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Company Overview
RenaissanceRe Holdings Ltd. ("RenaissanceRe") provides reinsurance and insurance
coverage that is subject to the risk of natural and man-made catastrophes. We
are a leader in using sophisticated computer models to construct a superior
portfolio of these coverages.
Our principal business is property catastrophe reinsurance. Our subsidiary,
Renaissance Reinsurance Ltd. ("Renaissance Reinsurance"), is one of the leading
providers of this coverage in the world. We provide reinsurance to insurance
companies and other reinsurers primarily on an excess of loss basis. This means
that we begin paying when our customers' claims from a catastrophe exceed a
certain retained amount. Through these coverages we are subject to claims
arising from large natural catastrophes, such as 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, tornadoes and
explosions.
We also write property catastrophe reinsurance on behalf of joint ventures, Top
Layer Reinsurance Ltd. ("Top Layer Re"), and DaVinci Reinsurance Ltd.
("DaVinci"). We act as the exclusive underwriting manager for these joint
ventures in return for management fees and a profit participation.
In addition to catastrophe reinsurance, we expect to increase our reinsurance of
certain specialty lines including aviation, catastrophe exposed workers
compensation coverage, satellite and finite. We also expect to increase our
primary insurance business where we will focus on writing commercial property
insurance on an excess and surplus lines basis. To a lesser extent, we also
provide homeowners insurance in various areas of the United States,
concentrating on business exposed to natural catastrophes.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Table of Contents
Financial Highlights 3
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Letter to Shareholders 4
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Underwriting Review 7
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Finance 13
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What is the Risk of a Large Catastrophe? 15
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Selected Financial Data 20
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Management's Discussion and Analysis 21
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Management's Responsibility for Financial Statements 39
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Report of Independent Auditors 39
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Consolidated Financial Statements 40
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Notes to Consolidated Financial Statements 44
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Directors and Officers 59
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Financial and Investor Information 60
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Financial Highlights
(amounts in thousands, except per share data) 2001 2000 1999 1998 1997
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Gross premiums written $501,321 $433,002 $351,305 $270,460 $228,287
Operating income available to common shareholders* 146,270 134,379 119,961 121,547 142,144
Net income available to common shareholders 164,366 127,228 104,241 74,577 139,249
Per Common Share Amounts
Operating income* - diluted $7.03 $6.86 $5.82 $5.42 $6.19
Net income - diluted 7.90 6.50 5.05 3.33 6.06
Book value 47.50 35.72 30.50 28.28 26.68
Dividends declared 1.60 1.50 1.40 1.20 1.00
Operating return on average common
shareholders' equity 17.8% 21.0% 19.8% 19.2% 25.0%
Operating Ratios
Claims and claim expense ratio* 45.0% 40.6% 34.9% 33.1% 23.7%
Underwriting expense ratio 25.2% 28.5% 28.1% 29.3% 23.8%
Combined ratio 70.2% 69.1% 63.0% 62.4% 47.5%
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* Operating income excludes net realized gains (losses) on investments.
Operating income and operating ratios exclude 1998 fourth quarter after tax
charge of $40.1 million relating to Stonington.
Operating Return on Average Common Equity
[BAR CHART]
1997 25.0%
1998 19.2%
1999 19.8%
2000 21.0%
2001 17.8%
Book Value per Common Share
[BAR CHART]
1997 $26.68
1998 $28.28
1999 $30.50
2000 $35.72
2001 $47.50
Managed Cat Premium*
[BAR CHART]
1997 $212
1998 $198
1999 $284
2000 $397
2001 $442
Operating Earnings per Common Share - Diluted
[BAR CHART]
1997 $6.19
1998 $5.42
1999 $5.82
2000 $6.86
2001 $7.03
* The total gross catastrophe reinsurance premium written by Renaissance
Reinsurance and joint ventures. Amounts in millions.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Letter to Shareholders
[PHOTO]
James N. Stanard
Chairman of the Board
and Chief Executive Officer
Dear Fellow Shareholder,
2001 was a year unlike any other. The concerns we had prior to September 11 -
both business and personal - seem like distant memories. RenaissanceRe was very
fortunate that we were not more heavily impacted by the tragedy. None of our
employees or family members suffered casualties, although we, like everyone
else, lost some friends.
Financially, our conservative risk management allowed us to turn in another very
profitable year, in spite of losses from the terrorist attack. Our operating
return on equity of 18% led our peer group for the ninth straight year. We grew
our top line and laid the groundwork for additional growth in 2002 by providing
stability of pricing, security and capacity to our clients. And, we continue to
have one of the strongest balance sheets in the business (relative to our size).
All in all, in 2001 I believe we turned in our best performance yet, in the face
of some severe market challenges.
Market Turmoil
Worldwide insurance markets were already in turmoil from growing underwriting
losses due to years of inadequate pricing, when September 11 threw them into
chaos. Many well-regarded firms sustained losses many times what they
anticipated from such an event, which caused them to reassess their risk
management procedures. Insureds wondered whether their reinsurance carriers were
strong enough to pay the next big loss, which heightened the importance of
security. Concerns increased about a possible "chain reaction" of insolvencies
if one major company failed to pay reinsurance claims. Although the industry
missed a potential major hurricane loss in November when Michelle, a category 4
storm, skirted past south Florida and the Florida Keys, the collapse of one of
the largest aviation pools in the world (Fortress Re), billions of dollars of
insured losses from the Enron bankruptcy, and large charges for prior loss
reserve inadequacies, made the fourth quarter miserable for most of the
industry.
Flight to Quality
The torrent of red ink accelerated upward pricing pressures that already existed
in the reinsurance markets. However, this hard market cycle differs from the
hard markets of 1985 and 1993 in one important respect: there is sufficient
capacity available for most types of business - as long as the insured is
willing to pay the market price. In fact, programs from quality clients that
were perceived as well priced were substantially oversubscribed.
This allowed the buyers to be choosy about the security of the reinsurers that
they would accept. As a result of this "flight to quality", highly rated, well
established companies were the first choice of the clients; lower rated
reinsurers who were smaller or who suffered ratings downgrades were heavily
selected against.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
[PHOTO]
Executive Management Team
Left to Right: Bill Riker, Dave Eklund, John Lummis, Jim Stanard
New capital came rushing into the market, some of it expecting to capitalize on
a capacity crisis that did not materialize. Certainly some of the new companies
have well-conceived business plans, quality management teams and a good chance
of being successful. However, the rush of capital supporting organizations
regardless of prior track record began to seem like a smaller scale repeat of
the dot.com frenzy.
RenaissanceRe's Competitive Advantages
The competitive advantages that led to our success in past years will continue
to be our platform for success into 2002 and beyond. While we discussed these in
past annual reports, they are worth repeating as they are the key drivers of our
strong performance and long-term growth:
1. Management: Our senior executives are highly experienced and have worked
together for years. Based on the nine-year track record that we have
compiled, it is reasonable to claim that our team is the best in the
business.
2. Underwriting Technology: Our proprietary REMS(C)computer system is the most
sophisticated catastrophe exposure management system in the world.
3. Franchise: As one of the largest cat writers in the world, we have a
tremendous base of high quality clients and the means to further expand our
market share.
Providing Stable Capacity
In the wake of September 11, we responded quickly and decisively to meet the
market's demand for high quality capacity. RenaissanceRe raised $233 million in
net proceeds from a common stock offering and $145 million from a preferred
stock offering - to increase our ability to do business, not to pay losses. We
created DaVinci Re, the second new Bermuda start-up announced and the first one
funded and operational, with $500 million of surplus. We added $135 million of
capital to our primary company, Glencoe, in the fourth quarter, bringing surplus
to over $200 million. Finally, in the first quarter of 2002, we increased our
reinsurance company surplus by $200 million to $1 billion. Other than September
11 itself, there was never a day that we were not completely open for business,
quoting reinsurance for immediate binding as well as multiyear options - just as
we do every day.
While we are always wary of excess capital, we made a decision based on
extraordinary market conditions that it was better to take the risk of having
too much capital than too little. In retrospect, this was the right decision and
I am comfortable that in these market conditions we will be able to deploy the
new capital while maintaining our ROE.
Nevertheless, while we continue to be aggressive in seizing opportunities, we
realize there is a limit to what we can effectively manage while maintaining our
standards of excellence. In order to assure that we continue to deliver the
returns our shareholders expect and the stability our customers demand, we are
committed to focusing our efforts on the following three areas:
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Letter to Shareholders
`we have a tremendous base of high quality clients and the means to further
expand our market share'
1. Substantially growing our market share in catastrophe reinsurance, by
providing pricing consistency to our clients.
2. Building a meaningful specialty reinsurance portfolio (in addition to
property cat). Market turmoil has finally presented opportunities at
attractive pricing that we have been patiently awaiting over the past
several years. We expect to write over $100 million of premium in 2002 from
aviation, catastrophe exposed workers compensation coverage, property risk,
satellite and finite reinsurance, among other lines. Although our past
premium volume has been small, our track record has been consistently good
with a loss ratio of 68% since inception.
3. Building our primary property catastrophe business. The market in which
Glencoe operates is the one in which the most severe capacity shortage
exists. We have increased Glencoe's capital to $200 million, and have
received a ratings upgrade to "A" from A.M. Best. As a result, we expect to
write more than $100 million of premium in 2002, compared to $13 million in
2001.
Diversification
The World Trade Center and other losses have shown that "diversification" is not
a panacea for controlling risk. Being diversified can simply mean that when
there are losses, you get them from all directions. We have never sought
diversification for its own sake. Rather, we have looked broadly for
opportunities outside of the cat business where we believed that we had, or
could develop, a competitive advantage. The right time to diversify is in a
market like the current one, in which competitors are shedding business in order
to get back to their core competencies. We have, today, the staff, management,
vehicles and client relationships in place to move quickly and smoothly to build
our base of businesses.
We expect that 2002 will be the first year in which our specialty reinsurance
business and our primary business through Glencoe will contribute a meaningful
amount to our earnings per share. While these are cyclical markets and thus our
top line will inevitably rise and fall, our goal is for these businesses to
become permanent franchises, like our cat reinsurance business, rather than just
short term cycle plays.
Challenges for 2002
2001 was a great year for our Company, in which we succeeded in all our
initiatives. We strengthened our position as the premier cat reinsurance writer
in the world; successfully executed our joint ventures to grow fee income; and
grew specialty reinsurance and Glencoe. Our goals for 2002 will be to maintain
our management focus on building competitive advantages in a limited number of
new areas of business and to continue to grow our traditional business. With our
strong track record, impeccable financial position, management talent and focus
we bring to our business, I believe we are well positioned for continued
success.
/s/ James N. Stanard
James N. Stanard
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
[PHOTO]
U.S. Underwriting
Standing Left to Right: Jon Paradine, Russell Smith
Sitting Left to Right: Rebecca Roberts, James Burnett-Herkes
[PHOTO]
International Underwriting and Specialty Reinsurance
Left to Right: Mike Cash, Kevin O'Donnell, Alex Reck, Ross Curtis
Reinsurance
Catastrophe Business
Our core property catastrophe reinsurance business again drove our success.
Judged on an absolute basis, our 2001 performance was impressive: our combined
ratio of 69% in our reinsurance business is a result that would please virtually
any reinsurer. On a relative basis, the performance is truly exceptional: we had
an underwriting profit in 2001, while virtually all of our competitors posted
underwriting losses. We believe that our unique market position, understanding
of the market and strong client relationships will continue to enhance our
performance in 2002.
The context for our 2001 performance was a year of record - and tragic - losses.
In total, insurance industry catastrophe losses for the year are now estimated
to be between $45 billion and $93 billion; the range is wide because of
differing views regarding the World Trade Center tragedy. We reported $48
million of net losses from the World Trade Center in the third quarter, but were
still able to report a profit in the quarter.
The relative impact of the World Trade Center tragedy on RenaissanceRe versus
the industry demonstrates the importance of the discipline and skill we bring to
the underwriting process. We had for many years believed that books of
commercial insurance and reinsurance tended to be underpriced, and we were very
selective in only assuming reasonably priced business. While we did not foresee
the risk of a terrorist attack, we did model the risk of northeastern hurricanes
and New York earthquakes in a more pessimistic light than others, leading us to
reject much of the available business and to have a relatively low market share
for these types of risks.
Over 75% of our losses from the World Trade Center tragedy arose from
retrocessional coverage that we assumed from other reinsurers, but even here our
performance was noteworthy: we had a 1% to 2% share of the retrocessional market
loss, but had a 10% to 15% share of assumed premium in this market at that time.
The retrocessional market is the most inefficient market segment, with wide
variations between the best and worst contracts. RenaissanceRe's proprietary
technology allows us to analyze a reinsurers' potential exposures, and assume
only those risks that are adequately priced and that fit our portfolio. Since
risks tend to be very broad based in terms of both territory and their scope of
coverage, a very disciplined process is required to avoid excessive exposures in
this market.
Total managed catastrophe premium, which represents the premium we write on
behalf of Renaissance Reinsurance and our joint ventures, grew by 11% to $442
million in 2001 from $397 million in 2000. From 1998, the bottom of the last
soft market, through to 2001, our managed catastrophe premium grew at a
compounded annual growth rate of 30%. Our estimated catastrophe reinsurance
market share grew from approximately 5% at December 31, 1998 to approximately
10% at January 1, 2002.
We believe this rate of growth is faster than any other large writers of
catastrophe business. We did not however seek growth for its own sake: we grew
premium when our clients required our capacity to support their business and the
pricing provided us reasonable returns for the risk assumed. We believe
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
[PHOTO]
RenaissanceRe of Europe
Left to Right: John Gill, Deirdre Doyle, Robin Lang, Ian Branagan
[PHOTO]
Structured Products
Left to Right: Laurie Orchard, Larry Richardson, Gene Chiaramonte, Jay Nichols
our growth demonstrates the scalability of our business; our infrastructure was
readily able to manage the expansion of our business, as evidenced by our
continuing profitability. Just as importantly, we produced growth by virtue of
being a preferred provider to many clients in light of the service that we
provide. In addition to writing reinsurance contracts, we actively consult with
many clients on their catastrophe risk management issues and help devise
practical solutions, either in the form of alternative reinsurance structures,
or recommended adjustments to their underlying portfolios of insurance.
The quality of the business that we write is more important to us than volume.
Even in the current hard market environment, skillful underwriting remains
critical. For business in force at January 1, 2002, we estimate that as much as
half was priced to produce low or negative returns. By contrast, virtually all
of the premium that we write is priced to produce reasonable returns.
In 2002, we are poised for managed catastrophe premium growth at a rate
substantially above the 11% we achieved in 2001. The hard market environment
will enhance opportunities for many companies, but ultimately we possess a
unique position relative to competitors. Our deep client relationships, coupled
with our strong capital position, should allow us to produce growth in excess of
the market's growth rate.
Structured Products
Our Structured Products Group is focused primarily on two areas: managing our
joint venture relationships, and developing and executing highly structured
reinsurance transactions to assume or cede risk. Our Structured Products
professionals have experience across a range of disciplines: accounting,
investment banking, and law, as well as insurance and reinsurance.
Seeking to leverage our catastrophe underwriting expertise and market-leading
position, we have embarked on a strategy to underwrite and manage portfolios of
catastrophe reinsurance on behalf of other companies in exchange for a
management fee and profit participation. By all measures, this strategy has been
a success: we increased joint venture managed premium by over 23% to $99 million
in 2001, and project substantial growth again in 2002.
Our joint venture business, conducted through our wholly-owned subsidiary
Renaissance Underwriting Managers, Ltd., began in January 1999 with the
formation of Top Layer Re, which was created to focus on high-layer, large limit
international business, with State Farm as our partner. Next, in November 1999,
OPCat was formed to assume a portfolio of cat reinsurance equivalent to that of
Renaissance Reinsurance, with Overseas Partners Limited as our partner. In both
cases, our partners viewed property catastrophe reinsurance as an attractive and
diversifying risk class if underwritten appropriately. For our partners, the
execution of
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RenaissanceRe Holdings Ltd. | Annual Report 2001
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Capital at
Business Ownership Ratings December 31, 2001
Top Layer Reinsurance Ltd. High Layer Non-U.S., 50% State Farm S&P "AAA" $122 million (plus
Property Cat including Mutual Automobile A.M. Best "A++" $3.9 billion stop-
Retro Insurance Company, loss protection from
50% RenaissanceRe State Farm)
Holdings Ltd.
DaVinci Reinsurance Ltd. Property Cat including 50% State Farm, S&P "A" $500 million
Retro and other short- 25% RenaissanceRe, A.M. Best "A"
tail lines 12.5% Max Re,
12.5% other investors
Renaissance Reinsurance Ltd. Property Cat including 100% RenaissanceRe S&P "A+" $800 million
Retro and other short- Holdings Ltd. A.M. Best "A+"
tail lines Moody's "A1"
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these strategies required significantly less manpower, start-up time and risk
and higher expected value if pursued as a joint venture with us. Top Layer Re
has been loss-free since inception and OPCat's performance has been very good,
consistent with RenaissanceRe's, since the commencement of our partnership. We
project substantial growth in 2002 for Top Layer Re.
In 2001, we continued to expand this segment of our business by adding another
joint venture vehicle - DaVinci Reinsurance Ltd. DaVinci was formed in October
2001, and was immediately successful in the January 1, 2002 renewal season. Like
the OPCat structure, DaVinci writes "companion" lines with Renaissance
Reinsurance with a view to having a portfolio similar to that of Renaissance.
DaVinci, which is consolidated in our financial statements, has an initial
capital base of $500 million from its initial investors, State Farm,
RenaissanceRe, Max Re, and smaller investments from other investors, and it is
rated "A" by both Standard & Poor's and A.M. Best. Importantly, DaVinci is able
to leverage upon Renaisssance's disciplined approach to underwriting and risk
management.
In a recent development, the Board of Directors of Overseas Partners Limited
decided to put its Bermuda insurance operations into run-off, and as an outcome
of that decision, has decided to wind-up its participation in the OPCat venture.
While OPCat was very successful, and its profitability exceeded original
expectations, business considerations outside of the OPCat venture led the Board
of Directors of Overseas Partners to this decision. Our strong working
relationship with Overseas Partners, combined with the flexibility that we have
in our capital base, allows us to provide a smooth transition to clients through
the assumption of the in-force OPCat portfolio into RenaissanceRe and DaVinci -
and this change, therefore, does not affect our expectations for total 2002
managed catastrophe premium.
In addition to managing joint venture relationships, the Structured Products
Group also works on a range of other highly-structured transactions. We have
been an active participant in the market for catastrophe-linked securities,
which are generally issued by insurers as an alternative to purchasing
reinsurance coverage. With our proprietary REMS(C) system, we can evaluate these
risks and confidently determine which bonds have favorable risk/return profiles.
