COMPANY OVERVIEW
RenaissanceRe Holdings Ltd. was established in 1993 to write catastrophe
reinsurance. This form of reinsurance requires us to indemnify our customers
(other insurance and reinsurance companies) for their losses from catastrophes,
subject to specified limits.
Since its formation, RenaissanceRe has consistently generated market leading
returns, representing the value we deliver to our shareholders. We have become
one of the largest writers of catastrophe reinsurance, reflecting the value we
deliver to our customers. The market recognizes RenaissanceRe as a leader in
using sophisticated computer models that simulate the impact of catastrophes on
insurance companies. We use our models to construct a superior portfolio of
reinsurance, and to advise customers about their catastrophe risks.
Over the past two years, there have been significant dislocations across the
worldwide insurance and reinsurance markets - and a substantial increase in the
amount of premium that meets our hurdle rate. In response, we substantially
increased our premium levels in catastrophe reinsurance, and also in other
lines.
Today, our business consists of four components:
1. Catastrophe reinsurance written for our own account. This is our
traditional core business.
2. Catastrophe reinsurance written for the account of joint ventures. We have
established joint ventures to expand our access to capital and leverage our
catastrophe underwriting skill to produce fee income.
3. Specialty reinsurance. We write reinsurance that covers certain classes of
business where we believe we have a sound basis for understanding and
pricing the risk that we assume; examples include catastrophe exposed
workers' compensation and personal accident, aviation, property per risk,
surety, finite and terrorism.
4. Individual risk business. This business includes both primary insurance and
quota share reinsurance - with the common characteristic being the detailed
analysis that we perform of each underlying insurance policy; most of this
business is catastrophe exposed.
[BAR GRAPH OMITTED]
Gross Managed Premium
(In millions)
1998
1999
2000
2001
2002
Specialty Reinsurance Premium
Individual Risk Premium
Joint Venture Cat Premium
Renaissance Reinsurance Cat Premium
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RenaissanceRe Holdings Ltd. | Annual Report 2002
TABLE OF CONTENTS
Financial Highlights 3
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Letter to Shareholders 4
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Underwriting Review 8
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Finance 16
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Selected Financial Data 20
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Management's Discussion and Analysis 21
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Management's Responsibility for Financial Statements 40
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Report of Independent Auditors 40
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Consolidated Financial Statements 41
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Notes to Consolidated Financial Statements 45
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Glossary 60
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Directors and Officers 63
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Financial and Investor Information 64
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RenaissanceRe Holdings Ltd. | Annual Report 2002
FINANCIAL HIGHLIGHTS
(In thousands, except per share data) 2002 2001 2000 1999 1998
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Gross premiums written $1,173,049 $501,321 $433,002 $351,305 $270,460
Operating income available to common shareholders* 365,236 146,270 134,379 119,961 121,547
Net income available to common shareholders 364,814 164,366 127,228 104,241 74,577
Per Common Share Amounts
Operating income* - diluted $ 5.20 $ 2.34 $ 2.29 $ 1.94 $ 1.81
Net income - diluted 5.20 2.63 2.17 1.68 1.11
Book value 21.39 15.83 11.91 10.17 9.43
Dividends declared 0.57 0.53 0.50 0.47 0.40
Operating Ratios
Operating return on average common
shareholders' equity* 29.0% 17.8% 21.0% 19.8% 19.2%
Claims and claim expense ratio* 38.1% 45.0% 40.6% 34.9% 33.1%
Underwriting expense ratio 19.0 25.2 28.5 28.1 29.3
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Combined ratio 57.1% 70.2% 69.1% 63.0% 62.4%
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* Operating income excludes net realized gains (losses) on investments.
Operating income and operating ratios also exclude cumulative effect of a
change in accounting principle relating to goodwill in 2002, and exclude
fourth quarter after-tax charge of $40.1 million relating to Stonington in
1998. (See page 21, Management's Discussion and Analysis for discussion of
non-GAAP measures.)
Operating Return on Average Common Equity
[BAR GRAPH OMITTED]
1998 19.2%
1999 19.8%
2000 21.0%
2001 17.8%
2002 29.0%
Book Value per Common Share
[BAR GRAPH OMITTED]
1998 $9.43
1999 $10.17
2000 $11.91
2001 $15.83
2002 $21.39
Managed Cat Premium*
[BAR GRAPH OMITTED]
1998 $198
1999 $284
2000 $397
2001 $442
2002 $739
Operating Earnings per Common Share - Diluted
[BAR GRAPH OMITTED]
1998 $1.81
1999 $1.94
2000 $2.29
2001 $2.34
2002 $5.20
* The total gross catastrophe reinsurance premium written by Renaissance
Reinsurance and joint ventures. Amounts in millions.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
LETTER TO SHAREHOLDERS
[PHOTO OMITTED]
JAMES N. STANARD
Chairman of the Board
and Chief Executive Officer
DEAR FELLOW SHAREHOLDER,
2002 was an outstanding year for RenaissanceRe by almost any measure. We
continued to expand our leadership in our core property catastrophe reinsurance
business and took advantage of opportunities in new areas where our risk
management expertise could be leveraged. We more than doubled our managed gross
written premiums to over $1.2 billion, and achieved 150% growth in operating
profits from the prior year. Our 29% operating return on equity led the industry
by a wide margin for the tenth consecutive year.
We attribute this performance to the consistent execution of our strategy and
the stability and talent of our management team, together with a little help
from the weather, which contributed to an unusually low level of catastrophe
losses.
As we enter our tenth year - our eighth as a public company - I am pleased to
say we are better positioned than ever. We are the largest and most profitable
catastrophe excess reinsurer in the world. We are generating meaningful profits
from our individual risk and specialty reinsurance businesses. Our balance sheet
remains one of the strongest in the industry (relative to our size), and
provides us with a competitive advantage as the "flight to quality" continues in
the worldwide reinsurance market. Finally, our reputation for stability,
innovation and speed in serving our clients is well established.
Business Environment - Severe Turmoil in the Insurance Markets
The past 18 months have been the most tumultuous for the worldwide insurance
industry in my 30 years in the business. In last year's letter to shareholders,
I discussed the effects of the September 11th tragedy, corporate scandals and
bankruptcies, and adverse loss development that affected the worldwide insurance
industry. Since then, continued adverse development on loss reserves, credit
issues and steep declines in worldwide equity markets have severely eroded the
capital base of many insurers.
Because of our disciplined risk management, RenaissanceRe was not significantly
affected by these industry problems, and we are well positioned to grow. By
contrast, poor results have forced many competitors to re-evaluate strategies
that have proven unsuccessful, resulting in organizational changes, new
underwriting standards and exits from various lines of business. In this current
market environment, we see many opportunities, and our key challenge is to focus
our energies on a few of the best prospects.
Diversification - Leveraging Our Strengths to Create Powerful New Franchises
The makeup of our business has changed significantly over the past several years
as a reaction to opportunities presented by the insurance and reinsurance
markets. Previously, our superior financial performance was driven almost
exclusively by our leadership position in property catastrophe reinsurance. Now,
three additional areas are making meaningful contributions to the bottom line:
o We have drawn on our underwriting skill to establish joint ventures from
which we generate fee income by managing third party capital in the
reinsurance market.
o We have made further use of our knowledge of catastrophe risk by building
our individual risk business - which principally assumes commercial
insurance exposures that are catastrophe exposed.
o We have grown our specialty reinsurance business to the point where we are
seen as a clear market leader
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RenaissanceRe Holdings Ltd. | Annual Report 2002
[PHOTO OMITTED]
OPERATING COMMITTEE
Standing Left to Right: Bill Riker, John Lummis,
Sitting Left to Right: Dave Eklund, Jim Stanard, Jay Nichols
in certain classes of business, and have a growing reputation as a "first
call" market in these lines.
As a result of this evolution in our business model, we estimate that less than
50% of our 2002 operating profit came from property catastrophe reinsurance
underwriting, compared with over 80% in 1997.
Our development of joint ventures that assume reinsurance is a major extension
of our franchise. We have gone from managing just over $99 million of premium
for joint ventures in 2001 to managing $261 million in 2002. The growth in 2002
was driven by our success in establishing DaVinci Re Holdings - which was formed
in October 2001 and wrote $188 million of premium in 2002. The fee income we
generate from managing our joint ventures and other fee producing activities now
totals $54 million. Fee income, although it is variable, cannot be negative and
therefore does not require any capital to support this business, which is an
important factor in our high returns on equity.
In another important development in 2002, the hard market presented us with an
ideal window of opportunity to continue to transform our specialty reinsurance
and individual risk businesses from small "proof of concept" activities to
established market leaders in their respective areas, which contribute
meaningfully to our bottom line.
Why should we expand into these new areas when "refocusing on the core business"
is the mantra for many competitors? We have been making an underwriting profit
in these businesses almost as long as we have written catastrophe reinsurance -
specialty reinsurance since 1993 and Glencoe's individual risk operations since
1996. Our rapid growth is not a radical change in our strategy, but rather a
reaction to market opportunity.
Corporate Governance
Over the course of our history, we have worked hard to develop a tradition of
excellence throughout our business, and that has included excellence in
representing our shareholders' interests. Over the last several years,
RenaissanceRe's Board was transformed from one led primarily by the private
equity investors who helped found our Company (and whose influence was very
beneficial to our growth and development), to a fully "mature" Board that
reflects our status as a broadly held public entity. During the course of this
transformation, RenaissanceRe has already put in place most of the practices
that are now being mandated by the regulators in their efforts to enhance
practices throughout the business community.
During 2002, our Board of Directors conducted a review of our corporate
governance policies and procedures. The Board retained Tillinghast - Towers
Perrin and outside counsel to assist it in this review. Partly as a result of
this review, we implemented various changes over the course of the year:
o We expanded the mandate of our corporate governance committee, comprised
solely of independent directors, to assume responsibility for the
nomination of additional directors at appropriate times, and monitor and
manage the effectiveness of our Board of Directors.
o We adopted a written corporate governance policy, which summarizes our
governance procedures, structures and policies, and outlines the
responsibilities of each of our committees. Among other things, the policy
formalized our practice of scheduling executive sessions of our
non-management directors at each Board meeting.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
LETTER TO SHAREHOLDERS
"IN THIS CURRENT MARKET ENVIRONMENT, WE SEE MANY OPPORTUNITIES, AND OUR KEY
CHALLENGE IS TO FOCUS OUR ENERGIES ON A FEW OF THE BEST PROSPECTS."
o Our Board reviewed and determined that each of our non-management directors
satisfied the standards of "independence" as defined under both the current
and pending New York Stock Exchange rules.
o We expanded the mandate of our Investment Committee (accordingly recast as
our Investment and Risk Management Committee) to include the review of
insurance liabilities and other financial risk matters.
We plan to continue to develop our corporate governance policies and procedures
to seek to keep pace with our rapidly evolving business.
Management Team - Formation of the Operating Committee
If there is a single key to our record of success over the past several years,
it is the quality of our management team. I believe that our top management team
is the best in the reinsurance business, and is deeper in talent than is
generally recognized. We have 20 senior officers, each of whom has embraced the
RenaissanceRe culture, and are the most critical factors in driving the growth
in our business.
As an organization, we value clarity and simplicity: there should be no
confusion as to who is accountable for each decision and activity. Having worked
together collaboratively for many years, we can make decisions quickly and this
has developed into an important competitive advantage, since we are known in the
market as an organization that can effectively execute complex transactions very
quickly. Finally, we do not work in organizational silos. Every significant
risk-taking decision is viewed by "multiple pairs of eyes."
As we are growing into several operations in several different locations, we
have recognized the need to adapt our management procedures. This year we
established an "Operating Committee" of our five top executives: Bill Riker,
Chief Operating Officer and President; Dave Eklund, President, Renaissance
Reinsurance; John Lummis, Chief Financial Officer; Jay Nichols, President,
Renaissance Underwriting Managers; and myself. This group approves all major
decisions, and we place great trust in each other's judgment, and on clear and
complete communication among the group.
Financial Measures - Charting RenaissanceRe's Performance
We judge the performance and financial health of our Company by continuously
reviewing a number of financial measures. The most fundamental one, in my
judgment, is growth in tangible book value per share (plus dividends): for each
share of stock, how much "real money" - excluding soft assets such as goodwill
and tax loss carryforwards - has been either accumulated in the Company or
transferred to the shareholder over time. This is a measure that we manage to
both in the short run and in the long run. This is how I look at the value of my
own shareholding in the Company, which represents the majority of my personal
net worth. A business is usually most successful in accomplishing what it is
focusing on, and in this case, we have been very successful. Since the end of
1995, the year of our IPO, through the end of 2002, we have produced a
compounded annual growth rate in tangible book value per share of 19%. I do not
believe that any other public company in the insurance or reinsurance industry
has matched our record of growth in tangible book value per share over the same
period.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
A second measure, less important, but still meaningful, is growth in operating
earnings per share. In a cyclical business it would be a serious mistake to
focus exclusively on this measure in the short run. When prices in the insurance
markets decline, RenaissanceRe will turn down under-priced business and let the
top line fall (as we did in the last soft market of 1996-1998). However, over
the course of cycles, measuring earnings from peak to peak, or average growth
over long periods, we should be able to deliver surprisingly good growth. Our
track record from 1995 through 2002 represents a compounded annual growth rate
of 13% - which includes periods of relatively modest growth, as well as periods
of explosive growth such as the past two years.
Of course, all shareholders want to see the stock price appreciate, but as an
investor who expects to be an owner for the long run, I do not worry about the
short-term swings in valuation. I believe that valuation will take care of
itself if we continue to achieve strong growth in tangible book value per share.
Challenges for 2003
The turmoil in the insurance market means that there will be many more
opportunities available to us than we can hope to realize. We will balance our
desire for growth in this environment with the discipline and focus that have
enabled us to deliver superior performance for shareholders over the course of
our history.
Our main priorities for 2003 are to:
1. Continue to build RenaissanceRe's position as the world's leading property
catastrophe reinsurance market;
2. Continue to meet or exceed our joint venture partners' expectations;
3. Continue to build our specialty reinsurance and individual risk businesses
into sustainable franchises;
4. Successfully enter a small number of additional business business segments,
probably through startup, purchase of renewal rights and/or joint ventures;
and
5. Develop our management talent and organizational structure to maintain our
entrepreneurial culture as our business and financial scale expand.
As always, we greatly appreciate your continued support of RenaissanceRe.
Thank you.
/s/ James N. Stanard
JAMES N. STANARD
Chairman of the Board
Chief Executive Officer
RenaissanceRe Holdings Ltd.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
UNDERWRITING REVIEW
[PHOTO OMITTED]
UNDERWRITING
Standing Left to Right: Ross Curtis, Bill Jagaer, Russell Smith,
Rebecca Roberts
Sitting Left to Right: Mike Cash, Kevin O'Donnell, Jonathan
Paradine
REINSURANCE
Catastrophe Reinsurance
Renaissance is one of the largest writers of catastrophe reinsurance in the
world, with an estimated market share of over 10%. Our business has achieved
exceptional growth, with managed catastrophe premium increasing from $442
million in 2001 to $739 million in 2002. Renaissance achieved this growth by
being the market of choice for many reinsurance buyers and brokers, as evidenced
by our number one position in Flaspohler Research Group's July 2002 Broker
Market Opportunities Survey. Our "best overall" score in this survey indicated
that Renaissance was the highest rated, best overall reinsurer in 2002.
Renaissance was also voted the best lead market for new coverages in per
occurrence excess property catastrophe lines.
Value Added
While outsiders often view catastrophe reinsurance as a commodity, we have
proven our ability to differentiate our product in a number of ways:
o Advisory services. We carry client service to a higher level by consulting
with clients on their catastrophe risk management questions, and routinely
conducting seminars for clients on catastrophe risk.
o Customized products. Although catastrophe reinsurance is often offered with
standard contract terms, we focus on designing customized products to fit
specific client needs. Proprietary technologies and systems allow us to
show brokers and clients alternative transaction structures and related
pricing to help them make more effective risk management decisions.
o Consistent pricing. Renaissance prices its coverage based on the underlying
risk exposures of a client. In a "soft" market environment, some have
suggested that we are "too expensive." In a "hard" market environment, some
have suggested that we are "too cheap." The reality is that we approach
pricing consistently across market conditions, and our clients appreciate
the predictability of our decision-making.
o Pricing validation. Our reputation as the premier underwriter of
catastrophe risk enables us to attract quality participants to open market
reinsurance programs in which we are the lead underwriter. If Renaissance
is leading a program, clients can expect that it will be successfully
completed.
o Capacity for large lines. Because of our confidence in our risk selection,
together with the multiple balance sheets that we manage (Renaissance
Reinsurance, DaVinci Re and Top Layer Re), we have the ability to provide
large limits to clients.
o Credit quality. Renaissance Reinsurance, DaVinci Re and Top Layer Re each
have high credit ratings. Because of our success in managing through large
loss years with profits, while most of the rest of the industry had
substantial losses, we are recognized for our risk management skills, and
seen as a partner that can be trusted, even more than the ratings would
suggest.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
[PHOTO OMITTED]
RENAISSANCERE OF EUROPE
Standing Left to Right: Robin Lang, Bryan Dalton, Deidre Doyle,
James Burnett-Herkes
Sitting Left to Right: John Gill, Ian Branagan, Richard Emslie,
John-Paul O'Leary
Given the value that we add, clients reward us with a greater amount of high
quality business. We are often able to obtain larger participations on "open
market" business, for which many reinsurers compete. We are also invited to
participate in business that is not presented to the open market. We estimate as
much as 30% of our total catastrophe premium comes from these private
transactions.
2002: Superior Performance in a Year of Light Cat Activity
For 2002, total catastrophe losses to the worldwide insurance industry are
estimated at approximately $13.5 billion; by contrast, using our simulation
model, which includes both low loss years and high loss years, we estimate an
average loss year for the industry worldwide to be $34 billion. We estimate that
our 2002 profits included approximately $70 million of benefit from the low
catastrophe loss activity during the year, versus a year of "normal" losses.
While we were again the top performer among our peers in 2002, both in terms of
underwriting and return on equity, we are even prouder of our performance in
more challenging years, such as the high catastrophe years of 2001 and 1999,
when our out-performance was even more pronounced.
2003: A Market for Skilled Underwriters
We view the current catastrophe market as one that plays to our strengths.
Despite the large price increases that followed the September 11th tragedy,
there continues to be wide disparity in the quality and pricing of business in
the catastrophe marketplace. Although we are confident in the quality of our own
book, which is priced to acceptable returns, we estimate that over 50% of the
business written in the overall market is priced to a negative or low return.
In light of the wide disparity in catastrophe market pricing, we believe
skillful underwriting and risk assessment remain critical to success. For
example, even as recently as 2002, some companies learned of the inadequacy of
their understanding of flood risk in Europe. Similarly, contract terms -
particularly how contracts deal with issues such as terrorism - are very
important, and we have been an industry leader in developing new contract terms.
While good modeling has been one key to our success, our emphasis on clarity in
contract terms has also been a significant contributor.
Specialty Reinsurance
During the year, we achieved dramatic growth in our specialty reinsurance
business line, booking $247 million of written premium in 2002 compared with
$78 million in 2001. This premium was generated from 82 programs, primarily
focused on catastrophe-exposed workers' compensation and personal accident,
aviation, property per risk, surety, finite and terrorism.
Business Focus
Our approach to specialty reinsurance has been grounded in our disciplined
underwriting: we seek to leverage the capabilities we have developed in our core
business to select specialty areas. We do not aspire to be "all things to all
people." Instead, we focus on a relatively small number of transactions, the
terms of which generally bear the following features:
o Expected margins in any class of business must be clearly positive, and
result in an acceptable return;
o The risk can be analyzed quantitatively;
o The "worst case" exposure of the risk is limited;
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RenaissanceRe Holdings Ltd. | Annual Report 2002
UNDERWRITING REVIEW
[PHOTO OMITTED]
UNDERWRITING SUPPORT
Standing Left to Right: Georgina Trott, Stephanie Slayton,
Tina Caton, Giselle Baksh
Sitting Left to Right: Josie Smith, Abigail Saunders, Maria Bento
o For each class of risk, we can generate significant premium from a
relatively small number of transactions, and influence terms and
conditions;
o There is low claims frequency; and
o The classes of risk present us with sustainable business.
