RENAISSANCERE HOLDINGS LTD. 2003 ANNUAL REPORT
[RENAISSANCERE HOLDINGS LOGO OMITTED]
2003 ANNUAL REPORT
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
44% 43% 30% 25% 19% 20% 21% 18% 29% 29%
TEN YEARS OF
MARKET-LEADING RETURNS ON
SHAREHOLDERS' EQUITY
The cover indicates the Company's operating return on average shareholders'
equity for the ten full fiscal years since the Company's founding. Operating
return reflects net income excluding realized gains and losses, for 2002
excludes the cumulative effect of a change in accounting principle relating to
goodwill and for 1998 excludes the impact of an after-tax charge related to our
Stonington subsidiary taken in the fourth quarter of 1998. Including the
charge, operating return on average shareholders' equity would have been 13%
for 1998.
We determine the average shareholders' equity for each year by taking the
average of common shareholders' equity for the first day of the year and the
last day of each calendar quarter. The Company started business in June 1993,
and, for that partial year of operation, the operating return on equity was 36%
(not annualized).
Company Overview 1 Financial Highlights 2 Letter to Shareholders 3
Leading the Industry Through Ten Years of Change 6 At a Glance 10
Questions & Answers 11 Financial Information 25 Corporate Information 67
COMPANY OVERVIEW
IN 2003, RENAISSANCERE HOLDINGS LTD.
CELEBRATED TEN CONSECUTIVE
YEARS OF OUTSTANDING
PERFORMANCE.
THIS RESULTED FROM OUR SUPERIOR RISK ANALYSIS
AND EXCEPTIONAL SERVICE TO OUR CUSTOMERS.
GROSS WRITTEN
MANAGED PREMIUMS
BY LINE
(IN MILLIONS)
[ BAR GRAPH OMITTED ]
RenaissanceRe was established in June 1993 to write property catastrophe
reinsurance. By pioneering the use of sophisticated computer models to construct
our portfolio, we have become one of the world's largest and most successful
catastrophe reinsurers. We have leveraged our expertise to establish leading
franchises in additional selected areas of insurance and reinsurance where we
believe we can enjoy a competitive advantage.
Today, we provide Catastrophe Reinsurance and Specialty Reinsurance. Our
subsidiary, Renaissance Underwriting Managers, has formed and manages several
joint ventures which assume Catastrophe Reinsurance and other reinsurance. We
also write primary insurance and quota share reinsurance through our Individual
Risk unit.
SERVING CUSTOMERS
--------------------------------------------------------------------------------
RenaissanceRe has earned a reputation for excellent customer service. We provide
superior risk advisory services, customized products, consistent pricing in all
market conditions and dependable capacity. We pay claims quickly and reliably.
REWARDING SHAREHOLDERS
--------------------------------------------------------------------------------
RenaissanceRe has an admirable record of rewarding shareholders. Our fundamental
benchmark is growth in tangible book value per share, plus accumulated
dividends, which we believe measures the real value we have created. Since our
initial public offering in 1995, we have produced a compounded annual growth
rate in tangible book value per share, plus accumulated dividends, of 27%, while
our annualized total return to shareholders was 30%.
RENAISSANCERE HOLDINGS LTD. 1
FINANCIAL HIGHLIGHTS
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
=======================================================================================================================
(In thousands, except per share data) 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Gross premiums written ......... $1,382,209 $1,173,049 $501,321 $433,002 $351,305
Operating income available
to common shareholders* 524,143 363,824 146,270 134,379 119,961
Net income available
to common shareholders 604,647 364,814 164,366 127,228 104,241
PER COMMON SHARE AMOUNTS
Operating income* - diluted .... $ 7.38 $ 5.18 $ 2.34 $ 2.29 $ 1.94
Net income - diluted ........... 8.52 5.20 2.63 2.17 1.68
Book value ..................... 29.61 21.39 15.83 11.91 10.17
Dividends declared ............. 0.60 0.57 0.53 0.50 0.47
OPERATING RATIOS
Operating return on average
common equity* ........ 29.2% 29.0% 17.8% 21.0% 19.8%
Claims and claim expense ratio . 33.0% 38.1% 45.0% 40.6% 34.9%
Underwriting expense ratio ..... 23.4% 19.0% 25.2% 28.5% 28.1%
-----------------------------------------------------------------------------------------------------------------------
Combined ratio ................. 56.4% 57.1% 70.2% 69.1% 63.0%
=======================================================================================================================
* In this annual report we refer to various non-GAAP measures, which are
explained on page 65. Operating income excludes net realized gains (losses) on
investments. Operating income and operating ratios also exclude the cumulative
effect of a change in accounting principle relating to goodwill in 2002, and
exclude a fourth quarter after-tax charge of $40.1 million relating to
Stonington in 1998.
OPERATING TANGIBLE BOOK OPERATING
RETURN ON VALUE PER EARNINGS
COMMON EQUITY COMMON SHARE PER SHARE
[ BAR GRAPH OMITTED ] [ BAR GRAPH OMITTED ] [ BAR GRAPH OMITTED ]
2 RENAISSANCERE HOLDINGS LTD.
LETTER TO SHAREHOLDERS
Dear Fellow Shareholder:
This annual report marks RenaissanceRe's tenth full year in business and our
eighth as a public company. These have been ten very successful years, and by
several measures 2003 was one of our best yet. Our operating income of $524
million was 48% higher than our previous best year, net income of $605 million
was 66% higher, operating earnings per share of $7.38 was 42% higher and gross
written managed premium of $1.5 billion was 17% higher. Finally, at 29%, our
operating return on equity was within a point of our best ever as a public
company and led our peer group for the eleventh straight year.
In early 2004 we increased our dividend by 27%, the ninth consecutive annual
dividend increase since our initial public offering. In addition, Renaissance
Reinsurance was upgraded to AA- by Standard & Poor's, one of a very few
insurance industry companies to have received a rating agency upgrade in the
last three years, which along with our A+ rating from AM Best places our
reinsurance business among a handful of reinsurers to be so highly rated.
PROGRESS ON 2003 GOALS
--------------------------------------------------------------------------------
In last year's letter I listed five priorities for 2003. I think we did a good
job on all five:
1. Continue to build RenaissanceRe's position as the world's leading property
catastrophe reinsurance market. Gross property catastrophe premium written by
Renaissance Reinsurance and our related joint ventures (which we refer to as
"managed cat premium") was $720 million, which we believe continues to make us
the world's largest writer of this business. This compares to an exceptionally
strong $717 million of premium written in 2002, which was up 62% compared with
2001. While property insurance and reinsurance prices have begun to fall this
year after four years of generally increasing prices, the quality of our
portfolio remains high and well within our historic levels for adequate returns.
2. Continue to meet or exceed our joint venture partners' expectations. Top
Layer Re and DaVinci Re, our two property catastrophe joint ventures, performed
well, beating budgeted profits, due to low losses.
3. Continue to build our Specialty Reinsurance and Individual Risk businesses
into sustainable franchises. In Specialty Reinsurance, we hired two executives
with deep experience in surety and medical malpractice, respectively, and we
became one of the leading reinsurance markets for three of our specialty classes
of US business. Managed Specialty Reinsurance premium grew 18% to $292 million,
compared to $247 million in 2002, and this business unit contributed over 20% of
our operating profit. While prices are continuing to rise in some types of
business, the rate of increase is slowing, and our book continues to grow in a
few focused areas.
In Individual Risk, we made several key staffing additions and initiated two
large programs with top quality managers. For the year, total written Individual
Risk premium grew 58% to $447 million, from the $283 million written for 2002.
In this market, property insurance prices are declining and as a result we are
decreasing the amount we write; at the same time, liability insurance pricing
continues to increase, and we are growing our specialty liability business in
select areas.
4. Successfully enter a small number of additional lines of business. During the
year, we announced one new business venture, Channel Re, in financial guaranty
reinsurance. This venture officially launched in February 2004, and is described
on page 16.
RENAISSANCERE HOLDINGS LTD. 3
5. Develop our management talent and organizational structure to maintain our
entrepreneurial culture as our business and financial scale expand. I believe we
made great strides in taking the same management culture, client focus and risk
control that we have always exhibited in our cat business and instituting them
in our newer business units.
OUR FIRST TEN YEARS --
A SHORT SUMMARY
--------------------------------------------------------------------------------
Our first ten years breaks into three periods. In the first, we focused on
building a successful property cat business, in the second we institutionalized
our business discipline, and in the third we began to broaden our business in
response to market need.
From our formation in 1993 through 1995, we grew our property cat business very
rapidly in a very "hard market" (an industry term meaning high prices). As a new
company, we established the three "success factors" that would define our
business: superior risk selection, superior marketing and superior capital
management. We worked hard to develop the leading catastrophe management
computer system (REMS(C)) and the risk management culture to use it effectively.
We focused on meeting our clients' needs through creative products and
responsive service. And we carefully managed our capital in the interests of our
long-term shareholders.
[ PHOTO OF JAMES N. STANARD
Chairman and Chief Executive Officer OMITTED ]
From 1996 through 1998, we focused on maintaining our underwriting discipline
in a period of falling prices, becoming the first major cat reinsurer to begin
cutting back risk exposure in 1996. We started Glencoe, which, with a lot of
patience, has grown to be a big success. We also acquired Nobel Insurance
Company (now called "Stonington"), which was not a successful transaction. When
our stock price sagged, we aggressively bought back shares -- thinking like
long-term shareholders. We also established the "strategic principles" that we
still use to evaluate new businesses: there must be a market opportunity, we
must be able to develop a competitive advantage, and the management required
must fit with our culture. We did not expand much beyond our core cat business
because of the first of these principles -- there was a lack of market
opportunity.
As cat market prices started to rise following market losses in 1998 and 1999,
we began to grow our cat premium again, becoming the world's largest writer in
2000. The hardening market conditions, which accelerated in late 2001 following
the World Trade Center tragedy, Enron's collapse, billions of dollars of
industry loss reserve shortfalls and the falling stock market, also allowed us
to grow Individual Risk and Specialty Reinsurance, and our joint venture
activity through Renaissance Underwriting Managers -- meeting all three
"strategic principles" in each case.
THE NEXT TEN YEARS
--------------------------------------------------------------------------------
Although it is satisfying to reflect over a successful ten-year history, it is
only relevant to the extent it helps guide us over our next ten years. To
describe where I see us going, I have imagined some comments that might be in
the Chairman's letter in 2013 -- ten years from now. My goal is that we will be
able to say that:
4 RENAISSANCERE HOLDINGS LTD.
1. We continue to maintain an excellent reputation with our clients, providing
them quick and fair claims payment, offering outstanding security, solving
their problems responsively and creatively, and providing them consistent
capacity and pricing.
2. Our franchise in catastrophe reinsurance is stronger than ever. We are a
leader in a number of select lines of specialty reinsurance and in a few
specific types of individual risk insurance. Most of these businesses are
run as wholly owned subsidiaries, while others are held in partially owned
joint ventures.
3. Our businesses are managed by small, stand-alone management teams, operating
with the same hands-on, client-focused, entrepreneurial culture that made us
successful in our first ten years.
4. For the ten-year period from 2004 - 2013, we continued to lead the industry
in the growth of book value per share (plus accumulated dividends).
I also expect that RenaissanceRe will remain a leader in risk management. But
being a leader in risk management does not always guarantee great results. We
may experience a big hurricane or earthquake, which could result in our first
annual loss in history -- such a loss might occur in a peak exposure area for us
(where pricing is especially favorable) and so produce relatively worse losses
than our competitors. We may also find that some of the new segments or joint
ventures that we enter do not turn into profitable businesses. We may even
experience a loss that we failed to adequately model.
However, I believe that we will continue to be distinguished as a risk
management leader by the way we handle these losses: we try to avoid what we
call "gratuitous exposure" -- broad coverage exposed to losses but not reflected
in the price; we seek to quickly identify developing exposures; we plan our
capital management actions following large losses; and we have a culture and a
track record of exiting ventures when they do not work, and sitting on our hands
when business is underpriced. By focusing on a limited number of specialties,
RenaissanceRe has fewer things that can go wrong, and we can better focus on the
unique risks of each specialty. I cannot think of any company in our industry
that is better equipped to handle the changing risk environment of the next ten
years.
CHALLENGES FOR 2004
--------------------------------------------------------------------------------
As we enter our second decade, we are pleased with our position but not
overconfident. We recognize that most of the markets in which we operate are
growing more difficult, and that our competitors keep getting smarter and
tougher -- in many cases emulating the strategies that have made us successful
(just as we try to learn from their successes).
We are on a good course, and so I would list for 2004 the same priorities as
last year, with one addition: to prepare for more competitive conditions in all
of our markets.
Our excellent reputation and satisfied client base, our deep and smoothly
functioning management team, and our balance sheet -- one of the strongest and
cleanest in the industry -- will continue to be great competitive advantages,
both in the catastrophe reinsurance sector and in other areas where we pursue
opportunities.
Sincerely,
/s/ James N. Stanard
--------------------
James N. Stanard
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
RENAISSANCERE HOLDINGS LTD. 5
RENAISSANCERE:
LEADING THE INDUSTRY THROUGH TEN YEARS OF CHANGE
OVER THE LAST TEN YEARS,
RENAISSANCERE HAS
LED THE CATASTROPHE
REINSURANCE INDUSTRY
IN THE WAY WE EVALUATE RISK, USE TECHNOLOGY,
ASSEMBLE TALENTED PROFESSIONALS AND ALLOCATE CAPITAL.
WE ARE NOW APPLYING OUR UNIQUE
APPROACH AND DISCIPLINE TO OTHER SECTORS.
1992
Hurricane Andrew causes the largest catastrophe loss to date ($16 billion in
1992 dollars), resulting in industry-wide withdrawal of capacity.
1993
RenaissanceRe is founded with an initial investment of $141 million from
Warburg, Pincus; General Electric Pension Fund; and USF&G Corporation.
1994
RenaissanceRe completes first version of its dynamic financial analysis computer
model.
1995
Initial Public Offering: RenaissanceRe lists on NYSE and sells 3.1 million
common shares at a split-adjusted price of $6.33 per share.
6 RENAISSANCERE HOLDINGS LTD.
1996
Company launches Glencoe subsidiary to write primary insurance.
1997
Share buybacks (beginning late '96) return capital during soft market.
1998
Company opens Dublin office to take advantage of catastrophe reinsurance
opportunities in Europe. Acquisition of Nobel Insurance Company.
1999
RenaissanceRe launches first joint ventures: Top Layer Re formed with State
Farm, and OPCat formed with Overseas Partners. Achieves 20% operating ROE
despite year of above-average cat losses.
TANGIBLE BOOK
VALUE PER
COMMON SHARE
PLUS ACCUMULATED
DIVIDENDS
(U.S. DOLLARS)
[ BAR GRAPH OMITTED ]
Hurricane Andrew hit the coast of Florida in 1992, causing tremendous
destruction and resulting in a $16 billion loss (in 1992 dollars) for the
insurance industry, the largest on record until that time. Many in the industry
had not believed -- or allowed themselves to believe -- that such large-scale
losses were even possible.
Existing reinsurers withdrew capacity from the market, creating an opportunity
for new participants, with fresh capital, to enter. In 1993, RenaissanceRe was
one of a handful of new reinsurers to emerge.
OPERATING
EARNINGS
PER SHARE
[ BAR GRAPH OMITTED ]
REASSESSING THE NATURE OF RISK. Driving our new business model was a fundamental
reassessment of the nature of risk. As reinsurers learned from Hurricane Andrew
-- a lesson soon reinforced by California's Northridge earthquake -- the risks
that companies faced were enormous, and capable of wiping out poorly constructed
portfolios in a matter of minutes. These risks were not well understood by
senior management at many companies.
For RenaissanceRe, this need to better appreciate risk was one of our paramount
pursuits, and the use of advanced information technology was the key to arriving
at a more sophisticated understanding of our exposures. Harnessing computer
models, and using advanced software to simulate the impact of catastrophes on
portfolios of insurance, RenaissanceRe developed proprietary techniques to
examine both the expected loss for individual contracts and, just as
importantly, to understand their correlation with other contracts within a
portfolio.
USING COMPUTER MODELS. Although models of catastrophic risk had been available
since the 1980's, they had generally been regarded with skepticism in the
industry, viewed more as academic exercises than tools to be used by working
practitioners in the evaluation and pricing of risk. Although the models were
later vindicated, most insurers did not take them seriously since they produced
estimates of potential losses that were sometimes much greater than ever
experienced.
RENAISSANCERE HOLDINGS LTD. 7
Initially, these models were rudimentary. The first ones merely projected
expected losses for a limited set of natural disasters. But over time, and with
support from customers like RenaissanceRe, they grew in sophistication:
increasing the types of perils considered, extending the geographic regions
examined, and capable of mining data to a much greater level of refinement.
More importantly, they evolved from being merely deterministic models -- that
projected a specific outcome for a specific event or series of events -- to
incorporate probabilities that could project an entire distribution of potential
outcomes for portfolios composed of multiple exposures.
2000
RenaissanceRe writes more catastrophe excess treaty reinsurance than any
competitor.
2001
RenaissanceRe is the first reinsurer to raise capital following WTC terrorist
attack, bringing to $827 million the total raised during the year. Launches
DaVinci Re joint venture.
2002
RenaissanceRe buys 9.2% stake in Platinum Underwriters Holdings, Ltd. Specialty
Reinsurance premiums jump to $247 million from $77 million in prior year.
2003
With several partners, RenaissanceRe announces intent to form Channel Re, a
financial guaranty joint venture, which begins business in February 2004.
Drawing upon these models, RenaissanceRe created a proprietary system, called
REMS(C), or Renaissance Exposure Management System. The result of many man-years
of work, and millions of dollars of investment, this proprietary software has a
variety of competitive advantages:
o Incorporating multiple vendor models, it allows us to compare different
assessments of risk, and thus to avoid bias toward any single model;
o It enables us to see the effect of a portfolio change in just a few seconds
-- far better than standard computer simulations that would take hours or
even days;
o The software can readily assess unusual contract features that could not be
modeled in standard software;
o While technically very sophisticated, REMS(C) produces simple "scores" that
allow our underwriters to make quick and effective judgments about the
relative ranking of prospective transactions -- reflecting for each
transaction both its expected margin and its correlation with our existing
portfolio.
OPERATING
RETURN ON
COMMON EQUITY
[ BAR GRAPH OMITTED ]
CREATING A NEW PARADIGM. Before RenaissanceRe was formed, the typical reinsurer
of catastrophe risks commanded a relatively small pool of capital, but fielded a
large and dispersed group of underwriters. These underwriters were endowed more
with marketing and relational abilities than with quantitative skills, and made
contract decisions based upon judgment, intuition and standardized guide-
8 RENAISSANCERE HOLDINGS LTD.
MANAGED CAT
PREMIUMS
(IN MILLIONS)
[ BAR GRAPH OMITTED ]
lines. Their objective was to capture a small percentage of a wide range of
transactions -- which they believed would ensure diversification -- and to gain
market share, which they relied upon for generating sufficient profits in hard
markets to compensate for inadequate pricing during soft ones.
We at RenaissanceRe developed a different approach. Using our computer
technology, we could readily identify superior transactions and greatly reduce
the number of decision-makers we required. We could construct a more diversified
portfolio whose risks were less correlated with one another. Furthermore, we
were determined to sell our product only at prices that reflected the true
nature of the risks we assumed, and if this meant writing less business in soft
markets, we were fully prepared to do so.
Constantly upgrading, expanding and incorporating new data into REMS(C), we have
continually enhanced our capabilities. We have also maintained discipline,
consistently using our models for underwriting decisions.
This use of models, however, has not made RenaissanceRe a slave to its system.
We recognize that our systems produce only estimates of risk -- not "facts"--
and that the models we use are based on assumptions that must be factored into
consideration. Our underwriters appreciate that an apparently precise answer
does not necessarily mean an accurate one. Rather, our system serves as a guide,
helping us to determine which risks are relatively superior, so that we may
construct a portfolio with the greatest potential for the highest possible
risk-adjusted return.
GROSS WRITTEN
MANAGED
PREMIUMS BY LINE
(IN MILLIONS)
[ BAR GRAPH OMITTED ]
Working with our customers, RenaissanceRe has become a driving force for better
data capture throughout our industry. Seeking to assume those risks we can
analyze in depth, we partner with customers whose systems are sufficiently
robust to capture an intensive amount of data, and who are capable of mining
that data down to a detailed level of understanding.
In an industry that has finally recognized the validity of computer models,
RenaissanceRe stands out as the company most adept at using them. Across our
Company, there is buy-in among all our professionals regarding our framework for
risk management and underwriting, and we have nurtured the integration of
sophisticated quantitative talent with practical risk-taking decisions. Such a
cohesive approach to risk-taking is difficult to achieve, and has been critical
to our success.
GROWTH IN CAPITAL
(IN MILLIONS)
[ BAR GRAPH OMITTED ]
NEXT STEPS. In 1993, RenaissanceRe started out by applying its strengths to
catastrophe reinsurance and became the leader in that field. Using our unique
abilities, we branched out into related areas, including other lines of
reinsurance, often having a low frequency/high severity risk profile similar to
catastrophe risk. We also entered the field of primary insurance, underwriting
in selected areas, often writing business with catastrophe-related exposures,
where our underwriting discipline and technological skill could be applied to
take advantage of attractive market conditions. Now, the Company is focused on
applying these skills to additional areas that are equally ripe for the
RenaissanceRe approach. In all endeavors, our goal is the same -- to achieve a
superior understanding of risk.
RENAISSANCERE HOLDINGS LTD. 9
AT A GLANCE
BY LEVERAGING OUR CORE CATASTROPHE EXPERTISE,
RENAISSANCERE
HAS ESTABLISHED MAJOR
MARKET POSITIONS
IN SELECTED AREAS OF INSURANCE
AND REINSURANCE.
CATASTROPHE AND SPECIALTY REINSURANCE
--------------------------------------------------------------------------------
RenaissanceRe is one of the world's leading reinsurers of natural and man-made
catastrophe risks, commanding an estimated market share of over 10%. In
Specialty Reinsurance, we focus on selected areas, such as catastrophe-exposed
workers' compensation, surety, aviation and terrorism.
RENAISSANCE UNDERWRITING MANAGERS
--------------------------------------------------------------------------------
This includes three business activities. First, with outside investors,
RenaissanceRe has created catastrophe reinsurance joint ventures DaVinci Re and
Top Layer Re, in which we own 25% and 50%, respectively. Second, we invest in
other companies, and participate in joint ventures, directed at other classes of
reinsurance; these include our 9.2% stake in Platinum Underwriters Holdings,
Ltd., a Bermuda-based reinsurer, and our 33% interest in Channel Re, a
Bermuda-based financial guaranty reinsurer. Third, we engage in structured
product transactions, in which we sell non-traditional participation in our
catastrophe portfolio and also assume reinsurance risk through the purchase of
catastrophe-linked securities.
INDIVIDUAL RISK
--------------------------------------------------------------------------------
The Company writes primary insurance and quota share reinsurance in a small
number of specialty areas, through our Glencoe, Lantana and Stonington
subsidiaries. Initially, we focused on catastrophe-exposed property insurance
and recently we have also begun to write specialty lines of liability insurance.
Our Individual Risk business unit, Glencoe Group Holdings Ltd., provides active
oversight of underwriting activities, partnering with program managers and other
vendors that perform various outsourced functions, such as customer relations,
marketing, back office processing and claims handling.
10 RENAISSANCERE HOLDINGS LTD.
CATASTROPHE AND SPECIALTY REINSURANCE
THIS YEAR, RENAISSANCERE AGAIN PROVED TO BE
THE LEADING
CATASTROPHE REINSURER
AND
SHOWED SIGNIFICANT
GROWTH IN OUR
SPECIALTY REINSURANCE
ACTIVITIES.
RENAISSANCERE HOLDINGS LTD. 11
[ PHOTOS OMITTED ]
ROSS A. CURTIS
Vice President
Renaissance
Reinsurance Ltd.
JAMES R. LEWIS DAVID A. EKLUND
Vice President President
Renaissance Chief Underwriting
Renaissance Ltd. Officer
Renaissance
Reinsurance Ltd.
KEVIN J. O'DONNELL MICHAEL W. CASH
Senior Vice President Senior Vice President
Renaissance Renaissance
Reinsurance Ltd. Reinsurance Ltd.
RUSSELL M. SMITH ROBERT J. LAMENDOLA
Senior Vice President Senior Vice President
Renaissance Renaissance
Reinsurance Ltd. Reinsurance Ltd.