We have also created proprietary products through which we cede participations
in the performance of our catastrophe reinsurance portfolio. While the basics of
a proportionate participation in another company's portfolio (known as a "quota
share") have been long-standing features of the reinsurance market, our
proprietary structured products contain a number of customized terms designed to
better meet our partners' needs, as well as our own risk management goals.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
[PHOTO]
Underwriting Support
Back Row Left to Right: Georgina Trott, Patricia Hendrickson,
Josephine Smith, Sandra Rebello
Front Row Left to Right: Stephanie Slayton,
Tina Caton, Keith Tacklyn
[PHOTO]
Marketing and Operations
Left to Right: Vanessa Pereira, Bob Hykes,
Fawn Burgess, Michelle Johnson
Specialty Business
In 2001, we wrote $77 million of specialty reinsurance premium (which excludes
catastrophe reinsurance). The business we wrote included accident and health,
property per risk, satellite and finite risk. We believe an important measure of
our underwriting skill is that our specialty lines did not produce significant
losses from the World Trade Center tragedy. Our inception-to-date loss ratio in
this class of business is 68%, which we believe is among the best levels of
performance in our industry. Much of the business that we saw since our 1993
inception was inadequately priced, and accordingly, we had written only $219
million of premium since that time through 2001 and have not aggressively grown
this business.
In the aftermath of September 11, the reinsurance market is hardening across
many lines, presenting significant opportunities for us to move into new lines
of specialty reinsurance. We will continue to target short tail lines, typically
with a low frequency, high severity profile, similar to catastrophe business,
where we can rigorously analyze the risk profile of the deal to arrive at a
reasonable assessment of expected returns and capital at risk. We will focus our
efforts on lines where we can create long-term businesses, which will likely
entail complex risks in which our sophisticated modeling capabilities will be a
critical advantage. Specifically, we are targeting aviation, specialty property
lines, and workers compensation and personal accident business exposed to
catastrophe risks, mindful of the correlations with our property catastrophe
reinsurance portfolio. Our profile in personal accident business has already
grown significantly, and we are now seen as a market leader. We expect strong
growth in our specialty reinsurance operations in 2002, driven by an improving
pricing environment.
Operational Support
Until just a few years ago, the opportunities for reinsurers to distinguish
themselves were limited: a reinsurer would be "in the game" by meeting its
customers' minimal requirements - adequate credit quality, rudimentary
accounting, and very basic risk management. In today's environment, the
standards for success are much higher, and the requisite intellectual capital to
achieve these standards is much greater.
Clients are ever more demanding of solutions that precisely fit their needs and
risk profile - creating opportunities for reinsurers who can demonstrate a
detailed understanding of their risk, and the ability not just to reinsure, but
to improve their clients' portfolios. In addition, speed is a requirement in
many situations and it is a competitive advantage to be able to confidently make
good - and rapid - underwriting decisions. This creates the need for very
effective processing and a real time, desktop underwriting system. The required
tools of our
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RenaissanceRe Holdings Ltd. | Annual Report 2001
[PHOTO]
Information Technology
Standing Left to Right: Dion Tucker, Suzanne Carrell, Dale Woods
Sitting Left to Right: Lloyd Holder, John Wineinger
business now include: probabilistic models of all business written that captures
correlations; devices to track actual performance relative to the expected; and
systems to monitor credit risks.
Against this more challenging environment, we believe that the operational
support teams at Renaissance have responded superbly - and have been leaders in
raising standards across our industry. Our modeling function continues to
advance on a variety of fronts:
o improved understanding of catastrophe risk by increasing resolution on
European and Japanese models, characterizing correlation between the U.S.
and Caribbean, and simulating more years in the catastrophe distribution;
o new systems that examine insurance portfolios to help clients identify
underperforming segments of their portfolio;
o new systems to enable us to better identify reinsurance contracts that are
not performing consistently with modeled expectations;
o risk models that capture various classes of risk: various types of
insurance risk (in addition to catastrophe), counterparty credit risk on
ceded retrocessions and investment risk;
o the ability to assess risk across multiple entities (including our various
joint ventures) and across different components of our capital structure.
Just as important, we are focused on the basics of our customer relationships.
When requested by brokers or clients, we seek to respond to requests for firm
quotes within 24 hours. When we receive a notice of loss from a client, we
target a 48 hour turnaround.
We bring a range of disciplines to bear on our operations: accounting,
administration, information technology and quantitative risk analysis. The value
of the Renaissance franchise - and our success in reinsurance underwriting - can
be attributed to all of these skill sets.
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RenaissanceRe Holdings Ltd. | Annual Report 2001
Underwriting Review
[PHOTO]
Primary Insurance
Standing Left to Right: Melissa Dotzel, Bill Ashley,
Nancy Spurling, Maggie Situ
Sitting Left to Right: Craig Tillman, Nikki Riker
Primary Insurance
Commercial Insurance
Following September 11, the commercial insurance market entered a stage of real
turmoil. Many insurers decided to cut back significantly on the size of lines
available to this market, as they developed a greater appreciation of the
potential for catastrophic loss in this segment, as well as correlations across
contracts and lines of business.
Against this backdrop, our subsidiary Glencoe saw a sharp increase in demand for
its core product of catastrophe exposed commercial insurance. The pricing
environment moved from being one of thin, or even negative margins, to an
environment where we believe reasonable returns are now available in certain
areas.
The increased demand for Glencoe's business took the form of a direct increase
in our core customer universe - middle market businesses - but it also came from
important insurance companies seeking to partner with Glencoe to manage books of
commercial insurance business.
Under these partnership relationships, Glencoe is writing property quota share
reinsurance in circumstances where we can add value by helping to define
appropriate underwriting criteria, as well as portfolio risk tolerances. Our
partners are market participants who can quickly access property business that
is undergoing price corrections.
In addition to its property business, Glencoe is also prepared to write limited
amounts of specialty risks, and to this end wrote a quota share of aviation
insurance. All told, we expect Glencoe to grow substantially in 2002.
To handle the increased flow of business, we have built out the Glencoe
operating platform in several ways: increasing staff to 6 professionals,
bringing on William Ashley, a well respected executive to serve as Chief
Operating Officer; and increasing capital by $135 million. As a result, Glencoe
has been upgraded to an "A" rating by A.M. Best.
We believe that Glencoe is readily scalable since we have already built a
sophisticated underwriting and risk management system that has been in use for
over 6 years. We write business where exposure information is good and we are
able to quantify the risks involved.
Homeowners Insurance
Our focus in the homeowners insurance market continues to be on
catastrophe-exposed business, where our catastrophe risk management skills can
be leveraged. The fundamental challenge that we have seen is that pricing levels
are generally below what we believe to be necessary to adequately compensate the
capital put at risk. Accordingly, we wrote only $11 million of premium in 2001,
and believe premium levels will remain modest in 2002. We continue to develop
our infrastructure, since our homeowners insurance business helps us to better
understand the needs of reinsurance clients. The homeowners unit has been
instrumental in developing a primary insurance portfolio tool, which is being
used by reinsurance company clients to optimize their portfolios.
12
RenaissanceRe Holdings Ltd. | Annual Report 2001
Finance
[PHOTO]
Finance
Standing Left to Right: Helen James, Penny Perry,
Todd Fonner, Alana Smith
Sitting Left to Right: Susan Holland, Marty Merritt,
Diana Petty, Preston Hutchings
Capital Management
RenaissanceRe is committed to efficiently using its capital resources. We seek
to maintain a capital position that is clearly sufficient to support the risks
that we assume, but not so conservative as to impair the returns to our
shareholders. In prior years, we often generated more capital than we could
profitably deploy in our business. Accordingly, from 1995 through 2000, we had
returned over $273 million in capital through share repurchases. During 2001,
our capital strategy shifted as we saw a hardening market environment that
presented us with significant opportunities.
In the environment following September 11, we made a conscious decision to
substantially build our capital base anticipating greater demand not only for
our core catastrophe reinsurance product but also for specialty reinsurance and
commercial insurance. We decided to raise this capital ahead of specific,
identified needs, based on our judgment that capital could be effectively
utilized.
Renaissance was the first company in the insurance or reinsurance sectors to
raise equity capital after September 11. In all, we raised $827 million in net
proceeds from our capital transactions in 2002:
o $233 million of common equity in October
o $145 million from a perpetual preferred equity offering in November
o $149 million from a debt offering in July
o $300 million in equity capital raised for DaVinci from outside investors
We also added $132 million to retained earnings. (The capital that we raised was
not to replace capital lost in the events of 2001.)
While we retain significant capacity for further growth, much of this capital
has already been well deployed:
o Renaissance Reinsurance, our principal operating company, has increased its
surplus by $200 million to $1 billion and is substantially increasing the
volume of catastrophe and specialty reinsurance that it writes.
o Glencoe increased its surplus by $135 million to over $200 million and is
increasing the commercial insurance premium that it writes.
o DaVinci received $100 million of permanent equity capital from Renaissance,
in addition to $100 million of bridge financing. DaVinci's total capital of
$500 million (including the $300 million from third parties as noted above)
is expected to be substantially deployed over the course of 2002.
Looking forward, we see the potential for additional opportunities in the
insurance and reinsurance markets, which may require further capital.
The significant industry underwriting losses of 2001, coupled with Enron's
bankruptcy, have heightened sensitivities to credit quality and capital
adequacy. Over the past year, our process of evaluating capital adequacy rose to
an even higher level of sophistication, as we systematized our evaluation to
capture more classes of risk and to look at various components of our capital
structure. As discussed in
13
RenaissanceRe Holdings Ltd. | Annual Report 2001
Finance
Cash and Investments by Category
December 31, 2001
--------------------------------------------------------------------------------
[Pie Chart]
Cash & Cash Equivalents 40%
Asset Backed Securities (Aaa) 13%
U.S Treasuries & Agencies (Aaa) 13%
Investment Grade Corporates 12%
Mortgage Backed Securities (Aaa) 9%
Sovereign & Supranational (Aaa) 5%
EMD & High Yield Debt 5%
Other 3%
--------------------------------------------------------------------------------
the operations review, over the past year we have developed our risk management
system so that it captures not only catastrophe risk, but also other classes of
insurance risk, credit risk, and investment risk. This system permits us to
develop a consolidated profit and loss distribution and to evaluate the level of
risk associated with each component of our capital structure, both in terms of
probability of default and expected loss. Our goal is to ensure that creditors
are subject only to an appropriate level of risk.
Recognizing our financial strength and operating success, Renaissance
Reinsurance received ratings upgrades and a new rating from the major rating
agencies:
Financial Strength Ratings
--------------------------------------------
December 31,
2000 2001
A.M. Best Company A A+
Moody's Investors Service - A1
Standard & Poor's A A+
Investments
In 2001, RenaissanceRe's fixed maturity investment portfolio returned 8.9%,
bringing its average annual return for the past three years to 7.2% - roughly 1%
above the average annual return of a comparable duration Treasury portfolio. The
portfolio continues to be comprised primarily of very high credit quality
securities (Aaa/Aa), with a short average duration. At year end, 5% of the
portfolio consists of securities rated below investment grade, split almost
evenly between U.S. high yield and emerging market debt. A smaller portion, 2%,
of the portfolio was invested in hedge funds and several private equity funds.
Although our target portfolio duration is between 2.75 - 3.00 years, the
duration at December 31 was much shorter - slightly less than 2 years. This
reduction in duration occurred because, after September 11, we were reluctant to
invest the cash raised by our financing activities in fixed income securities
trading at rates which, at the front of the yield curve, reached historic lows.
Consequently, in expectation of more favorable investment opportunities, we
permitted the cash position to expand. As 2002 progresses, we expect to deploy
that cash and return the portfolio's duration to normal levels.
In addition to being positioned to earn an attractive risk-adjusted return, the
portfolio is structured so as to limit the potential correlation between its
returns and catastrophic events likely to cause loss to RenaissanceRe. Last
September's 1.1% return was particularly informative about the structure and
quality of our portfolio because the events of September 11 likely affected
financial markets more severely than would a natural catastrophe of a similar
economic magnitude. In addition to the economic damage sustained by New York
City, and the United States broadly, the tragedy: (i) forced the New York Stock
Exchange to close for a longer stretch than any since World War I (ii) destroyed
the offices of several inter-dealer bond brokers and killed many of their
employees, and (iii) damaged the premises of the Bank of New York, one of the
largest clearing firms for U.S. Government securities trades, straining the
payment mechanisms upon which the fixed income market rests. As a result,
markets confronted a degree of uncertainty and illiquidity unlikely to accompany
a Florida hurricane or a California earthquake. In contrast to the RenaissanceRe
portfolio, more credit-oriented portfolios performed poorly during September:
the Lehman U.S. Credit Index returned -0.2% and the Merrill Lynch High Yield
index returned -6.9%.
Looking forward to 2002, RenaissanceRe intends to modestly expand its allocation
to alternative assets. To assist us in this regard, we have engaged Cambridge
Associates LLC to advise in structuring our investments in hedge funds and
private equity funds. We also intend to further integrate our investment risk
management system with our corporate risk management system.
14
RenaissanceRe Holdings Ltd. | Annual Report 2001
Industry Analysis
What is the risk of a large catastrophe?
Introduction
Over the past 10 years, the insurance sector has experienced a series of
catastrophes that are sometimes described as "large" and "unusual": at least $30
billion in losses from the World Trade Center tragedy; $17 billion from the
Northridge earthquake in 1994; and $20 billion from Hurricane Andrew in 1992
(all these amounts being expressed as estimates of insured losses, in 2001
dollars). In addition, in 1999, there was a relatively large number of smaller
events, each less than $10 billion, which together produced losses of $33
billion for the year.
Since various insurance companies have experienced financial difficulties
following the losses of 2001, as well as prior years, it is important for the
industry to assess the magnitude of potential losses that may occur in the
future. In our view, insurance companies should be prepared for much larger
losses than those experienced in 2001.
What is a catastrophe?
The dictionary definition of catastrophe refers to a "great disaster or
misfortune". Catastrophes cause human losses - death and personal injury, as
well as economic losses - property damage and lost opportunities. Human losses
and uninsured economic losses may dwarf the insured losses. However, given our
focus on the insurance business, this analysis considers only insured losses.
The United States insurance industry, through Property Claims Services ("PCS"),
defines a "catastrophe" as an event that produces more than $25 million in
property losses to insurance companies. Outside the United States, there is no
single definition widely adopted by the insurance industry, but the concept is
generally similar to the U.S. definition: the accumulation of losses from a
single event.
While the insurance industry often looks at the magnitude of catastrophes in the
context of losses arising from property insurance, the World Trade Center
tragedy reveals the risk that some events can cause large losses across a range
of insurance lines: not only property, but also aviation, event cancellation,
liability, life insurance, workers' compensation and other lines. For the World
Trade Center tragedy, the property line is estimated to have at least $20
billion of losses (including property damage and business interruption), and
other lines of insurance are estimated to have at least an additional $10
billion of losses. (There are also much higher estimates.)
Contractual definitions of a catastrophe are another dimension of the analysis.
For example, most property catastrophe reinsurance contracts have an
"occurrence" clause to identify and limit the losses that accumulate from a
single event for purposes of the contract. A catastrophe event is usually
defined to include both natural disasters (a hurricane, an earthquake, a flood)
and also "man-made" catastrophes (a terrorist attack, a riot, a fire); however,
contractual terms can be negotiated to include only specified perils, e.g.
hurricanes. Losses that can be included in the contractual definition of the
event must all be "connected" to the peril that caused them to occur, and there
can be various issues in defining whether a loss is sufficiently connected to an
event for purposes of a contract. Reinsurance contracts specify the period of
time in which losses must occur in order to receive coverage, normally expressed
as a number of consecutive hours. Common examples are 168 hours for earthquakes,
and 72 hours for hurricanes.
15
RenaissanceRe Holdings Ltd. | Annual Report 2001
Industry Analysis
What is large?
Using the PCS definition of a catastrophe, in the United States, there were 20
catastrophes in 2001. Several of the events were on the front page of newspapers
and put some insurers and reinsurers under real financial strain, but most
received little or no attention in the press, and did not cause any significant
strain to the insurance companies that responded to the losses.
U.S. property catastrophe losses were $4.6 billion in 2000, a very low loss
year, consuming 4% of U.S. property premium in 2000 (the last year for which
complete data is currently available); for the prior ten years (1991 to 2000),
property catastrophe losses represented 10% of the property premium on average,
with a high of 29% and a low of 3%. U.S. property catastrophe losses should also
be compared to total capital, which stood at $321 billion for U.S.
property/casualty companies at December 31, 2000.
Viewing over $100 billion in U.S. property insurance premium and over $300
billion of capital in the U.S. property/casualty industry, it is clear that a
single "catastrophe" at the minimum $25 million threshold would not be in any
way catastrophic for the industry as a whole. Taking the simple-minded approach
of looking at the average annual losses (expressed in nominal dollars) over the
past ten years, some observers might see $10 billion as "normal" for the United
States. However, looking at the losses for the industry as produced by our
simulation models, we estimate an average annual aggregate loss of $19 billion
for the industry in the United States and $33 billion worldwide. The average
from our models is considerably higher than the PCS ten-year average because we
are modeling events much larger than those that have actually occurred over the
past ten years.
What is unusual?
We need to do more than compare to the average loss levels in order to
understand what is truly large. Accordingly, we examine the important question
of the probability of more extreme losses. The following table shows our current
estimation of the probabilities of various annual aggregate property loss levels
viewed on a worldwide basis, and also for the United States alone.
Probability Worldwide United States
---------------------------------------------
20% $42 billion $24 billion
10% $57 billion $35 billion
5% $76 billion $46 billion
1% $130 billion $85 billion
This table indicates that the insurance industry should expect to see $42
billion or more of annual aggregate property catastrophe losses once every 5
years - or, said another way, there is a 20% chance that, next year, there will
be aggregate insured property catastrophe losses for the whole world of at least
$42 billion. Likewise, the table indicates the industry should expect $57
billion or more of such losses once every 10 years - a 10% chance of those loss
levels next year, $76 billion or more once every 20 years, and so on. Confining
the sample to a smaller geographic universe (the United States above) reduces
the loss level associated with any given probability level.
It should be underscored that the estimates above look at annual aggregate
losses; our simulation includes years where the loss total is driven by one
large event, as well years of multiple large events. Also our simulation only
reflects property and business interruption losses and so fails to capture
losses arising from other lines.
16
RenaissanceRe Holdings Ltd. | Annual Report 2001
'In our view, insurance companies should be prepared for much larger losses than
those experienced in 2001'
Given the foregoing analysis, we determine that property catastrophe losses of
the levels seen in 2001 should be expected at least once every 5 years - in
other words, there is a greater than 20% chance that losses of such a magnitude
might occur in any given year. While the losses of 2001 were driven by an
unexpected terrorist attack, the magnitude of the property loss should not be
seen as "unusual." We believe it would be a mistake for a company or a market to
view the financial impact of the World Trade Center tragedy as a worst case
scenario; regrettably, it is not even close to that.
