------- ---------- --------
Total Reinsurance (3) 935,485 890,470 451,364
Individual Risk (4) 446,724 282,579 49,957
---------- ---------- --------
Total gross written premium $1,382,209 $1,173,049 $501,321
========== ========== ========
(1) The category Worldwide (excluding U.S.) consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross written premiums written to date is predominantly from
Europe and Japan.
(2) The category Specialty Reinsurance consists of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks
being Worldwide.
(3) Excludes $20.8 million and $22.2 million of premium assumed from the
Individual Risk segment in 2003 and 2002, respectively.
(4) The category Individual Risk consists of contracts that are primarily
exposed to U.S. risks.
NOTE 16. SEGMENT REPORTING
The Company has two reportable segments: Reinsurance operations and Individual
Risk operations. The Reinsurance segment, which includes the results of
DaVinciRe, primarily provides property catastrophe reinsurance and specialty
reinsurance to selected insurers and reinsurers on a worldwide basis. We define
the Individual Risk segment to include underwriting that involves understanding
the characteristics of the original underlying insurance policy. The Individual
Risk segment currently provides insurance written on both an admitted basis and
an excess and surplus lines basis, and also provides reinsurance on a quota
share basis.
Data for the years ended December 31, 2003, 2002 and 2001 is as follows:
F-19
Year ended December 31, 2003 Reinsurance Individual Risk Eliminations (1) Other (2) Total
---------------------------- ----------- --------------- ---------------- --------- ----------
Gross premiums written $956,257 $446,724 $ (20,772) $ -- $1,382,209
======== ======== ========= ========= ==========
Net premiums written $789,769 $362,754 -- $1,152,523
======== ======== ==========
Net premiums earned $809,360 $306,383 -- $1,115,743
Claims and claim expenses incurred 209,197 158,547 -- 367,744
Acquisition expenses 93,227 100,913 -- 194,140
Operational expenses 52,504 14,893 -- 67,397
-------- -------- --------- ----------
Underwriting income $454,432 $ 32,030 -- 486,462
======== ======== --------- ----------
Other items $ 118,185 118,185
========= ----------
Net income available to common shareholders $ 604,647
==========
Claims and claim expense ratio 25.8% 51.7% 33.0%
Underwriting expense ratio 18.0% 37.8% 23.4%
-------- -------- ----------
Combined ratio 43.8% 89.5% 56.4%
======== ======== ==========
(1) Represents premium ceded from Individual Risk segment to Reinsurance
segment.
(2) The Other segment consists of other items, which includes net investment
income, net foreign exchange gains, other income, net realized gains on
investments, corporate expenses, interest expense, minority interests,
income tax benefit and dividends on preference shares.
Year ended December 31, 2002 Reinsurance Individual Risk Eliminations (1) Other (2) Total
---------------------------- ----------- --------------- ---------------- --------- ----------
Gross premiums written $912,695 $282,579 $ (22,225) $ -- $1,173,049
======== ======== ========= ========= ==========
Net premiums written $696,610 $227,101 -- $ 923,711
======== ======== ==========
Net premiums earned $667,926 $ 92,979 -- $ 760,905
Claims and claim expenses incurred 249,316 40,209 -- 289,525
Acquisition expenses 70,698 24,946 -- 95,644
Operational expenses 39,264 9,895 -- 49,159
-------- -------- --------- ----------
Underwriting income $308,648 $ 17,929 -- 326,577
======== ======== --------- ----------
Other items $ 38,237 38,237
========= ----------
Net income available to common shareholders $ 364,814
==========
Claims and claim expense ratio 37.3% 43.2% 38.1%
Underwriting expense ratio 16.5% 37.5% 19.0%
-------- -------- ----------
Combined ratio 53.8% 80.7% 57.1%
======== ======== ==========
(1) Represents premium ceded from Individual Risk segment to Reinsurance
segment.
(2) The Other segment consists of other items, which includes net investment
income, net foreign exchange gains, other income, net realized gains on
investments, corporate expenses, interest expense, minority interests,
income tax benefit and dividends on preference shares.
F-20
Year ended December 31, 2001 Reinsurance Individual Risk Other (1) Total
---------------------------- ----------- --------------- --------- ----------
Gross premiums written $451,364 $ 49,957 $ -- $ 501,321
======== ======== ========= ==========
Net premiums written $326,680 $ 12,867 -- $ 339,547
======== ======== ==========
Net premiums earned $325,223 $ 7,842 -- $ 333,065
Claims and claim expenses incurred 152,341 (2,424) -- 149,917
Acquisition expenses 44,029 1,330 -- 45,359
Operational expenses 28,198 10,405 -- 38,603
-------- -------- --------- ----------
Underwriting income $100,655 $ (1,469) -- 99,186
======== ======== --------- ----------
Other items $ 65,180 65,180
========= ----------
Net income available to common shareholders $ 164,366
==========
Claims and claim expense ratio 46.8% (30.9)% 45.0%
Underwriting expense ratio 22.2% 149.6% 25.2%
-------- -------- ----------
Combined ratio 69.0% 118.7% 70.2%
======== ======== ==========
(1) The Other segment consists of other items, which includes net investment
income, net foreign exchange gains, other income, net realized gains on
investments, corporate expenses, interest expense, minority interests,
income tax benefit and dividends on preference shares.