JON D. PARADINE IAN D. BRANAGAN
Vice President Managing Director
Renaissance Renaissance
Reinsurance Ltd. Reinsurance of Europe
WHAT HAS ENABLED RENAISSANCERE TO MAINTAIN ITS POSITION AS THE WORLD'S LEADING
CATASTROPHE REINSURER?
--------------------------------------------------------------------------------
A combination of things. In addition to our financial position and strong
reputation for risk management, we are very service oriented, providing clients
with customized products and sound advice about catastrophe risks. They
appreciate our consistent approach to pricing, our high credit quality and our
capacity for large lines.
WHY WAS YOUR CATASTROPHE BUSINESS ONLY FLAT THIS YEAR?
--------------------------------------------------------------------------------
We are actually very pleased with that performance. In 2003, new capacity came
into the market and prices began to soften. In that environment, the fact that
we sustained the high level of business we achieved in 2002 -- up 62% from 2001
-- was a considerable accomplishment. In such an environment, flat premium is
often the best that we can expect; we won't write business just to gain or
maintain market share, and are very disciplined about entering contracts that
meet our hurdle rates.
WHAT IS THE MOST SIGNIFICANT TREND YOU SEE UNFOLDING?
--------------------------------------------------------------------------------
We have never before seen such focus on long-term credit quality. Customers want
reinsurers who they know will be in business ten years from now, still willing
and able to pay claims. As a result, we continue to see a flight to quality,
which plays to one of our strengths.
WHAT STRATEGY IS DRIVING YOUR GROWTH IN SPECIALTY REINSURANCE?
--------------------------------------------------------------------------------
We target a few areas very carefully, where we see longer term opportunity and
can leverage our expertise. We ramped up our specialty business after September
11th, as opportunities emerged in a number of areas, and in 2003 our specialty
business increased 18%. Due to the nature of insurance market conditions, we
often do not see adequately priced business unless there is a material loss
event. When such instances arise, we seek to provide capacity and develop our
involvement as a long-term, consistent market in those lines of business, at
stable and sensible prices.
WHICH SPECIALTIES ARE YOU CURRENTLY FOCUSING ON?
--------------------------------------------------------------------------------
After September 11th, we took significant positions in catastrophe-related
workers' compensation and terrorism coverage, and aviation to a lesser extent.
After the Enron accounting scandal, we expanded into surety, on an excess of
loss basis. This year we brought in seasoned underwriters in surety and medical
malpractice reinsurance, two areas where we expect growth. Both fit our style:
other reinsurers have suffered large losses and withdrawn capacity. We recognize
that these areas -- such as medical malpractice -- have proven challenging to
others, but believe our underwriting skills will enable us to evaluate those
risks realistically, price our products accordingly and profit from currently
attractive market conditions, while building analytic tools to attempt to
generate a long-term franchise from the opportunity.
RENAISSANCERE HOLDINGS LTD. 13
RENAISSANCE UNDERWRITING MANAGERS:
JOINT VENTURES AND STRUCTURED PRODUCTS
THE COMPANY'S JOINT VENTURE AND
STRUCTURED PRODUCTS INITIATIVES
DEMONSTRATE RENAISSANCERE'S
INNOVATIVE, UNCONVENTIONAL
THINKING.
THEY EXTEND THE VALUE OF THE COMPANY'S
EXPERTISE, IDENTIFY AND MAKE USE OF LARGE POOLS OF
ADDITIONAL CAPITAL, ENHANCE REVENUES AND
ENABLE RENAISSANCERE TO BENEFIT FROM PARTNERING
WITH OTHER LEADING COMPANIES. IN TURN,
THIS GENERATES SHAREHOLDER VALUE.
14 RENAISSANCERE HOLDINGS LTD.
[ PHOTOS OMITTED ]
LAURENCE B. RICHARDSON, II
Vice President
Renaissance Underwriting
Managers, Ltd.
JOHN D. NICHOLS
President
Renaissance Underwriting
Managers, Ltd.
RICHARD G. WEECH
Vice President
Renaissance Underwriting
Managers, Ltd.
THOMAS M. TREZISE
Vice President
Renaissance Services, Ltd.
15
WHAT ARE THE ADVANTAGES OF CREATING JOINT VENTURES IN THE SAME BUSINESSES IN
WHICH YOU ALREADY HAVE CORE ACTIVITIES? DOESN'T THIS DOUBLE YOUR RISK?
--------------------------------------------------------------------------------
Our catastrophe-related joint ventures act as "turbo-chargers" to our core
reinsurance business, enabling us to leverage our underwriting skills, gain
additional market share and earn added income -- all with a manageable amount of
extra effort. Because the joint ventures have their own balance sheets and
access different pools of capital, they can underwrite the same risks we have
already evaluated, and we and our clients collectively benefit from placing the
risks in a different portfolio and on a different balance sheet. We earn fee
income for managing these ventures and we exercise operating and management
control; we also benefit through our equity position. In the case of DaVinci,
the joint venture insures the same risks as RenaissanceRe, whereas Top Layer
writes only non-U.S. business at high layers (i.e. with a low probability of
loss). In either case, our corporate financial and risk-management models take
our equity participation and fee income into account.
HOW DID DAVINCI RE AND TOP LAYER RE PERFORM IN 2003?
--------------------------------------------------------------------------------
Both performed exceptionally well, surpassing expectations. DaVinci experienced
only light losses, given the limited catastrophe losses for the year, and Top
Layer continued its record of being loss-free since inception. Both ventures
have been a winning proposition for our company, our partners and our customers.
HOW DO YOU CHOOSE JOINT VENTURE PARTNERS?
--------------------------------------------------------------------------------
We look for a long-term, viable partnership. We select our partners based upon
their interest in investing for the long term, an expertise that enhances our
capabilities for understanding the complexities of the business, and the
potential that they might provide increased access to markets.
HOW HAS YOUR 9.2% EQUITY INVESTMENT IN PLATINUM UNDERWRITERS HOLDINGS, LTD.
PERFORMED SINCE YOU BOUGHT IT LAST YEAR?
--------------------------------------------------------------------------------
It has worked out very well. Platinum provides reinsurance in a number of areas
in which we don't participate, and has executed well. At the same time, we have
given them advice on their catastrophe-related business. We invested $84
million, and our investment now has a market value of $146 million.
WHAT IS THE RATIONALE BEHIND THE NEW CHANNEL RE BUSINESS PARTNERSHIP?
--------------------------------------------------------------------------------
Together with MBIA, Koch Financial Corporation and Partner Re Ltd, we announced
this new entity in October 2003 and it commenced business in February 2004. It
will focus on financial guaranty reinsurance and has assumed an in-force
portfolio from MBIA. This is an opportune way to participate in the financial
guaranty reinsurance business, which has experienced a significant loss of
reinsurance capacity at a time of improving terms and conditions -- our favorite
time to enter a market. By partnering with MBIA, we were able to more easily
surmount the considerable barriers to entry that exist in this area, thus
immediately deploying capital and generating attractive returns.
16 RENAISSANCERE HOLDINGS LTD.
INDIVIDUAL RISK
IN 2003, RENAISSANCERE SIGNIFICANTLY
EXPANDED ITS PRESENCE IN
THE INDIVIDUAL RISK MARKET.
WE NOW HAVE IN PLACE THE TECHNOLOGICAL AND
OPERATING INFRASTRUCTURE, AND
THE BUSINESS PARTNERSHIPS, TO DELIVER VALUE
IN OUR CHOSEN FIELDS.
RENAISSANCERE HOLDINGS LTD. 17
[ Photos Omitted ]
RICHARD B. PRIMERANO
Senior Vice President
Chief Financial Officer
Glencoe U.S Holdings Inc.
JOSEPH J. GEORGE
Vice President
Glencoe Insurance Ltd.
WILLIAM I. RIKER DAVID A. HEATHERLY
President President
RenaissanceRe Holdings Ltd. Glencoe U.S. Holdings Inc.
WILLIAM B. ASHLEY MICHAEL S. NUENKE
Senior Vice President Vice President
Chief Operating Officer Glencoe U.S. Holdings Inc.
Glencoe Insurance Ltd.
18 RENAISSANCERE HOLDINGS LTD.
WHY HAS RENAISSANCERE SO DRAMATICALLY INCREASED ITS INVOLVEMENT IN INDIVIDUAL
RISK?
--------------------------------------------------------------------------------
We started our Individual Risk business in 1996, but only recently has pricing
become attractive for large-scale participation. After September 11th,
significant market dislocation created excellent entry opportunities, and our
business more than quintupled in 2002. This year, it rose another 51%. We are
now targeting specific areas that we had been following closely for several
years but that had not been attractive until now.
WHICH AREAS HAVE YOU IDENTIFIED FOR GROWTH?
--------------------------------------------------------------------------------
During 2003, our Individual Risk business was mostly in property insurance, with
smaller positions in commercial auto, claims-made liability and occurrence
liability. We believe the property segment, which has been strong for the past
few years, will decline, but certain classes of liability insurance are now very
attractive and our position should grow considerably.
GIVEN THE DIFFERENCES BETWEEN CATASTROPHE REINSURANCE AND WRITING PRIMARY
INSURANCE, WHAT SPECIAL SKILLS DO YOU BRING THAT WILL ENABLE YOU TO ACHIEVE
ABOVE-AVERAGE RETURNS?
--------------------------------------------------------------------------------
We believe that the same paradigm shift that occurred in catastrophe reinsurance
ten years ago is now underway in Individual Risk. Companies that employ computer
risk modeling, and capture and deeply analyze data, will be the beneficiaries.
WHY HAVE YOU DECIDED TO ENTRUST YOUR INDIVIDUAL RISK UNDERWRITING TO OUTSIDE
MANAGERS? ARE YOU GIVING UP THE DISCIPLINED CONTROL THAT HAS ALWAYS ENABLED YOU
TO BE SO SUCCESSFUL?
--------------------------------------------------------------------------------
Our Individual Risk business actually comes from three sources: directly from
brokers, from program managers, and from primary insurers for whom we provide
quota share reinsurance. The broker business is underwritten by us in-house. In
the case of program managers and our quota share reinsurance, we partner with
the industry's best people. We have identified a small handful of underwriters
who share our passion for data, who understand where the industry is heading,
and who have in place the systems for data gathering and mining that let them
robustly evaluate risks. We impose strict underwriting standards and maintain
ongoing oversight. This combines well with their unique understanding of
specialized markets. Moreover, we are not building a new business with them, but
are picking up mature books of business.
WHY DO YOU INCLUDE QUOTA SHARE REINSURANCE TOGETHER WITH PRIMARY INSURANCE IN
THIS BUSINESS UNIT?
--------------------------------------------------------------------------------
They share basic similarities: in order to succeed you have to perform a
thorough analysis to fully understand the individual risks that you are insuring
and the price adequacy of each individual policy. That leads us to define
"Individual Risk" a little differently from the way others do.
RENAISSANCERE HOLDINGS LTD. 19
FINANCE & ADMINISTRATION
RENAISSANCERE IS KNOWN FOR ITS
ACTIVE CAPITAL MANAGEMENT
AND PRUDENT INVESTMENTS.
AT THE END OF 2003, WE WERE WELL POSITIONED
TO PURSUE NEW OPPORTUNITIES AND
OUR INVESTMENT PORTFOLIO HAD OUTPERFORMED
ITS BENCHMARK INDICES.
20 RENAISSANCERE HOLDINGS LTD.
[ Photos Omitted ]
JOHN R. WINEINGER
Vice President
Renaissance Services Ltd.
STEPHEN H. WEINSTEIN JOHN M. LUMMIS
Vice President Executive Vice President
General Counsel Chief Financial Officer
RenaissanceRe Holdings Ltd. RenaissanceRe Holdings Ltd.
MARK A. WILCOX
Vice President
RenaissanceRe Holdings Ltd.
PETER C. DURHAGER TODD R. FONNER
Senior Vice President Vice President
Chief Administrative Officer Treasurer
RenaissanceRe Holdings Ltd. Renaissance Holdings Ltd.
W. PRESTON HUTCHINGS MARTIN J. MERRITT
Senior Vice President Senior Vice President
Chief Investment Officer Controller
RenaissanceRe Holdings Ltd. RenaissanceRe Holdings Ltd.
RENAISSANCERE HOLDINGS LTD. 21
CAPITAL MANAGEMENT
--------------------------------------------------------------------------------
RenaissanceRe is known for its active approach to managing capital.
We seek to optimize our capital structure by understanding our risk portfolio
and by anticipating opportunities in our operations and opportunities in the
capital markets.
We recognize that our key constituents -- customers, creditors and shareholders
-- each have an interest in our capital structure, and we manage our risk
portfolio and capital base with each of their interests in mind. This past year,
recognizing the increased importance of the credit quality of key operating
subsidiaries, we refined our risk tests as they apply at the subsidiary level.
At the start of 2003, January contract renewals were particularly strong.
Additionally, financial markets were uncertain, due to a looming war in Iraq. As
a result, we determined it was prudent to raise additional capital, to ensure
that we would be adequately capitalized for potential opportunities. In January
2003, we issued $100 million in Series B Preference Shares and $100 million in
5.875% Senior Notes, and received a total of $196 million in net proceeds. The
biggest capital-raising event of the year was again our earnings, which added
$605 million to our capital base.
As we closed 2003, we were pleased with our capital position. We produced a 29%
operating return on equity in 2003, and have the flexibility to pursue potential
new opportunities in 2004.
In February of 2004, Standard and Poor's recognized our operating success and
the strength of our capital position by upgrading the ratings of our reinsurance
company, our senior debt and our preferred securities.
INVESTMENTS
--------------------------------------------------------------------------------
Our investment portfolio returned 6.2% during 2003, and we again outperformed
our relevant indices. Our investment philosophy remains unchanged -- to assume
prudent risks and to contribute to a steady growth in RenaissanceRe's book value
per share. At the close of 2003, approximately 21% of the portfolio was invested
in short-term securities, 62% in longer-dated investment grade issues, 11% in
domestic high yield and the sovereign debt of emerging market borrowers and 6%
in alternative assets (principally a diversified portfolio of hedge funds). We
maintained a duration that averaged only slightly more than 2 years during 2003,
short of our target range of 2.75 - 3 years. Consistent with our underwriting
philosophy of avoiding gratuitous risk exposures, we are cautious about the
prospect for rising interest rates. We will certainly accept investment risk, as
shown by increased contributions to our non-investment grade portfolio (which
returned 28.2% in 2003) and our alternative portfolio (which returned 17.4%),
but we do seek to be adequately compensated for taking investment risk.
Renaissance continues to manage its investment portfolio as before: we make the
strategic calls on asset allocation and duration, and manage the very high-grade
component of our fixed income portfolio internally, and we employ external
managers for the fixed income sectors and asset classes for which special skills
and/or extensive resources are required.
CREDIT RATINGS S&P A.M. Best Moody's
----------------------------------------------------------------------
REINSURANCE SEGMENT (1)
Renaissance Reinsurance .......... AA-* A+ A1
DaVinci Re ....................... A A --
Top Layer Re ..................... AA A+ --
Renaissance Europe ............... -- A+ --
INDIVIDUAL RISK SEGMENT (1)
Glencoe .......................... -- A --
Glencoe U.S. ..................... -- A --
Stonington ....................... -- A --
Lantana .......................... -- A --
RenaissanceRe (2) ................ A* -- A3
----------------------------------------------------------------------
* Upgraded in February 2004
(1) The A.M. Best, S&P and Moody's ratings for the companies in the Reinsurance
and Individual Risk segments reflect the insurer financial strength rating.
(2) The S&P and Moody's ratings for RenaissanceRe represent the credit ratings
on its senior unsecured debt.
22 RENAISSANCERE HOLDINGS LTD.
[ Photos Omitted ]
BOARD OF DIRECTORS
RenaisssanceRe Holdings Ltd.
JAMES N. STANARD
Chairman and Chief
Executive Officer
RenaissanceRe
Holdings Ltd.
THOMAS A. COOPER
TAC Associates
BRIAN R. HALL
Retired
Johnson & Higgins
WILLIAM F. HECHT EDMUND B. GREENE
Chairman, President Retired
and CEO General Electric Company
PPL Corporation
W. JAMES MACGINNITIE
Actuary and Independent
Consultant
SCOTT E. PARDEE WILLIAM RIKER
Alan R. Holmes President
Professor of RenaissanceRe
Monetary Economics Holdings Ltd.
Middlebury College
23
OFFICERS
RenaissanceRe Holdings Ltd. and Subsidiaries
WILLIAM B. ASHLEY
Senior Vice President
Chief Operating Officer
Glencoe Insurance Ltd.
IAN D. BRANAGAN
Managing Director
Renaissance Reinsurance of Europe
MICHAEL W. CASH
Senior Vice President
Renaissance Reinsurance Ltd.
ROSS A. CURTIS
Vice President
Renaissance Reinsurance Ltd.
PETER C. DURHAGER
Senior Vice President
Chief Administrative Officer
RenaissanceRe Holdings Ltd.
DAVID A. EKLUND
President
Chief Underwriting Officer
Renaissance Reinsurance Ltd.
TODD R. FONNER
Vice President
Treasurer
RenaissanceRe Holdings Ltd.
JOSEPH J. GEORGE
Vice President
Glencoe Insurance Ltd.
DAVID A. HEATHERLY
President
Glencoe U.S. Holdings Inc.
W. PRESTON HUTCHINGS
Senior Vice President
Chief Investment Officer
RenaissanceRe Holdings Ltd.
ROBERT J. LAMENDOLA
Senior Vice President
Renaissance Reinsurance Ltd.
JAMES R. LEWIS
Vice President
Renaissance Reinsurance Ltd.
JOHN M. LUMMIS
Executive Vice President
Chief Financial Officer
RenaissanceRe Holdings Ltd.
MARTIN J. MERRITT
Senior Vice President
Controller
RenaissanceRe Holdings Ltd.
JOHN D. NICHOLS
President
Renaissance Underwriting Managers, Ltd.
MICHAEL S. NUENKE
Vice President
Glencoe U.S. Holdings Inc.
KEVIN J. O'DONNELL
Senior Vice President
Renaissance Reinsurance Ltd.
JON D. PARADINE
Vice President
Renaissance Reinsurance Ltd.
RICHARD B. PRIMERANO
Senior Vice President
Chief Financial Officer
Glencoe U.S. Holdings Inc.
LAURENCE B. RICHARDSON II
Vice President
Renaissance Underwriting Managers, Ltd.
WILLIAM I. RIKER
President
RenaissanceRe Holdings Ltd.
RUSSELL M. SMITH
Senior Vice President
Renaissance Reinsurance Ltd.
JAMES N. STANARD
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
THOMAS M. TREZISE
Vice President
Renaissance Services Ltd.
RICHARD G. WEECH
Vice President
Renaissance Underwriting Managers, Ltd.
STEPHEN H. WEINSTEIN
Vice President
General Counsel
RenaissanceRe Holdings Ltd.
MARK A. WILCOX
Vice President
RenaissanceRe Holdings Ltd.
JOHN R. WINEINGER
Vice President
Renaissance Services Ltd.
24 RENAISSANCERE HOLDINGS LTD.
FINANCIAL INFORMATION
RenaissanceRe Holdings Ltd. and Subsidiaries
TABLE OF CONTENTS: FINANCIAL INFORMATION
--------------------------------------------------------------------------------
Selected Financial Data ................................................... 26
Management's Discussion and Analysis ...................................... 27
Management's Responsibility for Financial Statements ...................... 42
Report of Independent Auditors ............................................ 42
Consolidated Balance Sheets ............................................... 43
Consolidated Statements of Income ......................................... 44
Consolidated Statements of Changes in Shareholders' Equity ................ 45
Consolidated Statements of Cash Flows ..................................... 46
Notes to Consolidated Financial Statements ................................ 47
Glossary of Selected Insurance and Reinsurance Terms ...................... 61
Comments on Regulation G .................................................. 65
Financial and Investor Information ........................................ 67
RENAISSANCERE HOLDINGS LTD. 25
SELECTED FINANCIAL DATA
RenaissanceRe Holdings Ltd. and Subsidiaries
Year Ended December 31,
----------------------------------------------------------------------
(In thousands, except per share data) 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Gross premiums written .............................. $1,382,209 $1,173,049 $ 501,321 $ 433,002 $ 351,305
Net premiums written ................................ 1,152,523 923,711 339,547 293,303 213,513
Net premiums earned ................................. 1,115,743 760,905 333,065 267,681 221,117
Net investment income ............................... 129,542 102,686 75,156 77,868 60,334
Net realized gains (losses) on sales of
investments ...................................... 80,504 10,177 18,096 (7,151) (15,720)
Claims and claim expenses incurred .................. 367,744 289,525 149,917 108,604 77,141
Acquisition costs ................................... 194,140 95,644 45,359 38,530 25,500
Operational expenses ................................ 67,397 49,159 38,603 37,954 36,768
Income before taxes and change in
accounting principle ............................. 623,430 386,070 180,046 131,876 102,716
Net income available to common
shareholders ..................................... 604,647 364,814 164,366 127,228 104,241
Earnings per common share - diluted(1) .............. 8.52 5.20 2.63 2.17 1.68
Dividends per common share .......................... 0.60 0.57 0.53 0.50 0.47
Weighted average common shares
outstanding ...................................... 71,002 70,211 62,391 58,728 61,884
----------------------------------------------------------------------------------------------------------------------------
At December 31,
----------------------------------------------------------------------
(In thousands) 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total investments and cash .......................... $4,187,617 $3,128,879 $2,194,430 $1,074,876 $1,059,790
Total assets ........................................ 4,729,702 3,745,736 2,643,652 1,468,989 1,617,243
Reserve for claims and claim expenses ............... 977,892 804,795 572,877 403,611 478,601
Reserve for unearned premiums ....................... 349,824 331,985 125,053 112,541 98,386
Debt ................................................ 350,000 275,000 183,500 50,000 250,000
Subordinated obligation to capital trust ............ 103,093 -- -- -- --
Company obligated mandatorily redeemable
capital securities of a subsidiary trust
holding solely junior subordinated
debentures of RenaissanceRe ....................... -- 84,630 87,630 87,630 89,630
Preferred shares .................................... 250,000 150,000 150,000 -- --
Total shareholders' equity attributable
to common shareholders ........................... 2,084,643 1,492,035 1,075,024 700,818 600,329
Common shares outstanding ........................... 70,399 69,750 67,893 58,863 59,058
----------------------------------------------------------------------------------------------------------------------------
(1) Earnings per common share - diluted was calculated by dividing net income
available to common shareholders by the number of weighted average common
shares and common share equivalents outstanding. Common share equivalents
are calculated on the basis of the treasury stock method.
26 RENAISSANCERE HOLDINGS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RenaissanceRe Holdings Ltd. and Subsidiaries
================================================================================
The following is a discussion and analysis of our results of operations for the
year ended December 31, 2003 compared with the years ended December 31, 2002 and
December 31, 2001. The following also includes a discussion of our financial
condition at December 31, 2003. This discussion and analysis should be read in
conjunction with the audited consolidated financial statements and related notes
included in this report. This 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 "Note on
Forward-Looking Statements"). 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
--------------------------------------------------------------------------------
RenaissanceRe was established in 1993 to write property catastrophe reinsurance.
By pioneering the use of sophisticated computer models to construct our
portfolio, we have become one of the world's largest and most successful
catastrophe reinsurers. We are seeking to leverage our expertise to establish
leading franchises in additional selected areas of insurance and reinsurance.
Since a substantial portion of the reinsurance and insurance we write provides
protection from damages relating to natural and man-made catastrophes, our
results depend to a large extent on the frequency and severity of such
catastrophic events, and the coverages we offer to clients impacted by these
events. Currently, we conduct our business through two reportable segments,
Reinsurance and Individual Risk.
Our revenues are principally derived from three sources: 1) net premiums earned
from the reinsurance and insurance policies we sell; 2) net investment income
and realized gains and losses from the investment of our capital funds and the
investment of the cash we receive on the policies which we sell; and 3) other
income received from our joint ventures and other structured products.
Our expenses primarily consist of: 1) claims and claim expenses incurred on the
policies of reinsurance and insurance we sell; 2) acquisition costs which
typically represent a percentage of the premiums we write; 3) operational
expenses which primarily consist of personnel expenses, rent and other operating
expenses; and 4) interest and dividend costs related to our debt, preference
shares and subordinated obligation to capital trust.