There is one common point of confusion as the probability of catastrophic events
is discussed: lack of clarity about the geographic universe against which the
probability is being judged. For example, the 1999 French storm Lothar produced
approximately $6 billion of industry losses and has been described as a 1/100
year event. Looking at the probability of an event of $6 billion occurring
somewhere in the world, it is quite clear that events of this magnitude are much
more likely than 1/100. An event producing $6 billion or more of losses
somewhere in the world should be expected almost every year. Focusing on the
probability of such a loss occurring within France, it is at least plausible to
consider a 1/100 probability (though we estimate the probability to be more
likely than that).
Conclusion
Too often, we hear industry observers excluding catastrophes from insurance
company results as if these events won't be repeated. The insurance industry is
in the business of protecting our customers from their losses arising from
catastrophes; over time large catastrophes will occur, and should be seen as
part of the normal course of business.
When the industry looks at pricing, it is clear that the loss exposures should
be considered across all possible years, meaning that the frequent lower loss
years need to be averaged with the infrequent, large loss years. We believe that
pricing below average cost continues in our industry because some companies only
look at the low loss years in computing average costs and do not have sufficient
understanding of the magnitude and frequency of the large loss years.
Even more importantly, when the industry looks at risk management, there is a
tendency to look at the last large loss as the principal data point. Instead, we
believe that a robust risk management process should include simulated events
that go well beyond recent history, and evaluate the impact of truly large
losses.
17
RenaissanceRe Holdings Ltd. | Annual Report 2001
Sub Contents to Financial Information
Selected Financial Data 20
--------------------------------------------------------------------------------
Management's Discussion & Analysis 21
--------------------------------------------------------------------------------
Management's Responsibility for Financial Statements 39
--------------------------------------------------------------------------------
Report of Independent Auditors 39
--------------------------------------------------------------------------------
Consolidated Balance Sheets 40
--------------------------------------------------------------------------------
Consolidated Statements of Income 41
--------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity 42
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows 43
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 44
--------------------------------------------------------------------------------
Directors and Officers 59
--------------------------------------------------------------------------------
Financial and Investor Information 60
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18
RenaissanceRe Holdings Ltd. | Annual Report 2001
Financial Information
RenaissanceRe Holdings Ltd. and Subsidiaries
19
RenaissanceRe Holdings Ltd. | Annual Report 2001
Selected Financial Data
(amounts in thousands, except per share data) 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
Income Statement Data
Gross premiums written $501,321 $433,002 $351,305 $270,460 $228,287
Net premiums written 339,547 293,303 213,513 195,019 195,752
Net premiums earned 333,065 267,681 221,117 204,947 211,490
Net investment income 75,156 77,868 60,334 52,834 49,573
Claims and claim expenses incurred 149,917 108,604 77,141 112,752 50,015
Acquisition costs 45,359 38,530 25,500 26,506 25,227
Operational expenses 38,603 37,954 36,768 34,525 25,131
Pre-tax income 180,046 131,876 102,716 54,102 139,249
Net income available to common shareholders 164,366 127,228 104,241 74,577 139,249
Earnings per common share - diluted 7.90 6.50 5.05 3.33 6.06
Dividends per common share 1.60 1.50 1.40 1.20 1.00
Weighted average common shares outstanding 20,797 19,576 20,628 22,428 22,967
--------------------------------------------------------------------------------------------------------------------
At December 31,
(amounts in thousands, except per share data) 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total investments and cash $2,194,430 $1,082,046 $1,059,790 $942,309 $859,467
Total assets 2,643,652 1,468,989 1,617,243 1,356,164 960,749
Reserve for claims and claim expenses 572,877 403,611 478,601 298,829 110,037
Reserve for unearned premiums 125,053 112,541 98,386 94,466 57,008
Debt 183,500 50,000 250,000 100,000 50,000
Capital securities (3) 87,630 87,630 89,630 100,000 100,000
Minority interest - DaVinci (4) 274,951 - - - -
Total shareholders' equity 1,225,024 700,818 600,329 612,232 598,703
Total shareholders' equity attributable
to common shareholders 1,075,024 700,818 600,329 612,232 598,703
Common shares outstanding 22,631 19,621 19,686 21,646 22,441
--------------------------------------------------------------------------------------------------------------------
(amounts in thousands, except per share data) 2001 2000 1999 1998(2) 1997
--------------------------------------------------------------------------------------------------------------------
Operating Ratios and other non-GAAP measures
Operating income to common shareholders (1) $146,270 $134,379 $119,961 $121,547 $142,144
Operating earnings per common share - diluted 7.03 6.86 5.82 5.42 6.19
Operating return on average common
shareholders' equity 17.8% 21.0% 19.8% 19.2% 25.0%
Claims and claim expense ratio 45.0% 40.6% 34.9% 33.1% 23.7%
Underwriting expense ratio 25.2 28.5 28.1 29.3 23.8
--------------------------------------------------------------------------------------------------------------------
Combined ratio 70.2% 69.1% 63.0% 62.4% 47.5%
--------------------------------------------------------------------------------------------------------------------
Book value per common share $47.50 $35.72 $30.50 $28.28 $26.68
--------------------------------------------------------------------------------------------------------------------
(1) Operating income excludes net realized gains or losses on investments.
(2) For 1998, operating income available to common shareholders, operating
earnings per common share - diluted, the claims and claim expense ratio,
the underwriting expense ratio, the combined ratio and the operating return
on average shareholders' equity also exclude the impact of an after tax
charge of $40.1 million taken in the fourth quarter of 1998 related to our
subsidiary, Stonington. Including the charge related to Stonington for
1998, operating income available to common shareholders, operating earnings
per common share - diluted, the claims and claim expense ratio, the
underwriting expense ratio, the combined ratio and the operating return on
average shareholders' equity would have been $81.5 million, $3.63, 55.0%,
29.8%, 84.8% and 12.9%, respectively.
(3) Company obligated mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures of RenaissanceRe.
(4) Interests of external parties in respect of net income and shareholders'
equity of DaVinciRe Holdings Ltd.
20
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Following is a discussion and analysis of our operations, which should be read
in conjunction with the audited consolidated financial statements and related
notes included in this annual report. This annual report 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 our Note on Forward Looking Statements on page
38 of this Annual Report. In addition, we refer you to our Risk Factors included
in other filings made with the Securities and Exchange Commission from time to
time.
Overview
Founded in 1993, RenaissanceRe is one of the leading providers of property
catastrophe reinsurance coverage in the world. We believe that we are a provider
of first choice for many insurers and reinsurers due to our modeling and
technical expertise and our industry-leading performance. We principally provide
property catastrophe reinsurance to insurers and reinsurers, with exposures
worldwide, on an excess of loss basis. Property catastrophe reinsurance
generally provides protection from claims arising from large catastrophes, such
as earthquakes, hurricanes, winter storms, freezes, floods, tornadoes, fires,
explosions and other man-made or natural disasters. Accordingly, our results
depend to a large extent on the frequency and severity of catastrophic events,
and the coverage offered to clients impacted by these events.
We are a leader in utilizing sophisticated computer models to construct a
superior portfolio of these property catastrophe coverages. We believe that a
combination of several factors - our disciplined underwriting approach, the
experience of our underwriters, as well as our sophisticated risk models - have
enabled us to significantly outperform the majority of our competitors. This was
especially evident during 2001 when we achieved an 18% operating return on
equity even though industry insurance losses were at an all time high.
For the years ended December 31, 2001 and December 31, 2000, our gross premiums
written were $501.3 million and $433.0 million, respectively, our net premiums
written were $339.5 million and $293.3 million, respectively, our operating
income available to common shareholders, which excludes realised gains and
losses on investments, was $146.3 million (or $7.03 per common share) and $134.4
million (or $6.86 per common share), respectively, and our net income available
to common shareholders was $164.4 million (or $7.90 per common share) and $127.2
million (or $6.50 per common share), respectively. At December 31, 2001, we had
total assets of $2.6 billion and total shareholders' equity of $1.2 billion. At
December 31, 2001, total shareholders' equity attributable to common
shareholders was $1.075 billion and our book value per common share was $47.50,
compared with $700.8 million and $35.72 per share at December 31, 2000.
Our principal subsidiary is Renaissance Reinsurance, a Bermuda domiciled
company. In 2001, Renaissance Reinsurance wrote $451.4 million of gross written
premiums, compared to $382.8 million in 2000. Of these premiums, $373.9 million
were derived from property catastrophe reinsurance coverage, compared to $345.0
million in 2000.
In recent years, we have formed certain joint ventures whereby we write property
catastrophe reinsurance for the joint ventures in return for management fees and
a profit participation.
o In January 1999, we formed Top Layer Re with State Farm to provide high
layer coverage for non-U.S. risks. Renaissance Reinsurance and State Farm
each own 50% of Top Layer Re.
o In October 2001, we formed DaVinci Reinsurance Ltd. with State Farm and
other private investors. DaVinci writes property catastrophe reinsurance
side-by-side with Renaissance Reinsurance and is consolidated in our
financial statements.
o In 1999, we were also appointed underwriting managers of OPCat, a wholly
owned subsidiary of Overseas Partners Partners Limited ("Overseas
Partners"). OPCat, like DaVinci, was formed to write property catastrophe
reinsurance side-by-side with Renaissance Reinsurance. In February 2002,
Overseas Partners decided to exit the reinsurance business. In conjunction
with this decision, Renaissance Reinsurance has agreed to assume OPCat's
business.
21
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
In November 1999, RenaissanceRe incorporated Renaissance Underwriting Managers
to act as underwriting manager to these joint ventures. Together, these joint
ventures wrote $98.9 million of premium in 2001, compared to $80.2 million in
2000. In total, Top Layer Re and DaVinci had access to approximately $4.3
billion of capital as of December 31, 2001.
We believe that our position as a leading property catastrophe reinsurance
underwriter is reflected by the continued growth in the property catastrophe
premiums written by Renaissance Reinsurance and these joint ventures (which,
when combined, we refer to as "managed catastrophe premiums"). The total managed
catastrophe premiums written on behalf of Renaissance Reinsurance and the joint
ventures increased to $441.8 million on a gross basis for the year ended
December 31, 2001 (2000 - $397.0 million), including $98.9 million written on
behalf of our joint ventures (2000 - $80.2 million). Subsequent to the World
Trade Center tragedy, demand and prices of property catastrophe reinsurance have
increased and we currently expect total managed catastrophe premiums to grow
substantially in 2002.
In addition to catastrophe reinsurance, we also write certain other lines of
reinsurance through Renaissance Reinsurance including aviation, finite,
satellite and catastrophe exposed workers compensation coverages. We refer to
this business as our "Specialty Reinsurance" business. In 2001, we wrote gross
written premiums of $77.5 million of specialty reinsurance, compared with $37.7
million written in 2000.
We also write primary insurance through our four subsidiaries Glencoe Insurance
Ltd., DeSoto Insurance Company, DeSoto Prime Insurance Company and Stonington
Insurance Company, formerly known as Nobel Insurance Company.
Glencoe, the largest of these subsidiaries, primarily provides catastrophe
exposed primary property coverage on an excess and surplus lines basis. During
2001, Glencoe's gross written premiums were $12.9 million, compared to $5.3
million in 2000.
DeSoto and DeSoto Prime are active in the Florida homeowners market. During
2001, DeSoto and DeSoto Prime wrote $11.2 million of primary homeowners
insurance coverage, compared to $12.7 million in 2000.
Stonington, a Texas-domiciled insurance company is licensed to operate in all 50
states of the U.S.
Because we focus on writing reinsurance and insurance which 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 coverage we offer to clients impacted by these events.
In addition to the reinsurance and insurance coverages discussed above, from
time to time, we may consider opportunistic diversification into new ventures,
either through organic growth or the acquisition of other companies or books of
business. In evaluating such new ventures, 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 operations.
Accordingly, we regularly review strategic opportunities and periodically engage
in discussions regarding possible transactions, although there can be no
assurance that we will complete any such transactions or that any such
transaction would contribute materially to our results of operations or
financial condition.
Summary of Critical Accounting Policies and Estimates
For most insurance and reinsurance companies, the most significant judgment made
by management is the estimation of the claims and claim expense reserves.
Because of the variability and uncertainty associated with loss estimation, it
is possible that our individual case reserves for each catastrophic event are
incorrect, possibly materially. The period of time from the reporting of a loss
to us through the settlement of our liability may be several years. During this
period, additional facts and trends will be revealed and as these factors become
apparent, reserves will be adjusted. Therefore, changes to our prior year loss
reserves can impact our current underwriting results by 1) improving our results
if the prior year reserves prove to be redundant, or 2) reducing our results if
the prior year reserves prove to be insufficient. The impact on net income from
changes in prior years loss reserves was an increase of $16.0 million during
2001, a decrease of $8.4 million during 2000 and an increase of $34.6 million in
1999.
22
RenaissanceRe Holdings Ltd. | Annual Report 2001
To reduce the potential impact from prior period reserve adjustments, we
estimate our claims and claim expense reserves based on 1) claims reports from
insureds, 2) our underwriters' experience in setting claims reserves, 3) the use
of computer models where applicable and 4) historical industry claims
experience. Where necessary we will also use statistical and actuarial methods
to estimate ultimate expected claims and claim expenses. We review our reserves
on a regular basis.
Other material judgments made by us are the estimates of potential impairments
in asset valuations, particularly:
1) Potential uncollectable reinsurance recoverables; and
2) impairments in our deferred tax asset
To estimate reinsurance recoverables which might be uncollectable, our senior
managers evaluate the financial condition of our reinsurers, on a reinsurer by
reinsurer basis, both before purchasing the reinsurance protection from them and
after the occurrence of a significant catastrophic event. We believe that our
process is effective, and to date we have not written off any significant
reinsurance recoveries. As of December 31, 2001, we have recorded a valuation
allowance of $8 million relating to reinsurance recoverables, based on specific
facts and circumstances evaluated by management.
In estimating impairments to our deferred tax asset, we analyze the businesses
which generated the deferred tax asset, and the businesses that will potentially
utilize the deferred tax asset. Our deferred tax asset relates primarily to net
operating loss carryforwards that are available to offset future taxes payable
of our U.S. operating subsidiaries. However, due to the limited opportunities in
the U.S. primary insurance market, the U.S. insurance operations have not
generated taxable income in the last few years. This calls into question the
recoverability of the deferred tax asset. Although we retain the benefit of this
asset through 2020, during 2001 and 2000 we recorded valuation allowances of
$14.0 million and $8.2 million, respectively. As of December 31, 2001, the net
balance of the deferred tax asset was $4.2 million.
Summary of Results of Operations for 2001 and 2000
A summary of the significant components of our revenues and expenses are as
follows:
-----------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------
(In thousands)
Net underwriting income - Reinsurance (1) $100,655 $85,532 $81,502
Net underwriting income (loss) - Primary (1) (1,469) (2,939) 206
Other income 16,244 10,959 4,915
Investment income 75,156 77,868 60,334
Interest and fixed charges (16,151) (24,749) (18,222)
Corporate expenses (11,485) (8,022) (9,888)
Taxes (14,262) (4,648) 1,525
Other (2,418) 378 (411)
-----------------------------------------------------------------------------------
Net operating income available to
common shareholders (2) 146,270 134,379 119,961
Net realized gains (losses) 18,096 (7,151) (15,720)
-----------------------------------------------------------------------------------
Net income $164,366 $127,228 $104,241
-----------------------------------------------------------------------------------
Operating income per common share $7.03 $6.86 $5.82
Net income per common share $7.90 $6.50 $5.05
-----------------------------------------------------------------------------------
(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses.
(2) Net operating income excludes realized gains and losses on investments.
23
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The $11.9 million increase in operating income in 2001, compared to 2000, was
primarily the result of the following items:
o a $15.1 million increase in underwriting income from our reinsurance
operations due primarily to an increase in net premiums earned of $64.1
million, in part offset by a $46.8 million increase in claims, plus
o an increase in fee income from our joint ventures of $8.2 million,
primarily as a result of fees earned in 2001 on premiums written on behalf
of our joint ventures in 2000, plus
o a reduction in interest and fixed charges of $8.6 million resulting
primarily from the repayment of $200 million of outstanding bank loans in
the fourth quarter of 2000, less
o an increase in tax expense during 2001 as a result of a $14.0 million
increase to our valuation allowance on our deferred tax asset as a result
of further reductions of our U.S. based insurance operations (after this
adjustment the net deferred tax asset on our balance sheet is $4.2
million), less
o an increase in corporate expenses of $3.5 million primarily due to costs
related to research and development initiatives conducted by us in 2001,
less
o a decrease in investment income of $2.7 million primarily as a result of
declining interest rates.
The $14.4 million increase in operating income in 2000, compared to 1999, was
primarily the result of the following items:
o a $17.5 million increase in investment income primarily due to an increase
in interest rates and an increase in the level of assets held during the
majority of 2000, plus
o an increase in fee income from our joint ventures of $7.9 million as a
result of an increase in premiums written on behalf of our joint ventures
to $80.2 million in 2000 compared with $4.3 million in 1999, less
o an increase of $7.2 million in interest expense as a result of an increase
in outstanding bank loans during the majority of 2000, less
o a $6.2 million increase in tax expense during the year, primarily as a
result of an $8.2 million increase to our valuation allowance on our
deferred tax asset, as a result of a decrease in our U.S. based insurance
operations.
Results of Operations for 2001 and 2000
The following is a discussion and analysis of our results of operations for the
year ended December 31, 2001, compared to each of the years ended December 31,
2000, and 1999, and a discussion of our financial condition at December 31,
2001.
Premiums
-----------------------------------------------------------------
Gross Written Premiums
Year ended December 31, 2001 2000 1999
-----------------------------------------------------------------
(In thousands)
Property Catastrophe Reinsurance $373,896 $345,086 $279,605
Specialty Reinsurance 77,468 37,730 2,740
-----------------------------------------------------------------
Total Reinsurance $451,364 $382,816 $282,345
-----------------------------------------------------------------
Insurance premiums Glencoe 12,858 5,273 4,986
Insurance premiums other 37,099 44,913 63,974
-----------------------------------------------------------------
Total insurance premiums 49,957 50,186 68,960
-----------------------------------------------------------------
Total gross written premiums $501,321 $433,002 $351,305
-----------------------------------------------------------------
24
RenaissanceRe Holdings Ltd. | Annual Report 2001
The increase in our property catastrophe premiums over the past two years is
primarily due to an improving market following the worldwide level of losses
occurring in 1999. During 1999, insured losses from natural catastrophes and
man-made disasters are estimated to be over $33 billion which, before the World
Trade Center disaster in 2001, was the second-highest claims total ever for
insurers. During 1999, nine significant worldwide catastrophic events occurred:
the hail storms in Sydney, Australia in April; the Oklahoma tornados in May;
Hurricane Floyd which struck in September; Typhoon Bart which struck Japan in
September; Turkish and Taiwanese earthquakes in August and September,
respectively; and the Danish windstorm, Anatol, and the French windstorms,
Lothar and Martin, in December. Six of these events each resulted in over $1
billion of insured damages.
Because of these events, as with many large losses, two things occurred 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 reinsurance premiums also increased, first 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.
Our property catastrophe premiums also increased as a result of reinstatement
premiums we received relating to these large losses. Per contractual terms, we
record reinstatement premiums after an insured notifies us of a claim.