The Company does not manage its assets by segment and therefore total assets are
not allocated to the segments.
NOTE 17. STOCK INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
The Company has a stock incentive plan under which all employees of the Company
and its subsidiaries may be granted stock options and restricted stock awards. A
stock option award under the Company's stock incentive plan allows for the
purchase of the Company's common shares at a price that is generally equal to
the five day average closing price of the common shares immediately prior to the
date of grant. Options to purchase common shares are granted periodically by the
Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The fair value of option grants is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield
of 1.4%, 1.4% and 1.7%; expected option life of five years for all years;
expected volatility of 30%, 30% and 31%; and a risk-free interest rate of 1.8%,
2.7% and 4.8%.
The following is a table of the changes in options outstanding for 2003, 2002
and 2001, respectively:
F-21
Awards Weighted Average
available for options exercise Fair value of Range of
grant outstanding price options exercise prices
---------- ---------- ------ ------ ---------------
Balance, December 31, 2000 595,062 6,068,553 $15.50
- --------------------------
Authorized 2,850,000 --
Options granted (1,500,867) 1,500,867 $30.61 $ 8.56 $21.35 - $33.85
Options forfeited 97,668 (97,668) $18.27
Options exercised -- (2,195,037) $18.44
Shares turned in or withheld 1,346,178 --
Restricted stock issued (716,748) --
Restricted stock forfeited 47,394 --
---------- ---------- ------ ------ ---------------
Balance, December 31, 2001 2,718,687 5,276,715 $18.97
- --------------------------
Authorized 2,550,000 --
Options granted (2,637,929) 2,637,929 $39.30 $ 6.47 $29.77 - $42.74
Options forfeited 137,655 (137,655) $18.95
Options exercised -- (3,597,769) $22.09
Shares turned in or withheld 2,114,379 --
Restricted stock issued (380,233) --
Restricted stock forfeited 68,660 --
---------- ---------- ------ ------ ---------------
Balance, December 31, 2002 4,571,219 4,179,220 $28.93
- --------------------------
Authorized -- --
Options granted (435,762) 435,762 $45.38 $10.99 $39.16 - $48.00
Options forfeited 23,000 (23,000) $12.40
Options exercised (295,627) $13.01
Shares turned in or withheld 74,344 --
Restricted stock issued (359,727) --
Restricted stock forfeited 571 --
---------- ---------- ------ ------ ---------------
Balance, December 31, 2003 3,873,645 4,296,355 $31.73
- --------------------------
Total options exercisable at
December 31, 2003 2,737,916
The Company's 2001 Stock Incentive Plan allows for the issuance of share-based
awards, the issuance of restricted common shares, the issuance of reload options
for shares tendered in connection with option exercises and a provision in the
calculation of shares available for issuance thereunder by deeming the number of
shares tendered to or withheld by the Company in connection with certain option
exercises to be so available.
The Company has also established a Non-Employee Director Stock Incentive Plan to
issue stock options and shares of restricted stock. Under the plan, the total
number of shares available for distribution at December 31, 2003 was 643,494
shares. At December 31, 2003, the number of options issued to directors and
unexercised was 300,000. In 2003, no options to purchase common shares were
granted and 13,206 restricted common shares were granted. In 2002, 12,000
options to purchase common shares were granted and 3,132 restricted common
shares were granted. In 2001, 12,000 options to purchase common shares and 5,616
restricted common shares were granted. The options and restricted common shares
vest ratably over three years.
Restricted common shares issued to employees normally vest ratably over a four
to five year period. During the restricted period, the employee receives
dividends and votes the restricted common shares, but the restricted shares may
not be sold, transferred or assigned. In 2003, 2002 and 2001 the Board of
Directors granted 359,727, 380,233 and 716,748 restricted shares with a value of
$16.0 million, $14.6 million and $17.2 million to certain employees. Prior to
2003, the value of the restricted shares awarded was recorded as unearned stock
grant compensation and
F-22
was presented as a separate component of shareholders' equity. During 2003 the
Company adopted SFAS 123, as amended by SFAS 148, and in accordance with the
provisions of SFAS 123 the value of the restricted stock grants awarded are no
longer reflected as unearned stock grant compensation as a separate component of
shareholders' equity. Accordingly the balance of unearned stock grant
compensation of $18.5 million at January 1, 2003 has been reclassified from its
separate account in shareholders' equity and reflected as a reduction in
additional paid-in capital. Under SFAS 123 the Company estimates the fair value
of restricted stock awards at the date of grant and amortizes this value as an
expense over the vesting period. Compensation expense related to the issuance of
restricted stock was $13.0 million, $8.2 million and $6.6 million in 2003, 2002
and 2001, respectively.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 18. STATUTORY REQUIREMENTS
Under the Insurance Act 1978, amendments thereto and Related Regulations of
Bermuda ("the Act"), certain subsidiaries of the Company are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires these subsidiaries of the Company to maintain
certain measures of solvency and liquidity. At December 31, 2003 the statutory
capital and surplus of the Bermuda subsidiaries was $2.4 billion and the amount
required to be maintained under Bermuda law was $457.5 million.