The operational results, also known as the underwriting results, of an insurance
or reinsurance company are discussed frequently by reference to its claims and
claim expense ratio, underwriting expense ratio, and combined ratio. The claims
and claim expense ratio is the result of dividing claims and claim expenses
incurred by net premiums earned. The underwriting expense ratio is the result of
dividing underwriting expenses (acquisition expenses and operational expenses)
by net premiums earned. The combined ratio is the sum of the claims and claim
expense ratio and the underwriting expense ratio. A combined ratio below 100%
generally indicates profitable underwriting prior to the consideration of
investment income. A combined ratio over 100% generally indicates unprofitable
underwriting prior to the consideration of investment income.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
--------------------------------------------------------------------------------
CLAIMS AND CLAIM EXPENSE RESERVES
We believe that the most significant accounting judgment made by management is
our estimate of the claims and claim expense reserves. Claim reserves represent
estimates, including actuarial and statistical projections at a given point in
time, of the ultimate settlement and administration costs of claims incurred,
and it is likely that the ultimate liability will exceed or be less than such
estimates. It is also possible that the ultimate liability may materially exceed
or be materially less than such estimates. Such estimates are not precise in
that, among other things, they are based on predictions of future developments
and estimates of future trends in claim severity and frequency and other
variable factors such as inflation.
Adjustments to our prior year estimated ultimate claims reserves will impact our
current year net income by increasing our net income if the prior year estimated
ultimate claims reserves are determined to be overstated, or by reducing our net
income if the prior year estimated ultimate claims reserves prove to be
insufficient. During the years ended December 31, 2003, 2002 and 2001, changes
to prior year estimated ultimate claims reserves had the following impact on our
net income; during 2003, prior years estimated ultimate claims reserves were
reduced by $95.1 million and accordingly, our 2003 net income was increased by
$95.1 million; during 2002, prior years estimated ultimate claims reserves were
reduced by $2.0 million, and our 2002 net income was increased by $2.0 million;
and during 2001, prior years estimated ultimate claims reserves were reduced by
$16.0 million, and our 2001 net income was increased by $16.0 million. (also see
Reserves for Claims and Claim Expenses.)
For our property catastrophe reinsurance operations, we initially set our claims
reserves based on case reserves and other reserve estimates reported by insureds
and ceding companies.
RENAISSANCERE HOLDINGS LTD. 27
We then add to these case reserves, our estimates for additional case reserves,
and an estimate for incurred but not reported reserves ("IBNR"). These estimates
are generally based upon our experience with similar claims, our knowledge of
potential industry loss levels for each loss, and industry information which we
gather and retain in our REMS(C) modeling system. The estimation of claims
resulting from catastrophic events is inherently difficult because of the
variability and uncertainty associated with property catastrophe claims. During
2003, with the accumulation of ten years of historical information on our claims
and claim expenses, we adopted a new system to reassess our property catastrophe
reserves on our older accident years.
In reserving for our specialty reinsurance and Individual Risk coverages we do
not have the benefit of a significant amount of our own historical experience in
these lines, and therefore we estimate our IBNR for our specialty reinsurance
and Individual Risk coverages by utilizing an actuarial method known as the
Bornhuetter-Ferguson technique, a widely used method for lines of business in
which a company may have limited historical loss experience. The utilization of
the Bornhuetter-Ferguson technique requires a company to estimate an ultimate
claims and claim expense ratio and select an estimated loss reporting pattern
for each line of business that it offers. The expected loss ratio is modified to
the extent that reported losses to date differ from what would be expected based
on the selected loss reporting pattern. This method gives more weight to the
actual reported loss experience as the underwriting period matures. We select
our estimates of the ultimate claims and claim expense ratios and estimated loss
reporting patterns by reviewing industry standards and adjusting these standards
based upon the coverages and terms of the coverages we offer.
Because any reserve estimate is simply an insurer's estimate of its ultimate
liability, and because there are numerous factors which affect reserves but can
not be determined with certainty in advance, our ultimate payments will vary,
perhaps materially, from our initial estimate of reserves. Therefore, because of
these inherent uncertainties, we have developed a reserving philosophy which
attempts to incorporate prudent assumptions and estimates. In future periods,
assuming future reported and paid claims activity is consistent with that of
recent quarters, and barring unforeseen circumstances, we believe that, as our
reserves on older accident years continue to age, we may experience further
reduction to our older accident year reserves.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that an adjustment to an earlier estimate is appropriate, such
adjustments are recorded in the quarter in which they are identified. Although
we believe we are cautious in our assumptions, and in the application of our
methodologies, we cannot be certain that our ultimate payments will not vary,
perhaps materially, from the estimates we have made.
At December 31, 2003, our total gross reserves for claims and claim expenses was
$977.9 million and our estimated IBNR reserves were $596.6 million. A 5% change
in such IBNR reserves would equate to a $29.8 million adjustment to claims and
claim expenses incurred, which would represent 4.9% of our 2003 net income and
1.3% of shareholders' equity at December 31, 2003.
PREMIUMS
We recognize premiums as income over the terms of the related contracts and
policies. Our written premiums are based on policy and contract terms and
include estimates based on information received from both insureds and ceding
companies. We record adjustment premiums in the period in which they occur.
We book premiums on non-proportional contracts in accordance with the contract
terms. Premiums written on losses occurring contracts are typically earned over
the contract period. Premiums on risks attaching contracts are generally earned
as reported by the cedants, which typically is over double the contract period.
Management makes estimates based on judgment and historical experience for
periods during which information has not yet been received. Such estimates are
subject to adjustment in subsequent periods when actual figures are recorded.
The minimum and deposit premium on excess policies are usually determined by the
contract wording. In the absence of defined amounts in the contract, management
estimates written premium on these contracts based on historical experience and
judgment. Actual amounts are determined in subsequent periods based on actual
exposures and any adjustments are recorded in the period in which they occur.
In our Individual Risk business, it is often necessary to estimate portions of
premiums written from quota-share contracts and by program managers. Management
estimates this premium based on discussions with ceding companies and program
managers and also based on historical experience and judgment. Total premiums
estimated at December 31, 2003 and 2002 were $103.7 million and $74.6 million,
respectively.
We record ceded premiums on the same basis as assumed premiums. Reinstatement
premiums are estimated by management, based on the contract terms, at the time
of the loss occurrence giving rise to the reinstatement.
28 RENAISSANCERE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
SUMMARY OF RESULTS OF OPERATIONS FOR 2003, 2002 AND 2001:
The following table presents our consolidated results by segment.
Year ended December 31, 2003
------------------------------------------------------------------------------------
(in thousands) Reinsurance Individual Risk Eliminations(1) Other Total
------------------------------------------------------------------------------------------------------------------------------------
Gross premiums written ........................ $ 956,257 $ 446,724 $ (20,772) $ -- $1,382,209
------------------------------------------------------------------------------------------------------------------------------------
Net premiums written .......................... $ 789,769 $ 362,754 -- $1,152,523
------------------------------------------------------------------------------------------------------------------------------------
Net premiums earned ........................... $ 809,360 $ 306,383 -- $1,115,743
Claims and claim expenses incurred ............ 209,197 158,547 -- 367,744
Acquisition expenses .......................... 93,227 100,913 -- 194,140
Operational expenses .......................... 52,504 14,893 -- 67,397
------------------------------------------------------------------------------------------------------------------------------------
Underwriting income ........................... $ 454,432 $ 32,030 -- 486,462
------------------------------------------------------------------------------------------------------------------------------------
Net investment income ......................... 129,542 129,542
Other income .................................. 27,070 27,070
Other items, net .............................. (2,394) (2,394)
Interest, preferred share dividends,
Capital Securities minority interest ....... (44,523) (44,523)
Minority interest - DaVinciRe ................. (72,014) (72,014)
Net realized gains on investments ............. 80,504 80,504
------------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders ... $ 118,185 $ 604,647
Claims and claim expense ratio ................ 25.8% 51.7% 33.0%
Underwriting expense ratio .................... 18.0% 37.8% 23.4%
------------------------------------------------------------------------------------------------------------------------------------
Combined ratio ............................. 43.8% 89.5% 56.4%
------------------------------------------------------------------------------------
(1) Represents premium ceded from Individual Risk segment to Reinsurance
segment
Year ended December 31, 2002
------------------------------------------------------------------------------------
(in thousands) Reinsurance Individual Risk Eliminations(1) Other Total
------------------------------------------------------------------------------------------------------------------------------------
Gross premiums written ........................ $ 912,695 $ 282,579 $ (22,225) $ -- $1,173,049
------------------------------------------------------------------------------------------------------------------------------------
Net premiums written .......................... $ 696,610 $ 227,101 -- $ 923,711
------------------------------------------------------------------------------------------------------------------------------------
Net premiums earned ........................... $ 667,926 $ 92,979 -- $ 760,905
Claims and claim expenses incurred ............ 249,316 40,209 -- 289,525
Acquisition expenses .......................... 70,698 24,946 -- 95,644
Operational expenses .......................... 39,264 9,895 -- 49,159
------------------------------------------------------------------------------------------------------------------------------------
Underwriting income ........................... $ 308,648 $ 17,929 -- 326,577
------------------------------------------------------------------------------------------------------------------------------------
Net investment income ......................... $ 102,686 102,686
Other income .................................. 32,821 32,821
Other items, net .............................. (10,351) (10,351)
Interest, preferred share dividends,
Capital Securities minority interest ........ (32,858) (32,858)
Minority interest - DaVinciRe ................. (55,051) (55,051)
Cumulative effect of a change
in accounting principle ..................... (9,187) (9,187)
Net realized gains on investments ............. 10,177 10,177
------------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders ... $ 38,237 $ 364,814
Claims and claim expense ratio 37.3% 43.2% 38.1%
Underwriting expense ratio 16.5% 37.5% 19.0%
------------------------------------------------------------------------------------------------------------------------------------
Combined ratio .............................. 53.8% 80.7% 57.1%
(1) Represents premium ceded from Individual Risk segment to Reinsurance segment
RENAISSANCERE HOLDINGS LTD. 29
Year ended December 31, 2001
------------------------------------------------------------------------
(in thousands) Reinsurance Individual Risk Other Total
-----------------------------------------------------------------------------------------------------------------------
Gross premiums written ....................... $ 451,364 $ 49,957 $ -- $ 501,321
-----------------------------------------------------------------------------------------------------------------------
Net premiums written .......................... $ 326,680 $ 12,867 -- $ 339,547
-----------------------------------------------------------------------------------------------------------------------
Net premiums earned ........................... $ 325,223 $ 7,842 -- $ 333,065
Claims and claim expenses incurred ........... 152,341 (2,424) -- 149,917
Acquisition expenses ......................... 44,029 1,330 -- 45,359
Operational expenses ......................... 28,198 10,405 -- 38,603
-----------------------------------------------------------------------------------------------------------------------
Underwriting income .......................... $ 100,655 $ (1,469) -- 99,186
-----------------------------------------------------------------------------------------------------------------------
Net investment income ........................ 75,156 75,156
Other income ................................. 16,244 16,244
Other items, net ............................. $ (27,414) (27,414)
Interest, preferred share dividends, Capital
Securities minority interest .............. (16,151) (16,151)
Minority interest - DaVinciRe ................ (751) (751)
Net realized gains on investments ............ 18,096 18,096
-----------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders .. $ 65,180 $ 164,366
Claims and claim expense ratio ............... 46.8% (30.9%) -- 45.0%
Underwriting expense ratio ................... 22.2% 149.6% -- 25.2%
-----------------------------------------------------------------------------------------------------------------------
Combined ratio ............................ 69.0% 118.7% -- 70.2%
SUMMARY OVERVIEW
For the years ended December 31, 2003 and 2002 our net premiums earned increased
by $354.8 million and $427.8 million, respectively, or 47% and 128%,
respectively. These increases were primarily due to the market dislocation which
occurred after the World Trade Center disaster, and the significant losses
stemming from this event. These losses caused an imbalance in the supply and
demand for our insurance and reinsurance products, and as a result, we increased
our written premiums, in both our established property catastrophe line and our
specialty reinsurance line, and also increased our premiums in our Individual
Risk operations. Contributing to the increase in Individual Risk operations
during 2003 was the continued growth of: 1) our Program Manager distribution
channel, where we write primary insurance through specialized program managers;
and 2) our Quota Share Reinsurance distribution channel, where we write quota
share reinsurance with primary insurers (see below for underwriting results by
segment).
With our increase in premiums written, we generally have also experienced
related increases in: 1) claims and claim expenses incurred; 2) acquisition
expenses; 3) operational expenses; and 4) net income. However, during 2003, we
produced a claims and claim expense ratio of 33.0%, which was aided by
reductions of prior years estimated ultimate claims reserves of $95 million, and
by an estimate of approximately $40 million of reduced losses due to a reduced
level of catastrophe loss events occurring in 2003.
NET INVESTMENT INCOME
Year ended December 31,
---------------------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Net investment income ........... $ 129,542 $ 102,686 $ 75,156
----------
During 2003 we increased the amount of investments allocated to other
investments. These investments are carried at fair value, with interest,
dividend income, realized gains (losses) and unrealized gains (losses) included
in investment income. During 2003, we recorded $25.9 million of net investment
income from these other investments (2002 - $0.4 million loss), which were
largely responsible for the increase in net investment income during 2003 (see
Investments). The increase in our net investment income in 2002 as compared with
2001 was due to the significant increase in our invested assets from $2.2
billion at December 31, 2001 to $3.1 billion at December 31, 2002, which was
generated primarily from strong cash flows from operations of $778 million.
Also, in the latter half of 2001 we raised $785 million from financing
activities which was available for us for investment purposes for the full year
of 2002.
30 RENAISSANCERE HOLDINGS LTD.
OTHER INCOME
Year ended December 31,
-----------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Property catastrophe business -
fee income ........................ $ 7,655 $ 3,882 $ 8,643
Property catastrophe business -
equity earnings -
Top Layer Re ...................... 21,167 22,339 9,663
Other items .......................... (1,752) 6,600 (2,062)
--------------------------------------------------------------------------------
Total other income ................ $ 27,070 $ 32,821 $ 16,244
----------
The majority of our other income is generated from our 50% equity ownership in
Top Layer Re. The increase in property catastrophe business - fee income during
2003 was primarily due to the $4 million annual fee we receive related to
services provided to Platinum. The reduction in other items is primarily related
to the derivative income we received in 2002 (as noted below), which did not
repeat in 2003.
During 2002, the significant increase in our equity earnings from Top Layer Re
was due to the increase in the premiums written by Top Layer Re, from $38.8
million in 2001 to $73.0 million in 2002, and the resultant net income from
those premiums. Also in 2002, income from other items increased due primarily to
$7.2 million of income related to derivative instruments under which recoveries
are triggered by an industry loss index or geological or physical variables.
CORPORATE EXPENSES
Year ended December 31,
--------------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Corporate expenses ................... $ 16,043 $ 14,327 $ 11,485
----------
Corporate expenses include expenses related to legal and certain consulting
expenses, costs for research and development, and other miscellaneous costs
associated with operating as a publicly traded company. The increase in
corporate expenses during 2003 primarily related to an increase in the cost for
directors' and officers' insurance and increases in fees to comply with recently
adopted regulations of the Securities and Exchange Commission, including those
related to complying with the Sarbanes-Oxley Act of 2002. The majority of the
increase in corporate expenses in 2002 primarily related to $1.9 million
increase in legal costs and $1.2 million of costs related to accelerated vesting
of equity compensation.
INTEREST, CAPITAL SECURITIES AND PREFERRED SHARE DIVIDENDS
Year ended December 31,
-----------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Interest - revolving credit facilities .... $ 2,318 $ 2,569 $2,378
Interest - $150 million 7.0%
Senior Notes ........................... 10,500 10,500 4,871
Interest - $100 million
5.875% Senior Notes .................... 5,434 -- --
Dividends - $103.1 million
Capital Securities ..................... 7,470 7,605 7,484
Dividends - $150 million 8.1%
Series A - Preference Shares ........... 12,150 12,184 1,418
Dividends - $100 million 7.3%
Series B - Preference Shares ........... 6,651 -- --
--------------------------------------------------------------------------------
Total interest and Capital
Securities and preferred
share dividends ........................ $44,523 $32,858 $16,151
----------
Our interest payments and preferred dividends increased during 2003, primarily
as a result of the issuance of $100 million 5.875% Senior Notes and the issuance
of $100 million 7.3% Series B Preference Shares. This capital was raised to
support the growth in our insurance and reinsurance operations.
Our interest payments and preferred dividends increased during 2002, primarily
as a result of the timing of our capital raising activities, which occurred in
the latter half of 2001. Accordingly, during 2002, the balance of the 7.0%
Senior Notes and the 8.1% Series A - Preference Shares were outstanding for the
entire year, and we incurred a full year of charges related to these securities
during 2002 as compared to a partial year of charges during 2001.
INCOME TAX EXPENSE (BENEFIT)
Year ended December 31,
------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Income tax expense (benefit) .................. $ (18) $ (115) $ 14,262
-------
During 2003 and 2002, we wrote a limited amount of business in our U.S.
operations, and, therefore, our U.S. net income was minimal and the related tax
impact for 2003 and 2002 was also minimal.
During 2001, we also had little or no net income in the U.S., however, at
December 31, 2001 we had accumulated a $26.9 million deferred tax asset. As a
result of the limited number of attractive opportunities in the U.S. primary
insurance market at that time, we decided to increase our valuation allowance by
$14.0 million. At December 31, 2003, the gross and net balance of the deferred
tax asset was $33.3 million and $4.0 million, respectively.
We currently plan to continue to increase the business written by our U.S.
insurance subsidiary. If, as a result, our U.S. operations begin to generate
taxable income, the appropriateness of the valuation allowance will be
reassessed and, accordingly,
RENAISSANCERE HOLDINGS LTD. 31
potential profits from our U.S. operations would possibly not have a
corresponding offset for tax expenses, up to the $29.3 million valuation
allowance recorded at December 31, 2003.
NET REALIZED GAINS ON INVESTMENTS
Year ended December 31,
-----------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Net realized gains on investments ......... $ 80,504 $ 10,177 $ 18,096
----------
Because our investment portfolio is structured to preserve capital and provide
us with a high level of liquidity, a large majority of our investments are
invested in the fixed income markets and, therefore, our realized holding gains
and losses on investments are highly correlated to fluctuations in interest
rates. Therefore, as interest rates decline, as occurred in 2003, 2002 and 2001,
we will tend to have realized gains from the turn over of our investment
portfolio, and as interest rates increase, we will tend to have realized losses
from the turnover of our investment portfolio, although the actual amount of
realized gains (losses) on sales of investments can be reduced depending on
which specific securities we choose to sell.
The amount of the realized gains or realized losses that will be recorded in the
future will be dependent upon the level of our investments, the changes in the
interest rate environment and how quickly or slowly we choose to turn over our
investment portfolio.
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") 142, "Goodwill and Other Intangible Assets." In the second
quarter of 2002, the Company completed its initial impairment review in
compliance with the transition provisions of SFAS 142 and, as a result, the
Company decided to record goodwill at zero value, the low end of an estimated
range of values, and wrote off the balance of its goodwill during the second
quarter of 2002, which totaled $9.2 million. In accordance with the provisions
of SFAS 142, this is required to be recorded as a cumulative effect of a change
in accounting principle in the consolidated statement of income and is required
to be recorded retroactive to January 1, 2002.
UNDERWRITING RESULTS BY SEGMENT
We conduct our business through two reportable segments, Reinsurance and
Individual Risk. Our Reinsurance segment provides reinsurance through our
catastrophe reinsurance and specialty reinsurance business units and through
Renaissance Underwriting Managers. Our Individual Risk segment provides primary
insurance and quota share reinsurance.
Our underwriting results by segment are provided below:
REINSURANCE SEGMENT
Our Reinsurance operations are comprised of three business units: 1) property
catastrophe reinsurance, primarily written through Renaissance Reinsurance and
DaVinci; 2) specialty reinsurance, primarily written through Renaissance
Reinsurance and DaVinci; and 3) certain activities of Renaissance Underwriting
Managers.
The following table summarizes the underwriting results and ratios for the
Reinsurance segment for the years ended December 31, 2003, 2002 and 2001:
Year ended December 31,
----------------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Property catastrophe premium(1)
Renaissance ......................... $488,124 $455,628 $373,896
DaVinci ............................. 155,541 187,822 --
--------------------------------------------------------------------------------
Total property
catastrophe premium ........... 643,665 643,450 373,896
Specialty premium
Renaissance ......................... 268,506 247,020 77,468
DaVinci ............................. 23,314 -- --
--------------------------------------------------------------------------------
Total specialty premium .......... 291,820 247,020 77,468
--------------------------------------------------------------------------------
Total Renaissance gross
premium written ............... $935,485 $890,470 $451,364
--------------------------------------------------------------------------------
Net premium written ................... $789,769 $696,610 $326,680
--------------------------------------------------------------------------------
Net premium earned - property
catastrophe ........................ $498,747 $462,471 $261,054
Net premium earned - specialty ........ 310,613 205,455 64,169
--------------------------------------------------------------------------------
Total net premium earned ........... 809,360 667,926 325,223
Claims and claim
expenses incurred .................. 209,197 249,316 152,341
Acquisition expenses .................. 93,227 70,698 44,029
Operational expenses .................. 52,504 39,264 28,198
--------------------------------------------------------------------------------
Underwriting income ................... $454,432 $308,648 $100,655
Claims and claim expense ratio ........ 25.8% 37.3% 46.8%
Underwriting expense ratio ............ 18.0% 16.5% 22.2%
--------------------------------------------------------------------------------
Combined ratio ..................... 43.8% 53.8% 69.0%
---------
(1) Excludes combined premium assumed from the Individual Risk segment of $20.8
million and $22.2 million for the years ended December 31, 2003 and 2002,
respectively.
Premiums
Property catastrophe - During 2003 our consolidated property catastrophe
premiums remained relatively flat, primarily due to increased competition and
due to some softening of prices in the market, where we accordingly chose not to
renew certain policies.
The increase in our property catastrophe premiums during 2002 was primarily due
to an improving market following 1) the World Trade Center disaster in 2001 and
2) insured losses from nine significant worldwide catastrophic events in 1999.
Because of these events, as with many large losses, two changes occurred in
2002: 1) many reinsurers recorded significant losses and were forced to, or
chose to, withdraw their underwriting capacity from these regions; and 2) these
losses raised the awareness of the severity of the losses which could
32 RENAISSANCERE HOLDINGS LTD.
impact these geographic locations. As a result of these factors, prices for
reinsurance coverages in these and other geographic locations increased, in some
cases significantly. Accordingly, our 2002 reinsurance premiums also increased,
firstly from the increased prices on renewing policies and secondly by enabling
us to write new business which was previously priced at an uneconomical rate of
return.
During 2004 we expect this market to remain relatively competitive which would
cause a corresponding reduction in pricing. Accordingly, we expect that the
level of our property catastrophe premiums will decrease in 2004.
Specialty reinsurance - During 2003 our consolidated specialty reinsurance
premiums increased by $45 million or 18%. This increase was primarily due to our
continued focus on a few targeted areas of this market where we believe we can
leverage our expertise. The markets representing the majority of the increase
were the catastrophe exposed workers' compensation market and the market for
terrorism-specific reinsurance.
During 2002, the factors that caused the improved market conditions in the
property catastrophe market also contributed to improving market conditions in
the lines of specialty reinsurance which we write, and subsequent to the World
Trade Center disaster, we significantly increased our participation in this
market. We categorize our specialty reinsurance premiums as reinsurance
coverages that are not specifically property catastrophe coverages. Examples of
specialty lines of reinsurance coverages provided by us include catastrophe
exposed workers' compensation, surety, aviation and terrorism.
Gross premiums written by geographic region
The following is a summary of our reinsurance premiums by geographic region.
Year ended December 31,
--------------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Property catastrophe
United States and Caribbean .......... $297,954 $310,090 $180,305
Europe ............................... 156,156 86,461 20,414
Worldwide ............................ 126,541 169,790 93,474
Australia and New Zealand ............ 26,588 2,127 12,159
Worldwide (excluding U.S.)(1) ........ 14,968 56,628 45,111
Other ................................ 21,458 18,354 22,433
Specialty reinsurance(2) ................ 291,820 247,020 77,468
--------------------------------------------------------------------------------
Total reinsurance gross
premiums written(3) .................. $935,485 $890,470 $451,364
----------
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross written premiums written to date is predominantly from
Europe and Japan.
(2) The category specialty reinsurance consists of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks being
Worldwide.
(3) Excludes $20.8 million and $22.2 million of total premium assumed by the
Reinsurance segment from the Individual Risk segment in 2003 and 2002,
respectively.