There are various classes of business that satisfy these criteria, but many that
do not. As a result, we remain selective, though poised to expand further in a
market environment where terms and conditions continue to improve.
Growing a Franchise
We have begun to establish a significant market presence and an important new
franchise for Renaissance in certain specialty areas. For example, we have
become the market leader in writing high layer, catastrophe-exposed workers'
compensation reinsurance. As in our core catastrophe reinsurance business, we
have become widely respected for the modeling capabilities and other strengths
we bring to this segment, and we view this business as an important long-term
addition. In other specialty classes of business, it is too soon to judge the
longevity of our market presence, though we believe that Renaissance is
positioned to become a "first call" market across other lines of reinsurance.
In order to define the risk profile of each line of specialty reinsurance, we
establish probability distributions and assess the correlations with the rest of
our portfolio. In lines with catastrophe risk, such as workers' compensation, we
are leveraging directly off our skill in modeling for our core business, and it
is important to understand the correlations between these lines and our core
catastrophe reinsurance portfolio. For other classes of business, which have
little or no natural catastrophe exposure, and hence have significantly less
correlation with our core catastrophe reinsurance business, probability
distributions are derived from a variety of underlying information, including
recent historical experience, but with the application of judgment as
appropriate. The nature of some of these businesses lends itself less to the
scientific analysis that we use on the catastrophe book, reflecting both the
nature of available exposure information, and also the impact of human factors.
We believe that we benefit from having probability distributions to represent
the underlying risks so that we can make consistent underwriting decisions, and
manage our total risk portfolio. Overall we seek conservative representations of
the risks.
Outlook for 2003
Since September 11th, 2001, prices have increased across virtually all specialty
classes of reinsurance. At the same time, for some classes, and even for certain
business within profitable classes, pricing remains below that required for an
acceptable return. In this environment, underwriting skill will continue to be
critical to ensure the quality of our book. We remain focused on identifying and
writing business that will enable us to achieve better-than-market-average
results. We believe that we have good prospects for further growth in 2003.
Specialty Reinsurance Premium
[BAR GRAPH OMITTED]
2000 $ 37.7
2001 $ 77.5
2002 $247.0
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RenaissanceRe Holdings Ltd. | Annual Report 2002
[PHOTO OMITTED]
STRUCTURED PRODUCTS
Standing Left to Right: Laurie Orchard, Larry Richardson
Sitting Left to Right: Paul Kaplan, Sean Moore
Structured Products
Of the $739 million of managed catastrophe premium that we wrote in 2002, $261
million was written in our joint ventures, managed by our Structured Products
Group. This compares with $99 million of premium written in our joint ventures
in 2001. The rapid growth in 2002 reflects the effectiveness of our Structured
Products Group in establishing DaVinci Reinsurance as a significant market in
its first full year of operation. In addition, Structured Products was involved
in ceded reinsurance transactions with over $70 million of ceded premium. In
total for 2002, our Structured Products Group was responsible for $54 million of
fee income, and $52 million of equity pick-up from the joint ventures in which
we have invested.
Joint Ventures
At the core of our Structured Products Group is the management of our joint
venture relationships. Our largest joint ventures are DaVinci Reinsurance and
Top Layer Re. While these joint ventures differ in their details, the broad
theme is the same: significant private investors seek access to the superior
underwriting skill of Renaissance, and invest in special purpose companies that
are managed and operated by our Structured Products Group.
The advantages to investors in the joint ventures are:
o Immediate access to the superior catastrophe reinsurance underwriting skill
of Renaissance, with the same underwriters for our joint ventures as for
Renaissance itself;
o Entrance and exit at book value, resulting in financial returns that are
primarily dependent upon catastrophe risk experience;
o Diversification benefit for those investors who do not have catastrophe
risk exposures;
o Financial returns, net of fees, which on a modeled-expected basis exceed
the returns of the average catastrophe reinsurance portfolio, as well as
many other investment opportunities.
The advantages to RenaissanceRe from these joint ventures are:
o An additional source of capital;
o An additional balance sheet for our customers;
o A vehicle whose capital can be readily managed up or down in response to
reinsurance market conditions, independent of public equity market
conditions; and
o A source of fee income.
Our Structured Products Group has both strong deal-oriented skills and
operational expertise to ensure that the joint venture operations are integrated
into our overall operations.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
UNDERWRITING REVIEW
------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL REINSURANCE UNDERWRITING VEHICLES
Capital at
Business Ownership Ratings December 31, 2002
Renaissance Reinsurance Ltd. Property Cat and 100% RenaissanceRe S&P "A+" $1.1 Billion
other short-tail lines Holdings Ltd. A.M. Best "A+"
Moody's "A1"
Top Layer Reinsurance Ltd. High Layer Non-U.S. 50% State Farm S&P "AA" $100 Million (plus
Property Cat Mutual Automobile A.M. Best "A+" $3.9 Billion stop-
Insurance Company, loss protection from
50% RenaissanceRe State Farm)
Holdings Ltd.
DaVinci Reinsurance Ltd. Property Cat and 50% State Farm, S&P "A" $585 Million
other short-tail lines 25% RenaissanceRe, A.M. Best "A"
12.5% Max Re,
12.5% other investors
------------------------------------------------------------------------------------------------------------------------------
Ceded and Assumed Reinsurance
Our Structured Products Group has created new ceded reinsurance structures
through which Renaissance cedes a participation in its catastrophe portfolio to
stable, long-term partners. One of the unique products resembles a quota share,
but is highly customized and is written with the underlying results tied to
Renaissance's underwriting year loss ratio. Transactions are tailored to each
client's particular needs and risk tolerance, based upon a pre-agreed formula.
RenaissanceRe receives an override and profit commission based on the results of
the portfolio, and has the ability to reduce or eliminate any overlap in
exposure between the clients' portfolios and the Renaissance portfolio. These
structures provide additional sources of flexible capital, augment our
traditional reinsurance purchases, and contribute to our total fee income.
Our Structured Products Group is also active in executing structured
transactions to assume risk, such as catastrophe linked securities. With our
proprietary REMS(C) system, we can successfully model these risks and accurately
determine which bonds have favorable risk/return profiles.
Strategic Investments
The Structured Products Group assists in analyzing and executing on various
strategic investments. In 2002, we made an equity investment in Platinum
Underwriters Holdings, Ltd. and also agreed to advise Platinum on catastrophe
risk management. We currently own 9.2% of the equity in Platinum, plus warrants
to purchase 2.5 million additional shares. We will receive an annual fee for
advice on Platinum's property catastrophe portfolio and this investment will
provide us with a window on the hardening casualty market.
Outlook for 2003
For 2003, we expect to be very active across the full range of Structured
Product activities. Joint venture premium is expected to grow, as are structured
assumed and ceded reinsurance transactions. In addition, we continue to explore
various strategic investments and additional joint venture opportunities,
particularly for classes of risk that are not correlated with catastrophe risk.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
[PHOTO OMITTED]
INDIVIDUAL RISK
Standing Left to Right: Craig Tillman, Peter Montpelier,
Bill Ashley, Nancy Spurling, Maggie Situ
Sitting Left to Right: Nikki Riker, Terry Faulkenberry,
Patricia Hendrickson, Dionne Burrows
INDIVIDUAL RISK
Like our Reinsurance segment, our Individual Risk segment has achieved
remarkable growth. Gross written premium rose to $260 million in 2002 from
$50 million in 2001. Most of the business that we write is commercial insurance
(or quota share reinsurance) that is catastrophe-exposed, which enables us to
leverage our core catastrophe underwriting and management skills.
Dramatic Improvement in the Price Environment
Since the September 11th tragedy, the commercial property insurance market has
seen substantial price increases, in many cases over 100%, coupled with reduced
coverage. There has been an increased recognition of catastrophe risk, and a
diminished supply of capacity. Before this change in the price environment, we
generally did not find the commercial property insurance market to be adequately
priced; following September 11th, the market began to meet our hurdle rate.
Unique Approach to the Business
We have taken a unique approach to our Individual Risk business; in fact, the
very concept of Individual Risk is unique, as we have combined the management of
primary insurance written directly for our subsidiary insurance companies,
together with quota share reinsurance that we write behind other, unaffiliated
primary insurance companies. Because quota share reinsurance has a similar
financial risk profile to primary insurance, and each calls for a detailed
understanding of the underlying policies, we group the two together. Each
individual policy - with relatively small individual exposures - is evaluated,
and the originator of the risk must manage, at a micro level, the construction
of a well-priced, balanced portfolio. (By contrast, our reinsurance business is
oriented around the analysis of existing portfolios of risks, and assessing the
appropriate pricing of large limit excess of loss reinsurance).
Our approach to Individual Risk business is also different from many in the
industry in that we are using external resources for many key functions. While
we view catastrophe risk underwriting as central to our value added - and
perform all of the catastrophe related underwriting and risk management, we are
extensively using outside resources to perform such functions as underwriting of
non-catastrophe risks, policy processing, premium accounting, and claims
handling. In turn, we have built an audit team to monitor and manage the
performance of these functions.
13
RenaissanceRe Holdings Ltd. | Annual Report 2002
UNDERWRITING REVIEW
[PHOTO OMITTED]
INFORMATION TECHNOLOGY
Standing Left to Right: Dale Woods, Kenneth Lamb, Dion Tucker
Sitting Left to Right: Shalanda Durrant, John Wineinger,
Lloyd Holder
Origination
The Individual Risk business we write comes to us from three distribution
channels:
1. Brokers. We write primary insurance through brokers on a risk-by-risk
basis; all underwriting and back-office functions for this business is
based in our offices in Bermuda while claims handling is outsourced.
2. Program Managers. We also write primary insurance through a small number of
high quality, specialized program managers, who produce business under well
defined underwriting guidelines, and provide most of the back-office
functions.
3. Quota Share Reinsurance. We write quota share reinsurance, with primary
insurers who, similar to our program managers, provide most of the
back-office functions. The underwriting responsibility is divided between
us, focusing on catastrophe risk, and the primary insurer, focusing on
other classes of risk.
We have a full set of corporate vehicles to support our growth in Individual
Risk. To date we have predominantly used our Glencoe subsidiary as our vehicle
for Individual Risk business. Glencoe, which is a Bermuda-based company, is
permitted to write on an excess and surplus lines basis in 51 U.S.
jurisdictions. Going forward, we also expect to use two other vehicles:
Stonington, which is a Texas-based company permitted to write on an "admitted"
basis in 50 U.S. jurisdictions; and Lantana, which is a Bermuda-based company
permitted to write business on an excess and surplus lines basis in 41 U.S.
jurisdictions. Both Stonington and Lantana are intended to write business on a
taxable basis in the U.S., recognizing that some of our new activities may call
for a larger U.S. presence.
Outlook for 2003
After the substantial price increases for catastrophe exposed commercial
insurance in 2002, we expect the rate of price increases to slow in 2003. For
this business, we continue to expect premium growth, which will be generated
predominantly by adding new programs (as distinguished from further price
increases on the existing book). With the rapid growth of our Individual Risk
business, we remain focused on developing our staff to support the growth; we
have over 29 employees engaged in this business, and expect to further grow our
staff over the course of 2003.
Individual Risk Premium
[BAR GRAPH OMITTED]
2000 $ 50.3
2001 $ 49.9
2002 $260.4
14
RenaissanceRe Holdings Ltd. | Annual Report 2002
[PHOTO OMITTED]
MARKETING AND HUMAN RESOURCES
Standing Left to Right: Vanessa Perreira, Fawn Burgess,
Wanda Richardson
Sitting Left to Right: Michelle Rafferty, Talitta Tucker
OPERATIONS SUPPORT
Superior systems and effective operational support are critical to the
RenaissanceRe business model. In particular, our Information Technology Team has
continued to provide excellent day-to-day support while pursuing strategic
projects to position the Company to operate more effectively in the future.
Achievements over the past year included:
o Completion of significant upgrades to our REMS(C) model by adding a module
to increase our testing of low probability catastrophe events.
o Creation of an initial model of terrorism. While this model is still
subject to further development, it does allow us to manage against
concentrations within geographic zones, and to consistently compare and
rank reinsurance transactions that are exposed to terrorism risk.
o Implementation of TRAC(C), a new underwriting tool aimed at improving
primary insurance customers' understanding of catastrophe risk.
o A full audit of our systems and our capacity to manage disasters that would
shut down any of our locations.
Various other operations support teams have also been important to our success
over the past year:
o Our Underwriting Support Team is responsible for managing the back-office
of our reinsurance operations, including contract processing, premium
accounting and claims. Over the past year, this team successfully executed
an expansion of our joint venture relations to include DaVinci, and the
expansion into specialty reinsurance.
o Our Marketing Team is responsible for coordinating our contacts with
brokers and customers, and our growth over the past year has been a
function of the relationships that have developed from our focused
marketing efforts.
o Our Human Resources Team oversees the management of our Company's most
important asset - its people.
15
RenaissanceRe Holdings Ltd. | Annual Report 2002
FINANCE
[PHOTO OMITTED]
FINANCE
Standing Left to Right: Steve Weinstein, Preston Hutchings,
Todd Fonner, Susan Holland, Jenny Swan
Sitting Left to Right: Alana Smith, Diana Davies, Marty Merritt,
Helen James
CAPITAL MANAGEMENT
While underwriting profit and reliable investment returns are critical in
generating returns under our business model, effectively managing our capital
base is the other essential factor. For 2002, our 29% return on equity reflects
not only success in our operations, but also the "right size" of our capital
base. Even excluding our estimated $70 million benefit from the light
catastrophe experience in 2002, our return on equity would have been 24%,
demonstrating the effective deployment of our capital in a positive reinsurance
market environment.
This return on equity is especially impressive given the $827 million of capital
that we raised in 2001: $233 million of common equity; $145 million of perpetual
preferred; $149 million in senior notes; and $300 million of equity invested by
outside investors in DaVinci. We raised most of this capital in the aftermath of
September 11th, essentially making the judgment that this capital could be
deployed through organic growth of our business. With the benefit of hindsight,
this judgment proved correct: using the proceeds of the 2001 capital
transactions, we increased the capital of each of our operating subsidiaries,
and then dramatically increased our premium volume, growing premium by over $259
million in Renaissance, $224 million in Glencoe, and $188 million in DaVinci
(comparing 2002 with 2001).
For 2002, our biggest capital raising "event" was the strong operating
performance of our Company, which generated $365 million in net income. By the
end of 2002, we had deployed additional capital in our operations: we increased
the capital of Renaissance Reinsurance by $300 million to $1.1 billion; we
increased the capital of Glencoe by $123 million to $325 million; we invested
$84 million in Platinum Underwriters Holdings, Ltd.
As we look forward to 2003, we remain optimistic about the prospects for our
business, and retain a bias towards having some excess capital so that we have
the flexibility to pursue new business opportunities. To this end, in the first
quarter of 2003, we raised $99 million in a senior notes offering and $97
million in a perpetual preferred offering, which will supplement the significant
capital growth from earnings that we expect for the year.
To gauge the level of risk in our capital structure, we have a proprietary risk
management system that evaluates the probability of default and expected loss
for each component of our capital. Our objective is to test that risk levels are
consistent with indicated ratings. Our high returns on equity are not a function
of exposing our creditors to excessive risk. Recognizing this, we have strong
financial strength ratings and debt ratings from the various credit rating
agencies as shown below.
--------------------------------------------------------------------------------
A.M. Standard
Best Moody's & Poor's
RenaissanceRe Holdings Ltd.
---------------------------------------------------------------------------
Senior Debt a A3 A-
Perpetual Preferred bbb Baa2 BBB
Trust Preferred bbb Baa1 BBB
RenaissanceRe Reinsurance Ltd.
---------------------------------------------------------------------------
Financial Strength A+ A1 A+
Top Layer Reinsurance Ltd.
---------------------------------------------------------------------------
Financial Strength A+ AA
Glencoe Insurance Ltd.
---------------------------------------------------------------------------
Financial Strength A
DaVinci Reinsurance Ltd.
---------------------------------------------------------------------------
Financial Strength A A
--------------------------------------------------------------------------------
16
RenaissanceRe Holdings Ltd. | Annual Report 2002
INVESTMENTS AND CASH BY CATEGORY
--------------------------------------------------------------------------------
At December 31, 2002
[PIE CHART OMITTED]
Cash and Cash Equivalents 3%
Other 8%
Short-Term Investments 18%
Emerging markets and High Yield Debt (1) 6%
Sovereign and Supranational (Aaa/Aa) 11%
U.S. Treasuries and Agencies (Aaa) 21%
Investment Grade Corporates (1) 14%
Mortgage Backed Securities (1) (Aaa) 9%
Asset Backed Securities (Aaa) 10%
(1) Represents securities which are externally managed; a portion of Investment
Grade Corporates are also externally managed.
--------------------------------------------------------------------------------
INVESTMENTS
Performance
In aggregate, the investment portfolio of RenaissanceRe returned 7.6% for 2002
with out-performance across all components of our fixed income portfolio offset
somewhat by a) an overweight position in cash and equivalent, and b) weak
performance in alternative assets. The fixed income portfolio returned 8.9% for
the year. By avoiding most of the year's notable credit problems, all components
of the fixed income portfolio outperformed their benchmarks - some by very
substantial amounts. In particular, the non-investment grade portion
(approximately $220 million at December 31) performed exceptionally well,
returning 8.6% for the year, well above the 1.9% lost by the Merrill Lynch High
Yield Index.
We chose to have a larger than target allocation to short term investments -
reflecting our substantial operating cash flows and our concern about the
potential for an increase in interest rates. The short-term investment portion
of the Company's portfolio returned 2.0%, which was greater than the average
3-Month LIBOR rate for the year. Only our small alternative asset portfolio ($96
million at December 31, 2002), which began to expand its hedge fund allocation
in mid-year, provided a less than satisfactory return; the 0.9% generated by the
portfolio was in line with relevant indices.
Portfolio Risk and Duration
Because most of RenaissanceRe's reinsurance business is short-tail in nature,
our liability portfolio does not require a particular portfolio duration.
Rather, we manage the portfolio's duration - and allocate amongst asset classes
- in order to deliver an attractive return with limited risk. In fact, for the
three years ending December 31, 2002 our portfolio delivered approximately 90%
of the return of the widely followed Lehman Brother U.S. Aggregate Index - but
with only 60% of the monthly variability of returns. By managing interest rate
and credit risk in this way, we can: a) provide our clients with the security
that comes from knowing that we have a high quality investment portfolio, with
limited risks; and b) help to provide our shareholders with annual appreciation
in book value per share. As a consequence of this approach to portfolio
management, and because interest rates have fallen to historically low levels,
our portfolio's effective duration stood at 2.25 years at year end - as opposed
to our "theoretical" target of 2.75 - 3.00 years. Until interest rates rise
appreciably, we are likely to maintain this duration posture and to remain
overweight in the short-term investment category of our portfolio.
17
RenaissanceRe Holdings Ltd. | Annual Report 2002
FINANCE
Administration
RenaissanceRe is responsible for managing the investment portfolios of its
wholly-owned companies as well as those of its partly-owned joint venture
affiliates. Most of these portfolios are also consolidated on our balance sheet.
So, although the total of these managed portfolios amounted to the $3 billion
shown in the accompanying financial statements, RenaissanceRe's effective
"economic interest" in these portfolios was approximately $2.4 billion at
year-end - and smaller still if only the wholly-owned companies are considered.
These various portfolios have slightly varied investment objectives - but they
all share a strong focus on liquidity, high average credit quality and short
duration (relative to many insurance company portfolios).
To deal with the administrative challenges of managing multiple portfolios, and
to fulfill its fiduciary responsibilities to its joint-venture partners,
RenaissanceRe formed an internal mutual fund in mid-2002. Because substantially
all internally managed assets are invested in this fund, Renaissance Investment
Holdings Ltd., RenaissanceRe and its affiliates receive identical returns on the
portions of their portfolios having identical objectives. The fund, which is
rated AAA-f by Standard & Poor's, consists of Treasuries, U.S. Government
agencies, highly-rated sovereigns, supranationals, asset backed securities and
corporate obligations. Approximately 85% of the portfolio is rated Aaa/AAA and
the balance Aa/AA. Together with our banks and custodian, we have structured an
innovative secured credit facility that enables the RenaissanceRe companies and
affiliates investing in our fund to use their shares in this internal mutual
fund as collateral to support the letters of credit that those companies and
affiliates are frequently required to post.