Under the Act, Renaissance Reinsurance and DaVinci are classified as Class 4
insurers, and are, therefore, restricted as to the payment of dividends in the
amount of 25% of the prior year's statutory capital and surplus, unless at least
two members of the Board of Directors attest that a dividend in excess of this
amount would not cause the company to fail to meet its relevant margins. During
2003, Renaissance Reinsurance declared aggregate cash dividends to the Company
of $322.3 million (2002 - $224.3 million). During 2003 DaVinci declared
aggregate cash dividends of $81.6 million (2002 - $3.5 million).
Under the Act, Glencoe is classified as a Class 3 insurer and Glencoe is also
eligible as an excess and surplus lines insurer in a number of states in the
U.S. Under the various capital and surplus requirements in Bermuda and in these
states, Glencoe is required to maintain a minimum of capital and surplus. In
this regard, the declaration of dividends from retained earnings and
distributions from additional paid-in capital are limited to the extent that the
above requirement is met. During 2003, Glencoe declared aggregate cash dividends
to the Company of $18.0 million (2002 - $nil).
The Company's U.S. insurance subsidiary, Stonington, is subject to various
statutory and regulatory restrictions regarding the payment of dividends. The
restrictions are determined using risk based capital tests, which is the
threshold that constitutes the authorized control level. If Stonington's
statutory capital and surplus falls below the authorized control level, the
commissioner is authorized to take whatever regulatory actions considered
necessary to protect policyholders and creditors. At December 31, 2003, the
statutory capital and surplus of Stonington was $28.8 million and the maximum
dividend we could pay in 2004 without prior approval was $2.6 million.
NOTE 19. COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and, except for U.S. Government securities, none of the Company's
investments exceeded 10% of shareholders' equity at December 31, 2003.
Concentrations of credit risk with respect to reinsurance balances are limited
due to their dispersion across various companies and geographies.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's investment guidelines permit, subject to specific approval,
investments in derivative instruments such as futures, options, foreign currency
forward contracts and swap agreements, which may be used to assume risk or for
hedging purposes.
F-23
LETTERS OF CREDIT
At December 31, 2003, the Company's bankers have issued letters of credit of
approximately $346.9 million in favor of certain ceding companies. Also, in
connection with the Top Layer Re joint venture, the Company has committed $37.5
million of capital in the form of a letter of credit. The letters of credit are
secured by cash and investments of similar amounts.
EMPLOYMENT AGREEMENTS
The Board of Directors has authorized the execution of employment agreements
between the Company and certain officers. These agreements provide for severance
payments under certain circumstances, as well as accelerated vesting of options
and restricted stock grants, upon a change in control, as defined therein and by
the Company's 2001 Stock Incentive Plan.
LITIGATION
The Company is party to various lawsuits arising in the normal course of
business. The Company does not believe that any of its pending litigation will
have a material impact on its consolidated financial statements.
NOTE 20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(amounts in tables expressed in thousands of United States dollars, except
per share amounts)
F-24
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30, December 31,
------------------- ------------------ -------------------- -------------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- --------- -------- -------- --------- --------- -------- ---------
Gross premium written $685,167 $ 460,834 $212,560 $270,294 $ 313,317 $ 282,597 $171,165 $ 159,324
======== ========= ======== ======== ========= ========= ======== =========
Net premiums written $590,370 $ 379,096 $160,223 $198,517 $ 236,570 $ 192,687 $165,360 $ 153,411
======== ========= ======== ======== ========= ========= ======== =========
Net premiums earned $263,474 $ 150,308 $275,535 $184,742 $ 277,364 $ 191,310 $299,370 $ 234,545
Net investment income 31,434 23,129 34,109 26,155 28,280 23,737 35,719 29,665
Net foreign exchange gains (losses) 3,951 (1,950) 7,640 3,650 252 888 1,788 1,273
Other income 5,505 8,129 7,238 8,147 7,979 7,951 6,348 8,594
Net realized investment gains (losses) 21,112 340 49,660 3,177 1,172 10,219 8,560 (3,559)
-------- --------- -------- -------- --------- --------- -------- ---------
Total revenues 325,476 179,956 374,182 225,871 315,047 234,105 351,785 270,518
-------- --------- -------- -------- --------- --------- -------- ---------
Claims and claim expenses incurred 82,780 43,118 100,076 73,149 96,856 82,931 88,032 90,327