Ceded premiums written
Year ended December 31,
-----------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Ceded premiums written ..................... $ 166,488 $ 216,085 $ 124,684
----------
Because of the potential volatility of the property catastrophe reinsurance
business, we purchase reinsurance to reduce our exposure to large losses. We use
our REMS(C) modeling system to evaluate how each purchase interacts with our
portfolio of reinsurance contracts we write, and with the other ceded
reinsurance contracts we purchase, to determine the appropriateness of the
pricing of each contract. During 2003, we reduced the level of reinsurance
purchased because of the reduction in the availability of appropriately priced
opportunities.
During 2002, the majority of the increase in our ceded reinsurance premiums was
from placements of quota share reinsurance agreements for participations in our
property catastrophe book of business. In accordance with these agreements we
retain fees and have the right to receive profit commissions associated with
these cessions. The fees and profit commissions are reflected as a reduction to
operating expenses and acquisition expenses, respectively.
Although we would remain liable to the extent that any of our reinsurers fail to
pay our claims, before placing reinsurance we evaluate the financial condition
of our reinsurers. At December 31, 2003, the majority of the $149.2 million of
net losses recoverable relates to outstanding claims reserves on our books, and,
in accordance with the terms of the policies, we generally must wait to collect
from our reinsurers until we pay the underlying claims. We expect to fully
collect the recorded net balance of the losses recoverable.
To the extent that appropriately priced coverage is available, we anticipate
continued use of reinsurance to reduce the potential volatility of our results.
Underwriting results
The increase in our 2003 net underwriting income from our Reinsurance segment
was primarily the result of three factors: 1) the comparably low level of
property catastrophe losses during 2003 which contributed approximately $40
million of a reduction in claims and claim expenses; 2) favorable development on
prior period reserves which contributed $70 million of a reduction in claims and
claim expenses; and 3) the increase in our net reinsurance premiums earned
during 2003, as a result of our increase in gross written property catastrophe
premiums in 2002 and the increase in our gross written specialty reinsurance
premiums in 2002 and 2003 (see "Premiums" above).
The increase in our 2002 net underwriting income from our Reinsurance segment
was primarily the result of three factors: 1) the low level of property
catastrophe losses during 2002; 2) the increase in our net reinsurance premiums
earned during 2002, a result of our increase in gross written property
catastrophe and specialty reinsurance premiums; and 3) the inception of
DaVinci's operations during 2002.
RENAISSANCERE HOLDINGS LTD. 33
Losses from our property catastrophe reinsurance and specialty reinsurance
policies can be infrequent, but severe; however during periods with benign
property catastrophe loss activity, such as 2003 and 2002, we have the potential
to produce a low level of losses and a related increase in underwriting income.
Although this occurred during 2003 and 2002, there can be no guarantee that this
reduced level of losses will occur in 2004 or beyond.
Also during 2003 and 2002, as discussed in the "Premiums" section above, we
significantly increased our specialty reinsurance premiums written. Although
specialty reinsurance premiums will normally produce higher claims and claim
expenses than the property catastrophe reinsurance business, the reduction in
our losses resulting from the low level of catastrophe losses during 2003 and
2002 and the reductions in prior year property catastrophe reserves during 2003
more than offset the increased level of loss activity arising from our specialty
reinsurance premiums.
Our underwriting expenses consist of acquisition expenses and operational
expenses. Acquisition expenses consist of costs to acquire premiums and are
principally comprised of broker commissions and excise taxes. Acquisition
expenses are driven by contract terms and are normally a set percentage of
premiums and, accordingly, these costs will normally fluctuate in line with the
fluctuation in premiums. Operational expenses consist of salaries and other
general and administrative expenses. Our reinsurance business operates with a
limited number of employees and we were able to grow our written premiums
without proportionally increasing our operating expenses during 2002. The
increase in underwriting expenses during 2003 was primarily due to an increase
in acquisition costs on our specialty reinsurance business, which is
attributable to commission costs related to certain quota share premiums written
in 2003 which typically carry higher acquisition costs than our excess of loss
contracts.
Recently, we have entered into joint ventures and specialized quota share
cessions of our book of business. In accordance with the joint venture and quota
share agreements, we are entitled to certain fee income and profit commissions.
We record these fees and profit commissions as a reduction in acquisition
expenses or operating expenses and accordingly these fees have also contributed
to the reduction in our expense ratio.
INDIVIDUAL RISK SEGMENT
We define our Individual Risk segment to include underwriting that involves
understanding the characteristics of the original underlying insurance policy.
Our principal products include: 1) commercial and homeowners property coverages,
including catastrophe-exposed lines; 2) commercial liability coverages,
including general, automobile, professional and various specialty lines; and 3)
reinsurance to other insurers on a quota share basis. We operate through the
Glencoe Group of companies, whose principal operating subsidiaries are Glencoe,
Stonington and Lantana.
The following table summarizes the underwriting results and ratios for the
Individual Risk segment for the years ended December 31, 2003, 2002, and 2001:
Year ended December 31,
------------------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Gross premiums written ............. $446,724 $282,579 $ 49,957
--------------------------------------------------------------------------------
Net premiums written ............... $362,754 $227,101 $ 12,867
--------------------------------------------------------------------------------
Net premiums earned ................ $306,383 $ 92,979 $ 7,842
Claims and claim expenses
incurred ........................ 158,547 40,209 (2,424)
Acquisition expenses ............... 100,913 24,946 1,330
Operational expenses ............... 14,893 9,895 10,405
--------------------------------------------------------------------------------
Underwriting income ................ $ 32,030 $ 17,929 $ (1,469)
Claims and claim expense ratio ..... 51.7% 43.2% (30.9)%
Underwriting expense ratio ......... 37.8% 37.5% 149.6%
--------------------------------------------------------------------------------
Combined ratio .................. 89.5% 80.7% 118.7%
------
Premiums
The increase in our premiums from our Individual Risk operations was as a result
of an improving market environment due primarily to: 1) the increase in demand
for insurance and reinsurance protection, and the withdrawal of supply, as a
result of the substantial losses stemming from the World Trade Center disaster
in 2001; 2) the ongoing increase to prior year reserves for many companies with
asbestos and environmental liabilities; and 3) the continuing increases to prior
year reserves for companies who participated in the casualty market of the late
1990's. As a result of these items, many insurance companies in the U.S. have
withdrawn from the U.S. insurance market, and many insurance companies have had
their credit ratings substantially reduced. In response to these dislocations,
we received numerous opportunities to partner with program managers who were
looking for high quality, stable companies with which to do business. Also,
because of our financial strength and our strong credit ratings, we received
increasing opportunities to work with existing insurance companies on a quota
share basis.
Ceded premiums written
Year ended December 31,
--------------------------------------
(in thousands) 2003 2002 2001
--------------------------------------------------------------------------------
Ceded premiums written(1) .............. $ 63,198 $ 33,253 $ 37,090
---------
(1) Excludes $20.8 million and $22.2 million of premium ceded to Renaissance
Reinsurance and DaVinci in 2003 and 2002, respectively.
We purchase reinsurance to reduce our exposure to large losses. With the
continued growth in the gross written premiums of our Individual Risk segment,
we continued to look for and were able to find opportunities to purchase
appropriately priced reinsurance coverage. To the extent that appropriately
priced coverage is available, we anticipate continued use of reinsurance to
reduce the potential volatility of our results.
34 RENAISSANCERE HOLDINGS LTD.
Underwriting results
The increases in the 2003 and 2002 net underwriting income of our Individual
Risk segment were primarily due to the growth in net earned premiums by $213.4
million and $85.1 million, respectively (as discussed above). In the future, the
combined ratio in our Individual Risk segment could fluctuate due to catastrophe
losses, adverse development or losses from other coverages that we write. During
2003 we began issuing insurance policies for certain commercial liability
coverages, including general, automobile and professional liability risks. The
claim reporting and claim development periods of these risks are longer than the
reporting and development periods for our property risks, and accordingly there
is normally greater uncertainty in the estimation of the reserves associated
with these policies.
FINANCIAL CONDITION
RenaissanceRe is a holding company, and we therefore rely on dividends from our
subsidiaries and investment income to make principal and interest payments on
our debt and capital securities, and to make dividend payments to our preference
and common shareholders.
The payment of dividends by our Bermuda subsidiaries is, under certain
circumstances, limited under U.S. statutory regulations and Bermuda insurance
law, which require our Bermuda insurance subsidiaries to maintain certain
measures of solvency and liquidity. At December 31, 2003, the statutory capital
and surplus of our Bermuda insurance subsidiaries was $2.4 billion, and the
amount of capital and surplus required to be maintained was $457.5 million.
During 2003, Renaissance Reinsurance, DaVinci and Glencoe declared aggregate
cash dividends of $322.3 million, $81.6 million and $18.0 million, respectively,
compared with $224.3 million, $3.5 million and $nil, respectively, in 2002.
Our U.S. insurance subsidiary, Stonington, is also required to maintain certain
measures of solvency and liquidity. This is determined using risk based capital
tests, which is the threshold that constitutes the authorized control level. If
Stonington's statutory capital and surplus falls below the authorized control
level, the commissioner is authorized to take whatever regulatory actions are
considered necessary to protect policyholders and creditors. At December 31,
2003, the statutory capital and surplus of Stonington was $28.8 million and the
maximum dividend we can pay in 2004 without prior approval is $2.6 million.
Our operating subsidiaries have historically produced sufficient cash flows to
meet their own expected claims payments and operational expenses and to provide
dividend payments to us. Our subsidiaries also maintain a concentration of
investments in high quality liquid securities, which management believes will
provide additional liquidity for extraordinary claims payments should the need
arise. Additionally, we maintain a $400 million credit facility to meet
additional liquidity and capital requirements, if necessary.
CASH FLOWS
Cash flows from operating activities for 2003 were $820.4 million, which
principally consisted of net income of $623.4 million (prior to dividends on
preference shares), plus $223.4 million for increases to net reserves for claims
and claim expenses. The 2003 cash flows from operations were primarily used to
increase the investment portfolio, including fixed income securities and other
investments.
We have generated cash flows from operations in 2003, 2002 and 2001
significantly in excess of our operating commitments. Because a large portion of
the coverages we provide typically can produce losses of high severity and low
frequency, it is not possible to accurately predict our future cash flows from
operating activities. As a consequence, cash flows from operating activities may
fluctuate, perhaps significantly, between individual quarters and years.
RESERVES FOR CLAIMS AND CLAIM EXPENSES
As discussed in the Summary of Critical Accounting Policies and Estimates, for
insurance and reinsurance companies, the most significant accounting judgment
made by management is the estimation of the claims and claim expense reserves.
Because of the variability and uncertainty associated with loss estimation, it
is possible that our individual case reserves are incorrect, possibly
materially.
A large portion of our coverages provide protection from natural and man-made
catastrophes which are generally infrequent, but can be significant, such as
losses from hurricanes and earthquakes. Our claims and claim expense reserves
will generally fluctuate, sometimes materially, based upon the occurrence of a
significant natural or man-made catastrophic loss for which we provide
reinsurance. Our claims reserves will also fluctuate based on the payments we
make for these large loss events. The timing of our payments on loss events can
be affected by the event causing the loss, the location of the loss, and whether
our losses are from policies with insurers or reinsurers.
During 2002 and 2003 we increased our specialty reinsurance and Individual Risk
gross written premiums (see "Premiums"). The addition of these lines of business
adds complexity to our claims reserving process and therefore adds uncertainty
to our claims reserve estimates as the reporting of information, the setting of
initial reserves and the loss settlement process for these lines of business
vary from our traditional property catastrophe line of business.
For our Reinsurance and Individual Risk operations, our estimates of claims
reserves include case reserves reported to us as well as our estimate of IBNR
losses to us. Our case reserve and our estimates for IBNR reserves are based on
1) claims reports from insureds and program managers; 2) our underwriters'
experience in setting claims reserves; 3) the use of computer models where
applicable; and 4) historical industry claims experience. For some classes of
business we also use statistical and actuarial methods to estimate ultimate
expected claims and claim expenses. We review our claims reserves on a regular
basis. (Also see "Summary of Critical Accounting Policies and Estimates.")
RENAISSANCERE HOLDINGS LTD. 35
CAPITAL RESOURCES
Our total capital resources at December 31, 2003 and 2002 were as follows:
At December 31,
-----------------------------
(in thousands) 2003 2002
-----------------------------------------------------------------
Common shareholders' equity ....... $2,084,643 $1,492,035
Preference shares ................. 250,000 150,000
-----------------------------------------------------------------
Total shareholders' equity ........ 2,334,643 1,642,035
7.0% Senior Notes ................. 150,000 150,000
8.54% subordinated obligation
to Capital Trust ......... 103,093 84,630
5.875% Senior Notes ............... 100,000 --
DaVinci revolving credit facility -
borrowed ................. 100,000 100,000
Revolving credit facility -
unborrowed ............... 400,000 310,000
Term and revolving loan facility .. -- 25,000
-----------------------------------------------------------------
Total capital resources ........... $3,187,736 $2,311,665
------------
During 2003, our capital resources increased primarily as a result of three
items: 1) our net income available to common shareholders of $604.6 million; 2)
the issuance of $100.0 million of 5.875% Senior Notes; and 3) the issuance of
$100.0 million of Series B preference shares.
In February 2003, we raised $100 million through the issuance of 4,000,000
Series B preference shares, and in November 2001, we raised $150 million through
the issuance of 6,000,000 Series A Preference Shares. The Series B and Series A
preference shares may be redeemed at $25 per share at our option on or after
February 4, 2008 and November 19, 2006, respectively; however we have no current
intentions to redeem the shares. Dividends on the Series B and Series A
preference shares are cumulative from the date of original issuance and are
payable quarterly in arrears at 7.3% and 8.1%, respectively, when, if, and as
declared by the Board of Directors. If we submit a proposal to our shareholders
concerning an amalgamation or submit any proposal that, as a result of any
changes to Bermuda law, requires approval of the holders of our preference
shares to vote as a single class, we may redeem the Series B and Series A
preference shares prior to February 4, 2008 and November 19, 2006, respectively,
at $26 per share. The preference shares have no stated maturity and are not
convertible into any other of our securities.
In January 2003, we issued $100 million of 5.875% Senior Notes due February 15,
2013, with interest on the notes payable on February 15 and August 15 of each
year, commencing August 15, 2003. In July 2001, we issued $150 million of 7.0%
Senior Notes due July 15, 2008 with interest on the notes payable on January 15
and July 15 of each year. The notes can be redeemed by us prior to maturity
subject to payment of a "make-whole" premium; however, we have no current
intentions of calling the notes. The notes, which are senior obligations,
contain various covenants, including limitations on mergers and consolidations,
restriction as to the disposition of stock of designated subsidiaries and
limitations on liens on the stock of designated subsidiaries. RenaissanceRe was
in compliance with the related covenants at December 31, 2003 and 2002.
Our Capital Trust has issued Capital Securities which pay cumulative cash
distributions at an annual rate of 8.54%, payable semi-annually. During 2003,
RenaissanceRe did not purchase any of the Capital Securities (2002 - $3.0
million purchased). RenaissanceRe has purchased an aggregate $15.4 million of
the Capital Securities since their issuance in 1997. The sole asset of the
Capital Trust consists of our junior subordinated debentures. The Indenture
relating to these junior subordinated debentures contains certain covenants,
including a covenant prohibiting us from the payment of dividends if we are in
default under the Indenture. We were in compliance with all of the covenants of
the Indenture at December 31, 2003. The Capital Securities mature on March 1,
2027.
Effective December 31, 2003, we adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 requires consolidation of all Variable Interest Entities
("VIE") by the investor that will absorb a majority of the VIE's expected losses
or residual returns. As further discussed in Note 7 to the Consolidated
Financial Statements, the Capital Trust was determined to be a VIE under FIN 46
and the Company has been determined not to be the primary beneficiary of the
Capital Trust. Accordingly, the Capital Trust has been deconsolidated effective
December 31, 2003. As a result, the accounts of the Capital Trust, principally
the Capital Securities previously classified as minority interest, are not
included in our consolidated balance sheet at December 31, 2003. Our $103.1
million subordinated obligation to the Capital Trust, previously eliminated in
consolidation, is recorded on our consolidated balance sheet at December 31,
2003 as a liability.
On April 19, 2002, DaVinciRe entered into a credit agreement providing for a
$100 million committed revolving credit facility. On May 10, 2002, DaVinciRe
borrowed the full $100 million available under this facility to repay $100
million of bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor
Renaissance Reinsurance is a guarantor of this facility and the lenders have no
recourse against us or our subsidiaries other than DaVinciRe and its subsidiary
under the DaVinciRe facility. Pursuant to the terms of the $400 million facility
maintained by RenaissanceRe, a default by DaVinciRe in its obligations will not
result in a default under the RenaissanceRe facility. At December 31, 2003, the
full amount was outstanding under this facility. Interest rates on the facility
are based on a spread above LIBOR, and averaged approximately 2.09% during 2003
(2002 - 2.63%). The credit agreement contains certain covenants requiring
DaVinciRe to maintain a debt to capital ratio of 30% or below and a minimum net
worth of $230 million. At December 31, 2003, DaVinciRe was in compliance with
the covenants of this agreement.
36 RENAISSANCERE HOLDINGS LTD.
Under the terms of certain reinsurance contracts, we may be required to provide
letters of credit to reinsureds in respect of reported claims and/or unearned
premiums. At December 31, 2003, we had outstanding letters of credit aggregating
$346.9 million. Also, in connection with our Top Layer Re joint venture we have
committed $37.5 million of collateral to support a letter of credit.
Our principal letter of credit facility is a $485 million syndicated secured
facility which accepts as collateral shares issued by our subsidiary RIHL. Our
participating operating subsidiaries and our managed joint ventures have pledged
(and must maintain) RIHL shares issued to them with a sufficient collateral
value to support their respective obligations under the facility, including
reimbursement obligations for outstanding letters of credit. The participating
subsidiaries and joint ventures also have the option to post alternative forms
of collateral. In addition, for liquidity purposes, each participating
subsidiary and joint venture must maintain additional unpledged RIHL shares that
have a net asset value at least equal to 15% of its facility usage, and in the
aggregate the net asset value of all unpledged RIHL shares must be maintained at
least equal to 15% of all of the outstanding RIHL shares. In the case of a
default under the facility, or in other circumstances in which the rights of our
lenders to collect on their collateral may be impaired, the lenders may exercise
certain remedies under the facility agreement, in accordance with and subject to
its terms, including redemption of pledged shares and conversion of the
collateral into cash or eligible marketable securities. The redemption of shares
by the collateral agent takes priority over any pending redemption of unpledged
shares by us or other holders. In November 2003, the term of this facility was
extended through March 31, 2004, and in January 2004, this facility was
increased to $485 million from $385 million. On March 12, 2004, we accepted a
commitment letter from Wachovia and Wachovia Securities in which Wachovia
confirmed its commitment to provide up to $150 million of an amended facility in
the amount of $585 million and having a term of 365 days from closing. Wachovia
Securities also agreed to use its reasonable best efforts to arrange for a
syndicate of lenders to provide the balance of the increased facility. The
syndication and closing of the facility are subject to customary terms and
conditions for letter of credit facilities of this type and size and Wachovia's
commitment is also subject to the receipt of commitments from other lenders for
the balance of the increased facility.
On August 8, 2003, we amended and restated our committed revolving credit
agreement to increase the facility from $310 million to $400 million and to make
certain other changes. The interest rates on this facility are based on a spread
above LIBOR. No balance was outstanding at December 31, 2003. As amended, the
agreement contains certain financial covenants. These covenants generally
provide that consolidated debt to capital shall not exceed the ratio (the "Debt
to Capital Ratio") of 0.35:1 and that the consolidated net worth (the "Net Worth
Requirements") of RenaissanceRe and Renaissance Reinsurance shall equal or
exceed $1 billion and $500 million, respectively, subject to certain adjustments
under certain circumstances in the case of the Debt to Capital Ratio and certain
grace periods in the case of the Net Worth Requirements, all as more fully set
forth in the agreement. The scheduled commitment termination date under the
amended agreement is August 8, 2006.
Our subsidiary, Glencoe U.S., had a $10.0 million term loan and $15.0 million
revolving loan facility with a syndicate of commercial banks. The term loan and
revolving credit facility were repaid in full in June 2003 in accordance with
the mandatory repayment provisions and the facility was terminated.
SHAREHOLDERS' EQUITY
During 2003, shareholders' equity increased by $692.6 million to $2.3 billion at
December 31, 2003, from $1.6 billion at December 31, 2002. The significant
components of the change in shareholders' equity included net income available
to common shareholders of $604.6 million and the issuance of $100 million Series
B preference shares.
From time to time, we have returned capital to our shareholders through share
repurchases. In August 2003, the Board authorized a share repurchase program of
$150 million. This authorization includes the remaining amounts available under
prior authorizations. No shares were repurchased during 2003 or 2002. In the
future, we may purchase shares under our current authorization, or increase the
size of our repurchase program. Any such determination will be subject to market
conditions and numerous other factors.
INVESTMENTS
At December 31, 2003, we held investments and cash totaling $4.2 billion,
compared to $3.1 billion in 2002.
The table below shows the aggregate amounts of our invested assets:
At December 31,
-------------------------------------
(in thousands) 2003 2002 2001
----------------------------------------------------------------------
Fixed maturities investments
available for sale,
at fair value ............. $2,947,841 $2,221,109 $1,282,483
Short-term investments,
at cost ................... 660,564 570,497 733,925
Other investments,
at fair value ............. 370,280 129,918 38,307
Equity investments in
reinsurance company,
at fair value ............. 145,535 120,288 --
Cash and cash equivalents ..... 63,397 87,067 139,715
--------------------------------------------------------------------------------
Total investments
and cash .......... $4,187,617 $3,128,879 $2,194,430
----------
RENAISSANCERE HOLDINGS LTD. 37
The $1.1 billion growth in our portfolio of invested assets for the year ended
December 31, 2003 resulted primarily from net cash provided by operating
activities of $820.4 million, the issuance of $100 million of 5.875% Senior
Notes and the issuance of $100 million Series B preference shares.
Because our coverages include substantial protection for damages resulting from
natural and man-made catastrophes, we may become liable for substantial claim
payments on short notice. Accordingly, our investment portfolio is structured to
preserve capital and provide a high level of liquidity which means that the
large majority of our investment portfolio consists of highly rated fixed income
securities, including U.S. Treasuries, highly-rated sovereign and supranational
securities, high-grade corporate securities and mortgage-backed and asset-backed
securities. At December 31, 2003, our invested asset portfolio of fixed
maturities and short term investments had a dollar weighted average rating of
AA, an average duration of 2.0 years and an average yield to maturity of 2.7%.
The equity investments in reinsurance company relate to our November 1, 2002
purchase of 3,960,000 common shares of Platinum in a private placement
transaction. In addition, we received ten-year warrants to purchase up to 2.5
million additional common shares of Platinum for $27.00 per share. We purchased
the common shares and warrants for an aggregate price of $84.2 million. At
December 31, 2003, we owned 9.2% of Platinum's outstanding common shares. We
have recorded our investment in Platinum at fair value, and at December 31, 2003
the aggregate fair value was $145.5 million. The aggregate unrealized gain of
$61.3 million on the Platinum investment is included in accumulated other
comprehensive income, of which $26.7 million represents our best estimate of the
value of the warrants.
At December 31, 2003, $56.4 million of cash and cash equivalents and investments
were invested in currencies other than the U.S. dollar, which represented 1.3%
of our invested assets.
A portion of our investment assets are directly held by our subsidiary RIHL, a
Bermuda company we organized for the primary purpose of holding the investments
in high quality marketable securities for RenaissanceRe, our operating
subsidiaries and certain of our joint venture affiliates. We believe that RIHL
permits us to consolidate and substantially facilitate our investment management
operations. RenaissanceRe and each of our participating operating subsidiaries
and affiliates have transferred to RIHL marketable securities or other assets,
in return for a subscription of RIHL equity interests. Each RIHL share is
redeemable by the subscribing companies for cash or in marketable securities.
Over time, the subsidiaries and joint ventures which participate in RIHL are
expected to both subscribe for additional shares and redeem outstanding shares,
as our and their respective liquidity needs change. RIHL is currently rated
AAAf/S2 by S&P.
Other investments
Included in other investments are investments in hedge funds of $170.1 million
(2002 - $61.4 million), a fund that invests in senior secured bank loans of
$77.2 million (2002 - $20.4 million), a European high yield credit fund of $38.3
million (2002 - $nil) and private equity partnerships of $24.2 million (2002 -
$14.6 million) (collectively "Investment Funds"). Also included in other
investments are investments in a medium term note, representing an interest in a
pool of European fixed income securities, of $30.0 million (2002 - $nil),
catastrophe bonds of $26.3 million (2002 - $33.5 million) and miscellaneous
investments of $4.2 million (2002 - $nil).