18
RenaissanceRe Holdings Ltd. | Annual Report 2002
FINANCIAL INFORMATION
RenaissanceRe Holdings Ltd. and Subsidiaries
TABLE OF CONTENTS: FINANCIAL INFORMATION
Selected Financial Data 20
-------------------------------------------------------------------------------
Management's Discussion and Analysis 21
-------------------------------------------------------------------------------
Management's Responsibility for Financial Statements 40
-------------------------------------------------------------------------------
Report of Independent Auditors 40
-------------------------------------------------------------------------------
Consolidated Balance Sheets 41
-------------------------------------------------------------------------------
Consolidated Statements of Income 42
-------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity 43
-------------------------------------------------------------------------------
Consolidated Statements of Cash Flows 44
-------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 45
-------------------------------------------------------------------------------
Glossary 60
-------------------------------------------------------------------------------
Directors and Officers 63
-------------------------------------------------------------------------------
Financial and Investor Information 64
-------------------------------------------------------------------------------
19
RenaissanceRe Holdings Ltd. | Annual Report 2002
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
Income Statement Data
Gross premiums written $1,173,049 $ 501,321 $ 433,002 $ 351,305 $ 270,460
Net premiums written 923,711 339,547 293,303 213,513 195,019
Net premiums earned 760,905 333,065 267,681 221,117 204,947
Net investment income 104,098 75,156 77,868 60,334 52,834
Claims and claim expenses incurred 289,525 149,917 108,604 77,141 112,752
Acquisition costs 95,644 45,359 38,530 25,500 26,506
Operational expenses 49,159 38,603 37,954 36,768 34,525
Net income available to common shareholders 364,814 164,366 127,228 104,241 74,577
Earnings per common share - diluted 5.20 2.63 2.17 1.68 1.11
Dividends per common share 0.57 0.53 0.50 0.47 0.40
Weighted average common shares outstanding 70,211 62,391 58,728 61,884 67,284
--------------------------------------------------------------------------------------------------------------------------------
At December 31,
(amounts in thousands) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total investments and cash $3,128,879 $2,194,430 $1,082,046 $1,059,790 $ 942,309
Total assets 3,745,736 2,643,652 1,468,989 1,617,243 1,356,164
Reserve for claims and claim expenses 804,795 572,877 403,611 478,601 298,829
Reserve for unearned premiums 331,985 125,053 112,541 98,386 94,466
Debt 275,000 183,500 50,000 250,000 100,000
Capital securities (1) 84,630 87,630 87,630 89,630 100,000
Minority interest - DaVinci (2) 363,546 274,951 -- -- --
Total shareholders' equity 1,642,035 1,225,024 700,818 600,329 612,232
Total shareholders' equity attributable
to common shareholders 1,492,035 1,075,024 700,818 600,329 612,232
Common shares outstanding 69,750 67,893 58,863 59,058 64,938
--------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands, except per share data) 2002 (4) 2001 2000 1999 1998 (5)
--------------------------------------------------------------------------------------------------------------------------------
Operating Ratios and other non-GAAP measures
Operating income to common shareholders (3) $ 365,236 $ 146,270 $ 134,379 $ 119,961 $ 121,547
Operating earnings per common share - diluted 5.20 2.34 2.29 1.94 1.81
Operating return on average common
shareholders' equity 29.0% 17.8% 21.0% 19.8% 19.2%
Claims and claim expense ratio 38.1% 45.0% 40.6% 34.9% 33.1%
Underwriting expense ratio 19.0 25.2 28.5 28.1 29.3
--------------------------------------------------------------------------------------------------------------------------------
Combined ratio 57.1% 70.2% 69.1% 63.0% 62.4%
--------------------------------------------------------------------------------------------------------------------------------
Book value per common share $ 21.39 $ 15.83 $ 11.91 $ 10.17 $ 9.43
--------------------------------------------------------------------------------------------------------------------------------
(1) Company obligated mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures of RenaissanceRe.
(2) Interests of external parties in respect of net income and shareholders'
equity of DaVinciRe Holdings Ltd.
(3) Operating income excludes net realized gains or losses on investments. (See
page 21, Management's Discussion and Analysis for discussion of non-GAAP
measures)
(4) Operating income, operating earnings per common share - diluted and
operating return on average common shareholders' equity for 2002 also
exclude the cumulative effect of a change in accounting principle.
(5) For 1998, operating income available to common shareholders, operating
earnings per common share - diluted, the claims and claim expense ratio,
the underwriting expense ratio, the combined ratio and the operating return
on average shareholders' equity also exclude the impact of an after tax
charge of $40.1 million taken in the fourth quarter of 1998 related to our
subsidiary, Stonington. Including the charge related to Stonington for
1998, operating income available to common shareholders, operating earnings
per common share - diluted, the claims and claim expense ratio, the
underwriting expense ratio, the combined ratio and the operating return on
average shareholders' equity would have been $81.5 million, $3.63, 55.0%,
29.8%, 84.8% and 12.9%, respectively.
20
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
The following is a discussion and analysis of our results of operations for the
year ended December 31, 2002 compared with the years ended December 31, 2001 and
December 31, 2000. The following also includes a discussion of our financial
condition at December 31, 2002. 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 our "Note
on Forward-looking Statements" on page 38 of this Annual Report. In addition, we
refer you to our Risk Factors included in other filings made with the Securities
and Exchange Commission from time to time.
We utilize two non-GAAP measures, operating income and operating return on
equity, to measure our performance. We currently use these measures to evaluate
the underlying fundamentals of our operations and believe them to be useful
measures of our corporate performance. We define operating income as net income
which excludes net realized gains and losses from the sale of investments and
certain one-time adjustments. Realized gains and losses from the sale of
investments are derived from the timing of the sale of investments and are not
derived from our operating performance. Operating return on equity is calculated
by dividing operating income by the average net book value of our common equity
for the year.
In calculating operating income, we have also excluded a one-time charge
occurring in 2002:
o In 2002, we adopted a new accounting pronouncement, SFAS 142 "Goodwill and
Other Intangible Assets." During 2002, after completing our initial
impairment review of our goodwill, we decided to reflect goodwill at zero
value and record a write-off of $9.2 million. Therefore, we felt it was
appropriate to exclude this charge from our calculation of operating
income, because 1) this was associated with a one time adoption of a new
accounting principle, and 2) we wrote off 100% of our balance of goodwill.
OVERVIEW
RenaissanceRe Holdings Ltd. was originally formed to provide reinsurance to
cover the risk of natural and man-made catastrophes. We use sophisticated
computer models to construct a superior portfolio of these coverages. Our
disciplined underwriting approach, sophisticated risk models and management
expertise have established us as a leader in the property catastrophe
reinsurance business and led to consistent strong performance and growth for our
Company.
Our principal business is property catastrophe reinsurance. Our subsidiary
Renaissance Reinsurance is one of the world's premier providers of this
coverage. Our coverage protects against large natural catastrophes, such as
earthquakes and hurricanes, as well as claims arising from other natural and
man-made catastrophes such as winter storms, freezes, floods, fires, tornadoes
and explosions. We offer this coverage to insurance companies and other
reinsurers primarily on an excess of loss basis. This means that we begin paying
when our customers' claims from a catastrophe exceed a certain retained amount.
We use our advanced proprietary modeling and management systems to maximize our
return on equity, subject to prudent risk constraints.
Recently, we have experienced substantial growth in premiums from specialty
lines of reinsurance written by Renaissance Reinsurance, including such lines as
catastrophe-exposed workers' compensation, surety, terrorism, property per risk,
aviation and finite reinsurance. We refer to these premiums as "specialty
reinsurance." During 2002 we more than tripled our gross written premiums from
specialty reinsurance to $247.0 million from $77.5 million written in 2001.
We have also experienced substantial growth in our individual risk business
written on an excess and surplus lines basis by Glencoe. We define our
individual risk segment to include underwriting that involves understanding the
characteristics of the original underlying insurance policy. Our individual risk
segment currently provides insurance for commercial and homeowners
catastrophe-exposed property business, and also provides reinsurance to other
insureds on a quota share basis. We significantly increased the gross written
premiums of our individual risk operations to $260.4 million, compared to $50.0
million in 2001.
21
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
In addition, we also manage property catastrophe reinsurance on behalf of two
joint ventures. In 1999 we formed Top Layer Reinsurance Ltd. ("Top Layer Re")
with State Farm to provide high layer coverage for non-U.S. risks. Renaissance
Reinsurance and State Farm each own 50% of Top Layer Re. We formed DaVinci
Reinsurance Ltd. ("DaVinci") in 2001 with State Farm and other private investors
to write property catastrophe reinsurance side-by-side with Renaissance
Reinsurance. We own a minority of DaVinci's outstanding equity but control a
majority of its outstanding voting power, and accordingly, DaVinci's financial
results are consolidated in our financial statements. We also previously acted
as underwriting manager for OPCat, however in February 2002, OPCat's parent
company, Overseas Partners Limited, decided to exit the reinsurance business,
and we subsequently assumed the in-force book of business of OPCat. We act as
the exclusive underwriting manager for these joint ventures in return for
management fees and a profit participation (such fees earned from DaVinci are
eliminated in consolidation). Together, these joint ventures wrote $261.0
million of premium in 2002, compared to $98.9 million in 2001. In total, as of
December 31, 2002, Top Layer Re and DaVinci had access to approximately $4.6
billion of capital resources, which includes $3.9 billion of limit through
reinsurance provided by State Farm.
We believe that our position as a leading property catastrophe reinsurance
underwriter is reflected by the continued growth in the gross property
catastrophe premiums written by Renaissance Reinsurance and our joint ventures
(which, when combined, we refer to as "managed catastrophe premiums"). The total
managed catastrophe premiums written on behalf of Renaissance Reinsurance and
our joint ventures increased by 67% in 2002 to $738.8 million from $441.8
million in 2001.
The occurrence of the World Trade Center disaster in 2001 and the significant
losses stemming from this event caused an imbalance in the supply and demand for
reinsurance capacity. As a result of this increase in demand, we increased our
reinsurance operations, both in our established property catastrophe line and in
specialty reinsurance, and we also increased our individual risk operations
written through Glencoe Insurance. Accordingly, during 2002 we more than doubled
our gross written premiums to $1,173.0 million from $501.3 million of gross
written premiums in 2001. Also, for the year ended December 31, 2002, our
operating income available to common shareholders more than doubled to $365.2
million from $146.3 million for the year ended December 31, 2001. Operating
income is net income excluding realized gains and losses on investments, and for
2002 operating income also excludes a $9.2 million write-off of goodwill. Our
net income available to common shareholders also more than doubled during 2002
to $364.8 million from $164.4 million for the same period during 2001. During
2002 our total assets increased by $1.1 billion, or 41%, to $3.7 billion. At
December 31, 2002, total shareholders' equity attributable to common
shareholders was $1.5 billion and our book value per common share was $21.39,
compared with $1.1 billion and $15.83 per share at December 31, 2001.
Because we write reinsurance and insurance which provides protection from
damages relating to natural and man-made catastrophes, our results depend to a
large extent on the frequency and severity of such catastrophic events, and the
coverage we offer to clients impacted by these events.
In addition to the reinsurance and insurance coverages discussed above, from
time to time, we consider opportunistic diversification into new ventures,
either through organic growth or the acquisition of other companies or books of
business of other companies. We may explore opportunities in lines of insurance
or reinsurance business in which we have limited experience, such as certain
casualty coverages. If these opportunities come to fruition, they will present
us with additional management and operational risks for which we will need to
further develop our resources to effectively manage this expansion. In
evaluating such new ventures, we seek an attractive return on equity, the
ability to develop or capitalize on a competitive advantage, and opportunities
that will not detract from our core reinsurance and individual risk operations.
Accordingly, we regularly review strategic opportunities and periodically engage
in discussions regarding possible transactions, although there can be no
assurance that we will complete any such transactions or that any such
transaction would contribute materially to our results of operations or
financial condition.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For almost all property and casualty insurance and reinsurance companies, the
most significant judgment made by management is the estimate of the claims and
claim expense reserves. Claim reserves represent estimates, including actuarial
and statistical projections at a given point in time, of our expectations of the
ultimate settlement and administration costs of claims incurred, and it is
possible that the ultimate liability may materially exceed or be materially less
than such estimates. Such estimates are not precise in that, among other 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.
22
RenaissanceRe Holdings Ltd. | Annual Report 2002
Adjustments to our prior year estimated claims reserves will impact our current
year net income by increasing our net income if the prior year estimated claims
reserves are determined to be overstated, or by reducing our net income if the
prior year estimated claims reserves prove to be insufficient. During the years
ended December 31, 2002, 2001 and 2000, changes to prior year estimated claims
reserves had the following impact on our net income; during 2002, prior years
estimated claims reserves were overstated by $2.0 million and accordingly, our
net income was increased by $2.0 million; during 2001, prior years estimated
claims reserves were overstated by $16.0 million, and our net income was
increased by $16.0 million; and during 2000, prior years estimated claims
reserves were deficient by $8.4 million, and our net income was decreased by
$8.4 million. (Also see "Financial Condition - Reserves for Claims and Claims
Expenses".)
For our property catastrophe reinsurance operations, we initially set our case
reserves based on case reserves and other reserve estimates reported by insureds
and ceding companies. We then add to these case reserves, our estimates for
additional case reserves, and an estimate for incurred but not reported reserves
("IBNR"). These estimates are normally based upon our experience with similar
claims, our knowledge of potential industry loss levels for each loss, and
industry information which we gather and retain in our REMS(C) modeling system.
Our estimates of claims resulting from catastrophic events are inherently
difficult because of the variability and uncertainty associated with property
catastrophe claims.
In reserving for our individual risk and specialty reinsurance coverages we do
not have the benefit of a significant amount of our own historical experience in
these lines, 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. It is common for insurance and reinsurance
companies to utilize this method for lines of business where 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 for each line of business. We select our estimates of the ultimate claims
and claim expense ratios by reviewing industry standards, and adjusting these
standards based upon the coverages we offer and the terms of the coverages we
offer.
All of our estimates are reviewed annually with an independent actuarial firm.
We also review our assumptions and our methodologies on a quarterly basis. If we
determine that our estimates need adjusting, such adjustments are recorded in
the quarter in which they are identified. Although we believe we are cautious in
our assumptions, and in the application of these methodologies, we cannot be
certain that our ultimate payments will not vary, perhaps materially, from the
estimates we have made. As of December 31, 2002, our estimated IBNR reserves
were $462.9 million, and a 5% change in such IBNR reserves, would equate to a
$23.1 million adjustment to claims and claim expenses incurred, which would
represent 6.3% of our 2002 net income, and 1.4% of shareholders' equity as at
December 31, 2002.
We incurred claims and claim expenses of $289.5 million, $149.9 million and
$108.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Our claims and claim expense reserves were $804.8 million, $572.9
million and $403.6 million at December 31, 2002, 2001 and 2000, respectively.
To estimate reinsurance recoverables which might be uncollectible, our senior
managers evaluate the financial condition of our reinsurers, on a
reinsurer-by-reinsurer basis, both before purchasing the reinsurance protection
from them and after the occurrence of a significant catastrophic event. As of
December 31, 2002, we have recoverables of $207.3 million and we have recorded a
valuation allowance of $7.8 million, based on specific facts and circumstances
evaluated by management. As of December 31, 2002, the majority of the $199.5
million of losses recoverable relate 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. There has been
little change in our reinsurance recoverables or our valuation allowance at
December 31, 2002 as compared to 2001 due to the relatively low level of
catastrophe losses during 2002, the slowdown in payments of older claims,
specifically claims resulting from the World Trade Center disaster, and the
continued financial strength of our reinsurers.
In estimating impairments to our deferred tax asset, we analyze the businesses
which generated the deferred tax asset, and the businesses that will potentially
utilize the deferred tax asset. Our deferred tax asset relates primarily to net
operating loss carryforwards that are available to offset future taxes payable
of our U.S. operating subsidiaries. However, due to the limited opportunities in
the U.S. primary insurance market, the U.S. insurance operations have not
generated taxable income in the last few years. This calls into question the
recoverability of the deferred tax asset. Although we retain the benefit of this
asset through 2022, during 2002, 2001 and 2000 we recorded valuation allowances
of $5.6 million, $14.0 million and $8.2 million, respectively. As of December
31, 2002, the gross balance of the deferred tax asset was $32.7 million and the
net balance of the deferred tax asset was $4.0 million.
23
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
SUMMARY OF RESULTS OF OPERATIONS FOR 2002 AND 2001
A summary of the significant components of our revenues and expenses is as
follows:
---------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------
(In thousands)
Net underwriting income - Renaissance $ 232,532 $ 100,655 $ 85,532
Net underwriting income - DaVinci 76,116 -- --
----------------------------------------------------------------------------------------------------
Total Underwriting income Reinsurance (1) 308,648 100,655 85,532
Net underwriting income (loss) - Individual Risk (1) 17,929 (1,469) (2,939)
Other income 32,821 16,244 10,959
Net investment income 104,098 75,156 77,868
Interest and preferred share dividends (32,858) (16,151) (24,749)
Corporate expenses, taxes and other (10,351) (27,414) (12,292)
Minority interest - DaVinci (55,051) (751) --
----------------------------------------------------------------------------------------------------
Net operating income available to
common shareholders (2) 365,236 146,270 134,379
Net realized gains (losses) on investments 8,765 18,096 (7,151)
Cumulative effect of a change in accounting principle (9,187) -- --
----------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 364,814 $ 164,366 $ 127,228
----------------------------------------------------------------------------------------------------
Operating income per common share - diluted $ 5.20 $ 2.34 $ 2.29
Net income per common share - diluted $ 5.20 $ 2.63 $ 2.17
(1) Net underwriting income consists of net premiums earned less claims and
claim expenses incurred, acquisition costs and operational expenses.
(2) Net operating income excludes realized gains and losses on investments and
the cumulative effect of a change in accounting principle.
---------------------------------------------------------------------------------------------------------
The $219.0 million increase in net operating income in 2002, compared to 2001,
was primarily the result of the following items:
o a $131.9 million increase in underwriting income from our reinsurance
operations due primarily to an increase in net earned premiums to $667.9
million from $325.2 million, primarily due to the market imbalances after
the World Trade Center disaster which enabled us to increase our property
catastrophe reinsurance premiums and more than triple our premiums from
specialty reinsurance as discussed above. Also, in large part as a result
of lower catastrophe losses during the year, our loss ratio decreased in
2002 to 38.1% compared with a loss ratio of 45.0% in 2001. The 2001 loss
ratio was higher due to losses emanating from the World Trade Center
disaster, plus
o the $76.1 million of underwriting income from the start-up of DaVinci
during 2002, however after offsetting this with the $54.3 million increase
related to the interests owned by other investors, the net increase to our
net income was $21.8 million, plus
o a $19.4 million increase in underwriting income from our individual risk
operations which resulted from the increase in our gross written premiums
in our individual risk segment to $260.3 million in 2002 from $50.0 million
in 2001, which was the result of the market imbalances as noted above, plus
o a $16.6 million increase in other income, which was primarily due to an
increase of $12.7 million in income from our Top Layer Re joint venture,
plus
o a $28.9 million increase in net investment income during the year, which
was primarily due to the $785 million increase in our assets from our net
capital raising activities in the second half of 2001 and the $935 million
increase in our assets during 2002, primarily resulting from the $778
million of cash flows generated from our operating activities during 2002.
The impact of the increase in available assets was partially offset by a
reduction in investment returns due to lower interest rates, plus
o a $17.1 million reduction in corporate expenses, taxes and other, which was
primarily due to the fact that in 2001 we decided to increase our valuation
allowance on our deferred tax asset by $14.0 million as a result of further
reductions of our U.S. based insurance business, less
o a $16.7 million increase in interest and fixed charges, which are primarily
the result of the issuance of $150 million of debt in July 2001, and the
issuance of $150 million of our 8.1% Series A preference shares in November
2001.