Acquisition costs 42,133 18,549 40,704 20,368 56,317 23,802 54,986 32,925
Operational expenses 14,907 10,663 16,332 9,962 17,882 9,616 18,276 18,918
Corporate expenses 3,468 2,690 4,677 4,688 4,456 3,466 3,442 3,483
Interest expense 5,954 2,714 7,162 3,433 6,145 3,499 6,461 3,423
-------- --------- -------- -------- --------- --------- -------- ---------
Total expenses 149,242 77,734 168,951 111,600 181,656 123,314 171,197 149,076
-------- --------- -------- -------- --------- --------- -------- ---------
Income before minority interest and taxes 176,234 102,222 205,231 114,271 133,391 110,791 180,588 121,442
Minority interest - Capital Securities -- 1,833 -- 1,831 -- 1,759 -- 2,182
Minority interest - DaVinci 20,885 9,477 20,150 13,470 15,211 17,689 15,768 14,415
-------- --------- -------- -------- --------- --------- -------- ---------
Income before taxes 155,349 90,912 185,081 98,970 118,180 91,343 164,820 104,845
Income tax benefit (expense) 55 (596) -- 273 (37) (59) -- 497
Cumulative effect of a change in accounting
principle - SFAS 142 - Goodwill -- (9,187) -- -- -- -- -- --
-------- --------- -------- -------- --------- --------- -------- ---------
Net income 155,404 81,129 185,081 99,243 118,143 91,284 164,820 105,342
Dividends on preference shares 4,119 3,038 4,917 3,003 4,903 3,038 4,862 3,105
-------- --------- -------- -------- --------- --------- -------- ---------
Net income available to common shareholders $151,285 $ 78,091 $180,164 $ 96,240 $ 113,240 $ 88,246 $159,958 $ 102,237
======== ========= ======== ======== ========= ========= ======== =========
Earnings per common share - basic $ 2.21 $ 1.17 $ 2.62 $ 1.43 $ 1.63 $ 1.30 $ 2.31 $ 1.50
Earnings per common share - diluted $ 2.14 $ 1.12 $ 2.54 $ 1.37 $ 1.59 $ 1.26 $ 2.25 $ 1.45
Weighted average shares - basic 68,593 66,788 68,914 67,326 69,307 67,865 69,341 68,241
Weighted average shares - diluted 70,564 69,787 71,056 70,209 71,187 70,272 71,202 70,574
Claims and claim expense ratio 31.4% 28.7% 36.3% 39.6% 34.9% 43.3% 29.4% 38.5%
Underwriting expense ratio 21.6% 19.4% 20.7% 16.4% 26.8% 17.5% 24.5% 22.1%
-------- --------- -------- -------- --------- --------- -------- ---------
Combined ratio 53.0% 48.1% 57.0% 56.0% 61.7% 60.8% 53.9% 60.6%
======== ========= ======== ======== ========= ========= ======== =========
F-25
RENAISSANCERE HOLDINGS LTD AND SUBSIDIARIES.
INDEX TO SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors on Schedules................................ S-2
I Summary of Investments other than Investments in Related Parties... S-3
II Condensed Financial Information of Registrant...................... S-4
III Supplementary Insurance Information ............................... S-7
IV Reinsurance for the years ended December 31, 2003, 2002 and 2001 S-8
VI Supplementary Information Concerning Property-Casualty
Insurance Operations............................................... S-9
Schedules other than those listed above are omitted for the reason that they are
not applicable.
S-1
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
To the Board of Directors and Shareholders of RenaissanceRe Holdings Ltd.
We have audited the consolidated financial statements of RenaissanceRe Holdings
Ltd. and Subsidiaries at December 31, 2003 and 2002, and for each of the three
years in the period ended December 31, 2003, and have issued our report thereon
dated January 30, 2004; such financial statements and our report thereon are
included elsewhere in this Annual Report on Form 10-K. Our audits also included
the financial statement schedules listed in Item 15(a)(2) of this Annual Report
on Form 10-K for the year ended December 31, 2003. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2003 the
Company changed its method of accounting for stock compensation and in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young
Hamilton, Bermuda
January 30, 2004
S-2
SCHEDULE I
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(MILLIONS OF UNITED STATES DOLLARS)
Year ended
December 31, 2003 Amount at
----------------------- which shown
Market in the
Cost (1) Value Balance Sheet
-------- -------- -------------
Type of investment:
Fixed maturities
U.S. treasuries and agencies $ 797.2 $ 799.3 $ 799.3
Non-U.S. government bonds 281.2 290.3 290.3
Corporate securities 810.1 846.4 846.4
Mortgage-backed securities 213.5 215.4 215.4
Asset-backed securities 793.8 796.4 796.4
-------- -------- --------
Total fixed maturities 2,895.8 2,947.8 2,947.8
-------- -------- --------
Short-term investments 660.6 660.6 660.6
Other investments 349.1 370.3 370.3
Equity investments in reinsurance company 84.2 145.5 145.5
Cash and cash equivalents 63.4 63.4 63.4
-------- -------- --------
Total investments, short-term investments, cash
and cash equivalents $4,053.1 $4,187.6 $4,187.6
======== ======== ========
S-3
SCHEDULE II
RENAISSANCERE HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENAISSANCERE HOLDINGS LTD.