Fair values of Investment Funds noted above are generally established on the
basis of the net valuation criteria established by the managers of the
Investment Funds. These net valuations are determined based upon the valuation
criteria established by the governing documents of such Investment Funds. Due to
a lag in the valuations reported by the fund managers the majority of our
Investment Funds are reported on a one month or one quarter lag. Such valuations
may differ significantly from the values that would have been used had ready
markets existed for the shares, partnership interests or notes of the Investment
Funds. Many of the Investment Funds are subject to restrictions on redemptions
which are determined by the governing documents and limit the Company's ability
to liquidate these investments in the short term. Interest income, income
distributions and realized and unrealized gains and losses on other investments,
including Investment Funds, are included in net investment income and totaled
$25.9 million (2002 - loss of $0.4 million) of which $21.2 million (2002 - loss
of $1.4 million) was related to net unrealized gains (losses).
The hedge funds are engaged in various investment strategies, including event
driven, diversified arbitrage, distressed, US long/short, global long/short and
sector long/short with original capital contributed by us, generally in the
range of $5 million to $15 million per fund. The loan fund primarily invests in
senior secured floating rate loans. The medium term note is issued by an
investment company which invests predominantly in investment-grade European
fixed income securities and passes through a variable U.S. dollar return on the
note based on the performance of the underlying securities. The European high
yield credit fund is denominated in Euros and primarily invests in unlisted and
listed fixed and floating rate debt securities issued by entities that are
domiciled in or have a substantial portion of their total assets or operations
in a European country. The private equity funds are primarily engaged in U.S.
private equity, real estate, distressed securities and secondary investment
strategies with initial capital commitments ranging from $1.5 million to $15
million. Catastrophe bonds generally include variable rate notes where the
return is contingent upon climatical or geological events.
38 RENAISSANCERE HOLDINGS LTD.
We have committed capital to private equity partnerships of $109.1 million, of
which $20.3 million has been contributed at December 31, 2003.
NON-INDEMNITY INDEX TRANSACTIONS
We have assumed risk through catastrophe and derivative instruments under which
losses could be triggered by an industry loss index or geological or physical
variables. During 2003, 2002 and 2001 we recorded income (loss) on non-indemnity
catastrophe index transactions of $0.8 million, $7.2 million, and ($4.6
million). We report income (loss) from these transactions in other income.
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on us are
considered in our catastrophe loss models. The effects of inflation are also
considered in pricing and in estimating reserves for unpaid claims and claim
expenses. The actual effects of this post-event inflation on our results cannot
be accurately known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At December 31, 2003, we have not entered into any off- balance sheet
arrangements, as defined by Item 303 (a)(4) of Regulation S-K.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible
Assets." (see Cumulative Effect of a Change in Accounting Principle - Goodwill.)
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and provides transitional
disclosure requirements. For the years ended December 31, 2002 and for the prior
years, we followed Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its employee stock compensation. Effective January 1, 2003, we adopted,
prospectively, the fair value recognition provisions of SFAS 123 for all
stock-based employee compensation granted, modified or settled after January 1,
2003. Under the fair value recognition provisions of SFAS 123, we estimate the
fair value of employee stock options and other stock-based compensation on the
date of grant and amortize this value as an expense over the vesting period.
In accordance with the transitional disclosure provisions of SFAS 148, the
following table sets out the effect on our net income and earnings per share for
all reported periods had the compensation cost been calculated based upon the
fair value method recommended in SFAS 123:
Year Ended December 31,
(in thousands -------------------------------------
except per share data) 2003 2002 2001
--------------------------------------------------------------------------------
Net income available to
common shareholders,
as reported ........................ $ 604,647 $ 364,814 $ 164,366
add: stock-based employee
compensation cost
included in
determination of
net income ......................... 13,892 8,243 6,561
less: fair value
compensation cost
under SFAS 123 ..................... 19,151 22,307 22,116
--------------------------------------------------------------------------------
Pro forma net income
available to common
shareholders ....................... $ 599,388 $ 350,750 $ 148,811
Earnings per share
Basic - as reported ............ $ 8.76 $ 5.40 $ 2.76
Basic - pro forma .............. $ 8.68 $ 5.19 $ 2.50
Diluted - as reported .......... $ 8.52 $ 5.20 $ 2.63
Diluted - pro forma ............ $ 8.44 $ 5.00 $ 2.39
----------
Effective December 31, 2003, we adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 requires consolidation of all Variable Interest Entities
("VIE") by the investor that will absorb a majority of the VIE's expected losses
or residual returns. As further discussed in Note 7 to the consolidated
financial statements, the Capital Trust was determined to be a VIE under FIN 46
and has been deconsolidated effective December 31, 2003. This has resulted in
reclassifying certain balances. The adoption of FIN 46 did not have a material
impact on our financial condition and results of operations.
CURRENT OUTLOOK
Although prices in the property insurance and reinsurance markets are beginning
to decline, and the rate of increase in prices of the casualty insurance and
reinsurance markets are also beginning to decline, we believe that the principal
components of our operations continue to display strong fundamentals. (see Item
1. Business - "Industry Trends" for additional commentary about the overall
market environment.) We currently anticipate the following developments in our
business:
RENAISSANCERE HOLDINGS LTD. 39
Reinsurance segment
We expect that our property catastrophe reinsurance premium will decline because
a declining price environment will result in fewer transactions that meet our
hurdle rate. We expect that specialty reinsurance premium will continue to
increase both as a function of increasing prices and additions to our specialty
underwriting staff. In addition, we believe that our position in the reinsurance
market is increasingly strong as a result of our reputation for service, prompt
claims payments, proprietary analytic tools and financial strength.
Individual Risk segment
We expect prices in the property insurance markets to decrease in 2004, and
prices in certain specialty casualty insurance markets to continue to increase
in 2004. Accordingly, in 2004 we expect our property insurance premiums to
decrease and our premiums from the casualty insurance market to increase. Also,
we believe that our strong infrastructure, our strong credit ratings and our
financial strength will enable us to attract additional program managers who
control attractive books of business and who are currently concerned with the
credit ratings of their current insurance carriers. Because of these
opportunities, we believe that our premiums in our Individual Risk segment for
the full year 2004 will increase as compared with the total Individual Risk
premiums for 2003.
Recognizing that there are many segments of the casualty market that remain
unattractive even after recent price increases, we intend to be selective and
write business only in those segments that we believe can produce an acceptable
return on capital.
New business
The current market environment is also providing us with increased opportunities
for our joint venture and structured product initiatives. In evaluating these
initiatives, we may consider opportunities in other areas of the insurance and
reinsurance markets, or in other financial markets, either through organic
growth, the formation of new joint ventures, or the acquisition of other
companies or books of business of other companies. We are currently in the
process of reviewing certain opportunities and periodically engage in
discussions regarding possible transactions, although there can be no assurance
that we will complete any such transactions or that any such transaction would
contribute materially to our results of operations or financial condition.
CONTRACTUAL OBLIGATIONS
At December 31, 2003
---------------------------------------------------------------------------------
(in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years
-----------------------------------------------------------------------------------------------------------------------------------
Long-term debt obligations(1)
7.0% Senior Notes ...................... $202,500 $ 10,500 $ 21,000 $171,000 $ --
5.875% Senior Notes .................... 153,615 5,875 11,750 11,750 124,240
Capital Securities ..................... 297,800 8,540 17,080 17,080 255,100
DiVinciRe revolving credit facility(2) . 102,586 1,950 100,636 -- --
Private equity commitments ...................... 88,800 88,800 -- -- --
Operating lease obligations ..................... 57,623 3,363 7,192 7,580 39,488
Obligations under derivative contracts .......... 7,146 1,553 3,104 2,489 --
-----------------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations .......... $910,070 $120,581 $160,762 $209,899 $418,828
---------------------------------------------------------------------------------
(1) Includes contractual interest and dividend payments.
(2) The interest on this facility is based on a spread above LIBOR. We
reflected the interest due in 2004 and 2005 based upon the current interest
rate on the facility.
40 RENAISSANCERE HOLDINGS LTD.
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
Exchange Act of 1934. Forward-looking statements are necessarily based on
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which, with
respect to future business decisions, are subject to change. These uncertainties
and contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, us.
In particular, statements using words such as "may," "should," "estimate,"
"expect," "anticipate," "intend," "believe," "predict," "potential," or words of
similar import generally involve forward-looking statements. For example, we
have included certain forward-looking statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" with regard to trends
in results, prices, volumes, operations, investment results, margins, combined
ratios, reserves, overall market trends, risk management and exchange rates.
This 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) risks associated with implementing our business strategies and initiatives
for organic growth, including risks relating to managing that growth;
(3) risks associated with the growth of our specialty reinsurance and
Individual Risk businesses, particularly the development of our
infrastructure to support this growth;
(4) risks relating to our strategy of relying on program managers, third party
administrators, and other vendors to support our Individual Risk
operations;
(5) other risks of doing business with program managers, including the risk we
might be bound to policyholder obligations beyond our underwriting intent,
and the risk that our program managers or agents may elect not to continue
or renew their programs with us;
(6) possible challenges in maintaining our fee-based operations, including
risks associated with retaining our existing partners and attracting
potential new partners;
(7) emerging claim and coverage issues, which could expand our obligations
beyond the amount we intend to underwrite;
(8) acts of terrorism, war or political unrest;
(9) a decrease in the level of demand for our reinsurance or insurance
business, or increased competition in the industry;
(10) the inherent uncertainties in our reserving process, which we believe are
increasing as we diversify into new product classes;
(11) changes in economic conditions, including interest rate, currency, equity
and credit conditions which could affect our investment portfolio;
(12) actions of competitors, including industry consolidation, the launch of new
entrants and the development of competing financial products;
(13) extraordinary events affecting our clients, such as bankruptcies and
liquidations, and the risk that we may not retain or replace our large
clients;
(14) the lowering or loss of any of the financial or claims- paying ratings of
RenaissanceRe or of one or more of our subsidiaries or changes in the
policies or practices of the rating agencies;
(15) loss of services of any one of our key executive officers;
(16) risks relating to the collectibility of our reinsurance, including both our
Reinsurance and Individual Risk operations, as well as risks relating to
the availability of coverage from creditworthy providers;
(17) failures of our reinsurers, brokers or program managers to honor their
obligations, including their obligations to make third party payments for
which we might be liable;
(18) changes in insurance regulations in the United States ("U.S.") or other
jurisdictions in which we operate, including potential challenges to
Renaissance Reinsurance's claim of exemption from insurance regulation
under current laws, and the risk of increased global regulation of the
insurance and reinsurance industry;
(19) the passage of federal or state legislation subjecting Renaissance
Reinsurance to supervision or regulation, including additional tax
regulation, in the U.S. or other jurisdictions in which we operate; and
(20) a contention by the U.S. Internal Revenue Service that our Bermuda
subsidiaries, including Renaissance Reinsurance and Glencoe, are subject to
U.S. taxation.
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, 2003, 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.
RENAISSANCERE HOLDINGS LTD. 41
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 judgments 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 indepen- dent 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
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
RENAISSANCERE HOLDINGS LTD.
---------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsi- bility 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 consoli-dated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 2003 the
Company changed its method of accounting for stock compensation and in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young
Hamilton, Bermuda
January 30, 2004
42 RENAISSANCERE HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
RenaissanceRe Holdings Ltd. and Subsidiaries
At December 31,
---------------------------
(In thousands of United States dollars, except per share amounts) 2003 2002
-----------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity investments available for sale, at fair value
(Amortized cost $2,895,795 and $2,153,715 at December 31, 2003 and
December 31, 2002, respectively) (Note 3) ................................. $2,947,841 $2,221,109
Short term investments, at cost ............................................... 660,564 570,497
Other investments, at fair value .............................................. 370,280 129,918
Equity investments in reinsurance company, at fair value
(Cost $84,199 at December 31, 2003 and 2002) .............................. 145,535 120,288
Cash and cash equivalents ..................................................... 63,397 87,067
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS AND CASH .................................................... 4,187,617 3,128,879
Premiums receivable ........................................................... 167,996 199,449
Ceded reinsurance balances .................................................... 56,852 73,360
Losses recoverable (Note 4) ................................................... 149,201 199,533
Accrued investment income ..................................................... 22,793 25,833
Deferred acquisition costs .................................................... 75,261 55,853
Other assets .................................................................. 69,982 62,829
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS .................................................................. $4,729,702 $3,745,736
-----------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for claims and claim expenses (Note 5) ................................ $977,892 $804,795
Reserve for unearned premiums ................................................. 349,824 331,985
Debt (Note 6) ................................................................. 350,000 275,000
Subordinated obligation to capital trust (Note 7) ............................. 103,093 --
Reinsurance balances payable .................................................. 131,629 146,732
Other liabilities ............................................................. 52,123 97,013
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ............................................................. 1,964,561 1,655,525
-----------------------------------------------------------------------------------------------------------
Minority Interest - mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures of the Company
(Note 7) .................................................................. -- 84,630
Minority Interest - DaVinci (Note 8) .......................................... 430,498 363,546
SHAREHOLDERS' EQUITY (Note 9)
Preference Shares: $1.00 par value - 10,000,000 shares issued and outstanding
at December 31, 2003 (2002 - 6,000,000) ................................... 250,000 150,000
Common shares and additional paid-in capital: $1.00 par value -
70,398,699 shares issued and outstanding at December 31, 2003 -
(2002 - 69,749,826 shares) ................................................ 314,414 320,936
Unearned stock grant compensation ............................................. -- (18,468)
Accumulated other comprehensive income ........................................ 113,382 95,234
Retained earnings ............................................................. 1,656,847 1,094,333
-----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY .................................................... 2,334,643 1,642,035
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY ................. $4,729,702 $3,745,736
-----------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
RENAISSANCERE HOLDINGS LTD. 43
CONSOLIDATED STATEMENTS OF INCOME
RenaissanceRe Holdings Ltd. and Subsidiaries
Years Ended December 31,
--------------------------------------------
(In thousands of United States dollars, except per share amounts) 2003 2002 2001
----------------------------------------------------------------------------------------------------------------
REVENUES
Gross premiums written ............................................ $1,382,209 $1,173,049 $501,321
----------------------------------------------------------------------------------------------------------------
Net premiums written .............................................. $1,152,523 $923,711 $339,547
Increase in unearned premiums ..................................... (36,780) (162,806) (6,482)
----------------------------------------------------------------------------------------------------------------
Net premiums earned ............................................... 1,115,743 760,905 333,065
Net investment income (Note 3) .................................... 129,542 102,686 75,156
Net foreign exchange gains (losses) ............................... 13,631 3,861 (1,667)
Other income ...................................................... 27,070 32,821 16,244
Net realized gains on investments (Note 3) ........................ 80,504 10,177 18,096
----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES .................................................... 1,366,490 910,450 440,894
----------------------------------------------------------------------------------------------------------------
EXPENSES
Claims and claim expenses incurred (Note 5) ....................... 367,744 289,525 149,917
Acquisition expenses .............................................. 194,140 95,644 45,359
Operational expenses .............................................. 67,397 49,159 38,603
Corporate expenses ................................................ 16,043 14,327 11,485
Interest expense .................................................. 18,252 13,069 7,249
----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES .................................................... 663,576 461,724 252,613
----------------------------------------------------------------------------------------------------------------
Income before minority interest, taxes and change
in accounting principle .................................. 702,914 448,726 188,281
Minority interest - mandatorily redeemable capital securities
of a subsidiary trust holding solely junior subordinated
debentures of the Company (Note 7) ....................... (7,470) (7,605) (7,484)
Minority interest - DaVinci (Note 8) .............................. (72,014) (55,051) (751)
----------------------------------------------------------------------------------------------------------------
Income before taxes and change in accounting principle ............ 623,430 386,070 180,046
Income tax benefit (expense) (Note 14) ............................ 18 115 (14,262)
Cumulative effect of a change in accounting principle ............. -- (9,187) --
----------------------------------------------------------------------------------------------------------------
NET INCOME ........................................................ 623,448 376,998 165,784
Dividends on preference shares .................................... (18,801) (12,184) (1,418)
----------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS ....................... $604,647 $364,814 $164,366
----------------------------------------------------------------------------------------------------------------
Earnings per Common Share - basic ................................. $8.76 $5.40 $2.76
Earnings per Common Share - diluted ............................... $8.52 $5.20 $2.63
----------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
44 RENAISSANCERE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RenaissanceRe Holdings Ltd. and Subsidiaries
Years Ended December 31,
-------------------------------------------
(In thousands of United States dollars) 2003 2002 2001
----------------------------------------------------------------------------------------------------
PREFERENCE SHARES
Balance - January 1 ................................... $150,000 $150,000 $ --
Issuance of shares .................................... 100,000 -- 150,000
----------------------------------------------------------------------------------------------------
Balance - December 31 ................................. 250,000 150,000 150,000
----------------------------------------------------------------------------------------------------
COMMON SHARES AND ADDITIONAL PAID-IN CAPITAL
Balance - January 1 ................................... 320,936 264,623 22,999
Issuance of common shares ............................. -- -- 232,525
Exercise of options, and issuance of
restricted stock awards (Note 17) ..................... 15,096 10,675 14,652
Offering expenses ..................................... (3,150) (73) (5,553)
Cumulative effect of change in accounting for
unearned stock grant compensation (Note 17) ........ (18,468) -- --
Stock dividend ........................................ -- 45,711 --
----------------------------------------------------------------------------------------------------
Balance - December 31 ................................. 314,414 320,936 264,623
----------------------------------------------------------------------------------------------------
UNEARNED STOCK GRANT COMPENSATION
Balance - January 1 ................................... (18,468) (20,163) (11,716)
Cumulative effect of change in accounting for
unearned stock grant compensation (Note 17) ........ 18,468 -- --
Net stock grants awarded, cancelled ................... -- (7,607) (15,653)
Amortization .......................................... -- 9,302 7,206
----------------------------------------------------------------------------------------------------
Balance - December 31 ................................. -- (18,468) (20,163)
----------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance - January 1 ................................... 95,234 16,295 6,831
Net unrealized gains on securities, net of
adjustment (see disclosure below) ..................... 18,148 78,939 9,464
----------------------------------------------------------------------------------------------------
Balance - December 31 ................................. 113,382 95,234 16,295
----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance - January 1 ................................... 1,094,333 814,269 682,704
Net income ............................................ 623,448 376,998 165,784
Dividends paid on common shares ....................... (42,133) (39,039) (32,801)
Dividends paid on preference shares ................... (18,801) (12,184) (1,418)
Stock dividend ........................................ -- (45,711) --
----------------------------------------------------------------------------------------------------
Balance - December 31 ................................. 1,656,847 1,094,333 814,269
----------------------------------------------------------------------------------------------------
Total Shareholders' Equity ............................ $2,334,643 $1,642,035 $1,225,024
----------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net income ............................................ $623,448 $376,998 $165,784
Other comprehensive income ............................ 18,148 78,939 9,464
----------------------------------------------------------------------------------------------------
Comprehensive income .................................. $641,596 $455,937 $175,248
----------------------------------------------------------------------------------------------------
DISCLOSURE REGARDING NET UNREALIZED GAINS
Net unrealized holding gains arising during the year .. $98,652 $89,116 $27,560
Net realized gains included in net income ............. (80,504) (10,177) (18,096)
----------------------------------------------------------------------------------------------------
Net unrealized gains on securities .................... $18,148 $78,939 $9,464
----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
RENAISSANCERE HOLDINGS LTD. 45
CONSOLIDATED STATEMENTS OF CASH FLOWS
RenaissanceRe Holdings Ltd. and Subsidiaries
Years Ended December 31,
-------------------------------------------
(In thousands of United States dollars) 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income .............................................................. $ 623,448 $ 376,998 $ 165,784
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization and depreciation ........................................ 13,091 19,041 3,190
Unrealized losses (gains) included in net investment income .......... (21,230) 1,412 --
Net realized investment gains ........................................ (80,504) (10,177) (18,096)
Minority interest in undistributed net income of DaVinci ............. 72,014 55,051 751
Change in:
Premiums receivable ............................................... 31,453 (97,247) (6,780)
Ceded reinsurance balances ........................................ 16,508 (21,780) (4,169)
Reserve for claims and claim expenses, net ........................ 223,429 231,236 119,314
Reserve for unearned premiums ..................................... 17,839 186,124 12,513
Deferred acquisition costs ........................................ (19,408) (50,015) (4,215)
Reinsurance balances payable ...................................... (15,103) 30,765 65,188
Other ............................................................. (41,128) 57,018 8,002
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ......................... 820,409 778,426 341,482
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sales of investments available for sale ................... 12,507,381 5,775,865 3,290,264
Purchases of investments available for sale ............................. (13,155,414) (6,727,950) (3,633,332)
Net purchases of short-term investments ................................. (90,067) 166,428 (720,170)
Net purchases of other investments ...................................... (216,039) -- --
Equity investments in reinsurance company ............................... -- (84,199) --
Acquisition of subsidiary, net of cash acquired ......................... -- (23,495) --
------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ....................... (954,139) (893,351) (1,063,238)
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Issuance of debt, net of expenses ....................................... 99,144 100,000 148,868
Issuance of preference shares, net of expenses .......................... 96,850 -- 145,275
Payment of bank loan .................................................... (25,000) (8,500) (16,500)
Dividends paid - Common Shares .......................................... (42,133) (39,039) (32,801)
Dividends paid - Preference Shares ...................................... (18,801) (12,184) (1,418)
Net increase in minority interests ...................................... -- 22,000 274,951
Issuance of common shares, net of expenses .............................. -- -- 232,525
------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................ 110,060 62,277 750,900
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .................... (23,670) (52,648) 29,144
Cash and cash equivalents, beginning of year ............................ 87,067 139,715 110,571
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year .................................. $ 63,397 $ 87,067 $ 139,715
------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
46 RENAISSANCERE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RenaissanceRe Holdings Ltd. and Subsidiaries
December 31, 2003 (amounts in tables expressed in thousands of United States
dollars, except per share amounts)
--------------------------------------------------------------------------------
NOTE 1. ORGANIZATION
--------------------------------------------------------------------------------
RenaissanceRe Holdings Ltd. ("RenaissanceRe", or the "Company"), was formed
under the laws of Bermuda on June 7, 1993. Through its subsidiaries, the Company
provides reinsurance and insurance to a broad range of customers.
o Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") is the Company's
principal subsidiary and provides property catastrophe and specialty
reinsurance coverage to insurers and reinsurers on a worldwide basis.
o The Company also manages property catastrophe reinsurance written on behalf
of joint ventures, principally including Top Layer Reinsurance Ltd. ("Top
Layer Re") and DaVinci Reinsurance Ltd. ("DaVinci"). The results of
DaVinci, and the results of DaVinci's parent, DaVinciRe Holdings Ltd.
("DaVinciRe"), are consol- idated in the Company's financial statements
(Note 8). Renaissance Underwriting Managers, Ltd., a wholly- owned
subsidiary, acts as exclusive underwriting manager for these joint ventures
in return for fee-based income and profit participation.
o The Company's Individual Risk operations include direct insurance written
on both an admitted basis through Stonington Insurance Company
("Stonington") and on an excess and surplus lines basis through Glencoe
Insur- ance Ltd. ("Glencoe") and Lantana Insurance Ltd. ("Lantana"), and
also provide reinsurance coverage, principally on a quota share basis,
which is analyzed on an Individual Risk basis.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP") and
include the accounts of RenaissanceRe and its wholly-owned and majority-owned
subsidiaries and DaVinciRe, which are collectively referred to herein as the
"Company." All intercompany transactions and balances have been eliminated on
consolidation. Certain prior year comparatives have been reclassified to conform
to current presentations. Minority interest represents the interests of external
parties in respect of net income and shareholders' equity of DaVinciRe, and, for
periods prior to December 31, 2003, the interests of external parties in respect
of net income and shareholders' equity of RenaissanceRe Capital Trust (the
"Capital Trust") (Note 7).
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported and
disclosed amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ materially from those estimates. The most significant accounting judgment
made by management is the estimation of reserves for claims and claim expense.
Other material accounting judgments made by management include the estimation of
certain written premiums.
PREMIUMS AND RELATED EXPENSES
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on contract and policy terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserves for unearned premiums represents the portion of
premiums written that relate to the unexpired terms of contracts and policies in
force. Such reserves are computed by pro-rata methods based on statistical data
or reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim expenses, based on
historical and current experience, and anticipated investment income related to
those premiums are considered in determining the recoverability of deferred
acquisition costs.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management.
CLAIMS AND CLAIM EXPENSES
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim
RENAISSANCERE HOLDINGS LTD. 47
severity and frequency and other factors which could vary significantly as
claims are settled. Also, the Company has recently increased its specialty
reinsurance and Individual Risk premiums, but does not have the benefit of a
significant amount of its own historical experience in these lines of business.