Reinstatement premiums allow an insured to purchase, or reinstate, the limit of
their reinsurance policy for the remainder of the policy period. Because of the
increased level of claims from the 1999 events, and more recently from the 2001
World Trade Center disaster, our reinstatement and adjustment premiums for the
years ended December 31, 2001, 2000 and 1999 were $35.3 million, $20.3 million
and $6.8 million, respectively.
Because of improving market conditions, we have increased our premiums in the
Specialty Reinsurance market, which we define as reinsurance coverages that are
not specifically property catastrophe coverages. In evaluating specialty
reinsurance opportunities, we focus on those coverages which, like property
catastrophe reinsurance, produce losses that are infrequent in nature, but could
be severe if they occur. Examples include aviation, satellite, finite and
catastrophe exposed workers compensation coverages.
Over the past couple of years, we have reduced the amount of insurance premiums
written by our other primary insurance companies because of the limited
profitable opportunities in the U.S. primary insurance markets. During 2001,
Stonington accounted for the majority of the premiums written, $25.9 million,
the substantial majority of which was reinsured.
Ceded Reinsurance Premiums
----------------------------------------------------
Ceded Premiums
Year ended December 31, 2001 2000 1999
----------------------------------------------------
(In thousands)
Reinsurance $124,684 $94,875 $77,153
Primary 37,090 44,824 60,639
----------------------------------------------------
Total $161,774 $139,699 $137,792
----------------------------------------------------
25
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Because of the potential volatility of the property catastrophe reinsurance
business, we purchase reinsurance to reduce our exposure to large losses. We
utilize 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. During 2001 and 2000, we increased our
purchases of reinsurance because we received a number of new opportunities to
purchase reinsurance at economical rates of return.
Although we would remain liable to the extent that any of our reinsurers fails
to pay our claims, before placing reinsurance we evaluate the financial
condition of our reinsurers. We believe that our process is effective and, to
date, we have not written off any significant reinsurance recoveries. As of
December 31, 2001, the majority of the $217.6 million of losses recoverable
relates to outstanding claims reserves on our books, and accordingly they cannot
be collected by us until we first pay our losses. We expect to fully collect on
all of this recorded reinsurance balance recoverable.
Also, we have recently begun buying quota share protection of our property
catastrophe reinsurance business. These policies are similar to our joint
venture activities, where we receive an override and a profit commission on
these cessions.
Approximately 50% of the limits under our reinsurance coverage have been
purchased on a multi-year basis, which will result in relatively stable costs on
those policies for fiscal years 2002 and 2003. To the extent that appropriately
priced coverage is available, we anticipate continued use of reinsurance to
reduce the potential volatility of our results.
---------------------------------------------------------------
Gross Premiums Written by Geographic Region
Year ended December 31, 2001 2000 1999
---------------------------------------------------------------
(In thousands)
United States and Caribbean $180,305 $145,871 $173,598
Worldwide 93,474 98,923 46,712
Worldwide (excluding U.S.) (1) 45,111 60,382 27,276
Europe 20,414 22,071 26,437
Other 22,433 9,559 2,370
Australia and New Zealand 12,159 8,280 3,212
Specialty reinsurance (2) 77,468 37,730 2,740
---------------------------------------------------------------
Total reinsurance 451,364 382,816 282,345
United States - primary 49,957 50,186 68,960
---------------------------------------------------------------
Total gross premiums written $501,321 $433,002 $351,305
---------------------------------------------------------------
(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 premiums written to date is predominantly from Europe
and Japan.
(2) The category "Specialty Reinsurance" includes coverages related to
non-catastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, aviation, finite and
satellite risks assumed by us.
Underwriting Results
The underwriting results of an insurance or reinsurance company are discussed
frequently by reference to its loss ratio, expense ratio, and combined ratio.
The loss ratio is the result of dividing claims and claim expenses incurred by
net premiums earned. The expense ratio is the result of dividing underwriting
expenses (acquisition and operational expenses) by net premiums earned. The
combined ratio is the sum of the loss ratio and the expense ratio.
26
RenaissanceRe Holdings Ltd. | Annual Report 2001
The table below sets forth our net premiums earned, claims and claim expenses
and underwriting expenses by segment and their corresponding loss, expense and
combined ratios:
-----------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------
(in thousands)
Reinsurance net earned premiums - property catastrophe $ 261,054 $ 225,907 $ 192,278
Reinsurance net earned premiums - specialty reinsurance 64,169 35,260 4,531
-----------------------------------------------------------------------------------------------
Total reinsurance net earned premiums 325,223 261,167 196,809
Primary net earned premiums 7,842 6,514 24,308
-----------------------------------------------------------------------------------------------
Total net earned premiums 333,065 267,681 221,117
-----------------------------------------------------------------------------------------------
Reinsurance claims and claim expenses 152,341 105,542 64,441
Primary claims and claim expenses (2,424) 3,062 12,700
-----------------------------------------------------------------------------------------------
Total claims and claim expenses 149,917 108,604 77,141
-----------------------------------------------------------------------------------------------
Reinsurance underwriting expenses 72,227 70,093 51,828
Primary underwriting expenses 11,735 6,391 10,440
-----------------------------------------------------------------------------------------------
Total underwriting expenses 83,962 76,484 62,268
-----------------------------------------------------------------------------------------------
Reinsurance net underwriting profit 100,655 85,532 80,540
Primary net underwriting profit (loss) (1,469) (2,939) 1,168
-----------------------------------------------------------------------------------------------
Net underwriting profit - total $ 99,186 $ 82,593 $ 81,708
-----------------------------------------------------------------------------------------------
Reinsurance claims and claim expense ratio 46.8% 40.4% 32.7%
Primary claims and claim expense ratio (30.9) 47.0 52.2
-----------------------------------------------------------------------------------------------
Total claims and claim expense ratio 45.0% 40.6% 34.9%
-----------------------------------------------------------------------------------------------
Reinsurance expense ratio 22.2% 26.8% 26.3%
Primary expense ratio 149.6 98.1 42.9
-----------------------------------------------------------------------------------------------
Total expense ratio 25.2% 28.5% 28.1%
-----------------------------------------------------------------------------------------------
Reinsurance combined ratio 69.0% 67.2% 59.0%
Primary combined ratio 118.7 145.1 95.1
-----------------------------------------------------------------------------------------------
Total combined ratio 70.2% 69.1% 63.0%
-----------------------------------------------------------------------------------------------
Our claims and claim expenses, claims and claim expenses ratio, and our combined
ratio for the reinsurance operations have increased primarily as a result of an
increase in our specialty reinsurance premiums, which normally will produce a
higher claims and claim expense and combined ratio than our principal product,
property catastrophe reinsurance. Our claims and claim expenses for 2001 also
increased as a result of our claims and claim expenses from the World Trade
Center tragedy.
Although industry wide insurance losses were the highest in history during 2001
and were the third highest in history in 1999, we recorded increases in net
income, cash flows from operations, earnings per share and book value per share.
We attribute this outstanding performance to our disciplined underwriting
approach, the experience of our underwriters, as well as our sophisticated risk
models.
27
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
In the normal course of business, we also purchase reinsurance protection (see
discussion of Ceded Reinsurance Premiums above). Our underwriting results
benefited from our purchase of reinsurance protection as we recorded reinsurance
recoveries of $160.4 million, $52.0 million and $255.3 million during fiscal
years 2001, 2000 and 1999, respectively. Although there can be no assurance that
our underwriting results will continue to benefit from the purchase of
reinsurance, we will continue to purchase reinsurance protection to the extent
that appropriately priced coverage is available.
Our underwriting expenses consist of operational expenses and acquisition costs.
Operational expenses consist of salaries and other general and administrative
expenses. Acquisition costs consist of costs to acquire premiums and are
principally made up of broker commissions and excise taxes. Our reinsurance
business operates with a limited number of employees and we are able to grow our
book of business without substantially increasing our operating costs.
Acquisition costs are driven by contract terms and are normally a set percentage
of premiums. Therefore, as our premiums increase, we expect that our operating
costs will tend to remain relatively stable. Since our acquisition costs are
based on a percentage of the premiums written, these costs will fluctuate in
line with the fluctuation in premiums. Therefore, in total, as our premiums
increase, we would expect that our expense ratio would decrease, as was the case
in 2001. Other factors may also affect the expense ratios, including business
mix, the receipt of ceding commissions or similar payments that may offset
expenses.
Acquisition costs and operational expenses for the year ended December 31, 2001
were $84.0 million, or 25.2%, compared to $76.5 million, or 28.5% of net
premiums earned for the year ended December 31, 2000. As discussed above, the
primary reason for the decrease in the underwriting expense ratio was the
increase in net premiums earned and the limited growth in the operational
expenses of our reinsurance business.
Acquisition costs and operational expenses for the year ended December 31, 2000
were $76.5 million, or 28.5% of net premiums earned, compared to $62.3 million,
or 28.1% of net premiums earned, for the year ended December 31, 1999. The
primary contributor to the increase in the underwriting expense ratio was the
increase in gross premiums earned by Renaissance Reinsurance with respect to
noncatastrophe reinsurance products, which typically produce a higher
underwriting expense ratio than our principal product, property catastrophe
reinsurance.
For our primary operations, the majority of the premiums written are currently
ceded to other reinsurers and as a result, net earned premiums from the primary
operations were relatively minor during 2001, 2000 and 1999. Based on this
reduced level of net earned premiums, relatively modest one-time adjustments to
net written premiums, claims and claim expenses incurred, acquisition expenses
or operating expenses can cause, and did cause, unusual fluctuations in the
claims and claim expense ratio and the underwriting expense ratio of the primary
operations. Because of its small scale, our primary insurance business does not
materially affect the ratios of our consolidated operations. As can be seen by
the net underwriting losses of the primary operations during 2001 and 2000, the
primary operations are not a significant contributor to our consolidated
operations. Subsequent to the World Trade Center disaster, and the resulting
insurance market turmoil, we currently expect that Glencoe, our Bermuda primary
operation, will experience considerable growth in 2002. We also expect that the
U.S. primary operations of DeSoto, DeSoto Prime and Stonington will continue to
be limited, and therefore we do not expect these entities to contribute
significantly to our consolidated operations during 2002, although these
operations may grow if market conditions allow.
Net Investment Income
---------------------------------------------------------
Year ended December 31, 2001 2000 1999
---------------------------------------------------------
(in thousands) $75,156 $77,868 $60,334
---------------------------------------------------------
28
RenaissanceRe Holdings Ltd. | Annual Report 2001
Because we primarily provide reinsurance coverage for damages resulting from
natural and man-made catastrophes, it is possible that we could become liable
for a significant amount of losses on a short-term notice. Accordingly we have
structured our investment portfolio to preserve capital and provide us with a
high level of liquidity, which means that the large majority of our investment
portfolio contains investments in fixed income securities, such as U.S.
Government bonds, corporate bonds and mortgage backed and asset backed
securities.
As a result of the declining interest rate environment during 2001, the average
yield on our portfolio fell from 6.8% as of December 31, 2000 to 4.2% as of
December 31, 2001. Accordingly, as yields on our portfolio decrease, our
interest income will also decrease, as was the case during 2001. Partially
offsetting this decrease was the significant growth in assets during the year,
which was primarily due to our capital raising activities of issuing $150
million of Senior Notes in July 2001, issuing 2.5 million Common Shares for $233
million in net proceeds in October 2001 and issuing, $150 million of Series A
Preference Shares in November 2001. At December 31, 2001, we had an unusually
large allocation to cash, which resulted from our decision to wait to invest the
proceeds of these capital transactions until we perceived more favorable market
conditions. In the short term this large cash allocation has depressed our
investment returns.
During 2000, the increase in investment income resulted primarily from an
increase in interest rates, together with an increase in the investment base
during the year. Although invested assets at December 31, 2001 only reflected an
increase of $22.3 million from the prior year end, we had an additional $200.0
million in bank loans during most of 2000, which was repaid during the fourth
quarter of 2000.
Other Income
---------------------------------------------------------
Year ended December 31, 2001 2000 1999
---------------------------------------------------------
(in thousands) $16,244 $10,959 $4,915
---------------------------------------------------------
As discussed previously, in 1999 we began to manage property catastrophe books
of business for the Top Layer Re and OPCat joint ventures. We record our profit
and/or equity participation from these joint ventures as other income. During
2001, 2000 and 1999 other income included $18.0 million, $9.8 million and $1.9
million of profits, respectively, from these two ventures. The remainder of our
other income relates to net results from small non-underwriting portions of our
operations, as well as minor activities with catastrophe and derivative
instruments under which losses could be triggered by an industry loss index or
geological or physical variables. In 2001, other income included approximately
$2.4 million from our primary operations and $2.7 million from our investments
in non-indemnity catastrophe index contracts. In 2000, contributions to other
income from our primary operations and from trading in catastrophe linked index
transactions were immaterial. In 1999, we reported $2.5 million in other income
relating to recoveries on catastrophe linked index transactions and $1.4 million
relating to other income from our primary operations.
During 2001, we formed a third joint venture, DaVinci, in which we own 25% of
the equity. Due to the voting and governance structures of DaVinci, our income
from this joint venture is not reflected in other income, but is instead
consolidated in our financial statements. Our profit participation and equity
participation in DaVinci will therefore be reflected primarily through
underwriting income and investment income, partially offset by an increase in
minority interest for the 75% of DaVinci owned by third parties.
Also, as discussed previously, since OPCat has decided to cease its operations,
and since we have decided to assume this book of business, our portion of the
earnings from this book of business will, in the future, be reflected in our
consolidated underwriting results and investment income instead of other income.
29
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Corporate Expenses
---------------------------------------------------------
Year ended December 31, 2001 2000 1999
---------------------------------------------------------
(in thousands) $11,485 $8,022 $9,888
---------------------------------------------------------
Corporate expenses are incurred by us in running our non-underwriting operations
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 majority of the increase in
corporate expenses during 2001 primarily related to costs related to research
and development initiatives conducted by us in 2001.
Fixed Charges
--------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------
(in thousands)
Interest - Revolving Credit Facilities $ 2,378 $17,167 $ 9,934
Interest - $150 million 7% Senior Notes 4,871 - -
Interest - $87.6 million Capital Securities 7,484 7,582 8,288
Dividends - $150 million 8.1% Preference Shares 1,418 - -
--------------------------------------------------------------------------------
Total Fixed Charges $16,151 $24,749 $18,222
--------------------------------------------------------------------------------
Due to our financial strength, we have had the ability to access the capital
markets for various forms of capital. It is advantageous to have access to
various forms of capital, as we therefore do not become dependant on any one
source of capital. Furthermore, the cost and flexibility of each form of capital
can help us to improve our return to common shareholders and at the same time,
maintain a level of capital that allows us to grow our operations.
During 2001, our total fixed charges decreased as a result of our repayment of
$200 million of borrowings under our revolving credit and term loan agreement in
the fourth quarter of 2000. Since the majority of these funds were borrowed in
August 1999, and due to the rising interest rates during 1999 and 2000, this
caused interest expense on our debt to increase in 2000 over interest expense in
1999.
As a result of our issuance during 2001 of the Senior Notes and the Preference
Shares, we expect our fixed charges to increase in 2002 compared to 2001.
Income Tax Expense (Benefit)
----------------------------------------------------------
Year ended December 31, 2001 2000 1999
----------------------------------------------------------
(in thousands) $14,262 $ 4,648 ($1,525)
----------------------------------------------------------
In 1998, in conjunction with charges we recorded relating to our purchase and
subsequent decision to significantly reduce the operations of Stonington, we
recorded a deferred tax asset of $22 million. This deferred tax asset relates
primarily to net operating loss carryforwards that are available to offset
future taxes payable of our U.S. operating subsidiaries. However, due to the
limited opportunities in the U.S. primary insurance market, the U.S. insurance
operations have not generated taxable income in the last few years. This calls
into question the recoverability of the deferred tax asset. Although we retain
the benefit of this asset through 2020, during 2001 and during 2000 we recorded
increases in our valuation allowances of $14.0 million and $8.2 million,
respectively. As of December 31, 2001, the net balance of the deferred tax asset
was $4.2 million.
30
RenaissanceRe Holdings Ltd. | Annual Report 2001
Should our current U.S. operations begin to generate taxable income, or should
additional opportunities arise to conduct business in the U.S., the valuation
allowance could be eliminated as profits are recorded, and we could possibly
earn profits without a corresponding reduction for taxes.
Realized Gains/(Losses)
----------------------------------------------------------
Year ended December 31, 2001 2000 1999
----------------------------------------------------------
(in thousands) $18,096 ($7,151) ($15,720)
----------------------------------------------------------
During 2001, net realized gains on sales of investments were $18.1 million,
compared to net realized losses of $7.2 million in 2000. As noted above, because
our portfolio is structured to preserve capital and provide us with a high level
of liquidity, our gains and losses on investments will be highly correlated to
fluctuations in interest rates. Accordingly as interest rates decline, we will
tend to have realized gains from the turnover of our portfolio, and as interest
rates increase, we will tend to have realized losses from the turnover of our
portfolio.
Financial Condition
As a holding company, we 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 shareholders and
common shareholders.
The payment of dividends by our subsidiaries is, under certain circumstances,
limited under U.S. statutory regulations and Bermuda insurance law. U.S.
statutory regulations and The Bermuda Insurance Act 1978, amendments thereto and
related regulations of Bermuda, require our Bermuda insurance subsidiaries to
maintain certain measures of solvency and liquidity. At December 31, 2001, the
statutory capital and surplus of our Bermuda insurance subsidiaries was $1,490.3
million, and the amount required to be maintained by the Act was $259.7 million.
Our U.S. subsidiaries are also required to maintain certain measures of solvency
and liquidity. At December 31, 2001, the statutory capital and surplus of our
U.S. subsidiaries was $32.6 million and the amount required to be maintained was
$24.3 million. During 2001, Renaissance Reinsurance declared aggregate cash
dividends of $147.1 million, compared with $95.6 million in 2000.
Our operating subsidiaries have historically produced sufficient cash flows to
meet their own expected claims payments and operational expenses and to provide
dividend payments to us. Our subsidiaries also maintain a concentration of
investments in high quality liquid securities, which management believes will
provide sufficient liquidity to meet extraordinary claims payments should the
need arise. Additionally, we maintain a $310.0 million credit facility to meet
additional capital requirements, if necessary.
Cash Flows
Cash flows from operating activities for 2001 were $341.5 million, which
principally consisted of net income of $166 million, plus $119 million for
losses incurred but not paid as of December 31, 2001, plus $58 million of
collections on losses recoverable. The 2001 cash flows from operations were
primarily utilized to reinvest in fixed income securities.
We have generated cash flows from operations in 2001 and in 2000 significantly
in excess of our operating commitments. To the extent that capital is not
utilized in our reinsurance business, we will consider using such capital to
invest in new opportunities.
Because of the nature of the coverages we provide, which 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.
31
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Reserve for Claims and Claim Expenses
For most insurance and reinsurance companies, the most significant judgment made
by management is the estimation of the claims and claim expense reserves.