BALANCE SHEETS
AT DECEMBER 31, 2003 AND 2002
(PARENT COMPANY)
(THOUSANDS OF UNITED STATES DOLLARS)
At December 31
2003 2002
---------- -----------
ASSETS:
Investments and cash
Fixed maturity investments, available for sale $ 111,600 $ 99,532
Short term investments, at cost 207,783 31,267
Other investments 3,093 --
Equity investments in reinsurance company, at fair value 145,535 120,288
Cash and cash equivalents 6,551 6,895
---------- -----------
Total investments and cash 474,562 257,982
Investments in subsidiaries 2,167,476 1,700,973
Accrued investment income 1,302 1,699
Other assets 20,398 --
Note receivable from subsidiary 40,761 --
---------- -----------
Total Assets $2,704,499 $ 1,960,654
========== ===========
LIABILITIES, MINORITY INTEREST, AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Notes and bank loans payable $ 250,000 $ 150,000
Contribution payable to subsidiaries -- 68,366
Subordinated obligation to capital trust 103,093 --
Other liabilities 16,763 15,623
---------- -----------
Total Liabilities 369,856 233,989
---------- -----------
Minority interest - mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures of the Company -- 84,630
SHAREHOLDERS' EQUITY:
Preference Shares: $1.00 par value - 10,000,000 shares issued and
outstanding at December 31, 2003 (2002 - 6,000,000) 250,000 150,000
Common Shares and additional paid-in capital: $1.00 par value - 70,398,699 shares
issued and outstanding at December 31, 2003 - (2002 - 69,749,826 shares) 314,414 320,936
Unearned stock grant compensation -- (18,468)
Accumulated other comprehensive income 113,382 95,234
Retained earnings 1,656,847 1,094,333
---------- -----------
Total Shareholders' Equity 2,334,643 1,642,035
---------- -----------
Total Liabilities, Minority Interest and Shareholders' Equity $2,704,499 $ 1,960,654
========== ===========
S-4
SCHEDULE II
RENAISSANCERE HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
RENAISSANCERE HOLDINGS LTD.
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(PARENT COMPANY)
(THOUSANDS OF UNITED STATES DOLLARS)
Year ended December 31,
2003 2002 2001
--------- --------- ---------
Revenues
Net investment income $ 15,940 $ 1,736 $ 2,068
Other income (expense) (327) 559 --
--------- --------- ---------
Total revenues 15,613 2,295 2,068
--------- --------- ---------
Expenses
Interest expense 15,934 9,694 5,014
Corporate expenses 11,730 11,742 8,632
--------- --------- ---------
Total expenses 27,664 21,436 13,646
--------- --------- ---------
Loss before equity in net income of subsidiaries & taxes (12,051) (19,141) (11,578)
Equity in net income of subsidiaries 642,969 403,744 184,846
--------- --------- ---------
Net income before taxes and minority interest 630,918 384,603 173,268
Minority interest - mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinated debentures
of the Company (7,470) (7,605) (7,484)
--------- --------- ---------
Net income 623,448 376,998 165,784
Income tax expense -- -- --
--------- --------- ---------
Net income 623,448 376,998 165,784
Dividends on preference shares (18,801) (12,184) (1,418)
--------- --------- ---------
Net income available to Common Shareholders $ 604,647 $ 364,814 $ 164,366
========= ========= =========
S-5
SCHEDULE II
RENAISSANCERE HOLDINGS LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
RENAISSANCERE HOLDINGS LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(PARENT COMPANY)
(THOUSANDS OF UNITED STATES DOLLARS)
Year ended December 31,
2003 2002 2001
--------- --------- ---------
Cash flows applied to operating activities:
Net income $ 623,448 $ 376,998 $ 165,784
Less: equity in net income of subsidiaries 642,969 403,744 184,846
--------- --------- ---------
(19,521) (26,746) (19,062)
Other, net (13,376) 18,299 (2,904)
--------- --------- ---------
Net cash applied to operating activities (32,897) (8,447) (21,966)
--------- --------- ---------
Cash flows provided by (applied to) investing activities:
Contributions to subsidiary (259,881) (377,846) (381,333)
Proceeds from maturities and sales of investments 354,953 218,949 148,413
Purchase of investments available for sale (334,772) (203,770) (238,149)
Net sales (purchases) of short-term investments (176,516) 148,611 (179,878)
Equity investment in reinsurance company -- (84,199) --
Dividends from subsidiaries 323,010 261,159 178,631
Note receivable from subsidiary (9,301) 100,000 --
--------- --------- ---------
Net cash provided by (applied to) investing activities (102,507) 62,904 (472,316)
--------- --------- ---------
Cash flows provided by (applied to) financing activities:
Issuance of debt 99,144 -- 148,868
Repayment of debt -- -- (8,000)
Dividends paid on Common Shares (42,133) (39,039) (32,801)
Dividends paid on Preference Shares (18,801) (12,184) (1,418)
Purchase of Capital Securities -- (3,000) --
Issuance (purchase) of Common Shares -- -- 247,481
Issuance of Prefence Shares 96,850 -- 145,275
--------- --------- ---------
Net cash provided by (applied to) financing activities 135,060 (54,223) 499,405
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (344) 234 5,123
Cash and Cash Equivalents, beginning of year 6,895 6,661 1,538
--------- --------- ---------
Cash and Cash Equivalents, end of year $ 6,551 $ 6,895 $ 6,661
========= ========= =========
S-6
SCHEDULE III
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(THOUSANDS OF UNITED STATES DOLLARS)
December 31, 2003 Year ended December 31, 2003
-------------------------------------------- ----------------------------------------------------------------------