Accordingly, the setting and reserving for incurred losses in these lines of
business could be subject to greater variability.
Ultimate losses may vary materially from the amounts provided in the
consolidated financial statements. These estimates are reviewed regularly and,
as experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in the
consolidated statement of income in the period in which they become known and
are accounted for as changes in estimates.
INVESTMENTS AND CASH
Investments in fixed maturities and the equity investments in reinsurance
company are classified as available for sale and are reported at fair value. The
net unrealized appreciation or depreciation on these investments is included in
accumulated other comprehensive income. Investment transactions are recorded on
the trade date with balances pending settlement reflected in the balance sheet
as a component of other assets or other liabilities.
Realized gains or losses on the sale of investments are determined on the basis
of the specific identification method and include adjustments to the cost basis
of investments for declines in value that are considered to be other-than-
temporary. Net investment income includes interest and dividend income together
with amortization of market premiums and discounts and is net of investment
management and custody fees. The amortization of premium and accretion of
discount for fixed maturity securities is computed using the interest method.
The effective yield used in the interest method is adjusted when sufficient
information exists to estimate the probability and timing of prepayments. Fair
values of investments are based on quoted market prices, or when such prices are
not available, by reference to broker or underwriter bid indications and/or
internal pricing valuation techniques.
Short term investments, which are managed as part of the Company's investment
portfolio and have a maturity of one year or less when purchased, are carried at
cost which approximates fair value. Cash equivalents include money market
instruments with a maturity of ninety days or less when purchased.
Other investments are carried at fair value with interest and dividend income,
income distributions and realized and unrealized gains and losses included in
net investment income.
During 2003, the Company changed the classification of equity appreciation on
certain hedge funds and private equity funds previously recorded as realized
gains and losses. The equity appreciation on these investments has been
reclassified to net investment income for all periods presented.
GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). In the
second quarter of 2002, the Company completed its initial impairment review in
compliance with the transition provisions of SFAS 142 and, as a result, the
Company decided to reflect goodwill at zero value, the low end of an estimated
range of values. In accordance with the provisions of SFAS 142, this is required
to be reflected as a cumulative effect of a change in accounting principle in
the statement of income and is required to be reflected as if this adjustment
was recorded in the first quarter of 2002.
EARNINGS PER SHARE
Basic earnings per share is based on weighted average common shares and excludes
any dilutive effects of options and restricted stock. Diluted earnings per share
assumes the exercise of all dilutive stock options and restricted stock grants.
FOREIGN EXCHANGE
The Company's functional currency is the United States dollar. Revenues and
expenses denominated in foreign currencies are translated at the prevailing
exchange rate at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are translated at exchange rates in effect at
the balance sheet date, which may result in the recognition of exchange gains or
losses which are included in the determination of net income.
VARIABLE INTEREST ENTITIES
Effective December 31, 2003, the Company adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51"
("FIN 46"). FIN 46 requires consolidation of all Variable Interest Entities
("VIE") by the investor that will absorb a majority of the VIE's expected losses
or residual returns. As further discussed in Note 7, the Capital Trust was
determined to be a VIE under FIN 46 and has been deconsolidated effective
December 31, 2003. This has resulted in reclassifying certain balances. The
adoption of FIN 46 did not have a material impact on the Company's financial
condition and results of operations.
STOCK INCENTIVE COMPENSATION PLANS
For the year ended December 31, 2002 and for the prior years, the Company
followed Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related interpretations in accounting for
its employee stock compensation. Effective January 1, 2003, the Company adopted,
prospectively, the fair value recognition provisions of SFAS 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), for all stock-based employee
compensation granted, modified or settled after January 1, 2003. Under the fair
value recognition provisions of SFAS 123, the Company estimates the fair value
of employee stock options and other stock-based compensation on the date of
grant and amortizes this value as an expense over the vesting period (see Note
17).
48 RENAISSANCERE HOLDINGS LTD.
During 2003, as a result of the Company's adoption of SFAS 123, the value of the
restricted stock grants awarded are no longer reflected as unearned stock grant
compensation as a separate component of shareholders' equity. Accordingly the
balance of unearned stock grant compensation of $18.5 million at January 1, 2003
has been reclassified from its separate account in shareholders' equity and
reflected as a reduction in additional paid-in capital.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS 123
and provides transitional disclosure requirements. In accordance with the
transitional disclosure provisions of SFAS 148, the following table sets out the
effect on the Company's net income and earnings per share for all reported
periods had the compensation cost been calculated based upon the fair value
method recommended in SFAS 123:
Year ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------
Net income available to common shareholders, as reported .... $604,647 $364,814 $164,366
add: stock-based employee compensation cost included in
determination of net income ........................ 13,892 8,243 6,561
less: fair value compensation cost under SFAS 123 ........... 19,151 22,307 21,116
------------------------------------------------------------------------------------------------------
Pro forma net income available to common shareholders ....... $599,388 $350,750 $148,811
Earnings per share
Basic - as reported ................................ $ 8.76 $ 5.40 $ 2.76
Basic - pro forma .................................. $ 8.68 $ 5.19 $ 2.50
Diluted - as reported .............................. $ 8.52 $ 5.20 $ 2.63
Diluted - pro forma ................................ $ 8.44 $ 5.00 $ 2.39
--------
TAXATION
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance against the deferred tax asset is provided for if and when the Company
believes that a portion of the deferred tax asset may not be realized in the
near term.
NOTE 3. INVESTMENTS
--------------------------------------------------------------------------------
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
Gross unrealized Gross unrealized
At December 31, 2003 Amortized cost gains losses Fair value
----------------------------------------------------------------------------------------------------------
U.S. treasuries and agencies . $ 797,229 $ 2,385 $ (303) $ 799,311
Non-U.S. government .......... 281,231 9,726 (600) 290,357
Corporate .................... 810,078 39,027 (2,729) 846,376
Mortgage-backed .............. 213,491 2,350 (478) 215,363
Asset-backed ................. 793,766 3,556 (888) 796,434
----------------------------------------------------------------------------------------------------------
$ 2,895,795 $ 57,044 $ (4,998) $ 2,947,841
----------- ----------- ----------- -----------
Gross unrealized Gross unrealized
At December 31, 2002 Amortized cost gains losses Fair value
----------------------------------------------------------------------------------------------------------
U.S. treasuries and agencies . $ 644,826 $ 14,647 $ (122) $ 659,351
Non-U.S. government .......... 367,638 13,507 (1,473) 379,672
Corporate .................... 536,053 29,235 (3,943) 561,345
Mortgage-backed .............. 292,551 9,106 (25) 301,632
Asset-backed ................. 312,647 6,567 (105) 319,109
----------------------------------------------------------------------------------------------------------
$ 2,153,715 $ 73,062 $ (5,668) $ 2,221,109
----------- ----------- ----------- -----------
RENAISSANCERE HOLDINGS LTD. 49
Contractual maturities of fixed maturity securities are shown below. Expected
maturities will differ from contractual matu-rities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
At December 31, 2003 Amortized cost Fair value
--------------------------------------------------------------------------
Due in less than one year ............... $ 24,248 $ 24,912
Due after one through five years ........ 1,456,758 1,469,428
Due after five through ten years ........ 276,117 296,796
Due after ten years ..................... 131,415 144,908
Mortgage-backed ......................... 213,491 215,363
Asset-backed ............................ 793,766 796,434
--------------------------------------------------------------------------
Total $2,895,795 $2,947,841
NET INVESTMENT INCOME
The components of net investment income are as follows:
Year ended December 31, 2003 2002 2001
--------------------------------------------------------------------------
Fixed maturities .................... $ 100,666 $ 91,784 $ 65,168
Short term investments .............. 8,158 11,137 7,785
Cash and cash equivalents ........... 1,852 3,238 3,285
Dividends on equity investments
in reinsurance company ........... 950 -- --
Other investments ................... 25,920 (383) 955
--------------------------------------------------------------------------
137,546 105,776 77,193
Investment expenses ................. 8,004 3,090 2,037
--------------------------------------------------------------------------
Net investment income ............... $ 129,542 $ 102,686 $ 75,156
---------
The analysis of realized gains (losses) and the change in unrealized gains on
investments is as follows:
Year ended December 31, 2003 2002 2001
--------------------------------------------------------------------------
Gross realized gains .............. $ 114,834 $ 67,294 $ 78,247
Gross realized losses ............. (34,330) (57,117) (60,151)
--------------------------------------------------------------------------
Net realized gains on investments . 80,504 10,177 18,096
Change in unrealized gains ........ 18,148 78,939 9,464
--------------------------------------------------------------------------
Total realized and change
in unrealized gains
on investments .................. $ 98,652 $ 89,116 $ 27,560
---------
At December 31, 2003 $36.8 million of cash and investments at fair value were on
deposit with, or in trust accounts for the benefit of, various regulatory
authorities as required by law (2002 - $29.7 million).
OTHER INVESTMENTS
Included in other investments are investments in hedge funds of $170.1 million
(2002 - $61.4 million), a fund that invests in senior secured bank loans of
$77.2 million (2002 - $20.4 million), a European high yield credit fund of $38.3
million (2002 - $nil) and private equity partnerships of $24.2 million (2002 -
$14.6 million) (collectively "Investment Funds").
Also included in other investments are investments in a medium term note,
representing an interest in a pool of European fixed income securities, of $30.0
million (2002 - $nil), catastrophe bonds of $26.3 million (2002 - $33.5
million), and miscellaneous investments of $4.2 million (2002 - $nil).
Fair values of Investment Funds are generally established on the basis of the
net valuation criteria established by the managers of the Investment Funds.
These net valuations are determined based upon the valuation criteria
established by the governing documents of such Investment Funds. Due to a lag in
the valuations reported by the fund managers the majority of our Investment
Funds are reported on a one month or one quarter lag. Such valuations may differ
significantly from the values that would have been used had ready markets
existed for the shares, partnership interests or notes of the Investment Funds.
Many of the Investment Funds are subject to restrictions on redemptions which
are determined by the governing documents and limit the Company's ability to
liquidate these investments in the short term. Interest income, income
distributions and realized and unrealized gains and losses on other investments,
including Investment Funds, are included in net investment income and totaled
$25.9 million (2002 - a loss of $0.4 million) of which $21.2 million (2002 -
loss of $1.4 million) was related to net unrealized gains (losses).
The Company has committed capital to private equity partnerships of $109.1
million, of which $20.3 million has been contributed at December 31, 2003.
EQUITY INVESTMENTS IN REINSURANCE COMPANY
On November 1, 2002, the Company purchased 3,960,000 common shares of Platinum
Underwriters Holdings, Ltd. ("Platinum") in a private placement transaction and
received ten-year warrants to purchase up to 2.5 million additional common
shares of Platinum for $27.00 per share. The Company purchased the common shares
and warrants for an aggregate price of $84.2 million. At December 31, 2003, the
Company owns 9.2% of Platinum's outstanding common shares. The Company records
its investments in Platinum at fair value, and at December 31, 2003 the
aggregate fair value was $145.5 million (2002 - $120.3 million). The aggregate
unrealized gain of $61.3 million (2002 - $36.1 million) is included in
accumulated other comprehensive income and includes $26.7 million (2002 - $15.9
million) of value estimated for the warrants using the Black-Scholes option
pricing model.
DERIVATIVES RELATED TO PHYSICAL VARIABLES
The Company has assumed and ceded risk through catastrophe linked securities and
derivative instruments under which losses or recoveries are triggered by an
industry loss index or geological or physical variables. During 2003, 2002 and
2001, the Company recognized gains on these contracts of $0.8 million, $7.2
million, and a loss of $4.6 million, respectively, which are included in other
income.
50 RENAISSANCERE HOLDINGS LTD.
CREDIT DEFAULT SWAPS
From time to time the Company invests in credit default swaps. The Company
accounts for these credit derivatives at fair value and records them on its
consolidated balance sheet as other assets or other liabilities depending on the
rights or obligations. The fair value of these credit derivatives, as recognized
in other liabilities in our balance sheet, at December 31, 2003 was a liability
of $3.5 million. During 2003, we recorded losses of $4.2 million in our
consolidated statement of income, including the $3.5 million liability on the
balance sheet at December 31, 2003.
NOTE 4. CEDED REINSURANCE
--------------------------------------------------------------------------------
The Company uses reinsurance to reduce its exposure to large losses. The Company
currently has in place contracts that provide for recovery of a portion of
certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. The Company would remain liable to the extent
that any reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $246.0 million, $218.0 million and $155.7
million for 2003, 2002 and 2001, respectively.
Other than loss recoveries, certain of the Company's ceded reinsurance contracts
also provide for recoveries of additional premiums, reinstatement premiums and
lost no claims bonuses, which are incurred when losses are ceded to reinsurance
contracts. Total recoveries netted against premiums and claims and claim
expenses incurred were $21.6 million, $63.0 million and $160.4 million for 2003,
2002 and 2001, respectively. At December 31, 2003, the Company has recorded a
$11.6 million valuation allowance against losses recoverable (2002 - $7.8
million).
NOTE 5. RESERVE FOR CLAIMS AND CLAIM EXPENSES
--------------------------------------------------------------------------------
For the Company's Reinsurance operations, estimates of claims and claim expenses
are based in part upon the estimation of claims resulting from catastrophic
events. Estimation by the Company of claims resulting from catastrophic events
is inherently difficult because of the potential severity of property
catastrophe claims. Additionally, the Company has recently increased its
Individual Risk and specialty reinsurance premiums but does not have the benefit
of a significant amount of its own historical experience in these lines.
Therefore, the Company uses both proprietary and commercially available models,
as well as historical reinsurance industry property catastrophe claims
experience, for purposes of evaluating future trends and providing an estimate
of ultimate claims costs.
For both the Company's Reinsurance and Individual Risk operations, the Company
uses statistical and actuarial methods to estimate ultimate expected claims and
claim expenses. The period of time from the reporting of a loss to the Company
and the settlement of the Company's liability may be several years. During this
period, additional facts and trends will be revealed. As these factors become
apparent, case reserves will be adjusted, sometimes requiring an increase or
decrease in the overall reserves of the Company, and at other times requiring a
reallocation of incurred but not reported ("IBNR") reserves to specific case
reserves. These estimates are reviewed regularly, and such adjustments, if any,
are reflected in results of operations in the period in which they become known
and are accounted for as changes in estimates. Adjustments to the Company's
claims and claim expense reserves can impact current year net income by either
increasing net income if the estimates of prior year claims and claim expense
reserves prove to be overstated or by decreasing net income if the estimates of
prior year claims and claim expense reserves prove to be insufficient.
Activity in the liability for unpaid claims and claim expenses is summarized as
follows:
Year ended December 31, 2003 2002 2001
------------------------------------------------------------------------
Net reserves as of January 1 .... $ 605,262 $ 355,321 $ 237,014
Net reserves assumed (released)
in acquisition (sale)
of subsidiary ................ (2,090) 33,579 --
Net incurred related to:
Current year ................. 462,816 291,520 165,914
Prior years .................. (95,072) (1,995) (15,997)
------------------------------------------------------------------------
Total net incurred .............. 367,744 289,525 149,917
------------------------------------------------------------------------
Net paid related to:
Current year ................. 61,770 10,017 20,470
Prior years .................. 80,455 63,146 11,140
------------------------------------------------------------------------
Total net paid .................. 142,225 73,163 31,610
------------------------------------------------------------------------
Total net reserves as of
December 31 .................. 828,691 605,262 355,321
Losses recoverable as of
December 31 .................. 149,201 199,533 217,556
------------------------------------------------------------------------
Total gross reserves as of
December 31 .................. $ 977,892 $ 804,795 $ 572,877
-----------
The prior year favorable development in 2003 was due primarily to the reduced
level of payment and loss activity associated with our property catastrophe
reserves from older accident years. The prior year favorable development in 2001
was due primarily to net additional recoveries on 1999 property catastrophe loss
events. The Company's total gross reserve for IBNR claims was $596.6 million at
December 31, 2003 (2002 - $462.9 million).
RENAISSANCERE HOLDINGS LTD. 51
Claims and claim expenses incurred were reduced by $23.0 million during 2003
(2002 - $15.0 million) related to income earned on an assumed reinsurance
contract that is classified as an underwriting-risk only deposit contract. A
deposit liability of $80.0 million is included in reinsurance balances payable
at December 31, 2003 (2002 - $103.0 million).
NOTE 6. DEBT
--------------------------------------------------------------------------------
In January 2003, the Company issued $100 million of 5.875% Senior Notes due
February 15, 2013, with interest on the notes payable on February 15 and August
15 of each year, commencing August 15, 2003. In July 2001, the Company issued
$150 million of 7.0% Senior Notes due July 15, 2008 with interest on the notes
payable on January 15 and July 15 of each year. The notes can be redeemed by the
Company prior to maturity subject to payment of a "make-whole" premium; however,
the Company has no current intentions of calling the notes. The notes, which are
senior obligations, contain various covenants, including limitations on mergers
and consolidations, restriction as to the disposition of stock of designated
subsidiaries and limitations on liens on the stock of designated subsidiaries.
The Company was in compliance with the related covenants at December 31, 2003
and 2002. At December 31, 2003, the fair value of the 5.875% Senior Notes was
$103.1 million and the fair value of the 7.0% Senior Notes was $167.7 million
(2002 - $164.0 million).
In April 2002, DaVinciRe entered into a credit agreement providing for a $100
million committed revolving credit facility. In May 2002, DaVinciRe borrowed the
full $100 million available under this facility to repay $100 million bridge
financing provided by RenaissanceRe. Neither RenaissanceRe nor Renaissance
Reinsurance is a guarantor of this facility and the lenders have no recourse
against RenaissanceRe or its subsidiaries other than DaVinciRe under this
facility. Pursuant to the terms of the $400 million credit facility maintained
by RenaissanceRe, a default by DaVinciRe on its obligations will not result in a
default under the RenaissanceRe facility (see below). At December 31, 2003, the
full amount was outstanding under the DaVinciRe facility and the fair value
approximated the carrying value. Interest rates on the facility are based on a
spread above LIBOR, and averaged approximately 2.09% during 2003 (2002 - 2.63%).
The credit agreement contains certain covenants requiring DaVinciRe to maintain
a debt to capital ratio of 30% or below and a minimum net worth of $230 million.
At December 31, 2003, DaVinciRe was in compliance with the covenants of this
agreement.
On August 8, 2003, RenaissanceRe amended and restated its committed revolving
credit agreement to increase the facility from $310 million to $400 million and
to make cer tain other changes. The interest rates on this facility are based on
a spread above LIBOR. No balance was outstanding at December 31, 2003. As
amended, the agreement contains certain financial covenants. These covenants
generally provide that consolidated debt to capital shall not exceed the ratio
(the "Debt to Capital Ratio") of 0.35:1 and that the consolidated net worth (the
"Net Worth Requirements") of RenaissanceRe and Renaissance Reinsurance shall
equal or exceed $1 billion and $500 million, respectively, subject to certain
adjustments under certain circumstances in the case of the Debt to Capital Ratio
and certain grace periods in the case of the Net Worth Requirements, all as more
fully set forth in the agreement. The scheduled commitment termination date
under the amended agreement is August 8, 2006.
Glencoe U.S. had a $10 million term loan and a $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
were based upon a spread above LIBOR, and averaged 1.85% during 2003 (2002 -
2.35%). The outstanding balances of the term loan and revolving credit facility,
totaling $25 million, were repaid in full in June 2003 and the term loan and
revolving loan facility were terminated.
Aggregate interest payments on the above debt totaled $15.9 million, $12.9
million and $1.0 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
NOTE 7. SUBORDINATED OBLIGATION TO CAPITAL TRUST (CAPITAL SECURITIES)
--------------------------------------------------------------------------------
In March 1997, the Company issued $100 million aggregate liquidation amount of
mandatorily redeemable capital securities ("Capital Securities") through a
subsidiary trust holding solely $103.1 million of the Company's 8.54% junior
subordinated debentures due March 1, 2027. The Capital Securities pay cumulative
cash distributions at an annual rate of 8.54%, payable semi-annually. The
Capital Trust is a wholly-owned subsidiary of the Company and was consolidated
into the Company's consolidated financial statements up until the Company's
adoption of FIN 46 at December 31, 2003. For periods prior to the adoption of
FIN 46, the Capital Securities and the related dividends are reflected in the
consolidated financial statements as a minority interest. The Company's
guarantee of the distributions on the Capital Securities issued by the Capital
Trust, when taken together with the Company's obligations under an expense
reimbursement agreement with the Capital Trust, provides full and unconditional
guarantee of amounts due on the Capital Securities issued by the Capital Trust.
Upon the adoption of FIN 46 at December 31, 2003, the Capital Trust was
determined to be a variable interest entity and the Company was determined not
to be the primary beneficiary of the Capital Trust. Accordingly the Capital
Trust was deconsolidated from the Company's consolidated financial statements at
December 31, 2003. As a result, the balance of
52 RENAISSANCERE HOLDINGS LTD.
the Capital Securities, previously classified as minority interest, has been
reclassified in the Company's consolidated balance sheet at December 31, 2003
and the $103.1 million subordinated obligation to the Capital Trust is
recognized on the Company's consolidated balance sheet at December 31, 2003 as a
liability. In addition, equity interests in the Capital Trust and purchased
Capital Securities held by the Company are included in investments at December
31, 2003. These investments include $15.4 million of Capital Securities
purchased by the Company and $3.1 million of common stock issued by the Capital
Trust to the Company in March 1997, both of which are eliminated on
consolidation for periods prior to the adoption of FIN 46 on December 31, 2003.
The adjustments required to deconsolidate the Capital Trust represent
reclassifications and there was no impact on consolidated net income.
During 2003, the Company did not purchase any Capital Securities (2002 - $3.0
million). The Company has purchased an aggregate $15.4 million of the Capital
Securities since their issuance in 1997.
NOTE 8. MINORITY INTEREST
--------------------------------------------------------------------------------
In October 2001, the Company formed DaVinciRe and DaVinci with other equity
investors. RenaissanceRe owns a minority economic interest in DaVinciRe;
however, because RenaissanceRe controls a majority of DaVinciRe's outstanding
voting rights, the consolidated financial statements of DaVinciRe are included
in the consolidated financial statements of the Company. The 75% portion of
DaVinciRe's earnings and shareholders' equity held by third parties is recorded
in the consolidated financial statements as minority interest.
NOTE 9. SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
The aggregate authorized capital of the Company is 325,000,000 shares consisting
of 225,000,000 common shares and 100,000,000 preference shares. The Company's
225,000,000 authorized $1.00 par value common shares consist of three separate
series with differing voting rights as follows:
Remaining
At December 31, 2003 authorized Outstanding
----------------------------------------------------------------------------
Full Voting Common Shares
(includes all shares registered and
available to the public) ............ 127,971,133 66,849,099
Diluted Voting Class I
Common Shares ....................... 10,224,185 3,549,600
Diluted Voting Class II
Common Shares ....................... 185,532 --
----------------------------------------------------------------------------
138,380,850 70,398,699
In October 2001, the Company issued 7.5 million common shares for proceeds, net
of fees, discounts and commissions, of $232.5 million. Costs associated with the
sale of the shares of $3.2 million were deducted from the related proceeds. The
net amount received in excess of common share par value was recorded in
additional paid-in capital.
In February 2003, the Company raised $100 million through the issuance of
4,000,000 Series B preference shares at $25 per share, and in November 2001, the
Company raised $150 million through the issuance of 6,000,000 Series A
preference shares at $25 per share. The Series B and Series A preference shares
may be redeemed at $25 per share at the Company's option on or after February 4,
2008 and November 19, 2006, respectively. Dividends on the Series B and Series A
preference shares are cumulative from the date of original issuance and are
payable quarterly in arrears at 7.3% and 8.1%, respectively, when, if, and as
declared by the Board of Directors. If the Company submits a proposal to its
shareholders concerning an amalgamation or submits any proposal that, as a
result of any changes to Bermuda law, requires approval of the holders of these
preference shares to vote as a single class, the Company may redeem the Series B
and Series A preference shares prior to February 4, 2008 and November 19, 2006,
respectively, at $26 per share. The preference shares have no stated maturity
and are not convertible into any other securities of the Company.
The Diluted Voting shareholders vote together with the common shareholders. The
Diluted Voting I Shares are limited to a fixed voting interest in the Company of
up to 9.9% on most corporate matters. The Diluted Voting shareholders are
entitled to the same rights, including receipt of dividends and the right to
vote on certain significant corporate matters, and are subject to the same
restrictions as the common shareholders. During 2001, $0.9 million of the
Diluted Voting I Shares were sold pursuant to shelf registrations on Form S-3.