24
RenaissanceRe Holdings Ltd. | Annual Report 2002
The $11.9 million increase in net operating income in 2001, compared to 2000,
was primarily the result of the following items:
o a $15.1 million increase in underwriting income from our reinsurance
operations due primarily to an increase in net premiums earned of $64.1
million, in part offset by a $46.8 million increase in claims, plus
o an increase in fee income from our joint ventures of $8.2 million,
primarily as a result of fees earned in 2001 on premiums written on behalf
of our joint ventures in 2000, plus
o a reduction in interest and fixed charges of $8.6 million resulting
primarily from the repayment of $200 million of outstanding bank loans in
the fourth quarter of 2000, less
o an increase in tax expense during 2001 as a result of a $14.0 million
increase to our valuation allowance on our deferred tax asset as a result
of further reductions of our U.S.-based insurance operations, less
o an increase in corporate expenses of $3.5 million primarily due to costs
related to research and development initiatives conducted by us in 2001,
less
o a decrease in investment income of $2.7 million primarily as a result of
declining interest rates.
RESULTS OF OPERATIONS FOR 2002 AND 2001
The following is a discussion and analysis of our results of operations for the
year ended December 31, 2002, compared to each of the years ended December 31,
2001, and 2000, and a discussion of our financial condition at December 31,
2002.
PREMIUMS
--------------------------------------------------------------------------------
Gross Written Premiums
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------
(In thousands)
Cat Premium
Renaissance $ 442,980 $ 373,896 $ 345,086
DaVinci 187,822 -- --
Assumed from OPCat 34,873 -- --
----------------------------------------------------------------------------
Total Cat Premium 665,675 373,896 345,086
Specialty Reinsurance 247,020 77,468 37,730
----------------------------------------------------------------------------
Total Reinsurance 912,695 451,364 382,816
Individual Risk Premium (1) 260,354 49,957 50,186
----------------------------------------------------------------------------
Total gross written premiums $1,173,049 $ 501,321 $ 433,002
----------------------------------------------------------------------------
(1) Excludes $22 million of premium ceded to Renaissance Reinsurance and DaVinci
in 2002.
--------------------------------------------------------------------------------
The increase in our property catastrophe premiums over the past two years is
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: hail storms in Sydney, Australia; tornados in
Oklahoma; Hurricane Floyd in the U.S.; Typhoon Bart in Japan; Turkish and
Taiwanese earthquakes; Danish windstorm, Anatol; and the French windstorms,
Lothar and Martin. Six of these events each resulted in over $1 billion of
insured damages.
Because of these events, as with many large losses, two changes occurred: 1)
many reinsurers recorded significant losses and were forced to, or chose to,
withdraw their underwriting capacity from these regions, and 2) these losses
raised the awareness of the severity of the losses which could impact these
geographic locations. As a result of these factors, prices for reinsurance
coverages in these and other geographic locations increased, in some cases
significantly. Accordingly, our reinsurance premiums also increased, 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. Also contributing to our increased written premiums in 2002 was the
inception of DaVinci, which wrote $187.8 million of gross written premiums.
25
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
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 accordingly, we began writing an
increased level of specialty reinsurance premiums in 2001 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 provided by us include catastrophe-exposed
workers' compensation, surety, terrorism, property per risk, aviation and finite
reinsurance. We expect specialty reinsurance written premiums to be a
significant contributor to our overall written premiums in 2003.
The market conditions that caused the improvements in the property catastrophe
market and the specialty reinsurance market have also caused improvements in the
individual risk market, and accordingly, during 2002 we significantly increased
our premiums in the individual risk market. We define the individual risk market
as underwriting that involves understanding the characteristics of the original
underlying insurance policy. The individual risk segment currently provides
insurance for commercial and homeowners catastrophe-exposed property business,
and also provides reinsurance to other insureds on a quota share basis. We
expect individual risk written premiums to be a significant contributor to our
overall written premiums in 2003.
--------------------------------------------------------------------------------
Gross Premiums Written by Geographic Region
Years ended December 31, 2002 2001 2000
---------------------------------------------------------------------------
(In thousands)
Property Catastrophe
United States and Caribbean $ 332,314 $ 180,305 $ 145,871
Worldwide 169,790 93,474 98,923
Europe 86,461 20,414 22,071
Worldwide (excluding U.S.) (1) 56,628 45,111 60,382
Other 18,354 22,433 9,559
Australia and New Zealand 2,127 12,159 8,280
Specialty reinsurance (2) 247,021 77,468 37,730
---------------------------------------------------------------------------
Total reinsurance 912,695 451,364 382,816
Individual risk (3) 260,354 49,957 50,186
---------------------------------------------------------------------------
Total gross premiums written $1,173,049 $ 501,321 $ 433,002
---------------------------------------------------------------------------
(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 consist of contracts that are
predominantly exposed to U.S. risks, with a small portion of the risks
being Worldwide.
(3) The category Individual Risk is made up of contracts that are primarily
exposed to U.S. risks.
--------------------------------------------------------------------------------
CEDED REINSURANCE PREMIUMS
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------
(In thousands)
Reinsurance $218,072 $124,684 $ 94,875
Individual Risk (1) 31,265 37,090 44,824
----------------------------------------------------------------------------
Total gross written premiums ceded $249,337 $161,774 $139,699
----------------------------------------------------------------------------
(1) Excludes $22 million of premium ceded to Renaissance Reinsurance and
DaVinci in 2002.
--------------------------------------------------------------------------------
26
RenaissanceRe Holdings Ltd. | Annual Report 2002
Because of the potential volatility of the property catastrophe reinsurance
business, we purchase reinsurance to reduce our exposure to large losses. We
utilize our REMS(C) modeling system to evaluate how each purchase interacts with
our portfolio of reinsurance contracts we write, and with the other ceded
reinsurance contracts we purchase. During 2002 and 2001, we increased our
purchases of reinsurance because we received a number of new opportunities to
purchase reinsurance. Also affecting the increase in our 2002 ceded reinsurance
premiums were placements of structured 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 fails
to pay our claims, before placing reinsurance we evaluate the financial
condition of our reinsurers. As of December 31, 2002, the majority of the $199.5
million of losses recoverable relate 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 underwriting results of an insurance or reinsurance company are discussed
frequently by reference to its loss ratio, expense ratio, and combined ratio.
The loss ratio is the result of dividing claims and claim expenses incurred by
net premiums earned. The expense ratio is the result of dividing underwriting
expenses (acquisition costs and operational expenses) by net premiums earned.
The combined ratio is the sum of the loss ratio and the expense ratio.
The table below sets forth our net premiums earned, claims and claim expenses
and underwriting expenses by segment and their corresponding claims,
underwriting expense and combined ratios:
-----------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------------------------
(In thousands)
Reinsurance net earned premiums - property catastrophe $ 462,471 $ 261,054 $ 225,907
Reinsurance net earned premiums - specialty 205,455 64,169 35,260
--------------------------------------------------------------------------------------------------
Total reinsurance net earned premiums 667,926 325,223 261,167
Individual risk net earned premiums 92,979 7,842 6,514
--------------------------------------------------------------------------------------------------
Total net earned premiums $ 760,905 $ 333,065 $ 267,681
--------------------------------------------------------------------------------------------------
Reinsurance claims and claim expenses $ 249,316 $ 152,341 $ 105,542
Individual risk claims and claim expenses 40,209 (2,424) 3,062
--------------------------------------------------------------------------------------------------
Total claims and claim expenses $ 289,525 $ 149,917 $ 108,604
--------------------------------------------------------------------------------------------------
Reinsurance underwriting expenses $ 109,962 $ 72,227 $ 70,093
Individual risk underwriting expenses 34,841 11,735 6,391
--------------------------------------------------------------------------------------------------
Total underwriting expenses $ 144,803 $ 83,962 $ 76,484
--------------------------------------------------------------------------------------------------
Reinsurance net underwriting income $ 308,648 $ 100,655 $ 85,532
Individual risk net underwriting income (loss) 17,929 (1,469) (2,939)
--------------------------------------------------------------------------------------------------
Total net underwriting income $ 362,577 $ 99,186 $ 82,593
--------------------------------------------------------------------------------------------------
Reinsurance claims and claim expenses ratio 37.3% 46.8% 40.4%
Individual risk claims and claim expenses ratio 43.2% (30.9%) 47.0%
Total claims and claim expenses ratio 38.1% 45.0% 40.6%
Reinsurance underwriting expenses ratio 16.5% 22.2% 26.8%
Individual risk underwriting expenses ratio 37.5% 149.6% 98.1%
Total underwriting expenses ratio 19.0% 25.2% 28.5%
Reinsurance combined ratio 53.8% 69.0% 67.2%
Individual risk combined ratio 80.7% 118.7% 145.1%
Total combined ratio 57.1% 70.2% 69.1%
-----------------------------------------------------------------------------------------------------
27
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
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, as a result of our increase in gross written property
catastrophe premiums and specialty reinsurance premiums (See "Premiums" above);
and 3) the inception of DaVinci's operations during 2002. Losses from our
property catastrophe reinsurance policies can be infrequent, but severe;
however, during periods with benign property catastrophe loss activity, such as
2002, we have the potential to produce an unusually low level of losses and a
related increase in underwriting income. Although this occurred during 2002,
there can be no guarantee that this reduced level of losses will continue in
2003 or beyond.
Also during 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 2002 more than offset
the increased normal loss activity arising from our specialty reinsurance
premiums.
The increase in our 2002 net underwriting income from our individual risk
segment was primarily the result of the growth in premiums in 2002 compared with
2001 (See "Premiums" above) and a reduction of the proportion of this business
that was ceded to third parties.
Our claims and claim expenses also benefited from our purchase of reinsurance
protection as we recorded reinsurance recoveries of $63.0 million, $160.4
million and $52.0 million during fiscal years 2002, 2001 and 2000, respectively.
Although there can be no assurance that our net claims and claim expenses will
continue to benefit from the purchase of reinsurance, we will continue to seek
to purchase reinsurance protection to the extent that appropriately priced
coverage is available.
Our underwriting expenses consist of acquisition costs and operational expenses.
Acquisition costs consist of costs to acquire premiums and are principally
comprised of broker commissions and excise taxes. Acquisition costs are driven
by contract terms and are normally a set percentage of premiums. Operational
expenses consist of salaries and other general and administrative expenses. Our
reinsurance business operates with a limited number of employees and we are able
to grow our written premiums without proportionally increasing our operating
costs. As our premiums increase, we expect that our operating costs will tend to
increase to a lesser extent and since our acquisition costs are based on a
percentage of the premiums earned, these costs will fluctuate in line with the
fluctuation in premiums. Therefore, in total, as our premiums increase, we would
expect that our expense ratio would decrease, as was the case in 2002 and 2001.
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 costs
or operating expenses and accordingly these fees have also contributed to the
reduction in our expense ratio.
Although industry-wide insurance losses were the highest in history during 2001,
we recorded increases in net underwriting profit, cash flows from operations,
earnings per share and book value per share. We attribute our performance to our
disciplined underwriting approach, the experience of our underwriters, and the
advantage afforded by our sophisticated risk models.
During 2001 and 2000, the majority of the premiums written in the individual
risk segment were ceded to other reinsurers and as a result, net earned premiums
from the individual risk operations were relatively minor. Based on this reduced
level of net earned premiums, relatively modest increases or decreases to net
written premiums, claims and claim expenses incurred, acquisition costs or
operating expenses can cause, and did cause, unusual fluctuations in the claims
and claim expenses ratio and the underwriting expense ratio of such individual
risk operations.
NET INVESTMENT INCOME
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
-------------------------------------------------------------------------
(In thousands) $104,098 $75,156 $77,868
--------------------------------------------------------------------------------
Because a majority of our coverages provide protection from damages resulting
from natural and man-made catastrophes, it is possible that we could become
liable for a significant amount of losses on short-term notice. Accordingly, we
have structured our investment portfolio to preserve capital and provide us with
a high level of liquidity, which means that the large majority of our investment
portfolio contains investments in marketable fixed income securities, such as
U.S. Government bonds, corporate bonds and mortgage backed and asset backed
securities.
28
RenaissanceRe Holdings Ltd. | Annual Report 2002
As a result of the declining interest rate environment during 2002, the average
yield on our portfolio fell to 3.09% as of December 31, 2002 from 4.2% as of
December 31, 2001. As yields on our portfolio decrease, our interest income will
also decrease. However, the decline in interest rates during 2002 was offset by
our significant growth in invested assets during the year, which was primarily
due to our strong cash flows from operations. Also, in the latter half of 2001,
we raised a net $785 million from financing activities, which was available to
us for investment purposes for the full year of 2002 (See "Financial Condition -
Capital Resources").
During 2001, as a result of the declining interest rate environment, the average
yield on our portfolio fell from 6.8% as of December 31, 2000 to 4.2% as of
December 31, 2001, which caused a reduction in our investment income. The
decline in our investment income during 2001 to $75.1 million from $77.9 million
during 2000 would have been greater, except that offsetting the impact of the
decreased yields were our strong cash flows from operations of $341 million and
our capital raising activities in the latter half of 2001, as noted above.
OTHER INCOME
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------
(In thousands)
Cat business - Fee Income $ 3,882 $ 8,643 $ 2,382
Cat business - Equity earnings -
Top Layer Re 22,339 9,663 7,433
Other items 6,600 (2,062) 1,144
-----------------------------------------------------------------------------
Total $ 32,821 $ 16,244 $ 10,959
-----------------------------------------------------------------------------
--------------------------------------------------------------------------------
As discussed previously, in 1999 we began to manage property catastrophe books
of business for the Top Layer Re and OPCat joint ventures and in return for
managing these joint ventures, we receive fees, profit commissions and/or an
equity participation in these ventures.
During 2002, our fee income decreased primarily as a result of the reduced level
of fees received from OPCat, as a result of the decision by OPCat's parent
company, Overseas Partners Limited, to exit the reinsurance business. During
2002 our equity earnings from Top Layer Re increased as a result of the increase
in premiums written by Top Layer Re and the resultant increase in Top Layer Re's
net income.
The balance of the other items in other income increased primarily due to
profits of $7.2 million on derivative instruments under which losses or
recoveries are triggered by an industry loss index or geological or physical
variables (2001 - a loss of $4.6 million).
During 2001, we formed DaVinci, in which we currently own 25% of the outstanding
equity. However, we own a majority of DaVinci's outstanding voting rights and
its results are consolidated in our financial statements. Accordingly, our
income from this joint venture is not reflected in other income; rather our
profit participation and equity participation in DaVinci are recorded primarily
through underwriting income and investment income, partially offset by an
increase in minority interest for the 75% of DaVinci owned by third parties.
Also, as discussed in "Ceded Premiums," we have entered into certain placements
of structured 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. We record these fees and profit commissions as a reduction in
acquisition costs and operating expenses. If we were to record DaVinci on the
equity method of accounting, and if we were to record our fees from the quota
share relationships in other income, our pro-forma other income from all of
these relationships would be as follows:
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
--------------------------------------------------------------------------
(In thousands)
Cat business - Fee income $ 54,071 $ 17,516 $ 7,577
Cat business - Equity earnings -
Top Layer Re, DaVinci 52,110 9,663 7,433
Other items 6,600 (1,813) 1,144
--------------------------------------------------------------------------
Total $112,781 $ 25,366 $ 16,154
--------------------------------------------------------------------------
--------------------------------------------------------------------------------
29
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
CORPORATE EXPENSES
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
-----------------------------------------------------------------------
(In thousands) $14,327 $11,485 $8,022
--------------------------------------------------------------------------------
Corporate expenses incurred 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 2002 primarily related to an increase in legal costs
of $1.9 million and costs of $1.2 million related to accelerated vesting of
equity compensation. The majority of the increase in corporate expenses in 2001
primarily related to costs related to research and development initiatives
conducted by us in 2001.
INTEREST AND PREFERRED SHARE DIVIDENDS
--------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------
(In thousands)
Interest - Revolving Credit Facilities $ 2,569 $ 2,378 $17,167
Interest - $150 million 7% Senior Notes 10,500 4,871 --
Dividends - $87.6 million Capital Securities 7,605 7,484 7,582
Dividends - $150 million 8.1% Series A - Preference Shares 12,184 1,418 --
----------------------------------------------------------------------------------------
Total Interest and Preferred Dividends $32,858 $16,151 $24,749
----------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Our interest payments and preferred share 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 as compared to a partial year of charges during 2001.
In January and February of 2003, we raised an additional $200 million from the
issuance of $100 million in 5.875% Senior Notes and $100 million in 7.3% Series
B Preference Shares, respectively, and as a result we expect our interest and
preferred share dividends to increase during 2003 as compared with 2002.
INCOME TAX EXPENSE (BENEFIT)
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------
(In thousands) $(115) $14,262 $4,648
--------------------------------------------------------------------------------
During 2002, we chose to write 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 2002 was also minimal.
During 2001 and 2000, we also had little or no net income in the U.S., however,
as of 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, our U.S. insurance operations did not generate taxable
income during those years, which called into question the recoverability of the
$26.9 million deferred tax asset. Although we retain the benefit of this asset
through 2020, during 2002, 2001 and 2000 we decided to increase our valuation
allowance by $5.6 million, $14.0 million and $8.2 million, respectively. As of
December 31, 2002, the gross and net balance of the deferred tax asset was $32.7
million and $4.0 million, respectively.
We currently plan to increase the business written by our U.S. insurance
subsidiaries. If, as a result, our U.S. operations begin to generate taxable
income, the appropriateness of the valuation allowance will be reassessed and,
accordingly, any potential profits from our U.S. operations would possibly not
have a corresponding offset for tax expenses, up to the $27.7 million valuation
allowance recorded as of December 31, 2002.
30
RenaissanceRe Holdings Ltd. | Annual Report 2002
REALIZED GAINS/(LOSSES)
--------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
-------------------------------------------------------------------------
(In thousands) $8,765 $18,096 $(7,151)
--------------------------------------------------------------------------------
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 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 2002 and 2001, we will tend
to have realized gains from the turnover of our investment portfolio, and as
interest rates increase, as was the case in 2000, we will tend to have realized
losses from the turnover of our investment portfolio, although such correlation
for 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. A larger investment portfolio, greater fluctuations in the
interest rate environment, and turning over an investment portfolio quickly,
will affect the magnitude of realized gains or realized losses.
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.
FINANCIAL CONDITION
RenaissanceRe is a holding company, and we therefore rely on dividends from our
subsidiaries and investment income to make principal and interest and dividend
payments on our debt and capital securities, and to make dividend payments to
our preference shareholders and common shareholders.
The payment of dividends by our Bermuda subsidiaries is, under certain
circumstances, limited under 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, 2002, the statutory capital
and surplus of our Bermuda insurance subsidiaries was $1,974.6 million, and the
amount of capital and surplus required to be maintained was $414.7 million. Our
U.S. subsidiaries are also required to maintain certain measures of solvency and
liquidity. At December 31, 2002, the statutory capital and surplus of our U.S.
subsidiaries was $25.4 million and the amount of capital and surplus required to
be maintained was $9.0 million. During 2002, Renaissance Reinsurance and DaVinci
declared aggregate cash dividends to us of $224.3 million and $3.5 million,
respectively, compared with $147.1 million and $0.7 million, respectively, in
2001.
Our operating subsidiaries have historically produced sufficient cash flows to
meet their own expected claims payments and operational expenses and to provide
dividend payments to us. Our subsidiaries also maintain a concentration of
investments in high quality liquid securities, which management believes will
provide sufficient liquidity to meet extraordinary claims payments should the
need arise. Additionally, we maintain a $310.0 million credit facility to meet
additional capital requirements, if necessary.
CASH FLOWS
Cash flows from operating activities for 2002 were $778.4 million, which
principally consisted of net income, prior to dividends to preference
shareholders, of $377.0 million, plus $231.2 million for increases to net
reserves for claims and claim expenses, plus $186.1 million for increases in
reserves for unearned premiums. The 2002 cash flows from operations were
primarily utilized to invest in fixed income securities.
31
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
We have generated cash flows from operations in 2002, 2001 and 2000
significantly in excess of our operating commitments. To the extent that capital
is not utilized in our reinsurance or individual risk segments, we will consider
using such capital to invest in new opportunities.