Because of the variability and uncertainty associated with loss estimation, it
is possible that our individual case reserves for each catastrophic event are
incorrect, possibly materially. The period of time from the reporting of a loss
to us through the settlement of our liability may be several years. During this
period, additional facts and trends will be revealed and as these factors become
apparent, reserves will be adjusted. Therefore, changes to our prior year loss
reserves can impact our current underwriting results by 1) improving our results
if the prior year reserves prove to be redundant, or 2) reducing our results if
the prior year reserves prove to be insufficient. The impact on net income from
changes in prior years loss reserves was an increase of $16.0 million during
2001, a decrease of $8.4 million during 2000 and an increase of $34.6 million in
1999.
For our insurance and reinsurance operations, our estimates of claims reserves
are based on 1) claims reports from insureds, 2) our underwriters' experience in
setting claims reserves, 3) the use of computer models where applicable and 4)
historical industry claims experience. Where necessary we will also use
statistical and actuarial methods to estimate ultimate expected claims and claim
expenses. We review our reserves on a regular basis.
Our principal business is property catastrophe reinsurance, which subjects us to
potential losses that are generally infrequent, but can be significant, such as
losses from hurricanes and earthquakes. Because the loss events to which we are
exposed are generally characterized by low frequency but high severity, our
claims and claim expense reserves will normally fluctuate, sometimes materially,
based upon the occurrence of a significant natural or man-made catastrophic loss
for which we provide reinsurance. Our reserves will also fluctuate based on the
payments we make for these large loss events. As we pay losses related to these
large events, if no other events have occurred, our loss reserves would normally
tend to decrease.
The table below sets forth our gross and net claims and claim expense reserves
for the previous eight years, compared with the balance of our shareholders'
equity.
--------------------------------------------------------------------------------
Gross Net Shareholders' Percentage
At December 31, Reserves Reserves Equity of Equity
--------------------------------------------------------------------------------
Gross Net
--------------------------------------------------------------------------------
1994 $ 63.3 $ 63.3 $ 265.2 23.9% 23.9%
1995 100.4 100.4 486.3 20.6 20.6
1996 105.4 105.4 546.2 19.3 19.3
1997 110.0 110.0 598.7 18.4 18.4
1998 298.8 197.5 612.2 48.8 32.3
1999 478.6 174.9 600.3 79.7 29.1
2000 403.6 237.0 700.8 57.6 33.8
2001 572.9 355.3 1,225.0 46.8 29.0
--------------------------------------------------------------------------------
The above information further reflects how our gross reserves, as a percentage
of equity, can fluctuate based on the occurrence of significant loss events. For
instance in 1999, our gross reserves, and our gross reserves as a percentage of
equity increased sharply, due to the nine significant loss events occurring in
1999, many of which occurred in the last four months of the year (see discussion
of Premiums above for a discussion of these events). However, as also can be
seen from the data above, because of our ability to purchase reasonably priced
reinsurance, historically our net reserves as a percentage of equity have shown
much less variation from year to year.
We generally expect that the majority of our losses from large catastrophic
events will be paid in a two to four year time frame. However, the event causing
the loss, the locations of the loss, and whether our losses are from policies
with insurers or reinsurers, can affect the time period in which our claims will
be paid. For instance, losses occurring in the U.S., tend to pay more quickly
than those losses occurring in other parts of the world. This trend is reflected
in the current balance of our reserves, whereby seven of the nine events
occurring in 1999, occurred outside of the U.S., and accordingly, our claim
payments on these losses have tended to pay slower than those on events
occurring in the U.S. Also, the 1999 events impacted claims payments in 2000 and
2001 to a greater extent than normal because most of the 1999 events occurred
late in the year, including the most severe events, which were the European
storms in December.
32
RenaissanceRe Holdings Ltd. | Annual Report 2001
For illustrative purposes, the table below sets forth our claim payments and
claim developments for the 1999 accident year for our Reinsurance segment
through December 31, 2001:
--------------------------------------------------------------------------------
Gross Ceded Net
1999 Accident Year - Reinsurance Segment Reserves Reserves Reserves
--------------------------------------------------------------------------------
Incurred reserve 282.7 185.0 $ 97.7
Claim payments in 1999 (26.8) - (26.8)
--------------------------------------------------------------------------------
Reserves as of December 31, 1999 $ 255.9 $ 185.0 $ 70.9
Claim payments in 2000 (110.5) (124.8) 14.3
Reserve additions in 2000 6.1 (0.6) 6.7
--------------------------------------------------------------------------------
Reserves as of December 31, 2000 151.5 59.6 91.9
Claim payments in 2001 (37.8) (54.1) 16.3
Reserve additions in 2001 10.4 29.4 (19.0)
--------------------------------------------------------------------------------
Reserves as of December 31, 2001 $ 124.1 $ 34.9 $ 89.2
--------------------------------------------------------------------------------
At December 31, 2001, 2000 and 1999, the claims and claim expense reserves of
the Reinsurance segment were $500.1 million, $296.4 million and $361.9 million,
respectively, of the total reserves of the Company. Also, as of December 31,
2001, 2000 and 1999, of the total reserves of the Reinsurance segment, 86%, 88%
and 91% of the reserves, respectively, related to claims and claim expense
reserves of the three most recent accident years. As of December 31, 2001, 2000
and 1999, included in our claims and claim expense reserves were reserves for
incurred but not reported claims ("IBNR") of $286.7 million, $228.8 million, and
$293.2 million, respectively.
During 2001, our claims and claim expense reserves, our claims recoveries and
our net reserves all increased as a result of losses we incurred from the World
Trade Center tragedy. During 2002, as we pay losses related to the World Trade
Center tragedy and other currently known loss events, if no additional
significant loss events occur, we would expect the balance of our claims and
claim expense reserves to decrease.
Capital Resources
Our total capital resources at December 31, 2001 and 2000 were as follows:
----------------------------------------------------------------
At December 31, 2001 2000
----------------------------------------------------------------
(In thousands)
Common shareholders' equity $1,075,024 $ 700,818
Series A preference shares 150,000 -
----------------------------------------------------------------
Total shareholders' equity 1,225,024 700,818
7.00% senior notes 150,000 -
8.54% capital securities 87,630 87,630
Revolving credit facility - unborrowed 310,000 302,000
Revolving credit facility - borrowed - 8,000
Term and revolving loan facility 33,500 42,000
----------------------------------------------------------------
Total capital resources $1,806,154 $1,140,448
----------------------------------------------------------------
33
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 ratings are downgraded. In some instances the downgrade must be to
a rating several levels below our current rating; in others, the trigger level
is somewhat higher; and in others it is only one or two levels below our current
rating. Many of our policies do not contain a provision of this type. Moreover,
we cannot precisely estimate the amount of premium that is at risk, 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 and do not anticipate that a material amount of premium would
be cancelled or nonrenewed. However, we can not assure that our premiums would
not decline, perhaps materially, following a ratings downgrade.
During 2001, as a result of the World Trade Center tragedy, two results occurred
in the reinsurance market. First, reinsurers recorded significant losses and
were forced to, or chose to, withdraw their underwriting capacity for certain
lines of reinsurance. Second, these losses raised the awareness of the severity
of the losses which could occur. These factors caused an imbalance in the supply
of and demand for reinsurance and, as a result, prices escalated for many
segments of the reinsurance market. These imbalances provided us with an
opportunity to increase our penetration of the property catastrophe reinsurance
market, as well as provided us with opportunities to grow other areas of our
operations, specifically our Specialty Reinsurance operations and our commercial
property insurance operations written through Glencoe Insurance.
With these increased opportunities to grow our businesses, we also decided to
materially increase our capital resources through the following activities:
1. In October 2001, we issued 2.5 million of Common Shares for net proceeds of
$233 million.
2. In November 2001, we raised $145 million in net proceeds through the
issuance of 6,000,000 $1.00 par value Series A Preference Shares at $25.00
per share. The shares are non-convertible and may be redeemed at $25.00 per
share on or after November 19, 2006. Dividends are cumulative from the date
of original issuance and are payable quarterly in arrears at 8.10% when,
if, and as, declared by our Board of Directors. Under certain
circumstances, such as amalgamations and changes to Bermuda law requiring
approval of the holders of our preference shares to vote as a single class,
we may redeem the shares prior to November 19, 2006 at $26.00 per share.
The preference shares have no stated maturity and are not convertible into
any of our other securities.
3. In July we issued $150 million of 7% Senior Notes due July 2008. We used a
portion of the proceeds to repay $16.5 million of outstanding amounts under
our $310 million revolving credit and term loan agreement. We can redeem
the notes prior to maturity subject to payment of a "make-whole" premium;
however, we currently have no intentions of calling the notes. The notes,
which are senior obligations, pay interest semi-annually and 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.
We also formed DaVinci, our third joint venture, in October 2001. To form
DaVinci, we raised $300 million of outside capital ($275 million as of December
31, 2001) and we utilized $200 million of our capital when we contributed $100
million as equity and provided $100 million as bridge financing. In the first
half of 2002, we expect DaVinci to replace our $100 million of bridge financing
with bank debt which, because we are consolidating DaVinci, will increase the
outstanding debt on our consolidated balance sheet.
Also, in conjunction with market opportunities following the World Trade Center
tragedy, we contributed an additional $135 million of capital to Glencoe,
thereby increasing its total capital to greater than $200 million.
We continue to maintain a revolving credit and term loan agreement with a
syndicate of commercial banks. During the third quarter of 2001, we repaid
borrowings of $16.5 million on this facility and as of December 31, 2001 no
amounts were outstanding. In the fourth quarter of 2000 we repaid $200.0 million
of the then outstanding balance. Interest rates on the facility are based on a
spread above LIBOR and averaged 5.45% during 2001, compared to 7.03% in 2000.
Our revolving credit agreement contains certain financial covenants including
requirements that consolidated debt to capital does not exceed a ratio of
0.35:1; consolidated net worth must exceed the greater of $100.0 million or 125%
of consolidated debt; and 80% of invested assets must be rated BBB- or better.
We were in compliance with all the covenants of this revolving credit and term
loan agreement at December 31, 2001.
34
RenaissanceRe Holdings Ltd. | Annual Report 2001
Renaissance U.S. has a $18.5 million term loan and $15.0 million revolving loan
facility with a syndicate of commercial banks, each of which is guaranteed by
RenaissanceRe. Interest rates on the facility are based upon a spread above
LIBOR, and averaged 4.71% during 2001, compared to 6.98% in 2000. The related
agreements contain certain financial covenants, including a covenant that
RenaissanceRe, as principal guarantor, maintain a ratio of liquid assets to debt
service of 4:1. The term loan has mandatory repayment provisions approximating
$9 million per year in each of years 2002 and 2003. The loan facility of $15
million is repayable in 2003. During 2001, Renaissance U.S. repaid approximately
$8.5 million of this facility. We were in compliance with all the covenants of
this term loan and revolving loan facility at December 31, 2001.
Our subsidiary, RenaissanceRe Capital Trust has issued capital securities which
pay cumulative cash distributions at an annual rate of 8.54%, payable
semi-annually. During 2000, we purchased $2.0 million of these capital
securities recognizing a gain of $0.5 million which has been reflected in
shareholders' equity. No securities were purchased during 2001. The sole asset
of the Trust consists of our junior subordinated debentures in an amount equal
to the outstanding capital securities. The Indenture relating to these junior
subordinated debentures contains certain covenants, including a covenant
prohibiting us from the payment of dividends if we are in default under the
Indenture. We were in compliance with all of the covenants of the Indenture at
December 31, 2001. The capital trust securities mature on March 1, 2027.
Generally Accepted Accounting Principles do not allow these securities to be
classified as a component of shareholders' equity, therefore, they are reflected
as minority interest.
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. Our letters of credit are secured by a lien on a portion of our
investment portfolio. At December 31, 2001, we had outstanding letters of credit
aggregating $125.8 million, compared to $44.9 million in 2000. This increase is
primarily related to the losses emanating from the World Trade Center tragedy.
Also, in connection with our Top Layer Re joint venture we have committed $37.5
million of collateral to support a letter of credit.
In order to encourage employee ownership of common shares, we have guaranteed
certain loan and pledge agreements between certain employees and Bank of
America, Illinois ("BofA"). Pursuant to the terms of this employee credit
facility, BofA has agreed to loan the participating employees up to an aggregate
of $25.0 million. The balance outstanding at December 31, 2001 was $24.1
million, compared to $24.8 million in 2000. Each loan under this employee credit
facility is required to be initially collateralized by the respective
participating employee with common shares or other collateral acceptable to
BofA. If the value of the collateral provided by a participating employee
subsequently decreases, the participating employee is required to contribute
additional collateral in the amount of such deficiency, failing which BofA can
accelerate the loan and liquidate the remaining collateral. Loans under this
employee credit facility are otherwise non-recourse to the participating
employees. Given the level of collateral, we do not presently anticipate that we
will be required to honor any guarantees under the employee credit facility,
although there can be no assurance that we will not be so required in the
future.
Shareholders' Equity
During 2001, shareholders' equity increased by $524.2 million, from $700.8
million at December 31, 2000 to $1.2 billion at December 31, 2001. The
significant components of the change in shareholders' equity included net income
from continuing operations of $164.4 million, $145 million received from the
issuance of 6 million Series A Preference Shares, and $233 million received from
the issuance of 2.5 million common shares, offset by the payment of dividends of
$32.8 million. At December 31, 2001, shareholders' equity attributable to common
shareholders was $1.075 billion.
From time to time, we have returned capital to our shareholders through share
repurchase programs. As at December 31, 2001, we had $27.1 million remaining
under our existing program. During 2000, we purchased 671,900 common shares for
an aggregate value of $25.1 million. During 1999, we repurchased 2,226,700
common shares for an aggregate value of $80.1 million. No shares were
repurchased during 2001.
Investments
At December 31, 2001, we held cash and investments totaling $2.2 billion,
compared to $1.1 billion in 2000, with net unrealized appreciation of $16.3
million, compared to unrealized appreciation of $6.8 million in 2000.
35
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Because we primarily provide coverage for damages resulting from natural and
man-made catastrophes, we may become liable for substantial claim payments on
short-term notice. Accordingly, our investment portfolio is structured to
preserve capital and provide a high level of liquidity which means that the
large majority of our investment portfolio contains investments in fixed income
securities, such as U.S. Government bonds, corporate bonds and mortgage backed
and asset backed securities.
The table below shows the aggregate amounts of investments available for sale,
other investments and cash and cash equivalents comprising our portfolio of
invested assets:
---------------------------------------------------------------------------
At December 31, 2001 2000
---------------------------------------------------------------------------
(In thousands)
Investments available for sale, at fair value $1,282,483 $ 928,102
Other investments 38,307 22,443
Cash, cash equivalents and short term investments 873,640 124,331
---------------------------------------------------------------------------
Total invested assets $2,194,430 $1,074,876
---------------------------------------------------------------------------
The growth in our portfolio of invested assets for the year ended December 31,
2001 resulted primarily from net cash provided by operating activities of $326
million, $233 million raised from the issuance of 2.5 million common shares,
$145 million received from the issuance of 6 million Series A Preference Shares,
$150 million raised from the issuance of 7% senior notes and $275 million of
third party investment in our most recent joint venture, DaVinci Reinsurance. At
year end, we had an unusually large allocation to cash, which resulted from our
decision to wait to invest the proceeds of these capital transactions until we
perceived more favorable market conditions; in the short term, this large cash
allocation has depressed our investment returns. Over time, we expect our cash
position to return to historical levels.
Our current investment guidelines call for the invested asset portfolio,
including cash and cash equivalents, to have at least an average AA rating as
measured by Standard & Poor's Ratings Group. At December 31, 2001, our invested
asset portfolio had a dollar weighted average rating of AA, an average duration
of 1.9 years and an average yield to maturity of 3.8%.
Catastrophe Linked Instruments
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 2001, 2000 and 1999 we recorded recoveries on non-indemnity
catastrophe index transactions of $2.7 million, nil, and $2.5 million,
respectively. We report these recoveries in other income. We cannot assure that
this performance will continue.
Market Sensitive Instruments
Our investment portfolio includes investments which are subject to changes in
market values with changes in interest rates. The aggregate hypothetical loss
generated from an immediate adverse parallel shift in the treasury yield curve
of 100 basis points would cause a decrease in total return of 1.9%, which
equated to a decrease in market value of approximately $41.0 million on a
portfolio valued at $2,156.1 million at December 31, 2001. At December 31, 2000,
the decrease in total return would have been 2.7%, which equated to a decrease
in market value of approximately $28.4 million on a portfolio valued at $1,052.4
million. The foregoing reflects the use of an immediate time horizon, since this
presents the worst-case scenario. Credit spreads are assumed to remain constant
in these hypothetical examples.
Currency
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.
36
RenaissanceRe Holdings Ltd. | Annual Report 2001
Our current foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including claims and claim expense reserves and
reinsurance balances payable. All changes in the exchange rates are recognized
currently in our statement of income. When necessary we will seek to hedge our
exposure to foreign currency transactions through the use of options, swaps
and/or forward contracts. As of December 31, 2001, we did not have any
outstanding options, swaps or forward contracts related to foreign currency
exposure.
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 inflation on our results cannot be accurately
known until claims are ultimately settled.
Off Balance Sheet and Special Purpose Entity Arrangements
As of December 31, 2001, we have not entered into any guarantees, or guaranteed
the liabilities of any non-consolidated affiliates or subsidiaries or other
non-related parties.
New Accounting Pronouncement
Effective January 1, 2002 we implemented SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS 133, goodwill and other intangible
assets are no longer being amortized but are reviewed periodically for
impairment. The adoption of SFAS 142 had no significant impact on our
consolidated financial statements.
Current Outlook
The World Trade Center tragedy has caused significant changes to the market
environment. Many insurance and reinsurance companies are seeking and receiving
higher prices for the risks that they assume and have substantially reduced
their exposures, including various exclusions for acts of terrorism and acts of
war. These actions are being taken as a result of an increased perception of
risk for the industry in general, as well as an improved understanding of the
correlation between, and within, various classes of business that were
previously believed to be independent by other companies. In addition, there is
a heightened sensitivity to credit quality as a number of other insurance
companies have experienced downgrades in their credit ratings.
Because RenaissanceRe experienced relatively limited losses from the World Trade
Center tragedy, and continues to have stable, high credit ratings, we believe we
are well positioned to significantly increase our managed catastrophe premiums.
In addition, we are anticipating that we will expand our presence in the
specialty reinsurance coverages, which by our definition are coverages that are
not specifically property catastrophe reinsurance coverages. In evaluating
opportunities in the specialty reinsurance market, we focus on those coverages
which, like property catastrophe reinsurance, produce losses that are infrequent
in nature, but could be severe if they occur. Examples include aviation,
satellite, finite and catastrophe exposed workers compensation coverages.
We also anticipate that we will increase the premiums written by our Bermuda
based primary insurance company, Glencoe. Glencoe, which primarily provides
catastrophe exposed primary property coverage on an excess and surplus lines
basis, wrote $12.9 million of gross written premiums in 2001.