The Diluted Voting I Shares sold were subsequently converted into common shares.
The Company currently does not intend to register or list the Diluted Voting
Shares on the New York Stock Exchange.
In August 2003, the Board authorized a share repurchase program of $150 million.
This authorization includes the remaining amounts available under prior
authorizations. The Company's decision to repurchase common shares will depend
on, among other matters, the market price of the common shares and the capital
requirements of the Company. No shares were repurchased during 2003, 2002 or
2001. Common shares repurchased by the Company are normally cancelled and
retired.
NOTE 10. EARNINGS PER SHARE
--------------------------------------------------------------------------------
The Company uses SFAS 128, "Earnings per Share" to account for its weighted
average shares. The numerator in both the Company's basic and diluted earnings
per share calculations
RENAISSANCERE HOLDINGS LTD. 53
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 at December 31, 2003 2002 2001
----------------------------------------------------------------------
Weighted average shares - basic ............ 69,039 67,555 59,490
Per share equivalents of employee stock
options and restricted shares ........... 1,963 2,656 2,901
----------------------------------------------------------------------
Weighted average shares - diluted .......... 71,002 70,211 62,391
--------
NOTE 11. RELATED PARTY TRANSACTIONS
AND MAJOR CUSTOMERS
--------------------------------------------------------------------------------
Other assets include the Company's investment in Top Layer Re of $34.9 million
(2002 - $36.1 million), which is 50% owned by Renaissance Reinsurance and is
carried using the equity method. The Company's earnings from Top Layer Re
totaled $21.2 million for the year ended December 31, 2003 (2002 - $22.3
million) and are included in other income. During 2003, the Company also
received distributions from Top Layer Re of $22.4 million (2002 - $9.7 million),
and a management fee of $3.0 million (2002 - $2.9 million).
During the years ended December 31, 2003, 2002 and 2001, the Company received
80.4%, 71.1% and 76.9%, respectively, of its reinsurance premium assumed from
four reinsurance brokers. Subsidiaries and affiliates of Marsh Inc., the
Benfield Group Limited, the Willis Group and AON Corporation accounted for
approximately 24.7%, 24.4%, 15.7% and 15.6%, respectively, of the Reinsurance
segment's gross premiums written in 2003.
NOTE 12. GOODWILL
--------------------------------------------------------------------------------
In connection with the Company's adoption of SFAS 142, the Company wrote-off the
balance of its goodwill during the second quarter of 2002, which totaled $9.2
million. As required by SFAS 142, this charge has been reflected in the
statement of income as a cumulative effect of a change in accounting principle.
The following table sets forth the effect of goodwill amortization on
comparative period earnings:
Year ended December 31, 2001
---------------------------------------------------------
Net income available to common
shareholders, as reported ................ $164,366
Add back: goodwill amortization expense .... 557
---------------------------------------------------------
Adjusted net income available to
common shareholders ..................... $164,923
Average common shares outstanding - basic .. 59,490
Average common shares outstanding - diluted. 62,391
Adjusted per common share data
Earnings per common share - basic ....... $ 2.77
Earnings per common share - diluted ..... $ 2.64
NOTE 13. DIVIDENDS
--------------------------------------------------------------------------------
Dividends declared and paid on Common Shares amounted to $0.60, $0.57 and $0.53
per common share for the years ended December 31, 2003, 2002, and 2001,
respectively.
During the second quarter of 2002, RenaissanceRe effected a three-for-one stock
split through a stock dividend of two additional common shares for each common
share owned. All of the common share and per common share information provided
in these financial statements is presented as if the stock dividend had occurred
for all periods.
The total amount of dividends paid to holders of the common shares during 2003,
2002 and 2001 was $42.1 million, $39.0 million and $32.8 million, respectively.
NOTE 14. TAXATION
--------------------------------------------------------------------------------
Under current Bermuda law, the Company is not required to pay taxes in Bermuda
on either income or capital gains. Income from the Company's U.S.-based
subsidiaries is subject to taxes imposed by U.S. authorities. Renaissance
Reinsurance of Europe is subject to the taxation laws of Ireland.
Income tax expense (benefit) for 2003, 2002 and 2001 is comprised as follows:
Year ended December 31, 2003 Current Deferred Total
-------------------------------------------------------------------
U.S. federal ................... $ -- $(18) $(18)
U.S. state and local ........... -- -- --
-------------------------------------------------------------------
$ -- $(18) $(18)
----------------------------------
-------------------------------------------------------------------
Year ended December 31, 2002
U.S. federal ................... $ -- $(115) $(115)
U.S. state and local ........... -- -- --
-------------------------------------------------------------------
$ -- $(115) $(115)
-------------------------------------------------------------------
Year ended December 31, 2001
U.S. federal ................... $2,369 $11,872 $14,241
U.S. state and local ........... 21 -- 21
-------------------------------------------------------------------
$2,390 $11,872 $14,262
54 RENAISSANCERE HOLDINGS LTD.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
At December 31, 2003 2002
---------------------------------------------------------
Deferred tax assets
Allowance for doubtful accounts . $ 533 $ 1,683
Unearned premium adjustment ..... 1,215 330
Claims reserves, principally
due to discounting for tax ... 1,641 1,409
Retroactive reinsurance gain .... 1,492 1,892
Net operating loss carryforwards 24,775 22,392
Goodwill ........................ 3,542 3,924
Others .......................... 568 1,509
---------------------------------------------------------
$ 33,766 $ 33,139
---------------------------------------------------------
Deferred tax liabilities
Other .................. (419) (1,428)
---------------------------------------------------------
Net deferred tax asset before
valuation allowance .... $ 33,347 $ 31,711
Valuation allowance ............. (29,342) (27,724)
---------------------------------------------------------
Net deferred tax asset .......... $ 4,005 $ 3,987
--------
The net deferred tax asset is included in other assets in the consolidated
balance sheet. Net operating loss carryforwards of $72.9 million (2002 - $65.9
million) are available to offset regular taxable U.S. income during the
carryforward period (through 2023).
During 2003, the Company recorded additions to the valuation allowance of $1.6
million. The Company's deferred tax asset relates primarily to net operating
loss carryforwards that are available to offset future taxes payable by the
Company's U.S. subsidiaries. Although the net operating losses, which gave rise
to a deferred tax asset have a carryforward period through 2023, the Company's
U.S. operations did not generate taxable income during the year ended December
31, 2003 or during prior years. Accordingly, under the circumstances, and until
the Company's U.S. operations begin to generate significant taxable income, the
Company believes that it is necessary to establish and maintain a valuation
allowance against a significant portion of the net deferred tax asset.
The Company was not liable for and accordingly paid no income taxes in the years
ended December 31, 2003 and 2002.
NOTE 15. GEOGRAPHIC INFORMATION
--------------------------------------------------------------------------------
Financial information relating to gross premiums written by geographic region is
as follows:
Year ended December 31, 2003 2002 2001
--------------------------------------------------------------------------------
Property catastrophe
United States and Caribbean ........ $ 297,954 $ 310,090 $ 180,305
Europe ............................. 156,156 86,461 20,414
Worldwide .......................... 126,541 169,790 93,474
Australia and New Zealand .......... 26,588 2,127 12,159
Worldwide (excluding U.S.)(1) ...... 14,968 56,628 45,111
Other .............................. 21,458 18,354 22,433
Specialty reinsurance(2) ........... 291,820 247,020 77,468
--------------------------------------------------------------------------------
Total reinsurance(3) ................... 935,485 890,470 451,364
Individual Risk(4) ..................... 446,724 282,579 49,957
--------------------------------------------------------------------------------
Total gross written premium $1,382,209 $1,173,049 $ 501,321
----------
(1) The category Worldwide (excluding U.S.) consists of contracts that cover
more than one geographic region (other than the U.S.). The exposure in this
category for gross written premiums written to date is predominantly from
Europe and Japan.
(2) The category specialty reinsurance consists of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks
being Worldwide.
(3) Excludes $20.8 million and $22.2 million of premium assumed from the
Individual Risk segment in 2003 and 2002, respectively.
(4) The category Individual Risk consists of contracts that are primarily
exposed to U.S. risks.
NOTE 16. SEGMENT REPORTING
--------------------------------------------------------------------------------
The Company has two reportable segments: Reinsurance operations and Individual
Risk operations. The Reinsurance segment, which includes the results of
DaVinciRe, primarily provides property catastrophe reinsurance and specialty
reinsurance to selected insurers and reinsurers on a worldwide basis. We define
the Individual Risk segment to include underwriting that involves understanding
the characteristics of the original underlying insurance policy. The Individual
Risk segment currently provides insurance written on both an admitted basis and
an excess and surplus lines basis, and also provides reinsurance on a quota
share basis.
RENAISSANCERE HOLDINGS LTD. 55
Data for the years ended December 31, 2003, 2002 and 2001 is as follows:
Year ended December 31, 2003 Reinsurance Individual Risk Eliminations(1) Other(2) Total
---------------------------------------------------------------------------------------------------------------------------
Gross premiums written ....................... $956,257 $446,724 $(20,772) $ -- $1,382,209
---------------------------------------------------------------------------------------------------------------------------
Net premiums written ......................... $789,769 $362,754 -- -- $1,152,523
---------------------------------------------------------------------------------------------------------------------------
Net premiums earned .......................... $809,360 $306,383 -- -- $1,115,743
Claims and claim expenses incurred ........... 209,197 158,547 -- -- 367,744
Acquisition expenses ......................... 93,227 100,913 -- -- 194,140
Operational expenses ......................... 52,504 14,893 -- -- 67,397
---------------------------------------------------------------------------------------------------------------------------
Underwriting income .......................... $454,432 $32,030 -- -- 486,462
---------------------------------------------------------------------------------------------------------------------------
Other items .................................. $118,185 118,185
---------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders .. $604,647
Claims and claim expense ratio ............... 25.8% 51.7 % -- -- 33.0%
Underwriting expense ratio ................... 18.0% 37.8 % -- -- 23.4%
---------------------------------------------------------------------------------------------------------------------------
Combined ratio ............................... 43.8% 89.5 % -- -- 56.4%
-----------------------------------------------------------------------------
(1) Represents premium ceded from Individual Risk segment to Reinsurance
segment
(2) The Other segment consists of other items, which includes net investment
income, net foreign exchange gains, other income, net realized gains on
investments, corporate expenses, interest expense, minority interests,
income tax benefit and dividends on preference shares.
Year ended December 31, 2002 Reinsurance Individual Risk Eliminations(1) Other(2) Total
---------------------------------------------------------------------------------------------------------------------------
Gross premiums written .................... $ 912,695 $ 282,579 $ (22,225) $ -- $1,173,049
---------------------------------------------------------------------------------------------------------------------------
Net premiums written ...................... $ 696,610 $ 227,101 -- -- 923,711
---------------------------------------------------------------------------------------------------------------------------
Net premiums earned ....................... $ 667,926 $ 92,979 -- -- 760,905
Claims and claim expenses incurred ........ 249,316 40,209 -- -- 289,525
Acquisition expenses ...................... 70,698 24,946 -- -- 95,644
Operational expenses ...................... 39,264 9,895 -- -- 49,159
---------------------------------------------------------------------------------------------------------------------------
Underwriting income ....................... $ 308,648 $ 17,929 -- -- 326,577
---------------------------------------------------------------------------------------------------------------------------
Other items $38,237 38,237
---------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 364,814
Claims and claim expense ratio ............ 37.3% 43.2% -- -- 38.1%
Underwriting expense ratio ................ 16.5% 37.5% -- -- 19.0%
---------------------------------------------------------------------------------------------------------------------------
Combined ratio ............................ 53.8% 80.7% -- -- 57.1%
(1) Represents premium ceded from Individual Risk segment to Reinsurance
segment
(2) The Other segment consists of other items, which includes net investment
income, net foreign exchange gains, other income, net realized gains on
investments, corporate expenses, interest expense, minority interests,
income tax benefit and dividends on preference shares.
Year ended December 31, 2001 Reinsurance Individual Risk Other(1) Total
---------------------------------------------------------------------------------------------------------
Gross premiums written ................... $451,364 $ 49,957 $ -- $501,321
---------------------------------------------------------------------------------------------------------
Net premiums written ..................... $326,680 $ 12,867 -- $339,547
---------------------------------------------------------------------------------------------------------
Net premiums earned ...................... $325,223 $ 7,842 -- $333,065
Claims and claim expenses incurred ....... 152,341 (2,424) -- 149,917
Acquisition expenses ..................... 44,029 1,330 -- 45,359
Operational expenses ..................... 28,198 10,405 -- 38,603
---------------------------------------------------------------------------------------------------------
Underwriting income ...................... $100,655 (1,469) -- 99,186
---------------------------------------------------------------------------------------------------------
Other items $ 65,180 65,180
---------------------------------------------------------------------------------------------------------
Net income available to common shareholders $164,366
Claims and claim expense ratio ........... 46.8% (30.9%) -- 45.0%
Underwriting expense ratio ............... 22.2% 149.6% -- 25.2%
---------------------------------------------------------------------------------------------------------
Combined ratio 69.0% 118.7% -- 70.2%
(1) The Other segment consists of other items, which includes net investment
income, net foreign exchange gains, other income, net realized gains on
investments, corporate expenses, interest expense, minority interests,
income tax benefit and dividends on preference shares.
The Company does not manage its assets by segment and therefore total assets are
not allocated to the segments.
56 RENAISSANCERE HOLDINGS LTD.
NOTE 17. STOCK INCENTIVE COMPENSATION
AND EMPLOYEE BENEFIT PLANS
--------------------------------------------------------------------------------
The Company has a stock incentive plan under which all employees of the Company
and its subsidiaries may be granted stock options and restricted stock awards. A
stock option award under the Company's stock incentive plan allows for the
purchase of the Company's common shares at a price that is generally equal to
the five day average closing price of the common shares immediately prior to the
date of grant. Options to purchase common shares are granted periodically by the
Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The fair value of option grants is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield
of 1.4%, 1.4% and 1.7%; expected option life of five years for all years;
expected volatility of 30%, 30% and 31%; and a risk-free interest rate of 1.8%,
2.7% and 4.8%.
The following is a table of the changes in options outstanding for 2003, 2002
and 2001, respectively:
Awards Weighted
available options Average Fair value of Range of
for grant outstanding exercise price options exercise prices
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 ... 595,062 6,068,553 $15.50
Authorized ................... 2,850,000 --
Options granted .............. (1,500,867) 1,500,867 $30.61 $8.56 $21.35-$33.85
Options forfeited ............ 97,668 (97,668) $18.27
Options exercised ............ -- (2,195,037) $18.44
Shares turned in or withheld . 1,346,178 --
Restricted stock issued ...... (716,748) --
Restricted stock forfeited ... 47,394 --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 ... 2,718,687 5,276,715 $18.97
Authorized ................... 2,550,000 --
Options granted .............. (2,637,929) 2,637,929 $39.30 $6.47 $29.77-$42.74
Options forfeited ............ 137,655 (137,655) $18.95
Options exercised ............ -- (3,597,769) $22.09
Shares turned in or withheld . 2,114,379 --
Restricted stock issued ...... (380,233) --
Restricted stock forfeited ... 68,660 --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 ... 4,571,219 4,179,220 $28.93
Authorized ................... -- --
Options granted .............. (435,762) 435,762 $45.38 $10.99 $39.16-$48.00
Options forfeited ............ 23,000 (23,000) $12.40
Options exercised ............ -- (295,627) $13.01
Shares turned in or withheld . 74,344 --
Restricted stock issued ...... (359,727) --
Restricted stock forfeited ... 571 --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 ... 3,873,645 4,296,355 $31.73
Total options exercisable at
December 31, 2003 ... 2,737,916
--------------------------------------------------------------------------------------
RENAISSANCERE HOLDINGS LTD. 57
The Company's 2001 Stock Incentive Plan allows for the issuance of share-based
awards, the issuance of restricted common shares, the issuance of reload options
for shares tendered in connection with option exercises and a provision in the
calculation of shares available for issuance thereunder by deeming the number of
shares tendered to or withheld by the Company in connection with certain option
exercises to be so available.
The Company has also established a Non-Employee Director Stock Incentive Plan to
issue stock options and shares of restricted stock. Under the plan, the total
number of shares available for distribution at December 31, 2003 was 643,494
shares. At December 31, 2003, the number of options issued to directors and
unexercised was 300,000. In 2003, no options to purchase common shares were
granted and 13,206 restricted common shares were granted. In 2002, 12,000
options to purchase common shares were granted and 3,132 restricted common
shares were granted. In 2001, 12,000 options to purchase common shares and 5,616
restricted common shares were granted. The options and restricted common shares
vest ratably over three years.
Restricted common shares issued to employees normally vest ratably over a four
to five year period. During the restricted period, the employee receives
dividends and votes the restricted common shares, but the restricted shares may
not be sold, transferred or assigned. In 2003, 2002 and 2001 the Board of
Directors granted 359,727, 380,233 and 716,748 restricted shares with a value of
$16.0 million, $14.6 million and $17.2 million to certain employees. Prior to
2003, the value of the restricted shares awarded was recorded as unearned stock
grant compensation and was presented as a separate component of shareholders'
equity. During 2003 the Company adopted SFAS 123, as amended by SFAS 148, and in
accordance with the provisions of SFAS 123 the value of the restricted stock
grants awarded are no longer reflected as unearned stock grant compensation as a
separate component of shareholders' equity.
Accordingly the balance of unearned stock grant compensation of $18.5 million at
January 1, 2003 has been reclassified from its separate account in shareholders'
equity and reflected as a reduction in additional paid-in capital. Under SFAS
123 the Company estimates the fair value of restricted stock awards at the date
of grant and amortizes this value as an expense over the vesting period.
Compensation expense related to the issuance of restricted stock was $13.0
million, $8.2 million and $6.6 million in 2003, 2002 and 2001, respectively.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 18. STATUTORY REQUIREMENTS
--------------------------------------------------------------------------------
Under the Insurance Act 1978, amendments thereto and Related Regulations of
Bermuda ("the Act"), certain subsidi- aries of the Company are required to
prepare statutory financial statements and to file in Bermuda a statutory
financial return. The Act also requires these subsidiaries of the Company to
maintain certain measures of solvency and liquidity. At December 31, 2003 the
statutory capital and surplus of the Bermuda subsidiaries was $2.4 billion and
the amount required to be maintained under Bermuda law was $457.5 million.
Under the Act, Renaissance Reinsurance and DaVinci are classified as Class 4
insurers, and are, therefore, restricted as to the payment of dividends in the
amount of 25% of the prior year's statutory capital and surplus, unless at least
two members of the Board of Directors attest that a dividend in excess of this
58 RENAISSANCERE HOLDINGS LTD.
amount would not cause the company to fail to meet its relevant margins. During
2003, Renaissance Reinsurance declared aggregate cash dividends to the Company
of $322.3 million (2002 - $224.3 million). During 2003 DaVinci declared
aggregate cash dividends of $81.6 million (2002 - $3.5 million).
Under the Act, Glencoe is classified as a Class 3 insurer and Glencoe is also
eligible as an excess and surplus lines insurer in a number of states in the
U.S. Under the various capital and surplus requirements in Bermuda and in these
states, Glencoe is required to maintain a minimum of capital and surplus. In
this regard, the declaration of dividends from retained earnings and
distributions from additional paid-in capital are limited to the extent that the
above requirement is met. During 2003, Glencoe declared aggregate cash dividends
to the Company of $18.0 million (2002 - $nil).
The Company's U.S. insurance subsidiary, Stonington, is subject to various
statutory and regulatory restrictions regarding the payment of dividends. The
restrictions are determined using risk based capital tests, which is the
threshold that constitutes the authorized control level. If Stonington's
statutory capital and surplus falls below the authorized control level, the
commissioner is authorized to take whatever regulatory actions considered
necessary to protect policyholders and creditors. At December 31, 2003, the
statutory capital and surplus of Stonington was $28.8 million and the maximum
dividend it could pay in 2004 without prior approval was $2.6 million.
NOTE 19. COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and, except for U.S. Government securities, none of the Company's
investments exceeded 10% of shareholders' equity at December 31, 2003.
Concentrations of credit risk with respect to reinsurance balances are limited
due to their dispersion across various companies and geographies.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's investment guidelines permit, subject to specific approval,
investments in derivative instruments such as futures, options, foreign currency
forward contracts and swap agreements, which may be used to assume risk or for
hedging purposes.
LETTERS OF CREDIT
At December 31, 2003, the Company's bankers have issued letters of credit of
approximately $346.9 million in favor of certain ceding companies. Also, in
connection with the Top Layer Re joint venture, the Company has committed $37.5
million of capital in the form of a letter of credit. The letters of credit are
secured by cash and investments of similar amounts.
EMPLOYMENT AGREEMENTS
The Board of Directors has authorized the execution of employment agreements
between the Company and certain officers. These agreements provide for severance
payments under certain circumstances, as well as accelerated vesting of options
and restricted stock grants, upon a change in control, as defined therein and by
the Company's 2001 Stock Incentive Plan.
LITIGATION
The Company is party to various lawsuits arising in the normal course of
business. The Company does not believe that any of its pending litigation will
have a material impact on its consolidated financial statements.
RENAISSANCERE HOLDINGS LTD. 59
NOTE 20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30,
--------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------------
Gross premiums written ................. $ 685,167 $ 460,834 $ 212,560 $ 270,294 $ 313,317 $ 282,597
-------------------------------------------------------------------------------------------------------------------------
Net premiums written ................... $ 590,370 $ 379,096 $ 160,223 $ 198,517 $ 236,570 $ 192,687
-------------------------------------------------------------------------------------------------------------------------
Net premiums earned .................... $ 263,474 $ 150,308 $ 275,535 $ 184,742 $ 277,364 $ 191,310
Net investment income .................. 31,434 23,129 34,109 26,155 28,280 23,737
Net foreign exchange gains (losses) .... 3,951 (1,950) 7,640 3,650 252 888
Other income ........................... 5,505 8,129 7,238 8,147 7,979 7,951
Net realized investment gains (losses) . 21,112 340 49,660 3,177 1,172 10,219
-------------------------------------------------------------------------------------------------------------------------
Total revenues ......................... 325,476 179,956 374,182 225,871 315,047 234,105
-------------------------------------------------------------------------------------------------------------------------
Claims and claim expenses incurred ..... 82,780 43,118 100,076 73,149 96,856 82,931
Acquisition costs ...................... 42,133 18,549 40,704 20,368 56,317 23,802
Operational expenses ................... 14,907 10,663 16,332 9,962 17,882 9,616
Corporate expenses ..................... 3,468 2,690 4,677 4,688 4,456 3,466
Interest expense ....................... 4,499 2,714 5,335 3,433 4,318 3,499
-------------------------------------------------------------------------------------------------------------------------
Total expenses ......................... 147,787 77,734 167,124 111,600 179,829 123,314
-------------------------------------------------------------------------------------------------------------------------
Income before minority interest
and taxes ..................... 177,689 102,222 207,058 114,271 135,218 110,791
Minority interest - Capital securities . 1,455 1,833 1,827 1,831 1,827 1,759
Minority interest - DaVinci ............ 20,885 9,477 20,150 13,470 15,211 17,689
-------------------------------------------------------------------------------------------------------------------------
Income before taxes .................... 155,349 90,912 185,081 98,970 118,180 91,343
Income tax benefit (expense) ........... 55 (596) -- 273 (37) (59)
Cumulative effect of a change
in accounting principle -
SFAS 142 - Goodwill ........... -- (9,187) -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Net income ............................. 155,404 81,129 185,081 99,243 118,143 91,284
Dividends on preference shares ......... 4,119 3,038 4,917 3,003 4,903 3,038
-------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders ........... $ 151,285 $ 78,091 $ 180,164 $ 96,240 $ 113,240
$ 88,246
Earnings per common share - basic ...... $ 2.21 $ 1.17 $ 2.62 $ 1.43 $ 1.63 $ 1.30
Earnings per common share - diluted .... $ 2.14 $ 1.12 $ 2.54 $ 1.37 $ 1.59 $ 1.26
Weighted average shares - basic ........ 68,593 66,788 68,914 67,326 69,307 67,865
Weighted average shares - diluted ...... 70,564 69,787 71,056 70,209 71,187 70,272
Claims and claim expense ratio ......... 31.4% 28.7% 36.3% 39.6% 34.9% 43.3%
Underwriting expense ratio ............. 21.6% 19.4% 20.7% 16.4% 26.8% 17.5%
-------------------------------------------------------------------------------------------------------------------------
Combined ratio ......................... 53.0% 48.1% 57.0% 56.0% 61.7% 60.8%
Quarter Ended
December 31,
------------------------
2003 2002
-----------------------------------------------------------------
Gross premiums written ................. $ 171,165 $ 159,324
-----------------------------------------------------------------
Net premiums written ................... $ 165,360 $ 153,411
-----------------------------------------------------------------
Net premiums earned .................... $ 299,370 $ 234,545
Net investment income .................. 35,719 29,665
Net foreign exchange gains (losses) .... 1,788 1,273
Other income ........................... 6,348 8,594
Net realized investment gains (losses) . 8,560 (3,559)
-----------------------------------------------------------------
Total revenues ......................... 351,785 270,518
-----------------------------------------------------------------
Claims and claim expenses incurred ..... 88,032 90,327
Acquisition costs ...................... 54,986 32,925
Operational expenses ................... 18,276 18,918
Corporate expenses ..................... 3,442 3,483
Interest expense ....................... 4,086 3,423
-----------------------------------------------------------------
Total expenses ......................... 168,822 149,076
-----------------------------------------------------------------
Income before minority interest
and taxes ..................... 182,963 121,442
Minority interest - Capital securities . 2,375 2,182
Minority interest - DaVinci ............ 15,768 14,415
-----------------------------------------------------------------
Income before taxes .................... 164,820 104,845
Income tax benefit (expense) ........... -- 497
Cumulative effect of a change
in accounting principle -
SFAS 142 - Goodwill ........... -- --
-----------------------------------------------------------------
Net income ............................. 164,820 105,342
Dividends on preference shares ......... 4,862 3,105
-----------------------------------------------------------------
Net income available to
common shareholders ...........