Deferred Amortization
Policy Future Policy Benefits, of Deferred
Acquisition Benefits, Losses and Net Claims, Policy Other
Operating Claims and Claims Unearned Premium Investment Losses and Settlement Acquisition Net
Costs Premiums Expenses Premiums Revenue Income Expenses Costs Expenses Written
----------- -------------------- -------- -------- ---------- ---------- ------------ ----------- -------
Reinsurance $10,853 $780,027 $121,526 $ 809,360 $ -- $ 209,197 $ 93,227 $52,504 $ 789,769
Individual Risk 64,408 197,865 228,298 306,383 -- 158,547 100,913 14,893 362,754
Other -- -- -- -- 129,542 -- -- -- --
------- -------- -------- ---------- -------- --------- -------- ------- ----------
Total $75,261 $977,892 $349,824 $1,115,743 $129,542 $ 367,744 $194,140 $67,397 $1,152,523
======= ======== ======== ========== ======== ========= ======== ======= ==========
December 31, 2002 Year ended December 31, 2002
-------------------------------------------- ---------------------------------------------------------------------
Deferred Amortization
Policy Future Policy Benefits, of Deferred
Acquisition Benefits, Losses and Net Claims, Policy Other
Operating Claims and Claims Unearned Premium Investment Losses and Settlement Acquisition Net
Costs Premiums Expenses Premiums Revenue Income Expenses Costs Expenses Written
----------- -------------------- -------- -------- ---------- ---------- ------------ ----------- -------
Reinsurance $16,388 $707,036 $167,345 $ 667,926 $ -- $ 249,316 $ 70,698 $39,264 $ 696,610
Individual Risk 39,465 97,759 164,640 92,979 -- 40,209 24,946 9,895 227,101
Other -- -- -- -- 102,686 -- -- -- --
------- -------- -------- ---------- -------- --------- -------- ------- ----------
Total $55,853 $804,795 $331,985 $ 760,905 $102,686 $ 289,525 $ 95,644 $49,159 $ 923,711
======= ======== ======== ========== ======== ========= ======== ======= ==========
December 31, 2001 Year ended December 31, 2001
-------------------------------------------- ---------------------------------------------------------------------
Deferred Amortization
Policy Future Policy Benefits, of Deferred
Acquisition Benefits, Losses and Net Claims, Policy Other
Operating Claims and Claims Unearned Premium Investment Losses and Settlement Acquisition Net
Costs Premiums Expenses Premiums Revenue Income Expenses Costs Expenses Written
----------- -------------------- -------- -------- ---------- ---------- ------------ ----------- -------
Reinsurance $ 9,692 $500,120 $104,338 $ 325,223 $ -- $ 152,341 $ 44,029 $28,198 $ 326,680
Individual Risk 3,122 72,757 20,715 7,842 -- (2,424) 1,330 10,405 12,867
Other -- -- -- -- 75,156 -- -- -- --
------- -------- -------- ---------- -------- --------- -------- ------- ----------
Total $12,814 $572,877 $125,053 $ 333,065 $ 75,156 $ 149,917 $ 45,359 $38,603 $ 339,547
======= ======== ======== ========== ======== ========= ======== ======= ==========
S-7
SCHEDULE IV
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
REINSURANCE
(THOUSANDS OF UNITED STATES DOLLARS)
Percentage
Ceded to Assumed of Amount
Gross Other From Other Assumed to
Amounts Companies Companies Net Amount Net
----------- ------------- ------------- -------------- --------------
Year ended December 31, 2003
Property and liability premiums written $ 97,327 $ 229,686 $ 1,284,882 $1,152,523 111%
=========== ============= ============= ============== ==============
Year ended December 31, 2002
Property and liability premiums written $ 68,427 $ 249,338 $ 1,104,622 $ 923,711 120%
=========== ============= ============= ============== ==============
Year ended December 31, 2001
Property and liability premiums written $ 20,792 $ 161,774 $ 480,529 $ 339,547 142%
=========== ============= ============= ============== ==============
S-8
SCHEDULE VI
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(THOUSANDS OF UNITED STATES DOLLARS)
Defered Reserve for
Policy Unpaid Claims Net
Acquisition and Claim Discount, if Unearned Earned Investment
Affiliation with Registrant Costs Expenses any, deducted Premiums Premiums Income
------------- ------------- ------------- -------------- ------------- ------------
Consolidated Subsidiaries
Year ended December 31, 2003 $ 75,261 $ 977,892 $ - $ 349,824 $ 1,115,743 $ 129,542
============= ============= ============ ============== ============= ===========
Year ended December 31, 2002 $ 55,853 $ 804,795 $ - $ 331,985 $ 760,905 $ 102,686
============= ============= ============ ============== ============= ============
Year ended December 31, 2001 $ 12,814 $ 572,877 $ - $ 125,053 $ 333,065 $ 75,156
============= ============= ============ ============== ============= ============
Amortization
of Deferred
Claims and Claim Expense Incurred Policy Paid Claim and
Related to Acquisition Claims Net Premiums
Affiliation with Registrant Current Year Prior Year Costs Expenses Written
-------------- --------------- ------------ -------------- -------------
Consolidated Subsidiaries
Year ended December 31, 2003 $ 462,816 $ (95,072) $ 194,140 $ 142,225 $ 1,152,523
============= =============== ============ ============== =============
Year ended December 31, 2002 $ 291,520 $ (1,995) $ 95,644 $ 73,163 $ 923,711
============= =============== ============ ============== =============
Year ended December 31, 2001 $ 165,914 $ (15,997) $ 45,359 $ 31,610 $ 339,547
============= =============== ============ ============== =============
S-9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2003
RenaissanceRe Holdings Ltd.