As a result of the World Trade Center tragedy, we expect the cost of reinsurance
protection to increase during 2002. If prices rise to levels whereby we believe
the purchase of reinsurance protection would become uneconomical, we may retain
a greater level of net risk in certain geographic regions. In order to obtain
longer-term retrocessional capacity, we have entered into multi-year contracts
with respect to a portion of our portfolio.
The World Trade Center tragedy has caused insurers and reinsurers to seek to
limit their potential exposures to losses from terrorism attacks. We often
exlcude terrorism in the reinsurance and insurance that we write, but do have
potential exposures to this risk. We are monitoring our aggregate exposures to
terrorist attacks.
37
RenaissanceRe Holdings Ltd. | Annual Report 2001
Subsequent to the World Trade Center tragedy, a substantial amount of capital
has entered the insurance and reinsurance markets both through investments in
established companies and through start-up ventures. The addition of new capital
in the marketplace may cause a reduction in prices of reinsurance contracts, or
could shorten the time horizon of the price increases for reinsurance contracts.
Currently, however, we do not believe that the new capital has resulted in
adverse changes to the prevailing pricing structure in the property catastrophe
reinsurance market. To the extent that the newly-formed companies or established
companies were to reduce the pricing of their products, this could force us to
reduce our future underwriting premiums.
Note on Forward Looking Statements
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934. Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which, with respect to
future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, us.
In particular, statements using words such as "may," "should," "estimate,"
"expect," "anticipate," "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, overall
market trends, risk management and exchange rates. This Annual Report 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) a decrease in the level of demand for our reinsurance or insurance
business, or increased competition in the industry;
(3) the lowering or loss of one of the financial or claims-paying ratings of
ours or one or more of our subsidiaries;
(4) acts of terrorism or acts of war;
(5) risks associated with implementing our business strategies and our
initiatives for organic growth, including risks relating to managing that
growth;
(6) slower than anticipated growth in our fee-based operations;
(7) changes in economic conditions, including interest and currency rate and
other conditions which could affect our investment portfolio;
(8) uncertainties in our reserving process;
(9) the ability of our reinsurers to honor their obligations;
(10) extraordinary events affecting our clients, such as bankruptcies and
liquidations;
(11) loss of services of any one of our key executive officers;
(12) the passage of federal or state legislation subjecting Renaissance
Reinsurance to supervision or regulation, including additional tax
regulation, in the United States or other jurisdictions in which we
operate;
(13) challenges by insurance regulators in the United States to Renaissance
Reinsurance's claim of exemption from insurance regulation under the
current laws;
(14) a contention by the United States Internal Revenue Service that our Bermuda
subsidiaries, including Renaissance Reinsurance, are subject to U.S.
taxation; and
(15) actions of competitors, including industry consolidation, the launch of new
entrants and the development of competing financial products.
The factors listed above should not be construed as exhaustive. Certain of these
factors are described in more detail in our filings with the Securities and
Exchange Commission, including in our Annual Report on Form 10-K for the year
ended December 31, 2001, under the caption "Risk Factors." 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.
38
RenaissanceRe Holdings Ltd. | Annual Report 2001
Management's Responsibility for Financial Statements
--------------------------------------------------------------------------------
Management is responsible for the integrity of the consolidated financial
statements and other financial information presented in this Annual Report. The
accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, applying certain
estimates and judgements as required.
The Company's internal controls are designed so that transactions are authorized
and executed in accordance with management's authorization, to provide
reasonable assurance as to the integrity and reliability of the financial
statements and to adequately safeguard the assets against unauthorized use or
disposition. Such controls are based on established policies and procedures and
are implemented by qualified personnel with an appropriate segregation of
duties.
Ernst & Young, independent auditors, are retained to audit the Company's
consolidated financial statements and express their opinion thereon. Their
accompanying report is based on audits conducted in accordance with auditing
standards generally accepted in the United States, which includes the
consideration of the Company's internal controls and an examination, on a test
basis, of evidence supporting the amounts and disclosures in the financial
statements. These procedures enable them to obtain a reasonable assurance about
whether the financial statements are free of material misstatement and provide a
reasonable basis for their opinion.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with the independent auditors, both privately and with management present, to
review accounting, auditing, internal controls and financial reporting matters.
/s/ James N. Stanard /s/ John M. Lummis
James N. Stanard John M. Lummis
Chairman and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Report of Independent Auditors
To The Board of Directors and Shareholders of RenaissanceRe Holdings Ltd. and
Subsidiaries.
--------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 2001 and 2000 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, 2001. 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young
Hamilton, Bermuda
January 23, 2002
39
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Balance Sheets
At December 31, 2001 2000
-------------------------------------------------------------------------------------------------------
(in thousands of United States dollars, except per share amounts)
Assets
Investments and cash
Fixed maturity investments available for sale, at fair value $ 1,282,483 $ 928,102
(Amortized cost $1,266,188 and $921,750 at December 31, 2001
and 2000, respectively) (Note 3)
Short term investments, at cost 7,372 13,760
Other investments 38,307 22,443
Cash and cash equivalents 866,268 110,571
-------------------------------------------------------------------------------------------------------
Total investments and cash 2,194,430 1,074,876
Reinsurance premiums receivable 102,202 95,423
Ceded reinsurance balances 41,690 37,520
Losses and premiums recoverable (Note 4) 217,556 167,604
Accrued investment income 17,696 15,034
Deferred acquisition costs 12,814 8,599
Other assets 57,264 69,933
-------------------------------------------------------------------------------------------------------
Total Assets $ 2,643,652 $ 1,468,989
-------------------------------------------------------------------------------------------------------
Liabilities, Minority Interests and Shareholders' Equity
Liabilities
Reserve for claims and claim expenses (Note 5) $ 572,877 $ 403,611
Reserve for unearned premiums 125,053 112,541
Debt (Note 6) 183,500 50,000
Reinsurance balances payable 115,967 50,779
Other liabilities 58,650 63,610
-------------------------------------------------------------------------------------------------------
Total Liabilities 1,056,047 680,541
-------------------------------------------------------------------------------------------------------
Minority interest - Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated
debentures of RenaissanceRe (Note 7) 87,630 87,630
Minority interest - DaVinci (Note 7) 274,951 -
Shareholders' Equity (Note 8)
Series A preference shares: $1.00 par value - 6,000,000 shares authorized,
issued and outstanding at December 31, 2001 (2000 - nil) 150,000 -
Common shares and additional paid-in capital: $1.00 par value - authorized
225,000,000 shares; issued and outstanding at December 31, 2001
22,630,883 shares (2000 - 19,621,267 shares) 264,623 22,999
Unearned stock grant compensation (Note 15) (20,163) (11,716)
Accumulated other comprehensive income 16,295 6,831
Retained earnings 814,269 682,704
-------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,225,024 700,818
-------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interests and Shareholders' Equity $ 2,643,652 $ 1,468,989
-------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
40
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Statements of Income
Years Ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------------------------------
(in thousands of United States dollars, except per share amounts)
Revenues
Gross premiums written $ 501,321 $ 433,002 $ 351,305
--------------------------------------------------------------------------------------------------------
Net premiums written $ 339,547 $ 293,303 $ 213,513
Decrease (increase) in unearned premiums (6,482) (25,622) 7,604
--------------------------------------------------------------------------------------------------------
Net premiums earned 333,065 267,681 221,117
Net investment income (Note 3) 75,156 77,868 60,334
Net foreign exchange gains (losses) (1,667) 378 (411)
Other income 16,244 10,959 4,915
Net realized gains (losses) on investments (Note 3) 18,096 (7,151) (15,720)
--------------------------------------------------------------------------------------------------------
Total Revenues 440,894 349,735 270,235
--------------------------------------------------------------------------------------------------------
Expenses
Claims and claim expenses incurred (Note 5) 149,917 108,604 77,141
Acquisition costs 45,359 38,530 25,500
Operational expenses 38,603 37,954 36,768
Corporate expenses 11,485 8,022 9,888
Interest expense 7,249 17,167 9,934
--------------------------------------------------------------------------------------------------------
Total Expenses 252,613 210,277 159,231
--------------------------------------------------------------------------------------------------------
Income before minority interests and taxes 188,281 139,458 111,004
Minority interest - Company obligated, mandatorily redeemable
capital securities of a subsidiary trust holding solely junior
subordinated debentures of RenaissanceRe (Note 7) (7,484) (7,582) (8,288)
Minority interest - DaVinci (Note 7) (751) - -
--------------------------------------------------------------------------------------------------------
Income before taxes 180,046 131,876 102,716
Income tax benefit (expense) (Note 12) (14,262) (4,648) 1,525
--------------------------------------------------------------------------------------------------------
Net income 165,784 127,228 104,241
Dividends on Series A preference shares (1,418) - -
--------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 164,366 $ 127,228 $ 104,241
--------------------------------------------------------------------------------------------------------
Earnings per common share - basic $ 8.29 $ 6.68 $ 5.10
Earnings per common share - diluted $ 7.90 $ 6.50 $ 5.05
See accompanying notes to the consolidated financial statements.
41
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------
(in thousands of United States dollars, except per share amounts)
Series A preference shares
Issuance of shares $ 150,000 $ - $ -
-------------------------------------------------------------------------------------------------------
Balance - December 31 150,000 - -
-------------------------------------------------------------------------------------------------------
Common shares & additional paid-in capital
Balance - January 1 22,999 19,686 39,035
Issuance of common shares 232,525 - -
Exercise of stock options & restricted share awards 14,652 3,495 6,461
Repurchase of shares - (672) (26,695)
Issuance costs of preference shares and other (5,553) 490 885
-------------------------------------------------------------------------------------------------------
Balance - December 31 264,623 22,999 19,686
-------------------------------------------------------------------------------------------------------
Unearned stock grant compensation
Balance - January 1 (11,716) (10,026) (8,183)
Stock grants awarded (15,653) (7,215) (5,382)
Amortization 7,206 5,525 3,539
-------------------------------------------------------------------------------------------------------
Balance - December 31 (20,163) (11,716) (10,026)
-------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Balance - January 1 6,831 (18,470) (5,144)
Net unrealized gains (losses) on investments,
net of adjustment (see disclosure below) 9,464 25,301 (13,326)
-------------------------------------------------------------------------------------------------------
Balance - December 31 16,295 6,831 (18,470)
-------------------------------------------------------------------------------------------------------
Retained earnings
Balance - January 1 682,704 609,139 586,524
Net income 165,784 127,228 104,241
Dividends on common shares (32,801) (29,228) (28,885)
Dividends on preference shares (1,418) - -
Repurchase of shares - (24,435) (53,403)
Other - - 662
-------------------------------------------------------------------------------------------------------
Balance - December 31 814,269 682,704 609,139
-------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 1,225,024 $ 700,818 $ 600,329
-------------------------------------------------------------------------------------------------------
Comprehensive Income
Net income $ 165,784 $ 127,228 $ 104,241
Other comprehensive income (loss) 9,464 25,301 (13,326)
-------------------------------------------------------------------------------------------------------
Comprehensive Income $ 175,248 $ 152,529 $ 90,915
-------------------------------------------------------------------------------------------------------
Disclosure Regarding Net Unrealized Gains (Losses)
Net unrealized holding gains (losses) arising during period $ 27,560 $ 18,150 $ (29,046)
Net realized losses (gains) included in net income (18,096) 7,151 15,720
-------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investments $ 9,464 $ 25,301 $ (13,326)
-------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
42
RenaissanceRe Holdings Ltd. | Annual Report 2001
Consolidated Statements of Cash Flows
Years Ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------------
(in thousands of United States dollars)
Cash Flows Provided by Operating Activities:
Net income $ 165,784 $ 127,228 $ 104,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,190 315 9,810
Net realized losses (gains) on investments (18,096) 7,151 15,720
Reinsurance balances, net 58,408 (14,346) (27,595)
Ceded reinsurance balances (4,169) 12,717 (8,867)
Accrued investment income (2,661) (1,578) (3,488)
Reserve for unearned premiums 12,513 14,155 3,920
Reserve for claims and claim expenses, net 119,314 86,033 51,524
Other, net 7,199 19,153 (14,960)
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 341,482 250,828 130,305
-----------------------------------------------------------------------------------------------------
Cash Flows Applied to Investing Activities:
Proceeds from maturities and sales of investments 3,290,264 2,171,484 1,986,498
Purchase of investments available for sale (3,633,332) (2,187,007) (2,146,361)
Net sales (purchases) of short term and other investments 6,384 (1,001) 13,543
-----------------------------------------------------------------------------------------------------
Net cash applied to investing activities (336,684) (16,524) (146,320)
-----------------------------------------------------------------------------------------------------
Cash Flows Provided by (Applied to) Financing Activities:
Sale (purchase) of common shares 232,525 (25,107) (80,098)
Net proceeds from (repayment of) bank loan (16,500) (200,000) 150,000
Sale of preference shares 145,275 - -
Issuance of senior debt 148,868 - -
Minority interests 274,951 - -
Dividends paid (34,220) (29,228) (28,885)
Purchase of capital securities - (1,510) (8,591)
-----------------------------------------------------------------------------------------------------
Net cash provided by (applied to) financing activities 750,899 (255,845) 32,426
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 755,697 (21,541) 16,411
Cash and Cash Equivalents, Beginning of Year 110,571 132,112 115,701
-----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 866,268 $ 110,571 $ 132,112
-----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
43
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
December 31, 2001 (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 it provides
reinsurance and insurance coverage where the risk of natural and man-made
catastrophes represents a significant component of the overall exposure.
o Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") is the Company's
principal subsidiary and provides property catastrophe reinsurance coverage to
insurers and reinsurers on a worldwide basis. To a lesser extent, Renaissance
Reinsurance also writes non-catastrophe reinsurance in certain specialty lines.
o The Company also manages property catastrophe reinsurance written on behalf of
joint ventures, including Top Layer Reinsurance Ltd. ("Top Layer Re"), Overseas
Partners Cat Ltd. ("Opcat") and DaVinci Reinsurance Ltd. ("DaVinci"). DaVinci
was formed in October 2001 with other equity investors and is consolidated in
the Company's financial statements. The Company acts as exclusive underwriting
manager for these joint ventures in return for fee-based income and profit
participation.
o The Company's primary operations include Glencoe Insurance Ltd. ("Glencoe"),
DeSoto Insurance Company ("DeSoto"), DeSoto Prime Insurance Company ("DeSoto
Prime") and Stonington Insurance Company ("Stonington", formerly Nobel Insurance
Company). Glencoe provides catastrophe exposed property coverage on an insurance
and reinsurance basis and DeSoto and DeSoto Prime operate in the U.S. homeowners
market. Stonington is licensed to operate in 50 states in the U.S.
Note 2. Significant Accounting Policies
Basis of presentation
The consolidated financial statements have been prepared on the basis of United
States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe and its wholly-owned and majority-owned subsidiaries
and DaVinci, which are collectively referred to herein as the "Company". All
intercompany transactions and balances have been eliminated on consolidation.
Minority interests represent the interests of external parties in respect of net
income and shareholders' equity of RenaissanceRe Capital Trust (the "Trust") and
DaVinciRe Holdings Ltd. (Note 7). The Company has also established a
wholly-owned subsidiary, RenaissanceRe Capital Trust II, which is a financing
subsidiary available to issue certain types of securities on behalf of the
Company. As of December 31, 2001, no such securities had been issued. Certain
comparative information has been reclassified to conform with the current year
presentation.
Use of estimates in financial statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported and
disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ materially from those estimates. The significant estimates reflected in
the Company's financial statements include, but are not limited to, the reserves
for claims and claim expenses and the related losses and premiums recoverable.
Premiums and related expenses
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on policy and contract terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserve for unearned premiums represents the portion of premiums
written that relate to the unexpired terms of contracts and policies in force.
Such reserves are computed by pro-rata methods based on statistical data or
reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim expenses, based on
historical and current experience, and anticipated investment income related to
those premiums are considered in determining the recoverability of deferred
acquisition costs.
44
RenaissanceRe Holdings Ltd. | Annual Report 2001
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management. For retroactive reinsurance contracts, the amount by which
liabilities associated with the reinsured policies exceed the amount paid for
reinsurance coverage is deferred and amortized into income using the recovery
method.
Claims and claim expenses
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the consolidated
financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in the consolidated statement
of income in the period in which they become known and are accounted for as
changes in estimates.
Investments and cash
Investments are considered available for sale and are reported at fair value.
The net unrealized appreciation or depreciation on investments is included in
accumulated other comprehensive income. Investment transactions are recorded on
the trade date with balances pending settlement reflected in the balance sheet
as a component of other assets or other liabilities.
Realized gains or losses on the sale of investments are determined on the basis
of the specific identification method and include adjustments to the net
realizable value of investments for declines in value that are considered to be
other-than-temporary. Net investment income includes interest and dividend
income together with amortization of market premiums and discounts and is net of
investment management and custody fees. The amortization of premium and
accretion of discount for fixed maturity securities is computed utilizing the
interest method. The effective yield utilized in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when such prices are not available, by reference to broker or underwriter bid
indications.
Short term investments, which have a maturity of one year or less when
purchased, are carried at cost which approximates fair value. Cash equivalents
include money market instruments with a maturity of ninety days or less when
purchased.
Goodwill
The Company amortizes goodwill on a straight-line basis over the expected
recovery period, principally twenty years. Goodwill is periodically reviewed for
impairment and amounts deemed unrecoverable are adjusted accordingly. Goodwill
is included in other assets on the consolidated balance sheet and is expensed
through corporate expenses in the consolidated statement of income. The
Financial Accounting Standards Board ("FASB") has recently issued Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." As a result, the Company's goodwill existing at December 31, 2001 will
cease to be amortized effective January 1, 2002, and will, thereafter, be
subject to an annual impairment review. The adoption of SFAS 142 will have no
significant impact on the Company's financial statements.
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.
45
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Stock incentive compensation plans
The Company has elected to follow Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under SFAS No. 123, "Accounting for Stock
Based Compensation", requires the use of option valuation models that were not
necessarily developed for use in valuing employee stock options. It is the
opinion of management that disclosure of the pro-forma impact of fair values
provides a more relevant and informative presentation of the impact of stock
options issued to employees than financial statement recognition of such
amounts.