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 judgment made by
management is the estimation of the claims and claim expense reserves. Because
of the variability and uncertainty associated with loss estimation, it is
possible that our individual case reserves for each catastrophic event are
incorrect, possibly materially.
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. Because loss events to which we are
exposed can be characterized by low frequency but high severity, our claims and
claim expense reserves will normally fluctuate, sometimes materially, based upon
the occurrence of a significant natural or man-made catastrophic loss for which
we provide reinsurance. Our 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, we increased our specialty reinsurance and individual risk gross
written premiums (See "Premiums"). The addition of these lines of business adds
additional uncertainty to our claims reserving process and 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 losses
incurred but not reported ("IBNR") to us. Our case reserve and our estimates for
IBNR reserves are based on 1) claims reports from insureds, 2) our underwriters'
experience in setting claims reserves, 3) the use of computer models where
applicable and 4) historical industry claims experience. Where necessary, we
will also use statistical and actuarial methods to estimate ultimate expected
claims and claim expenses. We review our claims reserves on a regular basis. As
of December 31, 2002, 2001 and 2000, included in our claims and claim expense
reserves were IBNR reserves of $462.9 million, $286.7 million and $228.8
million, respectively.
CAPITAL RESOURCES
Our total capital resources at December 31, 2002 and 2001 were as follows:
--------------------------------------------------------------------------------
At December 31, 2002 2001
-------------------------------------------------------------------------
(In thousands)
Common shareholders' equity $1,492,035 $1,075,024
8.1% Series A Preference Shares 150,000 150,000
-------------------------------------------------------------------------
Total shareholders' equity 1,642,035 1,225,024
7.00% Senior Notes 150,000 150,000
8.54% Capital Securities 84,630 87,630
DaVinci revolving credit facility - borrowed 100,000 --
Revolving credit facility - unborrowed 310,000 310,000
Term and revolving loan facility 25,000 33,500
-------------------------------------------------------------------------
Total capital resources $2,311,665 $1,806,154
-------------------------------------------------------------------------
--------------------------------------------------------------------------------
32
RenaissanceRe Holdings Ltd. | Annual Report 2002
During 2002, our capital resources increased primarily as a result of three
items: 1) our net income of $364.8 million; 2) an increase in unrealized gains
on our investment portfolio to $95.2 million ($16.3 million as of December 31,
2001), $36.1 million of which related to our investment in Platinum (See
Investments); and 3) the borrowing of the full $100 million available under
DaVinci's revolving credit facility.
On April 19, 2002, DaVinci entered into a credit agreement providing for a $100
million committed revolving credit facility. On May 10, 2002, DaVinci borrowed
the full $100 million available under this facility to repay $100 million of
bridge financing provided by RenaissanceRe. Neither RenaissanceRe nor
Renaissance Reinsurance is a guarantor of this facility and the lenders have no
recourse against us or our subsidiaries other than DaVinci under this facility.
Pursuant to the terms of the $310.0 million facility maintained by
RenaissanceRe, a default by DaVinci in its obligations will not result in a
default under the RenaissanceRe facility.
Although we own a minority of the economic interest of DaVinci, we control a
majority of its outstanding voting rights and, accordingly, DaVinci is
consolidated in our financial statements; as a result, the replacement of $100
million of debt from RenaissanceRe with $100 million of debt from a third party
has caused our reported consolidated debt to increase by $100 million. As of
December 31, 2002, the full amount was outstanding under this facility. Interest
rates on the facility are based on a spread above LIBOR, and averaged
approximately 2.63% during 2002. The credit agreement contains certain covenants
requiring DaVinci to maintain a debt to capital ratio of 30% or below and a
minimum net worth of $230 million. As at December 31, 2002, DaVinci was in
compliance with the covenants of this agreement.
With the increased opportunities to grow our business, we also decided to
materially increase our capital resources through the following activities:
1. In October 2001, we issued 2.5 million common shares for net proceeds of
$233 million.
2. In November 2001, we raised $145 million in net proceeds through the
issuance of 6,000,000 $1.00 par value Series A Preference Shares at $25.00
per share. The shares are non-convertible and may be redeemed at $25.00 per
share on or after November 19, 2006. Dividends are cumulative from the date
of original issuance and are payable quarterly in arrears at 8.1% when, if,
and as, declared by our Board of Directors. Under certain circumstances,
such as amalgamations and changes to Bermuda law requiring approval of the
holders of our preference shares to vote as a single class, we may redeem
the shares prior to November 19, 2006 at $26.00 per share. The preference
shares have no stated maturity and are not convertible into any of our
other securities.
3. In July 2001, we issued $150 million of 7% Senior Notes due July 2008. We
used a portion of the proceeds to repay $16.5 million of outstanding
amounts under our $310 million revolving credit and term loan agreement. We
can redeem the notes prior to maturity subject to payment of a "make-whole"
premium; however, we currently have no intentions of calling the notes. The
notes, which are senior obligations, pay interest semi-annually and contain
various covenants, including limitations on mergers and consolidations,
restriction as to the disposition of stock of designated subsidiaries and
limitations on liens on the stock of designated subsidiaries.
In October 2001 we formed DaVinci, and raised $300 million of outside capital
($275 million as of December 31, 2001). We also utilized $200 million of our own
capital in the formation of DaVinci when we contributed $100 million as equity
and provided $100 million as bridge financing. The bridge financing was repaid
in May 2002 when DaVinci entered into a revolving credit facility, as noted
above.
Also, in conjunction with market opportunities, as of December 31, 2002 we
increased the capital of Renaissance Reinsurance to $1.1 billion and increased
the capital of Glencoe to $325 million.
We maintain a revolving credit and term loan agreement with a syndicate of
commercial banks. There was no outstanding balance as of December 31, 2002 and
2001. During the third quarter of 2001, we repaid our borrowings of $16.5
million on this facility. Interest rates on the facility are based on a spread
above LIBOR and averaged 5.45% during 2001. If we were to borrow under this
agreement, the agreement contains certain financial covenants including
requirements that consolidated debt to capital does not exceed a ratio of
0.35:1; consolidated net worth must exceed the greater of $175.0 million or 125%
of consolidated debt; and 80% of invested assets must be rated BBB- by S&P or
Baa3 by Moodys Investor Service or better.
33
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Our subsidiary, Renaissance U.S. Holdings ("Renaissance U.S."), has a $10.0
million term loan and $15.0 million revolving loan facility with a syndicate of
commercial banks. Interest rates on the facility are based upon a spread above
LIBOR, and averaged 2.35% during 2002, compared to 4.71% during 2001. The
related agreements contain certain financial covenants, including a covenant
that RenaissanceRe, as principal guarantor, maintain a ratio of liquid assets to
debt service of 4:1. The term loan and revolving credit facility has a mandatory
repayment provision of $25 million in June 2003. During 2002, Renaissance U.S.
repaid the third installment of $8.5 million in accordance with the terms of the
loan. Renaissance U.S. was in compliance with all the covenants of this term
loan and revolving loan facility as at December 31, 2002.
Our subsidiary, RenaissanceRe Capital Trust has issued capital securities which
pay cumulative cash distributions at an annual rate of 8.54%, payable
semi-annually. During 2002, RenaissanceRe repurchased $3.0 million of the
Capital Securities. No Capital Securities were repurchased in 2001.
RenaissanceRe has repurchased an aggregate $15.4 million of the Capital
Securities since their issuance in 1997. The sole asset of the Trust consists of
our junior subordinated debentures in an amount equal to the outstanding capital
securities. The Indenture relating to these junior subordinated debentures
contains certain covenants, including a covenant prohibiting us from the payment
of dividends if we are in default under the Indenture. We were in compliance
with all of the covenants of the Indenture at December 31, 2002. The Capital
Trust securities mature on March 1, 2027. Generally Accepted Accounting
Principles do not allow these securities to be classified as a component of
shareholders' equity, therefore, they are recorded as minority interest.
Under the terms of certain reinsurance contracts, we may be required to provide
letters of credit to reinsureds in respect of reported claims and/or unearned
premiums. At December 31, 2002, we had outstanding letters of credit aggregating
$223.1 million, compared to $125.8 million in 2001. 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 facility is a $385 million secured
facility which accepts as collateral shares issued by our subsidiary Renaissance
Investment Holdings Ltd., or "RIHL". Our participating operating subsidiaries
and our managed joint ventures have pledged (and must maintain) RIHL shares
issued to it with a sufficient collateral value to support its obligations under
the facility, including reimbursement obligations for outstanding letters of
credit. The participating subsidiaries also have the option to post alternative
forms of collateral. In addition, each participating subsidiary and joint
venture must maintain additional unpledged RIHL shares at least equal to 15% of
its facility usage, and in the aggregate total unpledged RIHL shares must be
maintained at least equal to 15% of all of the outstanding RIHL shares, for
liquidity purposes, in addition to those pledged to support the facility. 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 are granted broad enforcement powers under the facility agreements, in
accordance with and subject to its terms. Upon the occurence of certain events
(including events of default) specified in the facility, the collateral agent
acting on behalf of the lenders is permitted to redeem pledged shares and
convert 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 order to encourage employee ownership of common shares, we have guaranteed
certain loan and pledge agreements between certain employees and Bank of
America, Illinois ("BofA"). Pursuant to the terms of this employee credit
facility, BofA has agreed to loan the participating employees up to an aggregate
of $25.0 million. The balance outstanding at December 31, 2002 was $22.9
million, compared to $24.1 million in 2001. Each loan under this employee credit
facility is required to be initially collateralized by the respective
participating employee with common shares or other collateral acceptable to
BofA. If the value of the collateral provided by a participating employee
subsequently decreases, the participating employee is required to contribute
additional collateral in the amount of such deficiency, failing which BofA can
accelerate the loan and liquidate the remaining collateral. Loans under this
employee credit facility are otherwise non-recourse to the participating
employees. Given the level of collateral, we do not presently anticipate that we
will be required to honor any guarantees under the employee credit facility,
although there can be no assurance that we will not be so required in the
future. No further loans or draws will be made under this facility. We
anticipate the repayment of these loans and the subsequent closure of this
facility prior to December 31, 2003.
In January 2003, we issued $100 million of 5.875% Senior Notes due February 15,
2013. The proceeds will be used for general corporate purposes. Interest on the
notes is payable on February 15 and August 15 of each year, commencing August
15, 2003. The notes can be redeemed by us prior to maturity subject to payment
of a "make-whole" premium; however, we have no current intentions of calling the
notes. The notes, which are senior obligations, contain various covenants,
including limitations on mergers and consolidations, restriction as to the
disposition of stock of designated subsidiaries and limitations on liens on the
stock of designated subsidiaries.
34
RenaissanceRe Holdings Ltd. | Annual Report 2002
In February 2003, we issued 4,000,000 Series B Preference Shares at $25 per
share. The shares may be redeemed at $25 per share at our option on or after
February 4, 2008. Dividends are cumulative from the date of original issuance
and are payable quarterly in arrears at 7.3%, commencing June 1, 2003 when, if,
and as declared by the Board of Directors. If we submit a proposal to our
shareholders concerning an amalgamation or submit any proposal that, as a result
of any changes to Bermuda law, requires approval of the holders of our
preference shares to vote as a single class, we may redeem the shares prior to
February 4, 2008 at $26 per share. The preference shares have no stated maturity
and are not convertible into any other of our securities.
SHAREHOLDERS' EQUITY
During 2002, shareholders' equity increased by $417 million to $1.6 billion as
of December 31, 2002, from $1.2 billion as of December 31, 2001. The significant
components of the change in shareholders' equity included net income from
continuing operations of $364.8 million and an increase in our unrealized gains
on investments available for sale of $78.9 million, offset by dividends to
common and preference shareholders of $51.2 million.
From time to time, we have returned capital to our shareholders through share
repurchase programs. The value of the remaining shares authorized under the
repurchase programs is $27.1 million. No shares were repurchased during 2002 or
2001. In the future, we may purchase shares under our current authorization, or
increase the size of our program. Any such determination will be subject to
market conditions and numerous other factors. Under Bermuda law, RenaissanceRe
common shares repurchased are normally cancelled and retired.
INVESTMENTS
At December 31, 2002, we held cash and investments totaling $3.1 billion,
compared to $2.2 billion in 2001.
The table below shows the aggregate amounts of our invested assets:
--------------------------------------------------------------------------------
At December 31, 2002 2001
--------------------------------------------------------------------------------
(In thousands)
Fixed maturities available for sale, at fair value $2,221,109 $1,282,483
Short-term investments, at cost 570,497 733,925
Other investments 129,918 38,307
Equity investment in reinsurance company, at fair value 120,288 --
Cash and cash equivalents 87,067 139,715
--------------------------------------------------------------------------------
Total investments $3,128,879 $2,194,430
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The $934.5 million growth in our portfolio of invested assets for the year ended
December 31, 2002 resulted primarily from net cash provided by operating
activities of $778.4 million, an addition of $100 million in debt by DaVinci and
the increase in the net unrealized appreciation on the available for sale
investment portfolio of $78.9 million.
The equity investment in reinsurance company relates to our November 1, 2002
purchase of 3,960,000 common shares of Platinum Underwriters Holdings, Ltd.
("Platinum") in a private placement transaction. In addition, we received a
ten-year warrant to purchase up to 2.5 million additional common shares of
Platinum for $27.00 per share. We purchased the common shares for an aggregate
price of $84.2 million. As at December 31, 2002, we own 9.2% of Platinum's
outstanding common shares. We have recorded our investment in Platinum at fair
value, and at December 31, 2002 the aggregate fair value was $120.3 million. The
aggregate unrealized gain of $36.1 million on the Platinum investment is
included in accumulated other comprehensive income, of which $15.9 million
represents our estimate of the value of the warrants.
Because we primarily provide coverage for damages resulting from natural and
man-made catastrophes, we may become liable for substantial claim payments on
short-term notice. Accordingly, our investment portfolio is structured to
preserve capital and provide a high level of liquidity which means that the
large majority of our investment portfolio contains investments in fixed income
securities, such as U.S. Government bonds, corporate bonds and mortgage backed
and asset backed securities.
35
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
ALTERNATIVE INVESTMENTS
Included in other investments are investments in hedge funds and a fund invested
in bank loans of $81.8 million (2001 - $28.4 million) and private equity funds
of $14.6 million (2001 - $4.9 million) (collectively "Investment Funds"). Fair
values for our investments in such Investment Funds are established on the basis
of the net valuation criteria established by the managers of such Investment
Funds. These net valuations are determined based upon the valuation criteria
established by the governing documents of such Investment Funds. Such valuations
may differ significantly from the values that would have been used had ready
markets existed for the shares of the Investment Funds. Realized and unrealized
gains and losses on Investment Funds are included as a component of net
investment income.
We have committed capital to private equity funds of $54.0 million, of which
$14.4 million has been contributed as at December 31, 2002.
Our current investment guidelines call for the invested asset portfolio, which
includes investments available for sale and short term investments to have at
least an average AA rating as measured by Standard & Poor's Ratings Group. At
December 31, 2002, our invested asset portfolio had a dollar weighted average
rating of AA, an average duration of 2.25 years and an average yield to maturity
of 3.09%.
CATASTROPHE LINKED INSTRUMENTS
We have assumed risk through catastrophe and derivative instruments under which
losses could be triggered by an industry loss index or geological or physical
variables. During 2002, 2001 and 2000 we recorded income or recoveries on
non-indemnity catastrophe index transactions of $7.2 million, and a loss of $4.6
million and nil, respectively. We report these recoveries in other income. We
cannot provide assurances that this performance will continue.
MARKET SENSITIVE INSTRUMENTS
Our investment portfolio includes investments whose market values will fluctuate
with changes in interest rates. The aggregate hypothetical loss generated from
an immediate adverse parallel shift in the treasury yield curve of 100 basis
points would cause a decrease in total return of 2.25%, which equated to a
decrease in market value of approximately $62.8 million on a portfolio valued at
$2,791.6 million at December 31, 2002. At December 31, 2001, the decrease in
total return would have been 1.9%, which equated to a decrease in market value
of approximately $41.0 million on a portfolio valued at $2,156.1 million. The
foregoing reflects the use of an immediate time horizon, since this presents the
worst-case scenario. Credit spreads are assumed to remain constant in these
hypothetical examples.
CURRENCY
Our functional currency is the U.S. dollar. We write a substantial portion of
our business in currencies other than U.S. dollars and may, from time to time,
experience exchange gains and losses and incur underwriting losses in currencies
other than U.S. dollars, which will in turn affect our consolidated financial
statements.
Our current foreign currency policy is to hold foreign currency assets,
including cash and receivables, that approximate the net monetary foreign
currency liabilities, including claims and claim expense reserves and
reinsurance balances payable. All changes in the exchange rates are recognized
currently in our statement of income. When necessary we will seek to hedge our
exposure to foreign currency transactions through the use of options, swaps
and/or forward contracts. As of December 31, 2002, we did not have any
outstanding options, swaps or forward contracts related to foreign currency
exposure.
36
RenaissanceRe Holdings Ltd. | Annual Report 2002
EFFECTS OF INFLATION
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local economy. The anticipated effects on us are
considered in our catastrophe loss models. The effects of inflation are also
considered in pricing and in estimating reserves for unpaid claims and claim
expenses. The actual effects of inflation on our results cannot be accurately
known until claims are ultimately settled.
OFF BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
As of December 31, 2002, 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, the Company adopted Statement of Financial Accounting
Standard ("SFAS") 142, "Goodwill and Other Intangible Assets." See "Results of
Operations - Cumulative Effect of a Change in Accounting Principle - Goodwill,"
above.
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, 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 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.
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:
---------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Net income, as reported $364,814 $164,366 $127,228
add: stock-based employee compensation cost included in
determination of net income 8,243 6,387 5,347
less: fair value compensation cost under SFAS 123 22,307 21,942 23,175
-----------------------------------------------------------------------------------------------
Pro-forma net income $350,750 $148,811 $109,400
-----------------------------------------------------------------------------------------------
Earnings per share
Basic - as reported $ 5.40 $ 2.76 $ 2.23
Basic - pro-forma $ 5.19 $ 2.50 $ 1.92
Diluted - as reported $ 5.20 $ 2.63 $ 2.17
Diluted - pro-forma $ 5.00 $ 2.39 $ 1.86
---------------------------------------------------------------------------------------------------
37
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
CURRENT OUTLOOK
We believe that there has been a significant dislocation in the insurance and
reinsurance markets, due primarily to:
o the increase in demand for insurance and reinsurance protection, and the
withdrawal in supply, as a result of the substantial losses stemming from
the World Trade Center disaster;
o substantial increases in prior years, loss reserves stemming from asbestos
related claims and an increase in losses from other casualty coverages
written in the late 1990's and 2000; and
o significant reductions in shareholders' equity of many insurance and
reinsurance companies due to the decline in the global equity markets.
Based on the factors above, the financial strength ratings of various insurance
and reinsurance companies were reduced during late 2001 and during 2002. Because
of these and other factors, we believe that the property catastrophe reinsurance
market, the specialty reinsurance market, and the individual risk markets in
which we participate, will continue to display strong fundamentals and will
provide us with growth opportunities during 2003. Also, because we experienced
relatively limited net losses from the World Trade Center disaster and the other
events noted above, we believe that we are well positioned to take advantage of
these and other potential opportunities during 2003.
Subsequent to the World Trade Center disaster, a substantial amount of capital
entered the insurance and reinsurance markets both through investments in
established companies and through start-up ventures. Currently, we do not
believe that the new capital has offset the widespread underwriting and
investment losses sufficiently to cause significant adverse changes to the
prevailing pricing structure in the property catastrophe reinsurance market.
However, it is possible that the new capital in the market, an environment with
continued light catastrophe losses, or other factors could cause a reduction in
prices of our products. To the extent that industry pricing of our products does
not meet our hurdle rate, we would plan to reduce our future underwriting
activities thus resulting in reduced premiums and a reduction in expected
earnings from this portion of our business.
The growth in our premiums from the specialty reinsurance and individual risk
markets presents us with added operational and management risks for which our
historical experience is limited. Accordingly, we plan to continue to expand and
enhance our underwriting, risk management and operational capabilities in
specialty reinsurance and individual risk to help control the risks associated
with these businesses.
We also believe that some of our future opportunities may arise in other lines
of business in which we have limited experience, such as certain casualty
coverages. If these opportunities come to fruition, they will present us with
additional management and operational risks for which we will need to further
develop our resources to effectively manage this expansion.