1
EXHIBITS
1. The Consolidated Financial Statements of RenaissanceRe Holdings Ltd.
and related Notes thereto are listed in the accompanying Index to
Consolidated Financial Statements and are filed as part of this
Report.
2. The Schedules to the Consolidated Financial Statements of
RenaissanceRe Holdings Ltd. are listed in the accompanying Index to
Schedules to Consolidated Financial Statements and are filed as part
of this Report.
3.1 Memorandum of Association.(1)
3.2 Amended and Restated Bye-Laws.(14)
3.3 Memorandum of Increase in Share Capital of RenaissanceRe Holdings
Ltd.(11)
4.1 Specimen Common Share certificate.(1)
10.1 RenaissanceRe Holdings Ltd. Restricted Stock Plan.(1)
10.2 Fifth Amended and Restated Employment Agreement, dated as of November
8, 2002, between RenaissanceRe Holdings Ltd. and James N. Stanard.(18)
10.3 Amended and Restated Employment Agreement, dated as of June 30, 2003,
between RenaissanceRe Holdings Ltd. and John M. Lummis.(15)
10.4 Employment Agreement, dated as of June 30, 2003, between RenaissanceRe
Holdings Ltd. and William I. Riker.(15)
10.5 Employment Agreement, dated as of June 30, 2003, between RenaissanceRe
Holdings Ltd. and David Eklund.(15)
10.6 Amended and Restated Employment Agreement, dated as of June 30, 2003,
between Renaissance Reinsurance Ltd. and John D. Nichols, Jr.(15)
10.7 Amended and Restated Credit Agreement, dated as of August 8, 2003,
among RenaissanceRe Holdings Ltd., the Lenders named therein, Deutsche
Bank AG New York Branch, as LC Issuer and Co-Documentation Agent,
Citibank, N.A., as Syndication Agent, Bank of America, N.A., as
Administrative Agent and Bank of America Securities LLC, as Sole Lead
Arranger and Sole Book Manager.(15)
10.8 Fourth Amendment Agreement, dated as of March 22, 2002, to the Credit
Agreement, among RenaissanceRe Holdings Ltd., the Lenders listed on
the signature pages thereto, Deutsche Bank AG, as LC Issuer and Bank
of America, National Association, as Administrative Agent for the
Lenders.(18)
10.9 Credit Agreement, dated as of April 19, 2002, among DaVinciRe Holdings
Ltd. the Lenders named therein and Citibank, N.A., as agent for the
Lenders.(13)
10.10 RenaissanceRe Holdings Ltd. Second Amended and Restated 1993 Stock
Incentive Plan. (4)
10.11 RenaissanceRe Holdings Ltd. 2001 Stock Incentive Plan.(3)
10.12 Amended and Restated RenaissanceRe Holdings Ltd. Non-Employee Director
Stock Plan.(2)
2
10.13 Amended and Restated Declaration of Trust of RenaissanceRe Capital
Trust, dated as of March 7, 1997, among RenaissanceRe Holdings Ltd.,
as Sponsor, The Bank of New York, as Property Trustee, The Bank of New
York (Delaware), as Delaware Trustee, and the Administrative Trustees
named therein.(5)
10.14 Indenture, dated as of March 7, 1997, among RenaissanceRe Holdings
Ltd., as Sponsor, and The Bank of New York, as Debenture Trustee.(5)
10.15 Series A Capital Securities Guarantee Agreement, dated as of March 7,
1997, between RenaissanceRe Holdings Ltd. and The Bank of New York, as
Trustee.(5)
10.16 Master Standby Letter of Credit Reimbursement Agreement, dated as of
November 2, 2001, between Renaissance Reinsurance Ltd. and Fleet
National Bank. Glencoe Insurance Ltd. and Timicuan Reinsurance Ltd.