Taxation
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. 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:
-----------------------------------------------------------------------------------------
At December 31, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------------------
U.S. asset backed securities $ 292,175 $ 3,804 $ (1,188) $ 294,791
U.S. corporate bonds 275,265 4,861 (2,885) 277,241
U.S. Government bonds 272,698 3,972 (774) 275,896
U.S. mortgage backed securities 201,209 3,196 (689) 203,716
Non-U.S. government bonds 160,732 5,399 (760) 165,371
Non-U.S. corporate bonds 64,109 2,673 (1,314) 65,468
-----------------------------------------------------------------------------------------
$ 1,266,188 $ 23,905 $ (7,610) $ 1,282,483
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
At December 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------------------------------
U.S. asset backed securities $ 201,828 $ 3,628 $ (17) $ 205,439
U.S. corporate bonds 229,466 4,394 (8,587) 225,273
U.S. Government bonds 264,183 3,725 (14) 267,894
U.S. mortgage backed securities 100,651 2,276 (213) 102,714
Non-U.S. government bonds 107,312 4,010 (1,100) 110,222
Non-U.S. corporate bonds 18,310 257 (2,007) 16,560
-----------------------------------------------------------------------------------------
$ 921,750 $ 18,290 $ (11,938) $ 928,102
-----------------------------------------------------------------------------------------
46
RenaissanceRe Holdings Ltd. | Annual Report 2001
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, 2001
Amortized Fair
Cost Value
----------------------------------------------------------
Due within one year $ 10,589 $ 10,797
Due after one through five years 487,302 494,286
Due after five through ten years 184,747 185,473
Due after ten years 90,166 93,420
U.S. asset backed securities 292,175 294,791
U.S. mortgage backed securities 201,209 203,716
----------------------------------------------------------
$1,266,188 $1,282,483
----------------------------------------------------------
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by ratings assigned by rating agencies (e.g. Standard &
Poor's Corporation) or, with respect to non-rated issues, as estimated by the
Company's investment managers.
---------------------------------------
At December 31,
2001 2000
---------------------------------------
AAA 69.9% 69.1%
AA 7.6 9.4
A 6.3 5.5
BBB 7.3 5.1
BB 2.7 2.9
B 4.4 5.5
CCC 0.6 0.3
CC 0.2 0.1
D 0.1 -
NR 0.9 2.1
---------------------------------------
100.0% 100.0%
---------------------------------------
Investment income
The components of net investment income are as follows:
--------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
--------------------------------------------------------------------
Fixed maturities and other investments $66,123 $62,588 $52,470
Short term investments 7,785 6,213 6,200
Cash and cash equivalents 3,285 10,858 2,898
--------------------------------------------------------------------
77,193 79,659 61,568
Investment expenses 2,037 1,791 1,234
--------------------------------------------------------------------
Net investment income $75,156 $77,868 $60,334
--------------------------------------------------------------------
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
--------------------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
--------------------------------------------------------------------------------
Gross realized gains $ 78,247 $ 11,173 $ 4,619
Gross realized losses (60,151) (18,324) (20,339)
Net realized gains (losses) on investments 18,096 (7,151) (15,720)
Unrealized gains (losses) 9,464 25,301 (13,326)
--------------------------------------------------------------------------------
Total realized and unrealized gains (losses)
on investments $ 27,560 $ 18,150 $(29,046)
--------------------------------------------------------------------------------
47
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
At December 31, 2001 approximately $12.1 million (2000 - $15.0 million) of cash
and investments at fair value were on deposit with various regulatory
authorities as required by law.
Alternative investments
Included in other investments are investments in hedge funds and a fund holding
bank loans of $28.4 million (2000 - $15.5 million) and private equity
investments of $4.9 million (2000 - $1.7 million). The Company has committed
capital to its private equity partnerships of $25.0 million, of which $5.0
million has been contributed at December 31, 2001.
Catastrophe linked instruments
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 2001, 2000 and
1999, the Company recognized gains on these contracts of $2.7 million, $nil, and
$2.5 million, respectively, which are included in other income. The fair value
of these contracts at December 31, 2001 is a loss of $1.0 million, which is
reflected in other income. Also included in other income are payments of $7.3
million for derivative type contracts to protect the Company's property
catastrophe reinsurance business.
Note 4. Ceded Reinsurance
The Company utilizes reinsurance to reduce its exposure to large losses. The
Company currently has in place contracts that provide for recovery of a portion
of certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. The Company would remain liable to the extent
that any reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $155.7 million, $149.8 million and $128.1
million for 2001, 2000 and 1999, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance contracts
also provide for recoveries of additional premiums, reinstatement premiums and
lost no claims bonuses which are incurred when losses are ceded to reinsurance
contracts. Total recoveries netted against premiums and claims and claim
expenses incurred were $160.4 million, $52.0 million and $255.3 million for
2001, 2000 and 1999, respectively. As of December 31, 2001, the Company has
recorded a $7.5 million valuation allowance against these recoveries.
Included in losses and premiums recoverable as of December 31, 2001, are
recoverables of $14.4 million (2000 - $23.2 million) which relate to a
retroactive reinsurance contract entered into by Stonington. SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts", requires that adverse development of the reserves covered by this
contract be reflected in the Company's statement of income when the adverse
development becomes known. However, the offsetting recovery under the contract
is required to be deferred and recognized into income, as a reduction to claims
and claim expenses as payments are received from the reinsurer. The balance of
the deferred recovery as of December 31, 2001 and 2000 was $8.4 million and
$13.9 million, respectively.
Note 5. Reserve for Claims and Claim Expenses
For the Company's reinsurance operations, estimates of claims and claim expenses
are based in part upon the estimation of claims resulting from catastrophic
events. Estimation by the Company of claims resulting from catastrophic events
based upon its own historical claim experience is inherently difficult because
of the Company's short operating history and the potential severity of property
catastrophe claims. Therefore, the Company utilizes both proprietary and
commercially available models, as well as historical reinsurance industry
property catastrophe claims experience, for purposes of evaluating future trends
and providing an estimate of ultimate claims costs.
For both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to estimate ultimate expected claims and claim
expenses. The period of time from the reporting of a loss to the Company and the
settlement of the Company's liability may be several years. During this period,
additional facts and trends will be revealed. As these factors become apparent,
case reserves will be adjusted, sometimes requiring an increase in the overall
reserves of the Company, and at other times requiring a reallocation of 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.
48
RenaissanceRe Holdings Ltd. | Annual Report 2001
Activity in the liability for unpaid claims and claim expenses is summarized as
follows:
--------------------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
--------------------------------------------------------------------------------
Net reserves as of January 1 $ 237,014 $ 174,913 $ 197,512
Net incurred related to:
Current year 165,914 100,168 111,720
Prior years (15,997) 8,436 (34,579)
--------------------------------------------------------------------------------
Total net incurred 149,917 108,604 77,141
--------------------------------------------------------------------------------
Net paid related to:
Current year 20,470 12,545 44,701
Prior years 11,140 33,958 55,039
--------------------------------------------------------------------------------
Total net paid 31,610 46,503 99,740
--------------------------------------------------------------------------------
Total net reserves as of December 31 355,321 237,014 174,913
Losses recoverable as of December 31 217,556 166,597 303,688
--------------------------------------------------------------------------------
Total gross reserves as of December 31 $ 572,877 $ 403,611 $ 478,601
--------------------------------------------------------------------------------
The prior year development in 2001 was due primarily to net additional
recoveries on 1999 property catastrophe loss events. The prior year development
in 2000 was due primarily to development on the 1999 losses related to the
European storms. During 1999, the prior year development was due primarily to
favorable development on property catastrophe reserves for 1998 and prior. The
Company's total gross reserve for incurred but not reported claims was $286.7
million as of December 31, 2001 (2000 - $228.8 million).
Note 6. Debt
The Company has a $310 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. During the third quarter of
2001, the Company repaid its borrowings of $16.5 million on this facility. As of
December 31, 2001 there was no outstanding balance, compared to $8.0 million
outstanding at December 31, 2000. Interest rates on the facility are based on a
spread above LIBOR and averaged 5.45 percent during 2001 (7.03 percent in 2000).
The credit agreement contains certain financial covenants including requirements
that consolidated debt to capital does not exceed a ratio of 0.35:1;
consolidated net worth must exceed the greater of $100 million or 125 percent of
consolidated debt; and 80 percent of invested assets must be rated BBB- by S&P
or Baa3 by Moody's Investor Service or better. The Company was in compliance
with all the covenants of this revolving credit and term loan agreement as at
December 31, 2001. The fair value of the borrowings approximate the carrying
value because such loans reprice frequently.
In July 2001, the Company issued $150 million of 7% Senior Notes due July 2008.
The Company used a portion of the proceeds to repay $16.5 million of outstanding
amounts under the $310 million revolving credit and term loan agreement.
Interest on the notes is 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 of the Company, 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. As of December 31,
2001 the fair value of the notes is $151.1 million.
Renaissance U.S. has an $18.5 million term loan and $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
are based upon a spread above LIBOR, and averaged 4.71 percent during 2001 (6.98
percent in 2000). As of December 31, 2001 the balance outstanding was $33.5
million (2000 - $42 million). The credit agreement contains certain financial
covenants, the primary one being that, RenaissanceRe, be its principal
guarantor, maintain a ratio of liquid assets to debt service of 4:1. The term
loan has mandatory repayment provisions approximating $9 million per year in
each of years 2002 and 2003. The loan facility of $15 million is repayable in
2003. During 2001, the Company repaid the second installment of $8.5 million in
accordance with the terms of the loan. The Company was in compliance with all
the covenants of this term loan and revolving loan facility as at December 31,
2001. The fair value of the borrowings approximate the carrying values because
such loans reprice frequently.
Interest payments on the above debt totaled $7.3 million, $17.2 million and $8.3
million for the years ended December 31, 2001, 2000 and 1999, respectively.
49
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Note 7. Minority Interests
Capital Securities
On March 7, 1997 the Company issued $100 million of Company obligated,
mandatorily redeemable capital securities of a subsidiary trust holding solely
$103,092,783 of the Company's 8.54 percent junior subordinated debentures due
March 1, 2027 ("Capital Securities") issued by the Trust. The capital securities
pay cumulative cash distributions at an annual rate of 8.54 percent, payable
semi-annually. The Trust is a wholly owned subsidiary of the Company and is
consolidated into the Company's consolidated financial statements. The capital
securities and the related dividends, are reflected in the consolidated
financial statements as a minority interest.
During 2000 and 1999 the Company repurchased $2.0 million and $10.4 million of
the capital securities, respectively, recognizing gains of $0.5 million and $1.8
million, respectively, which are reflected as a change in shareholders' equity.
No capital securities were repurchased in 2001.
DaVinci
In October 2001, the Company formed DaVinci with other equity investors. The
Company currently owns a minority economic interest but controls a majority of
the outstanding voting rights. The results of DaVinci are reflected in the
consolidated financial statements of the Company. The portion of DaVinci's
operations that relate to the minority shareholders is reflected in the
consolidated financial statements as minority interest.
Note 8. 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, 2001
Remaining Authorized Outstanding
---------------------------------------------------------------------------------------------------
Full Voting Common Shares
(includes all shares registered and available to the public) 175,738,949 21,447,683
Diluted Voting Class I Common Shares 12,590,585 1,183,200
Diluted Voting Class II Common Shares 185,532 -
---------------------------------------------------------------------------------------------------
188,515,066 22,630,883
---------------------------------------------------------------------------------------------------
On October 15, 2001, the Company issued 2.5 million common shares for proceeds,
net of fees, discounts and commissions, of approximately $232.5 million. Costs
associated with the sale of the shares, totaling approximately $3.2 million,
were deducted from the related proceeds. The net amount received in excess of
common share par value was recorded in additional paid-in capital.
In November 2001, the Company issued 6,000,000 $1.00 par value Series A
preference shares at $25.00 per share. The shares may be redeemed at $25.00 per
share at the Company's option on or after November 19, 2006. Dividends are
cumulative from the date of original issuance and are payable quarterly in
arrears at 8.10% when, if, and as declared by the Board of Directors. If the
Company submits a proposal to our shareholders concerning an amalgamation or
submits any proposal that, as a result of any changes to Bermuda law, requires
approval of the holders of our preference shares to vote as a single class, the
Company may redeem the shares prior to November 19, 2006 at $26.00 per share.
The preference shares have no stated maturity and are not convertible into any
other securities of the Company.
The Diluted Voting I Shares and the Diluted Voting II Shares (together the
Diluted Voting Shares) were authorized at a special general meeting of
shareholders on December 23, 1996. Subsequent to the authorization, affiliates
and other parties related to General Electric Investment Corporation ("GEI")
exchanged 5.7 million common shares for 4.2 million Diluted Voting I Shares and
1.5 million Diluted Voting II Shares, and as such are the sole holders of such
diluted voting securities.
50
RenaissanceRe Holdings Ltd. | Annual Report 2001
The Diluted Voting shareholders vote together with the common shareholders. The
Diluted Voting I Shares are limited to a fixed voting interest in the Company of
up to 9.9 percent on most corporate matters. The Diluted Voting shareholders are
entitled to the same rights, including receipt of dividends and the right to
vote on certain significant corporate matters, and are subject to the same
restrictions as the common shareholders. The Company currently does not intend
to register or list the Diluted Voting Shares on the New York Stock Exchange.
In February and May of 2000, the Board authorized share repurchase programs of
$25.0 million each. The value of the remaining shares authorized under the
repurchase programs is $27.1 million. For the year ended December 31, 2000 the
Company repurchased 671,900 common shares at an aggregate price of $25.1
million. During 1999 the Company repurchased a total of 2,226,700 common shares
at an aggregate price of $80.1 million. No shares were repurchased during 2001.
Common shares repurchased by the Company are normally cancelled and retired.
During 2001 and 2000, GEI completed the sale of 0.3 million and 1.0 million
Diluted Voting I Shares, respectively, pursuant to shelf registrations on Form
S-3. The Diluted Voting I shares sold by GEI were subsequently converted into
common shares.
On November 17, 1999, the Company purchased and cancelled 700,000 common shares
at $38.00 per share for an aggregate purchase price of $26.6 million from one of
the Company's founding institutional shareholders.
Note 9. Earnings Per Share
The Company utilizes SFAS No. 128, "Earnings per Share" to account for its
weighted average shares. The numerator in both the Company's basic and diluted
earnings per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares
outstanding (in thousands of per share amounts):
----------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
----------------------------------------------------------------
Weighted average shares - basic 19,830 19,034 20,444
Per share equivalents of employee
stock options and restricted shares 967 542 184
----------------------------------------------------------------
Weighted average shares - diluted 20,797 19,576 20,628
----------------------------------------------------------------
Note 10. Related Party Transactions and Major Customers
Other assets include the Company's investment in Top Layer Re of $23.4 million.
Top Layer Re, which is 50% owned by Renaissance Reinsurance, is carried using
the equity method. The Company's earnings from Top Layer Re and the Company's
performance-based fee from OPCat totaled $18.0 million for the year ended
December 31, 2001 (2000 - $9.8 million) and are included in other income. During
2001 and 2000, the Company also received distributions from Top Layer Re of $7.5
million and $1.2 million, respectively.
During the years ended December 31, 2001, 2000 and 1999, the Company received
76.9%, 78.3%, and 78.8%, respectively, of its premium assumed from its four
largest reinsurance brokers. Subsidiaries and affiliates of the Benfield Group
PLC, Marsh Inc., Willis Faber and AON Re Group accounted for approximately
28.0%, 23.0%, 14.0% and 11.9%, respectively, of the Company's premiums written
in 2001.
51
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Note 11. Dividends
During 2001, four regular quarterly dividends of $0.40 per share were paid to
shareholders of record as of February 20, May 18, August 14, and November 22.
During 2000, four regular quarterly dividends of $0.375 per share were paid to
shareholders of record as of February 17, May 18, August 17, and November 16.
During 1999, four regular quarterly dividends of $0.35 per share were paid to
shareholders of record as of February 18, May 28, August 19, and November 18.
The total amount of dividends paid to holders of the Common Shares during 2001,
2000 and 1999 was $32.8 million, $29.2 million and $28.9 million, respectively.
Note 12. 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 consists of:
--------------------------------------------------
At December 31, 2001
Current Deferred Total
--------------------------------------------------
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 taxes assets and deferred tax liabilities are presented below:
--------------------------------------------------------------------------------
At December 31,
2001 2000
--------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 1,627 $ 583
Claims reserves, principally due to discounting for tax 1,071 1,726
Retroactive reinsurance gain 2,861 4,716
Net operating loss carryforwards 19,710 16,980
Others 1,614 3,649
--------------------------------------------------------------------------------
26,883 27,654
Deferred tax liabilities:
Other (480) (883)
--------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 26,403 26,771
Valuation allowance (22,155) (8,218)
--------------------------------------------------------------------------------
Net deferred tax asset $ 4,248 $ 18,553
--------------------------------------------------------------------------------
The net deferred tax asset is included in other assets on the consolidated
balance sheet. The net operating loss carryforward of $58.5 million (2000 -
$49.9 million) is available to offset regular taxable U.S. income during the
carryforward period (through 2020).
During 2001, the Company recorded additions to the valuation allowance of $14.0
million against the net deferred tax asset. Although the net operating losses
which gave rise to a deferred tax asset have a carryforward period through 2020,
the Company's U.S. operations did not generate significant taxable income during
the years ended December 31, 2001 and 2000. 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.
52
RenaissanceRe Holdings Ltd. | Annual Report 2001
Note 13. Geographic Information
Financial information relating to gross premiums by geographic region is as
follows:
------------------------------------------------------------------
Year Ended December 31,
2001 2000 1999
------------------------------------------------------------------
United States and Caribbean $180,305 $145,871 $173,598
Worldwide 93,474 98,923 46,712
Worldwide (excluding U.S.) (1) 45,111 60,382 27,276
Other 22,433 9,559 2,370
Europe 20,414 22,071 26,437
Australia and New Zealand 12,159 8,280 3,212
Specialty reinsurance premium (2) 77,468 37,730 2,740
------------------------------------------------------------------
Total reinsurance 451,364 382,816 282,345
United States-primary 49,957 50,186 68,960
------------------------------------------------------------------
Total gross written premium $501,321 $433,002 $351,305
------------------------------------------------------------------
(1) The category "Worldwide (excluding U.S.)" reflects contracts that cover more
than one geographic region (other than the U.S.). The Company's exposure in this
category for gross premiums written to date is predominantly from Europe and
Japan.
(2) The category "Specialty reinsurance" includes coverages related to
non-catastrophe reinsurance risks assumed by us. These coverages primarily
include exposure to claims from accident and health, aviation, finite and
satellite risks assumed by us.
Note 14. Segment Reporting
The Company has two reportable segments: reinsurance operations and primary
operations. The reinsurance segment provides property catastrophe reinsurance as
well as other reinsurance to selected insurers and reinsurers on a worldwide
basis. The primary segment provides insurance both on a direct and on a surplus
lines basis for commercial and homeowners catastrophe-exposed property business.
Also included in the primary segment are auto and aviation coverages written by
Stonington, which have been substantially reinsured.
The activities of the Company's Bermuda and U.S. holding companies are the
primary contributors to the results reflected outside of the reinsurance and
primary segments. The pre-tax loss of the holding companies primarily consisted
of interest expense on bank loans, the minority interest on the capital
securities, and realized investment losses on the sales of investments,
partially offset by investment income on the assets of the holding companies
and, for 2001, income related to the Company's index based contracts.