The World Trade Center disaster has caused insurers and reinsurers to seek to
limit their potential exposures to losses from terrorism attacks. We often
exclude losses from terrorism in the reinsurance coverages that we write,
however, we have offered specific coverage for certain terrorism or terrorism
related events and, accordingly, we do have potential exposures to this risk.
Also, our subsidiary, Glencoe Insurance Ltd., in accordance with recently passed
legislation in the United States, is required to offer terrorism insurance to
the majority of its customers. Currently, the take-up rate by Glencoe's
customers has approximated 2%, however, we can not be certain on what the future
take up rates by Glencoe's clients will be. We continue to monitor our aggregate
exposure to terrorist attacks.
The cost of our reinsurance protection may increase during 2003. If prices rise
to levels at which we believe the purchase of reinsurance protection would
become uneconomical, we may retain a greater level of net risk in certain
geographic regions or for certain classes of risk. However, depending on market
conditions, it is also possible that we will have increased opportunities to
purchase reinsurance, resulting in increased levels of ceded premium. In order
to obtain longer-term retrocessional capacity, we have entered into multi-year
contracts with respect to a portion of our portfolio. We have also begun to
enter into quota share type reinsurance relationships from which we generate
fees and profit commissions.
NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934. Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which, with respect to
future business decisions, are subject to change. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, us.
38
RenaissanceRe Holdings Ltd. | Annual Report 2002
In particular, statements using words such as "may," "should," "estimate,"
"expect," "anticipate," "intend," "believe," "predict," "potential," or words of
similar import generally involve forward-looking statements. For example, we
have included certain forward-looking statements in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" with regard to trends
in results, prices, volumes, operations, investment results, margins, overall
market trends, risk management and exchange rates. This Annual Report also
contains forward-looking statements with respect to our business and industry,
such as those relating to our strategy and management objectives, trends in
market conditions, prices, market standing and product volumes, investment
results and pricing conditions in the reinsurance and insurance industries.
In light of the risks and uncertainties inherent in all future projections, the
inclusion of forward-looking statements in this report should not be considered
as a representation by us or any other person that our objectives or plans will
be achieved. Numerous factors could cause our actual results to differ
materially from those in the forward-looking statements, including the
following:
(1) the occurrence of natural or man-made catastrophic events with a frequency
or severity exceeding our estimates;
(2) a decrease in the level of demand for our reinsurance or insurance
business, or increased competition in the industry;
(3) the lowering or loss of one of the financial or claims-paying ratings of
ours or one or more of our subsidiaries;
(4) risks associated with implementing our business strategies and initiatives
for organic growth, including risks relating to managing that growth;
(5) acts of terrorism or acts of war;
(6) slower than anticipated growth in our fee-based operations, including risks
associated with retaining our existing partners and attracting potential
new partners;
(7) changes in economic conditions, including interest and currency rate
conditions which could affect our investment portfolio;
(8) uncertainties in our reserving process;
(9) failures of our reinsurers, brokers or program managers to honor their
obligations;
(10) extraordinary events affecting our clients, such as bankruptcies and
liquidations, and the risk that we may not retain or replace our large
clients in all future periods;
(11) loss of services of any one of our key executive officers;
(12) the passage of federal or state legislation subjecting Renaissance
Reinsurance to supervision or regulation, including additional tax
regulation, in the United States or other jurisdictions in which we
operate;
(13) changes in insurance regulations in the United States, including potential
challenges to Renaissance Reinsurance's claim of exemption from insurance
regulation under current laws;
(14) a contention by the United States Internal Revenue Service that our Bermuda
subsidiaries, including Renaissance Reinsurance, are subject to U.S.
taxation; and
(15) actions of competitors, including industry consolidation, the launch of new
entrants and the development of competing financial products.
The factors listed above should not be construed as exhaustive. Certain of these
factors are described in more detail in our filings with the Securities and
Exchange Commission, including in our Annual Report on Form 10-K for the year
ended December 31, 2002, 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.
39
RenaissanceRe Holdings Ltd. | Annual Report 2002
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Management is responsible for the integrity of the consolidated financial
statements and other financial information presented in this Annual Report. The
accompanying consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States, applying certain
estimates and judgements as required.
The Company's internal controls are designed so that transactions are authorized
and executed in accordance with management's authorization, to provide
reasonable assurance as to the integrity and reliability of the financial
statements and to adequately safeguard the assets against unauthorized use or
disposition. Such controls are based on established policies and procedures and
are implemented by qualified personnel with an appropriate segregation of
duties.
Ernst & Young, independent auditors, are retained to audit the Company's
consolidated financial statements and express their opinion thereon. Their
accompanying report is based on audits conducted in accordance with auditing
standards generally accepted in the United States, which includes the
consideration of the Company's internal controls and an examination, on a test
basis, of evidence supporting the amounts and disclosures in the financial
statements. These procedures enable them to obtain a reasonable assurance about
whether the financial statements are free of material misstatement and provide a
reasonable basis for their opinion.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee. The Audit Committee meets periodically
with the independent auditors, both privately and with management present, to
review accounting, auditing, internal controls and financial reporting matters.
/s/ James N. Stanard /s/ John M. Lummis
JAMES N. STANARD JOHN M. LUMMIS
Chairman and Executive Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of RenaissanceRe Holdings Ltd. and
Subsidiaries.
--------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of RenaissanceRe
Holdings Ltd. and Subsidiaries as of December 31, 2002 and 2001, 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, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill.
/s/ Ernst & Young
Hamilton, Bermuda
February 4, 2003
40
RenaissanceRe Holdings Ltd. | Annual Report 2002
CONSOLIDATED BALANCE SHEETS
At December 31, 2002 2001
--------------------------------------------------------------------------------------------------------
(In thousands of United States dollars, except per share amounts)
Assets
Investments and cash
Fixed maturity investments available for sale, at fair value $ 2,221,109 $ 1,282,483
(Amortized cost $2,153,715 and $1,266,188 at December 31, 2002
and 2001, respectively) (Note 3)
Short term investments, at cost 570,497 733,925
Other investments 129,918 38,307
Equity investment in reinsurance company, at fair value
(Cost $84,199 at December 31, 2002) 120,288 --
Cash and cash equivalents 87,067 139,715
--------------------------------------------------------------------------------------------------------
Total investments and cash 3,128,879 2,194,430
Reinsurance premiums receivable 199,449 102,202
Ceded reinsurance balances 73,360 41,690
Losses recoverable (Note 4) 199,533 217,556
Accrued investment income 25,833 17,696
Deferred acquisition costs 55,853 12,814
Other assets 62,829 57,264
--------------------------------------------------------------------------------------------------------
Total Assets $ 3,745,736 $ 2,643,652
--------------------------------------------------------------------------------------------------------
Liabilities, Minority Interests and Shareholders' Equity
Liabilities
Reserve for claims and claim expenses (Note 5) $ 804,795 $ 572,877
Reserve for unearned premiums 331,985 125,053
Debt (Note 6) 275,000 183,500
Reinsurance balances payable 146,732 115,967
Other liabilities 97,013 58,650
--------------------------------------------------------------------------------------------------------
Total Liabilities 1,655,525 1,056,047
--------------------------------------------------------------------------------------------------------
Minority interest - Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated
debentures of the Company (Note 7) 84,630 87,630
Minority interest - DaVinci (Note 7) 363,546 274,951
Shareholders' Equity (Note 8)
Series A Preference Shares: $1.00 par value - 6,000,000 shares authorized,
issued and outstanding at December 31, 2002 and 2001 150,000 150,000
Common Shares and additional paid-in capital: $1.00 par value - authorized
225,000,000 shares; issued and outstanding at December 31, 2002 -
69,749,826 shares (2001 - 67,892,649 shares) 320,936 264,623
Unearned stock grant compensation (Note 16) (18,468) (20,163)
Accumulated other comprehensive income 95,234 16,295
Retained earnings 1,094,333 814,269
--------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,642,035 1,225,024
--------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interests and Shareholders' Equity $ 3,745,736 $ 2,643,652
--------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
41
RenaissanceRe Holdings Ltd. | Annual Report 2002
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
(In thousands of United States dollars, except per share amounts)
Revenues
Gross premiums written $ 1,173,049 $ 501,321 $ 433,002
------------------------------------------------------------------------------------------------------------------
Net premiums written $ 923,711 $ 339,547 $ 293,303
Increase in unearned premiums (162,806) (6,482) (25,622)
------------------------------------------------------------------------------------------------------------------
Net premiums earned 760,905 333,065 267,681
Net investment income (Note 3) 104,098 75,156 77,868
Net foreign exchange gains (losses) 3,861 (1,667) 378
Other income 32,821 16,244 10,959
Net realized gains (losses) on investments (Note 3) 8,765 18,096 (7,151)
------------------------------------------------------------------------------------------------------------------
Total Revenues 910,450 440,894 349,735
------------------------------------------------------------------------------------------------------------------
Expenses
Claims and claim expenses incurred (Note 5) 289,525 149,917 108,604
Acquisition costs 95,644 45,359 38,530
Operational expenses 49,159 38,603 37,954
Corporate expenses 14,327 11,485 8,022
Interest expense 13,069 7,249 17,167
------------------------------------------------------------------------------------------------------------------
Total Expenses 461,724 252,613 210,277
------------------------------------------------------------------------------------------------------------------
Net income before minority interests, taxes and change in
accounting principle 448,726 188,281 139,458
Minority interest - Company obligated, mandatorily redeemable
capital securities of a subsidiary trust holding solely junior
subordinated debentures of the Company (Note 7) (7,605) (7,484) (7,582)
Minority interest - DaVinci (Note 7) (55,051) (751) --
------------------------------------------------------------------------------------------------------------------
Net income before taxes and change in accounting principle 386,070 180,046 131,876
Income tax benefit (expense) (Note 13) 115 (14,262) (4,648)
Cumulative effects of a change in accounting principle (9,187) -- --
------------------------------------------------------------------------------------------------------------------
Net income 376,998 165,784 127,228
Dividends on Series A Preference Shares (12,184) (1,418) --
------------------------------------------------------------------------------------------------------------------
Net income available to Common Shareholders $ 364,814 $ 164,366 $ 127,228
------------------------------------------------------------------------------------------------------------------
Earnings per Common Share - basic $ 5.40 $ 2.76 $ 2.23
Earnings per Common Share - diluted $ 5.20 $ 2.63 $ 2.17
------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
42
RenaissanceRe Holdings Ltd. | Annual Report 2002
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------
(In thousands of United States dollars)
Series A Preference Shares
Balance - January 1 $ 150,000 $ -- $ --
Issuance of shares -- 150,000 --
-----------------------------------------------------------------------------------------------
Balance - December 31 150,000 150,000 --
-----------------------------------------------------------------------------------------------
Common shares & additional paid-in capital
Balance - January 1 264,623 22,999 19,686
Issuance of common stock -- 232,525 --
Exercise of stock options & restricted stock awards 10,675 14,652 3,495
Offering expenses (73) (5,553) 490
Stock dividend 45,711 -- --
Repurchase of shares -- -- (672)
-----------------------------------------------------------------------------------------------
Balance - December 31 320,936 264,623 22,999
-----------------------------------------------------------------------------------------------
Unearned stock grant compensation
Balance - January 1 (20,163) (11,716) (10,026)
Net stock grants awarded, cancelled (7,607) (15,653) (7,215)
Amortization 9,302 7,206 5,525
-----------------------------------------------------------------------------------------------
Balance - December 31 (18,468) (20,163) (11,716)
-----------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Balance - January 1 16,295 6,831 (18,470)
Net unrealized gains on securities,
net of adjustment (see disclosure below) 78,939 9,464 25,301
-----------------------------------------------------------------------------------------------
Balance - December 31 95,234 16,295 6,831
-----------------------------------------------------------------------------------------------
Retained earnings
Balance - January 1 814,269 682,704 609,139
Net income 376,998 165,784 127,228
Dividends paid on Common Shares (39,039) (32,801) (29,228)
Dividends paid on Preference Shares (12,184) (1,418) --
Stock dividend (45,711) -- --
Repurchase of shares -- -- (24,435)
-----------------------------------------------------------------------------------------------
Balance - December 31 1,094,333 814,269 682,704
-----------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 1,642,035 $ 1,225,024 $ 700,818
-----------------------------------------------------------------------------------------------
Comprehensive Income
Net income $ 376,998 $ 165,784 $ 127,228
Other comprehensive income 78,939 9,464 25,301
-----------------------------------------------------------------------------------------------
Comprehensive Income $ 455,937 $ 175,248 $ 152,529
-----------------------------------------------------------------------------------------------
Disclosure Regarding Net Unrealized Gains
Net unrealized holding gains arising during year $ 87,704 $ 27,560 $ 18,150
Net realized losses (gains) included in net income (8,765) (18,096) 7,151
-----------------------------------------------------------------------------------------------
Net unrealized gains on securities $ 78,939 $ 9,464 $ 25,301
-----------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
43
RenaissanceRe Holdings Ltd. | Annual Report 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------
(In thousands of United States dollars)
Cash Flows Provided by Operating Activities:
Net income $ 376,998 $ 165,784 $ 127,228
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 19,041 3,190 315
Net realized losses (gains) on investments (8,765) (18,096) 7,151
Reinsurance balances, net (60,214) 58,408 (14,346)
Ceded reinsurance balances (21,780) (4,169) 12,717
Accrued investment income (8,137) (2,661) (1,578)
Reserve for unearned premiums 186,124 12,513 14,155
Reserve for claims and claim expenses, net 231,236 119,314 86,033
Minority interest in undistributed net income of DaVinci 55,051 751 --
Other, net 8,872 6,448 9,153
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 778,426 341,482 250,828
-----------------------------------------------------------------------------------------------------
Cash Flows Applied to Investing Activities:
Proceeds from maturities and sales of investments 5,775,865 3,290,264 2,171,484
Purchase of investments available for sale (6,727,950) (3,633,332) (2,187,007)
Net sales (purchases) of short term investments 166,428 (720,170) (1,001)
Equity investment in reinsurance company (84,199) -- --
Acquisition of subsidiary, net of cash acquired (23,495) -- --
-----------------------------------------------------------------------------------------------------
Net cash applied to investing activities (893,351) (1,063,238) (16,524)
-----------------------------------------------------------------------------------------------------
Cash Flows Provided by (Applied to) Financing Activities:
Issuance of debt 100,000 148,868 --
Repayment of debt (8,500) (16,500) (200,000)
Minority interests 25,000 274,951 --
Dividends paid on Common Shares (39,039) (32,801) (29,228)
Dividends paid on Preference Shares (12,184) (1,418) --
Purchase of Capital Securities (3,000) -- (1,510)
Issuance (purchase) of Common Shares -- 232,525 (25,107)
Issuance of Preference Shares -- 145,275 --
-----------------------------------------------------------------------------------------------------
Net cash provided by (applied to) financing activities 62,277 750,900 (255,845)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (52,648) 29,144 (21,541)
Cash and Cash Equivalents, Beginning of Year 139,715 110,571 132,112
-----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 87,067 $ 139,715 $ 110,571
-----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
44
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 (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 reinsurance coverage
to insurers and reinsurers on a worldwide basis. Renaissance Reinsurance
also writes specialty reinsurance in certain lines, including such lines as
catastrophe-exposed workers' compensation coverage, surety, property per
risk, terrorism, aviation and finite reinsurance.
o During the year, the Company renamed its primary segment "individual risk"
to more accurately reflect the risk characteristics of this business. The
individual risk segment currently provides insurance for commercial and
homeowners catastrophe-exposed property business, and also provides
reinsurance on a quota share basis. The Company's individual risk
operations principally include Glencoe Insurance Ltd. ("Glencoe"), and
Stonington Insurance Company ("Stonington").
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 consolidated in the Company's financial statements (Note
7). The Company acts as exclusive underwriting manager for these joint
ventures in return for fee-based income and profit participation.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared on the basis of United
States generally accepted accounting principles ("GAAP") and include the
accounts of RenaissanceRe and its wholly-owned and majority-owned subsidiaries
and DaVinci, which are collectively referred to herein as the "Company." All
intercompany transactions and balances have been eliminated on consolidation.
Minority interests represent the interests of external parties in respect of net
income and shareholders' equity of RenaissanceRe Capital Trust (the "Trust") and
DaVinciRe (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 judgment made by
management is the estimation of claims and claims expense reserves. Other
material judgments made by management include the estimates of potential
impairments in assets, particularly regarding the collectibility of reinsurance
recoverables and the recoverability of deferred tax assets.
Premiums and related expenses
Premiums are recognized as income, net of any applicable retrocessional
coverage, over the terms of the related contracts and policies. Premiums written
are based on policy and contract terms and include estimates based on
information received from both insureds and ceding companies. Subsequent
differences arising on such estimates are recorded in the period in which they
are determined. Reserve for unearned premiums represents the portion of premiums
written that relate to the unexpired terms of contracts and policies in force.
Such reserves are computed by pro-rata methods based on statistical data or
reports received from ceding companies.
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred policy
acquisition costs are limited to their estimated realizable value based on the
related unearned premiums. Anticipated claims and claim expenses, based on
historical and current experience, and anticipated investment income related to
those premiums are considered in determining the recoverability of deferred
acquisition costs.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies. The Company
evaluates the financial condition of its reinsurers through internal evaluation
by senior management. For retroactive reinsurance contracts, the amount by which
liabilities associated with the reinsured policies exceed the amount paid for
reinsurance coverage is deferred and amortized into income using the recovery
method.
45
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Claims and claim expenses
The reserve for claims and claim expenses includes estimates for unpaid claims
and claim expenses on reported losses as well as an estimate of losses incurred
but not reported. The reserve is based on individual claims, case reserves and
other reserve estimates reported by insureds and ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Also, the Company has
recently increased its specialty reinsurance and individual risk premiums, but
does not have the benefit of a significant amount of its own historical
experience in these lines of business. Accordingly, the setting and reserving
for incurred losses in these lines of business could be subject to greater
variability.
Ultimate losses may vary materially from the amounts provided in the
consolidated financial statements. These estimates are reviewed regularly and,
as experience develops and new information becomes known, the reserves are
adjusted as necessary. Such adjustments, if any, are reflected in the
consolidated statement of income in the period in which they become known and
are accounted for as changes in estimates.
Investments and cash
Investments in fixed maturities and the equity investment 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 utilizing the
interest method. The effective yield utilized in the interest method is adjusted
when sufficient information exists to estimate the probability and timing of
prepayments. Fair values of investments are based on quoted market prices, or
when such prices are not available, by reference to broker or underwriter bid
indications and/or internal pricing valuation techniques.
Short-term investments, which have a maturity of one year or less when
purchased, are carried at cost which approximates fair value. Cash equivalents
include money market instruments with a maturity of ninety days or less when
purchased.
During 2002, the Company changed the classification of certain investments
previously reflected as cash and cash equivalents. These investments were
reclassified to short-term investments to more appropriately reflect the
Company's investment strategy regarding those assets. Prior period comparative
information has been reclassified to conform with the current year presentation.
Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). In the second
quarter of 2002, the Company completed its initial 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.
46
RenaissanceRe Holdings Ltd. | Annual Report 2002
Stock incentive compensation plans
For the years 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.
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:
-------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
-------------------------------------------------------------------------------------------------
Net income as reported $364,814 $164,366 $127,228
add: stock-based employee compensation cost included in
determination of net income 8,243 6,387 5,347
less: fair value compensation cost under SFAS 123 22,307 21,942 23,175
-------------------------------------------------------------------------------------------------
Pro-forma net income $350,750 $148,811 $109,400
-------------------------------------------------------------------------------------------------
Earnings per share
Basic - as reported $ 5.40 $ 2.76 $ 2.23
Basic - pro-forma $ 5.19 $ 2.50 $ 1.92
Diluted - as reported $ 5.20 $ 2.63 $ 2.17
Diluted - pro-forma $ 5.00 $ 2.39 $ 1.86
-------------------------------------------------------------------------------------------------
Taxation
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance against the deferred tax asset is provided for, if and when,
the Company believes that a portion of the deferred tax asset may not be
realized in the near term.