have each become a party to this agreement pursuant to an accession
agreement, and DaVinci Reinsurance Ltd. has entered in a substantially
similar agreement with Fleet National Bank.(17)
10.17 Certificate of Designation, Preferences and Rights of 8.10% Series A
Preference Shares.(6)
10.18 Certificate of Designation, Preferences and Rights of 7.30% Series B
Preference Shares.(10)
10.19 Senior Indenture, dated as of July 1, 2001, between RenaissanceRe
Holdings Ltd., as Issuer, and Bankers Trust Company, as Trustee.(7)
10.20 First Supplemental Indenture, dated as of July 17, 2001, to the
Indenture, dated as of July 1, 2001, between RenaissanceRe Holdings
Ltd., as Issuer, and Bankers Trust Company, as Trustee.(7)
10.21 Second Supplemental Indenture, by and between RenaissanceRe Holdings
Ltd. and Deutsche Bank Trust Company Americas (f/k/a Bankers Trust
Company), dated as of January 31, 2003.(9)
10.22 Investment Agreement, dated as of September 20, 2002, by and among
RenaissanceRe Holdings Ltd., Platinum Underwriters Holdings, Ltd. and
The St. Paul Companies, Inc.(2)
10.23 First Amendment to the Investment Agreement by and among Platinum
Holdings Ltd., The St. Paul Companies, and RenaissanceRe Holdings
Ltd., dated as of November 1, 2002.(8)
10.24 Option Agreement, between Platinum Underwriters Holdings, Ltd. and
RenaissanceRe Holdings Ltd., dated as of November 1, 2002.(8)
10.25 Transfer Restrictions, Registration Rights and Standstill Agreement
between Platinum Underwriters Holdings, Ltd. and RenaissanceRe
Holdings Ltd., dated as of November 1, 2002.(8)
10.26 Services and Capacity Reservation Agreement between Platinum
Underwriters Holdings, Ltd. and RenaissanceRe Holdings Ltd., dated as
of November 1, 2002.(8)
10.27 Reimbursement Agreement, dated as of December 20, 2002, among
Renaissance Reinsurance Ltd., Renaissance Reinsurance of Europe,
Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., Timicuan Reinsurance
Ltd., RenaissanceRe Holdings Ltd., the Lenders named therein, Wachovia
Bank, National Association, National Australia Bank, Ltd., ING Bank
N.V., London Branch, and Barclays Bank PLC.(18)
10.28 First Amendment to Reimbursement Agreement, dated as of November 14,
2003, among Renaissance Reinsurance Ltd., Renaissance Reinsurance of
Europe, Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., Timicuan
Reinsurance Ltd., RenaissanceRe Holdings Ltd., the Lenders named
therein, Wachovia Bank, National Association, National Australia Bank,
Ltd., ING Bank N.V., London Branch, and Barclays Bank PLC.
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10.29 Form of Director Retention Agreement, dated as of November 8, 2002,
entered into by each of the non-employee directors of RenaissanceRe
Holdings Ltd.(8)
10.30 Agreement to Increase Commitment, dated as of January 30, 2004, among
Renaissance Reinsurance Ltd., Renaissance Reinsurance of Europe,
Glencoe Insurance Ltd., DaVinci Reinsurance Ltd., Timicuan Reinsurance
Ltd., RenaissanceRe Holdings Ltd. and Wachovia Bank, National
Association.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
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.
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(1) Incorporated by reference to the Registration Statement on Form S-1 of
RenaissanceRe Holdings Ltd. (Registration No. 33-70008) which was
declared effective by the Commission on July 26, 1995.
(2) Incorporated by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 (Registration No. 333-90758) dated July 19,
2002.
(3) Incorporated by reference to Exhibit 99.2 to the Registration
Statement on Form S-8 (Registration No. 333-90758) dated June 19,
2002.
(4) Incorporated by reference to Exhibit 99.3 to the Registration
Statement on Form S-8 (Registration No. 333-90758) dated June 19,
2002.
(5) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on March 19, 1997,
relating to certain events which occurred on March 7, 1997 (SEC File
Number 000-26512).
(6) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on November 16, 2001,
relating to certain events which occurred on November 14, 2001.
(7) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on July 17, 2001,
relating to certain events which occurred on July 12, 2001.
(8) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on November 6, 2002,
relating to certain events which occurred on November 1, 2002.
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(9) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on January 31, 2003,
relating to certain events which occurred on January 28, 2003.
(10) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Current
Report on Form 8-K, filed with the Commission on February 2, 2003,
relating to certain events which occurred on January 30, 2003.
(11) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended March 31, 1998, filed with
the Commission on May 14, 1998 (SEC File Number 000-26512).
(12) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 1998, filed with the
Commission on August 14, 1998 (SEC File Number 000-26512).
(13) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended March 31, 2002, filed with
the Commission on May 15, 2002.
(14) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 2002, filed with the
Commission on August 14, 2002.
(15) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Quarterly
Report on Form 10-Q for the period ended June 30, 2003, filed with the
Commission on August 14, 2003.
(16) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 1998, filed with
the Commission on March 31, 1999 (SEC File Number 000-26512).
(17) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 2001 filed with
the Commission on April 1, 2002.
(18) Incorporated by reference to RenaissanceRe Holdings Ltd.'s Annual
Report on Form 10-K for the year ended December 31, 2002 filed with the
Commission on March 31, 2003.
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