53
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Data for the years ended December 31, 2001, 2000 and 1999 was as follows:
---------------------------------------------------------------------------------------
Year Ended December 31, 2001 Reinsurance Primary Other Total
---------------------------------------------------------------------------------------
Gross premiums written $ 451,364 $ 49,957 $ - $ 501,321
Net premiums written 326,680 12,867 - 339,547
Total revenues 417,518 17,467 5,909 440,894
Income (loss) before taxes 192,602 2,673 (15,229) 180,046
Assets 2,062,547 348,796 232,309 2,643,652
---------------------------------------------------------------------------------------
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%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Year Ended December 31, 2000 Reinsurance Primary Other Total
---------------------------------------------------------------------------------------
Gross premiums written $ 382,816 $ 50,186 $ - $ 433,002
Net premiums written 287,941 5,362 - 293,303
Total revenues 325,637 13,280 10,818 349,735
Income (loss) before taxes 150,003 (4,406) (13,721) 131,876
Assets 1,169,568 251,740 47,681 1,468,989
---------------------------------------------------------------------------------------
Claims and claim expense ratio 40.4% 47.0% - 40.6%
Underwriting expense ratio 26.8 98.1 - 28.5
---------------------------------------------------------------------------------------
Combined ratio 67.2% 145.1% - 69.1%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Year Ended December 31, 1999 Reinsurance Primary Other Total
---------------------------------------------------------------------------------------
Gross premiums written $ 282,345 $ 68,960 $ - $ 351,305
Net premiums written 205,192 8,321 - 213,513
Total revenues 232,715 31,377 6,143 270,235
Income (loss) before taxes 117,408 8,926 (23,618) 102,716
Assets 1,112,692 274,401 230,150 1,617,243
---------------------------------------------------------------------------------------
Claims and claim expense ratio 32.7% 52.2% - 34.9%
Underwriting expense ratio 26.3 42.9 - 28.1
---------------------------------------------------------------------------------------
Combined ratio 59.0% 95.1% - 63.0%
---------------------------------------------------------------------------------------
54
RenaissanceRe Holdings Ltd. | Annual Report 2001
Note 15. Stock Incentive Compensation and Employee Benefit Plans
The Company has a stock incentive plan under which all employees of the Company
and its subsidiaries may be granted stock options and restricted stock awards. A
stock option award under the Company's stock incentive plan allows for the
purchase of the Company's common shares at a price that is generally equal to
the five day average closing price of the common shares immediately prior to the
date of grant. Options to purchase common shares are granted periodically by the
Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The Company adopted the disclosure-only method under SFAS No. 123, as of
December 31, 1996, and continues to account for stock-based compensation plans
under Accounting Principles Board Opinion No. 25. In accordance with SFAS No.
123, the fair value of option grants is estimated on the date of grant using the
Black-Scholes option pricing model for pro-forma footnote purposes with the
following weighted average assumptions used for grants in 2001, 2000 and 1999,
respectively; dividend yield of 1.7, 1.9 and 3.4 percent, expected option life
of five years for all years, and expected volatility of 30.99, 28.51 and 27.41
percent. The risk-free interest rate was assumed to be 4.8 percent in 2001, 5.0
percent in 2000 and 6.3 percent in 1999. If the compensation cost had been
determined based upon the fair value method recommended in SFAS No. 123, the
Company's net income would have been $153.2 million, $109.4 million and $100.9
million for each of 2001, 2000 and 1999, respectively, and the Company's
earnings per share on a diluted basis would have been $7.37, $5.59 and $4.89 for
each of 2001, 2000 and 1999, respectively.
The following is a table of the changes in options outstanding for 2001, 2000
and 1999, respectively:
------------------------------------------------------------------------------------------------------------------
Awards Weighted
available for Options average exercise Fair value of Range of
grant outstanding price options exercise prices
------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,414,542 1,619,770 $35.62
Options granted (363,139) 363,139 $36.42 $12.24 $33.19 - $41.29
Options forfeited 247,537 (247,537) $38.46
Options exercised - (148,504) $16.41
Shares turned in or withheld 82,811
Restricted stock issued (186,625)
Restricted stock forfeited 16,335
----------------------------------------------------------------------------------
Balance, December 31, 1999 1,211,461 1,586,868 $37.22
Options granted (1,590,118) 1,590,118 $49.02 $13.51 $34.00 - $74.45
Options forfeited 75,560 (75,560) $43.44
Options exercised - (1,078,575) $38.73
Shares turned in or withheld 729,360
Restricted stock issued (236,879)
Restricted stock forfeited 8,970
----------------------------------------------------------------------------------
Balance, December 31, 2000 198,354 2,022,851 $46.50
Authorized 950,000
Options granted (500,289) 500,289 $92.43 $25.69 $64.06 - 101.55
Options forfeited 32,556 (32,556) $54.81
Options exercised - (731,679) $55.33
Shares turned in or withheld 448,726
Restricted stock issued (238,916)
Restricted stock forfeited 15,798
----------------------------------------------------------------------------------
Balance, December 31, 2001 906,229 1,758,905 $56.92
----------------------------------------------------------------------------------
Total options exercisable at December 31, 2001 857,983
------------------------------------------------------------------------------------------------------------------
55
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Under the Company's 2001 Stock Incentive Plan the total number of shares
available for distribution as of December 31, 2001 was 906,229 shares. The Plan
also 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 as of December 31, 2001 was 73,944
shares. As of December 31, 2001, the number of options issued to directors and
unexercised was 114,000. In 2001, no options to purchase common shares were
granted and 1,872 restricted common shares were granted. In 2000, 70,000 options
to purchase common shares and 3,328 restricted common shares were granted. In
1999, 12,000 options to purchase common shares and 1,665 restricted common
shares were granted. The options and restricted common shares vest ratably over
three years.
The Company has also established an employee stock bonus plan. Under the plan,
eligible employees may elect to receive a grant of common shares of up to 50
percent of their bonus in lieu of cash, with an associated grant from the
Company of an equal number of restricted shares. The restricted common shares
vest ratably over a four year period. During the restricted period, the employee
receives dividends and votes the restricted common shares, but the restricted
shares may not be sold, transferred or assigned. In 2001, 2000 and 1999 the
Company issued 50,220, 77,342 and 56,430 shares under this plan, respectively,
with fair values of $3.2 million, $2.9 million and $2.0 million, respectively.
Additionally, in 2001, 2000 and 1999 the Board of Directors granted 188,696,
159,537 and 130,195 restricted shares with a value of $14.0 million, $6.3
million, and $4.6 million to certain employees. The shares granted to these
employees vest ratably over a four to five year period. At the time of grant,
the market value of the shares awarded under these plans is recorded as unearned
stock grant compensation and is presented as a separate component of
shareholders' equity. The unearned compensation is charged to operations over
the vesting period. Compensation expense related to these plans was $7.2
million, $5.5 million, and $3.4 million in 2001, 2000 and 1999, respectively.
In 2000, the Company granted a special option grant to all of its directors and
officers equal to three times the normal annual grant. As a result of this
special grant, annual option grants were not granted in 2001 and it is not
currently anticipated that annual option grants will be granted in 2002.
However, during 2001, the Board issued certain special option grants as it
deemed appropriate to attract or retain personnel and also retains the right to
issue other special grants in the future. The majority of the options granted in
2001 related to options granted to new employees and options issued with respect
to shares tendered in connection with option exercises, in accordance with the
reload provisions of the Company's Stock Incentive Plan.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
Note 16. 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 during the period. As at December 31,
2001, the statutory capital and surplus of the Bermuda subsidiaries was $1,490.3
million and the amount required to be maintained under Bermuda law was $259.7
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 percent of the prior year's statutory capital and surplus, unless
at least two members of the Board of Directors attest that a dividend in excess
of this amount would not cause the company to fail to meet their relevant
margins. During 2001, Renaissance Reinsurance and DaVinci paid aggregate cash
dividends of $141.9 million and $0.7 million, respectively.
56
RenaissanceRe Holdings Ltd. | Annual Report 2001
Glencoe is also eligible as an excess and surplus lines insurer in a number of
states in America. There are various capital and surplus requirements in these
states. Glencoe, as DeSoto's parent company, is required to maintain a minimum
of $50 million in capital and surplus. In this regard, the declaration of
dividends from retained earnings and distributions from additional paid-in
capital are limited to the extent that the above requirements are met.
The Company's U.S. insurance subsidiaries are subject to various statutory and
regulatory restrictions regarding the payment of dividends. The restrictions are
primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amounted to $32.6 million at
December 31, 2001 and the amount required to be maintained was $24.3 million.
Codification of statutory accounting in the U.S. was generally effective January
1, 2001. Codification did not have a significant impact on the statutory surplus
of the Company's U.S. insurance subsidiaries.
Note 17. Commitments and Contingencies
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and, except for U.S. Government bonds, none of the Company's
investments exceeded 10 percent of shareholders' equity at December 31, 2001.
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 and foreign
currency forward contracts for purposes other than trading. The Company
anticipates that any such investments would be limited to yield enhancement,
duration management, foreign currency exposure management or to obtain an
exposure to a particular financial market.
Letters of credit
As of December 31, 2001, the Company's bankers have issued letters of credit of
approximately $125.8 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 collateral 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, under a change in control, as defined therein and
by the Company's Stock Option Plan.
Employee Credit Facility
In June of 1997, the Company executed a credit facility in order to encourage
direct, long-term ownership of the Company's shares, and to facilitate purchases
of the Company's shares by officers of the Company. Under the terms of the
facility, the purchases are financed by personal loans to the officers from the
bank. Such loans are collateralized by the shares purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. At December 31, 2001, the bank loans guaranteed by the
Company totaled $24.1 million. At December 31, 2001, the common shares that
collateralizes the loans had a fair value of $59.2 million.
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.
57
RenaissanceRe Holdings Ltd. | Annual Report 2001
Notes to Consolidated Financial Statements
Note 18. Quarterly Financial Results (Unaudited)
(amounts in tables expressed in thousands of United States dollars, except per
share amounts)
--------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
March 31, June 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------------
Gross premiums written $ 198,208 $ 160,471 $ 122,012 $ 97,650
--------------------------------------------------------------------------------------
Net premiums written $ 121,232 $ 103,364 $ 92,946 $ 64,765
--------------------------------------------------------------------------------------
Net premiums earned $ 83,900 $ 52,765 $ 75,531 $ 62,519
Net investment income 17,884 18,467 18,270 19,240
Net foreign exchange
gains (losses) (295) (137) 233 (169)
Other income 3,869 1,402 3,901 1,709
Net realized investment
gains (losses) 7,615 (6,787) 2,881 (3,594)
--------------------------------------------------------------------------------------
Total revenues 112,973 65,710 100,816 79,705
--------------------------------------------------------------------------------------
Claims and claim
expenses incurred 41,895 17,713 32,315 24,878
Acquisition costs 12,545 7,242 10,608 7,602
Operational expenses 8,512 7,807 9,894 9,065
Corporate expenses 1,528 2,342 4,780 2,532
Interest expense 864 4,252 683 4,358
--------------------------------------------------------------------------------------
Total expenses 65,344 39,356 58,280 48,435
--------------------------------------------------------------------------------------
Income before minority interest
and taxes 47,629 26,354 42,536 31,270
Minority interest -
capital securities 1,847 1,859 1,895 1,938
Minority interest - DaVinci - - - -
--------------------------------------------------------------------------------------
Income before taxes 45,782 24,495 40,641 29,332
Income tax benefit (expense) (876) (420) (302) 388
--------------------------------------------------------------------------------------
Net income 44,906 24,075 40,339 29,720
Dividends on preference shares - - - -
--------------------------------------------------------------------------------------
Net income to common
shareholders $ 44,906 $ 24,075 $ 40,339 $ 29,720
--------------------------------------------------------------------------------------
Earnings per common
share - basic $ 2.34 $ 1.25 $ 2.09 $ 1.58
Earnings per common
share - diluted $ 2.22 $ 1.24 $ 2.00 $ 1.55
Weighted average
shares-basic 19,227 19,266 19,279 18,851
Weighted average
shares-diluted 20,230 19,475 20,151 19,147
Claims and claim expense ratio 49.9% 33.6% 42.8% 39.8%
Underwriting expense ratio 25.1 28.5 27.1 26.7
--------------------------------------------------------------------------------------
Combined ratio 75.0% 62.1% 69.9% 66.5%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
September 30, December 31,
2001 2000 2001 2000
--------------------------------------------------------------------------------------
Gross premiums written $ 123,571 $ 122,470 $ 57,530 $ 52,411
--------------------------------------------------------------------------------------
Net premiums written $ 79,030 $ 85,564 $ 46,339 $ 39,610
--------------------------------------------------------------------------------------
Net premiums earned $ 79,933 $ 73,284 $ 93,701 $ 79,113
Net investment income 18,738 21,236 20,264 19,205
Net foreign exchange
gains (losses) (1,051) 447 (554) 237
Other income 1,070 2,960 7,404 4,607
Net realized investment
gains (losses) 4,978 1,482 2,622 1,748
--------------------------------------------------------------------------------------
Total revenues 103,668 99,409 123,437 104,910
--------------------------------------------------------------------------------------
Claims and claim
expenses incurred 46,986 29,953 28,721 36,060
Acquisition costs 11,461 11,074 10,745 12,612
Operational expenses 9,408 11,050 10,789 10,032
Corporate expenses 1,366 196 3,811 2,952
Interest expense 2,699 4,639 3,003 3,918
--------------------------------------------------------------------------------------
Total expenses 71,920 56,912 57,069 65,574
--------------------------------------------------------------------------------------
Income before minority interest
and taxes 31,748 42,497 66,368 39,336
Minority interest -
capital securities 1,823 1,866 1,919 1,919
Minority interest - DaVinci - - 751 -
--------------------------------------------------------------------------------------
Income before taxes 29,925 40,631 63,698 37,417
Income tax benefit (expense) 3 (4,986) (13,087) 370
--------------------------------------------------------------------------------------
Net income 29,928 35,645 50,611 37,787
Dividends on preference shares - - 1,418 -
--------------------------------------------------------------------------------------
Net income to common
shareholders $ 29,928 $ 35,645 $ 49,193 $ 37,787
--------------------------------------------------------------------------------------
Earnings per common
share - basic $ 1.54 $ 1.89 $ 2.29 $ 1.97
Earnings per common
share - diluted $ 1.48 $ 1.83 $ 2.18 $ 1.87
Weighted average
shares-basic 19,377 18,877 21,439 19,141
Weighted average
shares-diluted 20,288 19,520 22,518 20,163
Claims and claim expense ratio 58.8% 40.9% 30.7% 45.6%
Underwriting expense ratio 26.1 30.2 23.0 28.6
--------------------------------------------------------------------------------------
Combined ratio 84.9% 71.1% 53.7% 74.2%
--------------------------------------------------------------------------------------
58
RenaissanceRe Holdings Ltd. | Annual Report 2001
Directors and Officers
RenaissanceRe Holdings Ltd. and Subsidiaries
(as of March 1, 2002)
Board of Directors
--------------------------------------------------------------------------------
James N. Stanard (4) Edmund B. Greene (1) W. James MacGinnitie (3)(4)
Chairman of the Board Retired Independent Consultant
Chief Executive Officer General Electric Company
Scott E. Pardee (1)(3)
Arthur S. Bahr (2) Brian R. Hall (1) Alan R. Holmes Professor of
Retired Retired Monetary Economics
General Electric Investment Johnson & Higgins Middlebury College
Corporation
William F. Hecht (2) William I. Riker (3)
Thomas A. Cooper (2)(4) Chairman President
TAC Associates PPL Corporation Chief Operating Officer
Committees of the Board: 1 - Audit 2 - Compensation 3 - Investment 4 - Transaction
Officers of RenaissanceRe Holdings Ltd. and Subsidiaries
--------------------------------------------------------------------------------
James N. Stanard Kevin J. O'Donnell John R. Wineinger
Chairman of the Board Senior Vice President Vice President
Chief Executive Officer Renaissance Reinsurance Ltd Renaissance Services Ltd.
RenaissanceRe Holdings Ltd.
Russell M. Smith Gene Chiaramonte
William I. Riker Senior Vice President Assistant Vice President
President Renaissance Reinsurance Ltd Renaissance Reinsurance Ltd.
Chief Operating Officer
RenaissanceRe Holdings Ltd. Michael W. Cash Ross A. Curtis
Vice President Assistant Vice President
David A. Eklund Renaissance Reinsurance Ltd Renaissance Reinsurance Ltd.
President
Chief Underwriting Officer Todd R. Fonner Jonathan D. Paradine
Renaissance Reinsurance Ltd. Vice President Assistant Vice President
Treasurer Renaissance Reinsurance Ltd.
John M. Lummis RenaissanceRe Holdings Ltd.
Executive Vice President Diana R. Petty
Chief Financial Officer Martin J. Merritt Assistant Vice President
RenaissanceRe Holdings Ltd. Vice President Assistant Controller
Controller RenaissanceRe Holdings Ltd.
John D. Nichols, Jr. RenaissanceRe Holdings Ltd.
Senior Vice President William B. Ashley
RenaissanceRe Holdings Ltd. Laurence B. Richardson II Chief Operating Officer
Vice President Glencoe Insurance Ltd.
W. Preston Hutchings Renaissance Underwriting
Senior Vice President Managers Ltd. Craig W. Tillman
Chief Investment Officer Chief Underwriting Officer
RenaissanceRe Holdings Ltd. Stephen H. Weinstein Glencoe Insurance Ltd.
Vice President
Robert E. Hykes General Counsel Thomas H. Friedberg
Senior Vice President Corporate Secretary President
Renaissance Services Ltd. RenaissanceRe Holdings Ltd. Stonington Insurance Company
Ian D. Branagan
Managing Director
Renaissance Reinsurance of Europe
59
RenaissanceRe Holdings Ltd. | Annual Report 2001
Financial and Investor Information
RenaissanceRe Holdings Ltd. and Subsidiaries
For copies of the Company's Annual Report, press releases, Forms 10-K and 10-Q
or other filings, please visit our website: www.renre.com or contact:
Kekst and Company
437 Madison Avenue
New York, NY 10022
Tel. 212-521-4800
For general information about the Company contact:
Martin J. Merritt
Vice President
Tel. 441-299-7230
Email: mjm@renre.com
Stock Information
The Company's stock is listed on The New York Stock Exchange under the symbol
RNR.
The following table sets forth, for the periods indicated, the high and low
closing prices per share of our common shares as reported in composite New York
Stock Exchange trading.
2001 Price Range 2000 Price Range
High Low High Low
----------------------------------------------------------------------
First Quarter $ 83.85 $ 63.55 $ 41.13 $ 35.88
Second Quarter 75.70 62.50 44.13 36.13
Third Quarter 88.91 68.60 64.88 42.50
Fourth Quarter 103.70 91.40 81.50 58.13
Independent Auditors
Ernst & Young
Hamilton, Bermuda
Transfer Agent
Mellon Investor Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
USA
Tel. 1-800-756-3353
www.melloninvestor.com
Additional requests can be directed to:
The Company Secretary
RenaissanceRe Holdings Ltd.
Renaissance House
8-12 East Broadway
P.O. Box HM2527
Hamilton HMGX, Bermuda
Tel. 441-295-4513
Fax. 441-292-9453
60
RenaissanceRe Holdings Ltd. | Annual Report 2001