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on fixed
maturity investments are as follows:
-------------------------------------------------------------------------------------------------
At December 31, 2002
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
U.S. treasuries and agencies $ 644,826 $ 14,647 $ (122) $ 659,351
Corporate securities 536,053 29,235 (3,943) 561,345
Non-U.S. government bonds 367,638 13,507 (1,473) 379,672
Asset-backed securities 312,647 6,567 (105) 319,109
Mortgage-backed securities 292,551 9,106 (25) 301,632
-------------------------------------------------------------------------------------------------
Total investments $2,153,715 $ 73,062 $ (5,668) $2,221,109
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
47
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------
At December 31, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------------------
U.S. treasuries and agencies $ 272,698 $ 3,972 $ (774) $ 275,896
Corporate securities 339,374 7,534 (4,199) 342,709
Non-U.S. government bonds 160,732 5,399 (760) 165,371
Asset-backed securities 292,175 3,804 (1,188) 294,791
Mortgage-backed securities 201,209 3,196 (689) 203,716
----------------------------------------------------------------------------------------------
Total investments $1,266,188 $ 23,905 $ (7,610) $1,282,483
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Contractual maturities of fixed maturity securities are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
--------------------------------------------------------------------------------
At December 31, 2002
Amortized Fair
Cost Value
--------------------------------------------------------------------------------
Due in less than one year $ 23,102 $ 23,203
Due after one through five years 1,078,572 1,107,899
Due after five through ten years 337,759 350,275
Due after ten years 109,084 118,991
Mortgage-backed securities 292,551 301,632
Asset-backed securities 312,647 319,109
--------------------------------------------------------------------------------
Total investments $2,153,715 $2,221,109
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Investment income
The components of net investment income are as follows:
--------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------
Fixed maturities $ 91,784 $ 65,168 $ 62,588
Short term investments 11,137 7,785 6,213
Cash and cash equivalents 3,238 3,285 10,858
Other investments 1,029 955 --
--------------------------------------------------------------------------------
107,188 77,193 79,659
Investment expenses 3,090 2,037 1,791
--------------------------------------------------------------------------------
Net investment income $104,098 $ 75,156 $ 77,868
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
--------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------
Gross realized gains $ 70,815 $ 78,247 $ 11,173
Gross realized losses (62,050) (60,151) (18,324)
--------------------------------------------------------------------------------
Net realized gains (losses) on investments 8,765 18,096 (7,151)
Unrealized gains 78,939 9,464 25,301
--------------------------------------------------------------------------------
Total realized and unrealized gains
on investments $ 87,704 $ 27,560 $ 18,150
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
At December 31, 2002 approximately $29.7 million (2001 - $12.1 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.
48
RenaissanceRe Holdings Ltd. | Annual Report 2002
Alternative investments
Included in other investments are investments in hedge funds and a fund invested
in bank loans totaling $81.8 million (2001 - $28.4 million) and private equity
funds of $14.6 million (2001 - $4.9 million) (collectively "Investment Funds").
Fair values for the Company's investments in such Investment Funds are
established on the basis of the net valuation criteria established by the
managers of such Investment Funds. These net valuations are determined based
upon the valuation criteria established by the governing documents of such
Investment Funds. Such valuations may differ significantly from the values that
would have been used had ready markets existed for the shares of the Investment
Funds. Realized and unrealized gains and losses on Investment Funds are included
as a component of net investment income.
The Company has committed capital to private equity funds of $54.0 million, of
which $14.4 million has been contributed as at December 31, 2002.
Equity investment 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 purchase price of $84.2 million. As at December
31, 2002, the Company owns 9.2% of Platinum's outstanding common shares. The
Company records its investment in Platinum at fair value, and at December 31,
2002 the aggregate fair value was $120.3 million. The aggregate unrealized gain
of $36.1 million is included in accumulated other comprehensive income.
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 2002, 2001 and
2000, the Company recognized gains (losses) on these contracts of $7.2 million,
a loss of $4.6 million, and nil, respectively, which are included in other
income.
NOTE 4. CEDED REINSURANCE
The Company utilizes reinsurance to reduce its exposure to large losses. The
Company currently has in place contracts that provide for recovery of a portion
of certain claims and claim expenses from reinsurers in excess of various
retentions and loss warranties. The Company would remain liable to the extent
that any reinsurance company fails to meet its obligations. The earned
reinsurance premiums ceded were $218.0 million, $155.7 million and $149.8
million for 2002, 2001 and 2000, 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 $63.0 million, $160.4 million and $52.0 million for 2002,
2001 and 2000, respectively. As of December 31, 2002, the Company has recorded a
$7.8 million valuation allowance against losses recoverable (2001 - $7.5
million).
Included in losses recoverable as of December 31, 2002 are recoverables of $10.0
million (2001 - $14.4 million) which relate to a retroactive reinsurance
contract entered into by Stonington. SFAS 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts," requires that
adverse development of the reserves covered by this contract be reflected in the
Company's statement of income when the adverse development becomes known.
However, the offsetting recovery under the contract is required to be deferred
and recognized into income, as a reduction to claims and claim expenses as
payments are received from the reinsurer. The balance of the deferred recovery
as of December 31, 2002 was $5.6 million (2001 - $8.4 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 utilizes both proprietary and commercially available
models, as well as historical reinsurance industry property catastrophe claims
experience, for purposes of evaluating future trends and providing an estimate
of ultimate claims costs.
49
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
---------------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
---------------------------------------------------------------------------------------
Net reserves as of January 1 $ 355,321 $ 237,014 $ 174,913
Net reserves assumed in acquisition of subsidiary 33,579 -- --
Net incurred related to:
Current year 291,520 165,914 100,168
Prior years (1,995) (15,997) 8,436
---------------------------------------------------------------------------------------
Total net incurred 289,525 149,917 108,604
---------------------------------------------------------------------------------------
Net paid related to:
Current year 10,017 20,470 12,545
Prior years 63,146 11,140 33,958
---------------------------------------------------------------------------------------
Total net paid 73,163 31,610 46,503
---------------------------------------------------------------------------------------
Total net reserves as of December 31 605,262 355,321 237,014
Losses recoverable as of December 31 199,533 217,556 166,597
---------------------------------------------------------------------------------------
Total gross reserves as of December 31 $ 804,795 $ 572,877 $ 403,611
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
The prior year favorable development in 2001 was due primarily to net additional
recoveries on 1999 property catastrophe loss events. The prior year adverse
development in 2000 was due primarily to adverse development on the 1999 losses
related to the European storms. The Company's total gross reserve for IBNR
claims was $462.9 million as of December 31, 2002 (2001 - $286.7 million).
Claims and claim expenses incurred were reduced by $15.0 million during 2002
(2001-nil) related to income earned on an assumed reinsurance contract that is
classified as an underwriting-risk only deposit contract. A deposit liability of
$103.0 million is included in reinsurance balance payable at December 31, 2002
(2001-$80.0 million).
NOTE 6. DEBT
In July 2001, RenaissanceRe issued $150 million of 7% Senior Notes due July
2008. RenaissanceRe used a portion of the proceeds to repay $16.5 million of
outstanding amounts under the $310 million revolving credit and term loan
agreement. Interest on the notes is payable on January 15 and July 15 of each
year. The notes can be redeemed by RenaissanceRe prior to maturity subject to
payment of a "make-whole" premium; however, RenaissanceRe has no current
intentions of calling the notes. The notes, which are senior obligations of
RenaissanceRe, contain various covenants, including limitations on mergers and
consolidations, restriction as to the disposition of stock of designated
subsidiaries and limitations on liens on the stock of designated subsidiaries.
As of December 31, 2002 the fair value of the notes was $164.0 million (2001 -
$151.1 million).
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 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 $310.0 million facility maintained
by RenaissanceRe, a default by DaVinciRe on its obligations will not result in a
default under the RenaissanceRe facility. Although RenaissanceRe owns a minority
of the economic interest of DaVinciRe, RenaissanceRe controls a majority of its
outstanding voting rights and, accordingly, DaVinciRe is consolidated in the
Company's financial statements; as a result, the replacement of $100 million of
debt from RenaissanceRe with $100 million of debt from a third party has caused
the Company's reported consolidated debt to
50
RenaissanceRe Holdings Ltd. | Annual Report 2002
increase by $100 million. As of December 31, 2002, the full amount was
outstanding under this facility. Interest rates on the facility are based on a
spread above LIBOR, and averaged approximately 2.63% during 2002. 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. As at
December 31, 2002, DaVinciRe was in compliance with the covenants of this
agreement.
FRenaissanceRe has a $310 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. There was no outstanding balance
as of December 31, 2002 and 2001. During the third quarter of 2001,
RenaissanceRe repaid its borrowings of $16.5 million on this facility. Interest
rates on the facility are based on a spread above LIBOR and averaged 5.45% in
2001. If RenaissanceRe were to borrow under this agreement, the agreement
contains certain financial covenants including requirements that consolidated
debt to capital does not exceed a ratio of 0.35:1; consolidated net worth must
exceed the greater of $175 million or 125% of consolidated debt; and 80% of
invested assets must be rated BBB- by S&P or Baa3 by Moody's Investor Service or
better.
Renaissance U.S. has a $10 million term loan and a $15 million revolving loan
facility with a syndicate of commercial banks. Interest rates on the facility
are based upon a spread above LIBOR, and averaged 2.35% during 2002 (4.71% in
2001). As of December 31, 2002 the balance outstanding was $25 million (2001 -
$33.5 million). The credit agreement contains certain financial covenants, the
primary one being that RenaissanceRe be its principal guarantor and maintain a
ratio of liquid assets to debt service of 4:1. The term loan and revolving
credit facility has a mandatory repayment provision of $25 million in 2003.
During 2002, the Company repaid the third installment of $8.5 million in
accordance with the terms of the loan. The Company was in compliance with all
the covenants of this term loan and revolving loan facility as at December 31,
2002. The fair value of the borrowings approximate the carrying values because
such loans reprice frequently.
Interest payments on the above debt totaled $13.1 million, $7.3 million and
$17.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
NOTE 7. MINORITY INTERESTS
Capital Securities
On March 7, 1997 the Company issued $100 million of Company obligated,
mandatorily redeemable capital securities of a subsidiary trust holding solely
$103,092,783 of the Company's 8.54% junior subordinated debentures due March 1,
2027 ("Capital Securities") issued by the Trust. The Capital Securities pay
cumulative cash distributions at an annual rate of 8.54%, payable semi-annually.
The Trust is a wholly owned subsidiary of the Company and is consolidated into
the Company's consolidated financial statements. The Capital Securities and the
related dividends are reflected in the consolidated financial statements as a
minority interest. RenaissanceRe's guarantee of the distributions on the Capital
Securities issued by the Trust, when taken together with RenaissanceRe's
obligations under an expense reimbursement agreement with the Trust, provides
full and unconditional guarantee of amounts due on the Capital Securities issued
by the Trust.
During 2002, the Company repurchased $3.0 million of the Capital Securities. No
Capital Securities were repurchased in 2001. The Company has repurchased an
aggregate $15.4 million of the Capital Securities since their issuance in 1997.
DaVinci
In October 2001, the Company formed DaVinciRe 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
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 8. SHAREHOLDERS' EQUITY
The aggregate authorized capital of the Company is 325,000,000 shares consisting
of 225,000,000 common shares and 100,000,000 preference shares. The Company's
225,000,000 authorized $1.00 par value common shares consist of three separate
series with differing voting rights as follows:
----------------------------------------------------------------------------------------------------
At December 31, 2002
Remaining Authorized Outstanding
----------------------------------------------------------------------------------------------------
Full Voting Common Shares
(includes all shares registered and available to the public) 128,620,006 66,200,226
Diluted Voting Class I Common Shares 10,224,185 3,549,600
Diluted Voting Class II Common Shares 185,532 --
----------------------------------------------------------------------------------------------------
139,029,723 69,749,826
----------------------------------------------------------------------------------------------------
51
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 15, 2001, the Company issued 7.5 million common shares for proceeds,
net of fees, discounts and commissions, of approximately $232.5 million. Costs
associated with the sale of the shares, totaling approximately $3.2 million,
were deducted from the related proceeds. The net amount received in excess of
common share par value was recorded in additional paid-in capital.
In November 2001, the Company issued 6,000,000 $1.00 par value Series A
Preference Shares at $25.00 per share. The shares may be redeemed at $25.00 per
share at the Company's option on or after November 19, 2006. Dividends are
cumulative from the date of original issuance and are payable quarterly in
arrears at 8.10% when, if, and as declared by the Board of Directors. If the
Company submits a proposal to our shareholders concerning an amalgamation or
submits any proposal that, as a result of any changes to Bermuda law, requires
approval of the holders of our preference shares to vote as a single class, the
Company may redeem the shares prior to November 19, 2006 at $26.00 per share.
The preference shares have no stated maturity and are not convertible into any
other securities of the Company.
The Diluted Voting I Shares and the Diluted Voting II Shares (together the
"Diluted Voting Shares") were authorized at a special general meeting of
shareholders on December 23, 1996. Subsequent to the authorization, affiliates
and other parties related to General Electric Investment Corporation ("GEI")
exchanged 17.1 million common shares for 12.6 million Diluted Voting I Shares
and 4.5 million Diluted Voting II Shares, and as such are the sole holders of
the Diluted Voting I Shares.
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. The Company currently does not intend
to register or list the Diluted Voting Shares on the New York Stock Exchange.
In February and May of 2000, the Board authorized share repurchase programs of
$25.0 million each. The value of the remaining shares authorized under the
repurchase programs is $27.1 million. No shares were repurchased during 2002 or
2001. Common shares repurchased by the Company are normally cancelled and
retired.
During 2001, GEI completed the sale of 0.9 million and Diluted Voting I Shares,
pursuant to shelf registrations on Form S-3. The Diluted Voting I Shares sold by
GEI were subsequently converted into common shares.
NOTE 9. EARNINGS PER SHARE
The Company utilizes SFAS 128, "Earnings per Share" to account for its weighted
average shares. The numerator in both the Company's basic and diluted earnings
per share calculations is identical. The following table sets forth the
reconciliation of the denominator from basic to diluted weighted average shares
outstanding (in thousands of per share amounts):
--------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------
Weighted average shares - basic 67,555 59,490 57,102
Per share equivalents of employee
stock options and restricted shares 2,656 2,901 1,626
--------------------------------------------------------------------------------
Weighted average shares - diluted 70,211 62,391 58,728
--------------------------------------------------------------------------------
NOTE 10. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
Other assets include the Company's investment in Top Layer Re of $36.1 million
(2001 - $23.4 million), which is 50% owned by Renaissance Reinsurance and is
carried using the equity method. The Company's earnings from Top Layer Re
totaled $22.3 million for the year ended December 31, 2002 (2001 - $9.7 million)
and are included in other income. During 2002 and 2001, the Company also
received distributions from Top Layer Re of $9.7 million and $7.5 million,
respectively.
During the years ended December 31, 2002, 2001 and 2000, the Company received
71.1%, 76.9%, and 78.3%, respectively, of its reinsurance premium assumed from
four reinsurance brokers. Subsidiaries and affiliates of Marsh Inc., the
Benfield Group PLC, Willis Faber and AON Re Group accounted for approximately
27.5%, 19.0%, 13.1% and 11.5%, respectively, of the Company's gross premiums
written in 2002.
52
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTE 11. 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 operations as a cumulative effect of a change in accounting
principle. The following table sets forth the effect of goodwill amortization on
comparative period earnings:
--------------------------------------------------------------------------------
Years ended December 31, 2001 2000
--------------------------------------------------------------------------------
Net income available to common shareholders, as reported $164,366 $127,228
Add back: goodwill amortization expense 557 209
--------------------------------------------------------------------------------
Adjusted net income available to common shareholders $164,923 $127,437
--------------------------------------------------------------------------------
Average common shares outstanding - basic 59,490 57,102
Average common shares outstanding - diluted 62,391 58,728
Adjusted per common share data
Earnings per common share - basic $ 2.77 $ 2.23
Earnings per common share - diluted $ 2.64 $ 2.17
--------------------------------------------------------------------------------
NOTE 12. DIVIDENDS
Dividends declared and paid on Common Shares amounted to $0.57, $0.53 and $0.50
per common share for the years ended December 31, 2002, 2001, and 2000,
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 as if the stock dividend had occurred for all
periods presented.
The total amount of dividends paid to holders of the Common Shares during 2002,
2001 and 2000 was $39.0 million, $32.8 million and $29.2 million, respectively.
NOTE 13. 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 (benefit) expense for 2002, 2001 and 2000 is comprised as follows:
--------------------------------------------------------------------------------
Year ended December 31, 2002 Current Deferred Total
--------------------------------------------------------------------------------
U.S. federal $ -- $ (115) $ (115)
U.S. state and local -- -- --
--------------------------------------------------------------------------------
$ -- $ (115) $ (115)
--------------------------------------------------------------------------------
Year ended December 31, 2001 Current Deferred Total
--------------------------------------------------------------------------------
U.S. federal $ 2,369 $11,872 $14,241
U.S. state and local 21 -- 21
--------------------------------------------------------------------------------
$ 2,390 $11,872 $14,262
--------------------------------------------------------------------------------
Year ended December 31, 2000 Current Deferred Total
--------------------------------------------------------------------------------
U.S. federal $ 28 $ 4,602 $ 4,630
U.S. state and local 18 -- 18
--------------------------------------------------------------------------------
$ 46 $ 4,602 $ 4,648
--------------------------------------------------------------------------------
53
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2002 2001
--------------------------------------------------------------------------------
Deferred tax assets
Allowance for doubtful accounts $ 1,683 $ 1,627
Claims reserves, principally due to discounting for tax 1,409 1,071
Retroactive reinsurance gain 1,892 2,861
Net operating loss carryforwards 22,392 19,710
Goodwill 3,924 1,177
Others 1,839 437
--------------------------------------------------------------------------------
33,139 26,883
--------------------------------------------------------------------------------
Deferred tax liabilities
Other (1,428) (480)
--------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 31,711 26,403
Valuation allowance (27,724) (22,155)
--------------------------------------------------------------------------------
Net deferred tax asset $ 3,987 $ 4,248
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The net deferred tax asset is included in other assets in the consolidated
balance sheet. The net operating loss carryforward of $65.9 million (2001 -
$58.5 million) is available to offset regular taxable U.S. income during the
carryforward period (through 2022).
During 2002, the Company recorded additions to the valuation allowance of $5.6
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 2022, the Company's
U.S. operations did not generate significant taxable income during the year
ended December 31, 2002 and 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.
NOTE 14. GEOGRAPHIC INFORMATION
Financial information relating to gross premiums by geographic region is as
follows:
--------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------
United States and Caribbean $ 332,314 $ 180,305 $ 145,871
Worldwide 169,790 93,474 98,923
Europe 86,461 20,414 22,071
Worldwide (excluding U.S.) (1) 56,628 45,111 60,382
Other 18,354 22,433 9,559
Australia and New Zealand 2,127 12,159 8,280
Specialty reinsurance (2) 247,021 77,468 37,730
--------------------------------------------------------------------------------
Total reinsurance 912,695 451,364 382,816
Individual risk (3) 260,354 49,957 50,186
--------------------------------------------------------------------------------
Total gross premiums written $1,173,049 $ 501,321 $ 433,002
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(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) The category Individual Risk consists of contracts that are primarily
exposed to U.S. risks.
--------------------------------------------------------------------------------
54
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTE 15. SEGMENT REPORTING
The Company has two reportable segments: reinsurance operations and individual
risk operations (formerly primary operations). The reinsurance segment, which
includes the results of DaVinci in 2002, primarily provides property catastrophe
reinsurance and specialty reinsurance to selected insurers and reinsurers on a
worldwide basis. During the year, we renamed our primary segment "individual
risk" to more accurately describe the risk characteristics of this business. 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 for commercial and
homeowners' catastrophe-exposed property business, and also provides reinsurance
on a quota share basis.
The activities of the Company's Bermuda and U.S. holding companies are the
primary contributors to the results reflected outside of the reinsurance and
individual risk segments. The pre-tax loss of the holding companies primarily
consisted of interest expense on bank loans, minority interests, and realized
investment losses on the sales of investments, partially offset by investment
income on the assets of the holding companies and, for 2001, income related to
the Company's index-based contracts.