$ 159,958 $ 102,237
Earnings per common share - basic ...... $ 2.31 $ 1.50
Earnings per common share - diluted .... $ 2.25 $ 1.45
Weighted average shares - basic ........ 69,341 68,241
Weighted average shares - diluted ...... 71,202 70,574
Claims and claim expense ratio ......... 29.4% 38.5%
Underwriting expense ratio ............. 24.5% 22.1%
-----------------------------------------------------------------
Combined ratio ......................... 53.9% 60.6%
60 RENAISSANCERE HOLDINGS LTD.
GLOSSARY OF SELECTED INSURANCE AND REINSURANCE TERMS
--------------------------------------------------------------------------------
Acquisition expenses The aggregate expenses incurred by a company acquiring
new business, including commissions, underwriting
expenses and administrative expenses.
Attachment point The dollar amount of loss (per occurrence or in the
aggregate, as the case may be) above which excess of
loss reinsurance becomes operative.
Broker An intermediary who negotiates contracts of insurance or
reinsurance, receiving a commission for placement and
other services rendered, between (1) a policy holder and
a primary insurer, on behalf of the insured party, (2) a
primary insurer and reinsurer, on behalf of the primary
insurer, or (3) a reinsurer and a retrocessionaire, on
behalf of the reinsurer.
Capacity The percentage of surplus, or the dollar amount of
exposure, that an insurer or reinsurer is willing or
able to place at risk. Capacity may apply to a single
risk, a program, a line of business or an entire book of
business. Capacity may be constrained by legal
restrictions, corporate restrictions or indirect
restrictions.
Case reserves Loss reserves, established with respect to specific,
individual reported claims.
Casualty insurance or Insurance or reinsurance that is primarily concerned
reinsurance with the losses caused by injuries to third per sons and
their property (in other words, persons other than the
policyholder) and the legal liability imposed on the
insured resulting therefrom. Also referred to as
liability insurance.
Catastrophe A severe loss, typically involving multiple claimants.
Common perils include earthquakes, hurricanes,
hailstorms, severe winter weather, floods, fires,
tornadoes, explosions and other natural or man-made
disasters. Catastrophe losses may also arise from acts
of war, acts of terrorism and political instability.
Catastrophe excess of A form of excess of loss reinsurance that, subject to a
loss reinsurance specified limit, indemnifies the ceding company for the
amount of loss in excess of a specified retention with
respect to an accumulation of losses resulting from a
"catastrophe."
Cede; cedant; When a party reinsures its liability with another, it
ceding company "cedes" business and is referred to as the "cedant" or
"ceding company."
Claim Request by an insured or reinsured for indemnification
by an insurance company or a reinsurance company for
loss incurred from an insured peril or event.
Claims and claim The ratio of claims and claim expenses to net premiums
expense ratio earned determined in accordance with either SAP or GAAP.
Claim expenses The expenses of settling claims, including legal and
other fees and the portion of general expenses allocated
to claim settlement costs (also known as claim
adjustment expenses) plus losses incurred with respect
to claims.
Claim reserves Liabilities established by insurers and reinsurers to
reflect the estimated costs of claim payments and the
related expenses that the insurer or reinsurer will
ultimately be required to pay in respect of insurance or
reinsurance policies it has issued. Claims reserves
consist of case reserves, established with respect to
individual reported claims, and "IBNR" reserves. For
reinsurers, loss expense reserves are generally not
significant because substantially all of the loss
expenses associated with particular claims are incurred
by the primary insurer and reported to reinsurers as
losses.
Combined ratio The combined ratio is the sum of the claims and claim
expense ratio and the underwriting expense ratio. A
combined ratio below 100% generally indicates profitable
underwriting prior to the consideration of investment
income. A combined ratio over 100% generally indicates
unprofitable underwriting prior to the consideration of
investment income.
RENAISSANCERE HOLDINGS LTD. 61
Earned Premium (1) That part of the premium applicable to the expired
part of the policy period, including the short-rate
premium on cancellation, the entire premium on the
amount of loss paid under some contracts, and the entire
premium on the contract on the expiration of the policy,
which is recognized as income during the period.
(2) That portion of the reinsurance premium calculated
on a monthly, quarterly or annual basis which is to be
retained by the reinsurer and recognized as income in
the period should their cession be canceled.
(3) When a premium is paid in advance for a certain
time, the company is said to "earn" the premium as the
time advances. For example, a policy written for three
years and paid for in advance would be one-third earned
at the end of the first year.
Excess and surplus Any type of coverage that cannot be placed with an
insurer admitted to do business in a certain
jurisdiction. Risks placed in excess and surplus lines
markets are often substandard as respects adverse loss
experience, unusual, or unable to be placed in
conventional markets due to a shortage of capacity.
Excess of loss Reinsurance or insurance that indemnifies the reinsured
or insured against all or a specified portion of losses
on underlying insurance policies in excess of a
specified amount, which is called a "level" or
"retention." Also known as non-proportional reinsurance.
Excess of loss reinsurance is written in layers. A
reinsurer or group of reinsurers accepts a layer of
coverage up to a specified amount. The total coverage
purchased by the cedant is referred to as a "program"
and will typically be placed with predetermined
reinsurers in pre-negotiated layers. Any liability
exceeding the outer limit of the program reverts to the
ceding company, which also bears the credit risk of a
reinsurer's insolvency.
Exclusions Those risk, perils, or classes of insurance with respect
to which the reinsurer will not pay loss or provide
reinsurance, notwithstanding the other terms and
conditions of reinsurance.
Frequency The number of claims occurring during a given coverage
period.
Generally accepted Accounting principles as set forth in opinions of the
accounting principles Accounting Principles Board of the American Institute of
("GAAP") Certified Public Accountants and/or statements of the
Financial Accounting Standards Board and/or their
respective successors and which are applicable in the
circumstances as of the date in question. Also referred
to as GAAP.
Gross premiums written Total premiums for insurance written and assumed
reinsurance during a given period.
Incurred but not Reserves for estimated losses that have been incurred by
reported ("IBNR") insureds and reinsureds but not yet reported to the
insurer or reinsurer including unknown future
developments on losses which are known to the insurer or
reinsurer.
Layer The interval between the retention or attachment point
and the maximum limit of indemnity for which a reinsurer
is responsible.
Line of Business The general classification of insurance written by
insurers, i.e., fire, allied lines, homeowners, among
others.
Loss; losses An occurrence that is the basis for submission and/or
payment of a claim. Whether losses are covered, limited
or excluded from coverage is dependant on the terms of
the policy.
Loss ratio Claims incurred expressed as a percentage of net earned
premiums.
Loss reserve For an individual loss, an estimate of the amount the
insurer expects to pay for the reported claim. For total
losses, estimates of expected payments for reported and
unreported claims. May include amounts for claims
expenses.
Net premiums earned The portion of net premiums written during or prior to a
given period that was actually recognized as income
during such period.
Net premiums written Gross premiums written for a given period less premiums
ceded to reinsurers and retrocessionaires during such
period.
No claims bonus A reduction of premiums assumed or ceded if no claims
have been made within a specified period.
62 RENAISSANCERE HOLDINGS LTD.
Perils This term refers to the causes of possible loss in the
property field, such as fire, windstorm, collision,
hail, etc. In the casualty field, the term "hazard" is
more frequently used.
Premiums; written, The amount charged during the term on policies and
earned and unearned contracts issued, renewed or reinsured by an insurance
company or reinsurance company. Written premium is
premium registered on the books of an issuer or
reinsurer at the time a policy is issued and paid for.
Unearned premium is premium for a future exposure
period. Earned premium is written premium minus unearned
premium for an individual policy.
Property insurance Insurance or reinsurance that provides coverage to a
or reinsurance person with an insurable interest in tangible property
for that person's property loss, damage or loss of use.
Property per risk Reinsurance on a treaty basis of individual property
treaty reinsurance risks insured by a ceding company.
Proportional A generic term describing all forms of reinsurance in
reinsurance which the reinsurer shares a proportional part of the
original premiums and losses of the reinsured. (Also
known as pro rata reinsurance, quota share reinsurance
or participating reinsurance.) In proportional
reinsurance the reinsurer generally pays the ceding
company a ceding commission. The ceding commission
generally is based on the ceding company's cost of
acquiring the business being reinsured (including
commissions, premium taxes, assessments and
miscellaneous administrative expense) and also may
include a profit factor. See also "Quota Share
Reinsurance" and "Surplus Share Reinsurance."
Quota Share Reinsurance A form of proportional reinsurance in which the
reinsurer assumes an agreed percentage of each insurance
being reinsured and shares all premiums and losses
according with the reinsured. See also "Proportional
Reinsurance" and "Surplus Share Reinsurance."
Reinstatement premium The premium charged for the restoration of the
reinsurance limit of a catastrophe contract to its full
amount after payment by the reinsurer of losses as a
result of an occurrence.
Reinsurance An arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance or
reinsurance company, the ceding company, against all or
a portion of the insurance or reinsurance risks
underwritten by the ceding company under one or more
policies. Reinsurance can provide a ceding company with
several benefits, including a reduction in net liability
on individual risks and catastrophe protection from
large or multiple losses. Reinsurance also provides a
ceding company with additional underwriting capacity by
permitting it to accept larger risks and write more
business than would be possible without a concomitant
increase in capital and surplus, and facilitates the
maintenance of acceptable financial ratios by the ceding
company. Reinsurance does not legally discharge the
primary insurer from its liability with respect to its
obligations to the insured.
Retention The amount or portion of risk that an insurer retains
for its own account. Losses in excess of the retention
level are paid by the reinsurer. In proportional
treaties, the retention may be a percentage of the
original policy's limit. In excess of loss business, the
retention is a dollar amount of loss, a loss ratio or a
percentage.
Retrocessional A transaction whereby a reinsurer cedes to another
reinsurance; reinsurer, the retrocessionaire, all or part of the
retrocessionaire reinsurance that the first reinsurer has assumed.
Retrocessional reinsurance does not legally discharge
the ceding reinsurer from its liability with respect to
its obligations to the reinsured. Reinsurance companies
cede risks to retrocessionaires for reasons similar to
those that cause primary insurers to purchase
reinsurance: to reduce net liability on individual
risks, to protect against catastrophic losses, to
stabilize financial ratios and to obtain additional
underwriting capacity.
Risk excess of loss A form of excess of loss reinsurance that covers a loss
reinsurance of the reinsured on a single "risk" in excess of its
retention level of the type reinsured, rather than to
aggregate losses for all covered risks, as does
catastrophe excess of loss reinsurance. A "risk" in this
context might mean the insurance coverage on one
building or a group of buildings or the insurance
coverage under a single policy, which the reinsured
treats as a single risk.
Risks A term used to denote the physical units of property at
risk or the object of insurance protection that are not
perils or hazards. Also defined as chance of loss or
uncertainty of loss.
RENAISSANCERE HOLDINGS LTD. 63
Specialty lines Lines of insurance and reinsurance that provide coverage
for risks that are often unusual or difficult to place
and do not fit the underwriting criteria of standard
commercial products carriers.
Statutory accounting Recording transactions and preparing financial
principles ("SAP") statements in accordance with the rules and procedures
prescribed or permitted by Bermuda and/or the U.S. state
insurance regulatory authorities including the NAIC,
which in general reflect a liquidating, rather than
going concern, concept of accounting.
Stop Loss A form of reinsurance under which the reinsurer pays
some or all of a cedant's aggregate retained losses in
excess of a predetermined dollar amount or in excess of
a percentage of premium.
Submission An unprocessed application for (i) insurance coverage
forwarded to a primary insurer by a prospective
policyholder or by a broker on behalf of such
prospective policyholder, (ii) reinsurance coverage
forwarded to a reinsurer by a prospective ceding insurer
or by a broker or intermediary on behalf of such
prospective ceding insurer or (iii) retrocessional
coverage forwarded to a retrocessionaire by a
prospective ceding reinsurer or by a broker or
intermediary on behalf of such prospective ceding
reinsurer.
Surplus share A form of pro rata reinsurance (proportional)
reinsurance indemnifying the ceding company against loss to the
extent of the surplus insurance liability ceded, on a
share basis similar to quota share. See also
"Proportional Reinsurance" and "Quota Share
Reinsurance."
Total Managed Cat The total catastrophe reinsurance premiums written on a
Premium gross basis by our managed catastrophe joint ventures as
well as by our wholly owned subsidiaries.
Treaty A reinsurance agreement covering a book or class of
business that is automatically accepted on a bulk basis
by a reinsurer. A treaty contains common contract terms
along with a specific risk definition, data on limit and
retention, and provisions for premium and duration.
Underwriting The insurer's or reinsurer's process of reviewing
applications submitted for insurance coverage, deciding
whether to accept all or part of the coverage requested
and determining the applicable premiums.
Underwriting capacity The maximum amount that an insurance company can
underwrite. The limit is generally determined by the
company's retained earnings and investment capital.
Reinsurance serves to increase a company's underwriting
capacity by reducing its exposure from particular risks.
Underwriting expense The ratio of the sum of the acquisition expenses and
ratio operational expenses to net premiums earned, determined
in accordance with U.S. GAAP.
Underwriting expenses The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general
and other expenses attributable to underwriting
operations.
Unearned premium The portion of premiums written representing the
unexpired portions of the policies or contracts which
the insurer or reinsurer has on its books as of a
certain date.
64 RENAISSANCERE HOLDINGS LTD.
COMMENTS ON REGULATION G
--------------------------------------------------------------------------------
In addition to the GAAP financial measures set forth in this Annual Report, the
Company has included certain non-GAAP financial measures in this Annual Report
within the meaning of Regulation G. The Company has consistently provided these
financial measurements in previous annual reports and the Company's management
believes that these measurements are important to investors and other interested
persons, and that investors and such other persons benefit from having a
consistent basis for comparison between quarters and for the comparison with
other companies within the industry. These measures may not, however, be
comparable to similarly titled measures used by companies outside of the
insurance industry. Investors are cautioned not to place undue reliance on these
non-GAAP measures in assessing the Company's overall financial performance.
The Company uses "operating income" as a measure to evaluate the underlying
fundamentals of its operations and believes it to be a useful measure of its
corporate performance. "Operating income" differs from "net income applicable to
common shareholders", which the Company believes is the most directly comparable
GAAP measure, only by the exclusion of net realized gains and losses on
investments, the cumulative effect of a change in accounting principle -
goodwill and a charge relating to our Stonington subsidiary taken in 1998. The
Company's management believes that "operating income" is useful to investors
because it more accurately measures and predicts the Company's results of
operations by removing the variability arising from fluctuations in the
Company's investment portfolio and by removing non-recurring matters such as
changes in accounting principles - goodwill, which are not considered by
management to be a relevant indicator of business operations. The Company also
uses operating income to calculate operating income per common share and
operating return on average common equity. The following is a reconciliation of
1) net income applicable to common shareholders to operating income; 2) net
income per common share to net operating income per common share; and 3) return
on average common equity to operating return on average common equity:
Year Ended
-----------------------------------------------------------------------------
(In thousands of U.S. dollars) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders ........................ $ 604,647 $ 364,814 $ 164,366 $ 127,22 $ 104,241
Adjustment for net realized
(gains) losses on investments (80,504) (10,177) (18,096) 7,151 15,720
Adjustment for cumulative
effect of a change in
accounting principle -
SFAS 142 - Goodwill ......... -- 9,187 -- -- --
Adjustment for fourth-quarter
after-tax charge related to
Stonington in 1998 .......... -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Operating income .............................. $ 524,143 $ 363,824 $ 146,270 $ 134,379 $ 119,961
-------------------------------------------------------------------------------------------------------------------------------
Net income per common
share (diluted) ...................... $ 8.52 $ 5.20 $ 2.63 $ 2.17 $ 1.68
Adjustment for net realized
(gains) losses on investments (1.14) (0.14) (0.29) 0.12 0.25
Adjustment for cumulative
effect of a change in
accounting principle -
SFAS 142 - Goodwill ......... -- 0.13 -- -- --
Adjustment for fourth-quarter
after-tax charge related to
Stonington in 1998 .......... -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Operating income per common
share (diluted) ...................... $ 7.38 $ 5.18 $ 2.34 $ 2.29 $ 1.94
-------------------------------------------------------------------------------------------------------------------------------
Return on average common
equity (annualized) .................. 33.7% 29.1% 20.0% 19.9% 17.2%
Adjustment for net realized
(gains) losses on investments (4.5%) (0.8%) (2.2%) 1.1% 2.6%
Adjustment for cumulative
effect of a change in
accounting principle -
SFAS 142 - Goodwill ......... -- 0.7% -- -- --
Adjustment for fourth-quarter
after-tax charge related to
Stonington in 1998 .......... -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Operating return on average
common equity (annualized) ........... 29.2% 29.0% 17.8% 21.0% 19.8%
---------
Year Ended
-----------------------------------------------------------------------------------
(In thousands of U.S. dollars) 1998 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------------------
Net income available to common
shareholders ........................ $ 74,57 $ 139,249 $ 156,160 $ 162,786 $ 96,419 $ 31,281
Adjustment for net realized
(gains) losses on investments 6,890 2,895 2,938 (2,315) (246) 7
Adjustment for cumulative
effect of a change in
accounting principle -
SFAS 142 - Goodwill ......... -- -- -- -- -- --
Adjustment for fourth-quarter
after-tax charge related to
Stonington in 1998 .......... 40,080 -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Operating income .............................. $ 121,547 $ 142,144 $ 159,098 $ 160,471 $ 96,173 $ 31,288
------------------------------------------------------------------------------------------------------------------------------------
Net income per common
share (diluted) ...................... $ 1.11 $ 2.02 $ 2.00 $ 2.25 $ 1.41 $ 0.46
Adjustment for net realized
(gains) losses on investments 0.10 0.04 0.04 (0.03) -- --
Adjustment for cumulative
effect of a change in
accounting principle -
SFAS 142 - Goodwill ......... -- -- -- -- -- --
Adjustment for fourth-quarter
after-tax charge related to
Stonington in 1998 .......... 0.60 -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Operating income per common
share (diluted) ...................... $ 1.81 $ 2.06 $ 2.04 $ 2.22 $ 1.41 $ 0.46
------------------------------------------------------------------------------------------------------------------------------------
Return on average common
equity (annualized) .................. 11.8% 24.5% 29.2% 43.8% 44.2% 32.7%
Adjustment for net realized
(gains) losses on investments 1.1% .5% .6% (0.6%) (0.1%) --
Adjustment for cumulative
effect of a change in
accounting principle -
SFAS 142 - Goodwill ......... -- -- -- -- -- --
Adjustment for fourth-quarter
after-tax charge related to
Stonington in 1998 .......... 6.6% -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Operating return on average
common equity (annualized) ........... 19.5% 25.0% 29.8% 43.2% 44.1% 32.7%
RENAISSANCERE HOLDINGS LTD. 65
The Company has also included in this Annual Report "managed cat premium" and
"gross written managed premium". "Managed cat premium" is defined as gross
catastrophe premium written by Renaissance Reinsurance and its related joint
ventures. "Gross managed premium" differs from gross written premium, which the
Company believes is the most directly comparable GAAP measure, due to the
inclusion of premiums written on behalf of our joint ventures Top Layer Re,
which is accounted for under the equity method of accounting, and OPCat, which
was accounted for under the equity method of accounting prior to 2002. "Managed
cat premium" differs from total catastrophe premium, which the Company believes
is the most directly comparable GAAP measure, due to the inclusion of
catastrophe premium written on behalf of our joint venture Top Layer Re, which
is accounted for under the equity method of accounting, and OPCat, which was
accounted for under the equity method of accounting prior to 2002. The following
is a reconciliation of 1) gross managed premium to gross written premium; and 2)
managed cat premium to total catastrophe premium:
Year Ended*
---------------------------------------------------------------------------
(In thousands of U.S. dollars) 2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Total catastrophe premium ..................... $ 643,665 $ 643,450 $ 373,896 $ 345,086 $ 279,605
Catastrophe premium written by OP Cat. -- -- 29,129 55,398 --
Catastrophe premium written by
Top Layer Re ................ 76,735 73,099 38,761 24,877 4,316
---------------------------------------------------------------------------------------------------------------------------
Managed catastrophe premium ................... $ 720,400 $ 716,549 $ 441,786 $ 425,361 $ 283,921
---------------------------------------------------------------------------------------------------------------------------
Gross written premium ......................... $ 1,382,209 $ 1,173,049 $ 501,321 $ 433,002 $ 351,305
Premium written by OP Cat ............ -- -- 29,129 55,398 --
Premium written by Top Layer Re ...... 76,735 73,099 38,761 24,877 4,316
---------------------------------------------------------------------------------------------------------------------------
Gross managed premium ......................... $ 1,458,944 $ 1,246,148 $ 569,211 $ 513,277 $ 355,621
---------------------------------------------------------------------------------------------------------------------------
* In the years 1993 - 1998, there is no difference between gross managed
premium and gross written premium, and managed catastrophe premium and
total catastrophe premium.
The Company has also included in this Annual Report "tangible book value per
share plus accumulated dividends". This is defined as book value per share
excluding intangible assets such as goodwill. "Tangible book value per share
plus accumulated dividends" differs from book value per share, which the Company
believes is the most directly comparable GAAP measure, due to the exclusion of
goodwill and, in 2002, the effect of a cumulative adjustment due to a change in
accounting principle.
Year Ended*
------------------------------------------------------------------------------------
(In thousands of U.S. dollars) 2003 2002 2001 2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
Book value per share ...................... $ 29.61 $ 21.39 $ 15.83 $ 11.91 $ 10.17 $ 9.43 $ 8.89 $ 7.74 $ 6.33
Adjustment for goodwill .......... -- -- (0.14) (0.17) (0.11 ) (0.23) -- -- --
Adjustment for
accumulated dividends ... 0.60 0.57 0.53 0.50 0.47 0.40 0.33 0.27 0.05
---------------------------------------------------------------------------------------------------------------------------------
Tangible book value per
share plus accumulated
dividends ........................ $ 30.21 $ 21.96 $ 16.22 $ 12.24 $ 10.53 $ 9.60 $ 9.22 $ 8.01 $ 6.38
-------
* In the years 1993 - 1994, there is no difference between book value per
share and tangible book value per share plus accumulated dividends.
66 RENAISSANCERE HOLDINGS LTD.
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
Senior 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.
2003 PRICE RANGE 2002 Price Range
HIGH LOW High Low
---------------------------------------------------------------
First Quarter . . . . . .$ 40.78 $ 34.40 $ 36.35 $ 28.90
Second Quarter . . . . . . 46.93 40.07 39.65 33.85
Third Quarter . . . . . . 48.69 41.15 39.40 31.30
Fourth Quarter . . . . . . 49.35 44.45 43.24 37.49
-------------------
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
Designed and produced by Taylor & Ives, Inc., NYC
RENAISSANCERE HOLDINGS LTD.
Renaissance House
8-12 East Broadway
P.O. Box HM 2527
Hamilton HMGX, Bermuda
Tel: 441 295 4513
Fax 441 292 9453
www.renre.com