Data for the years ended December 31, 2002, 2001 and 2000 was as follows:
----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
----------------------------------------------------------------------------------------------------------------------
Reinsurance (1) Individual Risk (1) Other Eliminations (2) Total
Gross premiums written $ 912,695 $ 282,579 $ (22,225) $1,173,049
Net premiums written 696,610 227,101 923,711
Income 308,648 17,929 $ 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%
----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
----------------------------------------------------------------------------------------------------------------------
Reinsurance (1) Individual Risk (1) Other Eliminations Total
Gross premiums written $ 451,364 $ 49,957 $ 501,321
Net premiums written 326,680 12,867 339,547
Income (loss) 100,655 (1,469) $ 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%
----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
----------------------------------------------------------------------------------------------------------------------
Reinsurance (1) Individual Risk (1) Other Eliminations Total
Gross premiums written $ 382,816 $ 50,186 $ 433,002
Net premiums written 287,941 5,362 293,303
Income (loss) 85,532 (2,939) $ 44,635 127,228
Claims and claim expense ratio 40.4% 47.0% 40.6%
Underwriting expense ratio 26.8 98.1 28.5
----------------------------------------------------------------------------------------------------------------------
Combined ratio 67.2% 145.1% 69.1%
----------------------------------------------------------------------------------------------------------------------
(1) Income (loss) for the Reinsurance and Individual Risk segments represents net underwriting income. Net
underwriting income consists of net premiums earned less claims and claims expenses, acquisition costs and
operational expenses.
(2) Represents premium ceded from Individual Risk segment to Reinsurance segment.
----------------------------------------------------------------------------------------------------------------------
With the low level of net earned premium for the individual risk operations of
$7.8 million and $6.5 million in 2001 and 2000, respectively, relatively modest
adjustments to claims and claim expenses incurred and to operating expenses
caused unusual fluctuations in the claims and claim expenses ratio and the
underwriting expense ratio of our individual risk operations. The Company does
not manage its assets by segment and therefore investment income and total
assets are not allocated to the segments.
55
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. STOCK INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
The Company has a stock incentive plan under which all employees of the Company
and its subsidiaries may be granted stock options and restricted stock awards. A
stock option award under the Company's stock incentive plan allows for the
purchase of the Company's common shares at a price that is generally equal to
the five day average closing price of the common shares immediately prior to the
date of grant. Options to purchase common shares are granted periodically by the
Board of Directors, generally vest over four years and generally expire ten
years from the date of grant.
The fair value of option grants is estimated on the date of grant using a
Black-Scholes option pricing model for pro-forma footnote purposes with the
following weighted average assumptions used for grants in 2002, 2001 and 2000,
respectively: dividend yield of 1.4%, 1.7% and 1.9%; expected option life of
five years for all years; expected volatility of 30%, 31% and 29%; and a
risk-free interest rate of 2.7%, 4.8% and 5.0%.
The following is a table of the changes in options outstanding for 2002, 2001
and 2000, respectively:
-------------------------------------------------------------------------------------------------------------------------
Awards Weighted Average Fair
available for Options exercise value of Range of
grant outstanding price options exercise prices
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 3,634,383 4,760,604 $ 12.41
Options granted (4,770,354) 4,770,354 $ 16.34 $ 4.50 $11.33 - 24.82
Options forfeited 226,680 (226,680) $ 14.48
Options exercised (3,235,725) $ 12.91
Shares turned in or withheld 2,188,080
Restricted stock issued (710,637)
Restricted stock forfeited 26,910
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 595,062 6,068,553 $ 15.50
Options 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
Options 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
-------------------------------------------------------------------------------------------------------------------------
Total options exercisable at
December 31, 2002 2,062,886
-------------------------------------------------------------------------------------------------------------------------
56
RenaissanceRe Holdings Ltd. | Annual Report 2002
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 as of December 31, 2002 was 656,700
shares. As of December 31, 2002, the number of options issued to directors and
unexercised was 300,000. 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. In
2000, 210,000 options to purchase common shares and 9,984 restricted common
shares were granted. The options and restricted common shares vest ratably over
three years.
The Company has also established an employee stock bonus plan. Under the plan,
eligible employees may elect to receive a grant of common shares of up to 50% of
their bonus in lieu of cash, with an associated grant from the Company of an
equal number of restricted shares. The restricted common shares vest ratably
over a four year period. During the restricted period, the employee receives
dividends and votes the restricted common shares, but the restricted shares may
not be sold, transferred or assigned. In 2002, 2001 and 2000 the Company issued
101,536, 150,660 and 232,026 shares under this plan, respectively, with fair
values of $3.9 million, $3.2 million and $2.9 million, respectively.
Additionally, in 2002, 2001 and 2000 the Board of Directors granted 278,697,
566,088 and 478,611 restricted shares with a value of $10.7 million, $14.0
million, and $6.3 million to certain employees. The shares granted to these
employees vest ratably over a four to five year period. At the time of grant,
the market value of the shares awarded under these plans is recorded as unearned
stock grant compensation and is presented as a separate component of
shareholders' equity. The unearned compensation is charged to operations over
the vesting period. Compensation expense related to these plans was $8.2
million, $7.2 million, and $5.5 million in 2002, 2001 and 2000, respectively.
All of the Company's employees are eligible for defined contribution pension
plans. Contributions are primarily based upon a percentage of eligible
compensation.
NOTE 17. STATUTORY REQUIREMENTS
Under the Insurance Act 1978, amendments thereto and Related Regulations of
Bermuda ("the Act"), certain subsidiaries of the Company are required to prepare
statutory financial statements and to file in Bermuda a statutory financial
return. The Act also requires these subsidiaries of the Company to maintain
certain measures of solvency and liquidity during the period. As at December 31,
2002 the statutory capital and surplus of the Bermuda subsidiaries was $2.0
billion and the amount required to be maintained under Bermuda law was $414.7
million.
Under the Act, Renaissance Reinsurance and DaVinci are classified as Class 4
insurers, and are, therefore, restricted as to the payment of dividends in the
amount of 25% of the prior year's statutory capital and surplus, unless at least
two members of the Board of Directors attest that a dividend in excess of this
amount would not cause the company to fail to meet their relevant margins.
During 2002, Renaissance Reinsurance and DaVinci paid aggregate cash dividends
of $224.3 million and $3.5 million, respectively.
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
America. 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.
The Company's U.S. insurance subsidiaries are subject to various statutory and
regulatory restrictions regarding the payment of dividends. The restrictions are
primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amounted to $25.4 million at
December 31, 2002 and the amount required to be maintained was $9.0 million.
57
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. COMMITMENTS AND CONTINGENCIES
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of investments, cash and reinsurance balances.
The Company limits the amount of credit exposure to any one financial
institution and, except for U.S. Government bonds, none of the Company's
investments exceeded 10% of shareholders' equity at December 31, 2002.
Concentrations of credit risk with respect to reinsurance balances are limited
due to their dispersion across various companies and geographies.
Financial instruments with off-balance sheet risk
The Company's investment guidelines permit, subject to specific approval,
investments in derivative instruments such as futures, options and foreign
currency forward contracts for purposes other than trading. The Company
anticipates that any such investments would be limited to yield enhancement,
duration management, foreign currency exposure management or to obtain an
exposure to a particular financial market. The Company had no investments in
these derivative instruments as of December 31, 2002 and 2001.
Letters of credit
As of December 31, 2002, the Company's bankers have issued letters of credit of
approximately $223.1 million in favor of certain ceding companies. Also, in
connection with the Top Layer Re joint venture, the Company has committed $37.5
million of collateral in the form of a letter of credit. The letters of credit
are secured by cash and investments of similar amounts.
Employment agreements
The Board of Directors has authorized the execution of employment agreements
between the Company and certain officers. These agreements provide for severance
payments under certain circumstances, as well as accelerated vesting of options
and restricted stock grants, upon a change in control, as defined therein and by
the Company's 2001 Stock Incentive Plan.
Employee credit facility
In June 1997, the Company executed a credit facility in order to encourage
direct, long-term ownership of the Company's shares, and to facilitate purchases
of the Company's shares by officers of the Company. Under the terms of the
facility, the purchases are financed by personal loans to the officers from the
bank. Such loans are collateralized by the shares purchased. The Company
guarantees the loans, but has recourse to the collateral if it incurs a loss
under the guarantee. Following the adoption of revised rules by the Securities
and Exchange Commission in 2002 which prohibit the Company from extending credit
to its employees, there have been no further advances of credit to employees
under this facility. At December 31, 2002, the bank loans guaranteed by the
Company totaled $22.9 million (2001 - $24.1 million). At December 31, 2002, the
common shares that collateralize the loans had a fair value of $53.7 million
(2001 - $59.2 million). No new loans may be made under this facility and the
Company anticipates the repayment of these loans and the subsequent closure of
the facility prior to December 31, 2003.
Litigation
The Company is party to various lawsuits arising in the normal course of
business. The Company does not believe that any of its pending litigation will
have a material impact on its consolidated financial statements.
NOTE 19. SUBSEQUENT EVENTS
In January 2003, the Company issued $100 million of 5.875% Senior Notes due
February 15, 2013. The proceeds will be used for general corporate purposes.
Interest on the notes is payable on February 15 and August 15 of each year,
commencing August 15, 2003. The notes can be redeemed by the Company prior to
maturity subject to payment of a "make-whole" premium; however, the Company has
no current intentions of calling the notes. The notes, which are senior
obligations of the Company, contain various covenants, including limitations on
mergers and consolidations, restriction as to the disposition of stock of
designated subsidiaries and limitations on liens on the stock of designated
subsidiaries.
In February 2003, the Company issued 4,000,000 $1.00 par value Series B
Preference Shares at $25 per share. The shares may be redeemed at $25 per share
at the Company's option on or after February 4, 2008. Dividends are cumulative
from the date of original issuance and are payable quarterly in arrears at 7.3%,
commencing June 1, 2003 when, if, and as declared by the Board of Directors. If
the Company submits a proposal to our shareholders concerning an amalgamation or
submits any proposal that, as a result of any changes to Bermuda law, requires
approval of the holders of our preference shares to vote as a single class, the
Company may redeem the shares prior to February 4, 2008 at $26 per share. The
preference shares have no stated maturity and are not convertible into any other
securities of the Company.
58
RenaissanceRe Holdings Ltd. | Annual Report 2002
NOTE 20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30, December 31,
2002 2001 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Gross premiums written $ 460,834 $ 198,208 $ 270,294 $ 122,012 $ 282,597 $ 123,571 $ 159,324 $ 57,530
---------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ 379,096 $ 121,232 $ 198,517 $ 92,946 $ 192,687 $ 79,030 $ 153,411 $ 46,339
---------------------------------------------------------------------------------------------------------------------------------
Net premiums earned $ 150,308 $ 83,900 $ 184,742 $ 75,531 $ 191,310 $ 79,933 $ 234,545 $ 93,701
Net investment income 22,783 17,884 26,364 18,270 26,065 18,738 28,886 20,264
Net foreign exchange
gains (losses) (1,950) (295) 3,650 233 888 (1,051) 1,273 (554)
Other income 8,129 3,869 8,147 3,901 7,951 1,070 8,594 7,404
Net realized investment
gains (losses) 686 7,615 2,968 2,881 7,891 4,978 (2,780) 2,622
---------------------------------------------------------------------------------------------------------------------------------
Total revenues 179,956 112,973 255,871 100,816 234,105 103,668 270,518 123,437
---------------------------------------------------------------------------------------------------------------------------------
Claims and claim
expenses incurred 43,118 41,895 73,149 32,315 82,931 46,986 90,327 28,721
Acquisition costs 18,549 12,545 20,368 10,608 23,802 11,461 32,925 10,745
Operational expenses 10,663 8,512 9,962 9,894 9,616 9,408 18,918 10,789
Corporate expenses 2,690 1,528 4,688 4,780 3,466 1,366 3,483 3,811
Interest expense 2,714 864 3,433 683 3,499 2,699 3,423 3,003
---------------------------------------------------------------------------------------------------------------------------------
Total expenses 77,734 65,344 111,600 58,280 123,314 71,920 149,076 57,069
---------------------------------------------------------------------------------------------------------------------------------
Income before minority interest
and taxes 102,222 47,629 114,271 42,536 110,791 31,748 121,442 66,368
Minority interest -
Capital Securities 1,833 1,847 1,831 1,895 1,759 1,823 2,182 1,919
Minority interest - DaVinci 9,477 -- 13,470 -- 17,689 -- 14,415 751
---------------------------------------------------------------------------------------------------------------------------------
Income before taxes 90,912 45,782 98,970 40,641 91,343 29,925 104,845 63,698
Income tax benefit (expense) (596) (876) 273 (302) (59) 3 497 (13,087)
---------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of a change in
accounting principle - SFAS 142 -
Goodwill (9,187) -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Net income 81,129 44,906 99,243 40,339 91,284 29,928 105,342 50,611
Dividends on Preference Shares 3,038 -- 3,003 -- 3,038 -- 3,105 1,418
---------------------------------------------------------------------------------------------------------------------------------
Net income to Common
Shareholders $ 78,091 $ 44,906 $ 96,240 $ 40,339 $ 88,246 $ 29,928 $ 102,237 $ 49,193
---------------------------------------------------------------------------------------------------------------------------------
Earnings per common
share - basic $ 1.17 $ 0.78 $ 1.43 $ 0.70 $ 1.30 $ 0.51 $ 1.50 $ 0.76
Earnings per common
share - diluted $ 1.12 $ 0.74 $ 1.37 $ 0.67 $ 1.26 $ 0.49 $ 1.45 $ 0.73
Weighted average
shares-basic 66,788 57,681 67,326 57,838 67,865 58,130 68,241 64,317
Weighted average
shares-diluted 69,787 60,689 70,209 60,454 70,272 60,863 70,574 67,554
Claims and claim expense ratio 28.7% 49.9% 39.6% 42.8% 43.3% 58.8% 38.5% 30.7%
Underwriting expense ratio 19.4 25.1 16.4 27.1 17.5 26.1 22.1 23.0
---------------------------------------------------------------------------------------------------------------------------------
Combined ratio 48.1% 75.0% 56.0% 69.9% 60.8% 84.9% 60.6% 53.7%
---------------------------------------------------------------------------------------------------------------------------------
59
RenaissanceRe Holdings Ltd. | Annual Report 2002
GLOSSARY OF SELECTED INSURANCE TERMS
Attachment point The amount of loss (per occurrence or in the aggregate,
as the case may be) above which excess of loss
reinsurance becomes operative.
Broker One 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.
Casualty insurance Insurance that is primarily concerned with the losses
caused by injuries to third persons and their property
(in other words, persons other than the policyholder)
and the legal liability imposed on the insured
resulting therefrom. Also referred to as liability
insurance.
Catastrophe A severe loss, typically involving multiple claimants.
Common perils include earthquakes, hurricanes,
hailstorms, severe winter weather, floods, fires,
tornadoes, explosions and other natural or man-made
disasters. Catastrophe losses may also arise from acts
of war, acts of terrorism and political instability.
Catastrophe excess A form of excess of loss reinsurance that, subject to a
of 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; cedent; When a party reinsures its liability with another, it
ceding company "cedes" business and is referred to as the "cedent" or
"ceding company."
Claim expenses The expenses of settling claims, including legal and
other fees and the portion of general expenses
allocated to claim settlement costs.
Claims and claim The ratio of claims and claim expenses to net premiums
expense ratio earned, determined in accordance with either SAP or
GAAP.
Claims and The expenses of settling claims, including legal and
claim expenses 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.
Claims 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 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 loss and loss
expense ratio, the acquisition cost ratio and the
general and administrative expense ratio, determined in
accordance with U.S. GAAP. 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.
Excess and surplus Any type of coverage that cannot be placed with an
lines reinsurance 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.
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RenaissanceRe Holdings Ltd. | Annual Report 2002
Excess of loss A generic term describing reinsurance that indemnifies
reinsurance the reinsured 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 cedent 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.
Frequency The number of claims occurring during a given coverage
period.
Funded cover A form of insurance where the insured pays premiums to
a reinsurer to serve essentially as a deposit in order
to offset future losses. On a funded cover, there is
generally limited or no transfer of risk for
catastrophe losses from the insured to the reinsurer.
Generally accepted Accounting principles as set forth in opinions of the
accounting principles Accounting Principles Board of the American Institute
("GAAP") of Certified Public Accountants and/or statements of
the Financial Accounting Standards Board and/or their
respective successors and which are applicable in the
circumstances as of the date in question. Also referred
to as GAAP.
Gross premiums written Total premiums for insurance written and assumed
reinsurance during a given period.
Incurred but not Reserves for estimated losses that have been incurred
reported ("IBNR") by insureds and reinsureds but not yet reported to the
insurer or reinsurer including unknown future
developments on losses which are known to the insurer
or reinsurer.
Layer The interval between the retention or attachment point
and the maximum limit of indemnity for which a
reinsurer is responsible.
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.
Premiums The amount charged during the term on policies and
contracts issued, renewed or reinsured by an insurance
company or reinsurance company.
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.
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.
61
RenaissanceRe Holdings Ltd. | Annual Report 2002
GLOSSARY OF SELECTED INSURANCE TERMS
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 A form of excess of loss reinsurance that covers a loss
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.
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.
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.
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 United
States state insurance regulatory authorities including
the NAIC, which in general reflect a liquidating,
rather than going concern, concept of accounting.
Total Managed The total catastrophe reinsurance premiums written on a
Cat Premium gross basis by our managed catastrophe joint ventures
as well as by our wholly owned subsidiaries.
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 expenses The aggregate of policy acquisition costs, including
commissions, and the portion of administrative, general
and other expenses attributable to underwriting
operations.
62
RenaissanceRe Holdings Ltd. | Annual Report 2002
DIRECTORS AND OFFICERS
RenaissanceRe Holdings Ltd. and Subsidiaries
(as of March 1, 2003)
BOARD OF DIRECTORS
--------------------------------------------------------------------------------------------------------------
James N. Stanard (4) Brian R. Hall (1)(2) Scott E. Pardee (1)(3)
Chairman of the Board Retired Alan R. Holmes Professor of
Chief Executive Officer Johnson & Higgins Monetary Economics
Middlebury College
Thomas A. Cooper (2)(4) William F. Hecht (2)
TAC Associates Chairman William I. Riker (3)
PPL Corporation President
Edmund B. Greene (1) Chief Operating Officer
Retired W. James MacGinnitie (3)(4)
General Electric Company Independent Consultant
Committees of the Board: 1 - Audit 2 - Compensation & Governance 3 - Investment
& Risk Management 4 - Transaction
OFFICERS OF RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------
William B. Ashley W. Preston Hutchings William I. Riker
Chief Operating Officer Senior Vice President President
Glencoe Insurance Ltd. Chief Investment Officer Chief Operating Officer
RenaissanceRe Holdings Ltd. RenaissanceRe Holdings Ltd.
Ian D. Branagan
Managing Director John M. Lummis Russell M. Smith
Renaissance Reinsurance of Europe Executive Vice President Senior Vice President
Chief Financial Officer Renaissance Reinsurance Ltd.
Michael W. Cash RenaissanceRe Holdings Ltd.
Senior Vice President James N. Stanard
Renaissance Reinsurance Ltd. Martin J. Merritt Chairman of the Board
Senior Vice President Chief Executive Officer
Ross A. Curtis Controller RenaissanceRe Holdings Ltd.
Vice President RenaissanceRe Holdings Ltd.
Renaissance Reinsurance Ltd. Craig W. Tillman
John D. Nichols, Jr. Chief Underwriting Officer
David A. Eklund President Glencoe Insurance Ltd.
President Renaissance Underwriting
Chief Underwriting Officer Managers, Ltd. Stephen H. Weinstein
Renaissance Reinsurance Ltd. Vice President
Kevin J. O'Donnell General Counsel
Todd R. Fonner Senior Vice President Corporate Secretary
Vice President Renaissance Reinsurance Ltd. RenaissanceRe Holdings Ltd.
Treasurer
RenaissanceRe Holdings Ltd. Jonathan D. Paradine John R. Wineinger
Vice President Vice President
Thomas H. Friedberg Renaissance Reinsurance Ltd. Renaissance Services Ltd.
President
Stonington Insurance Company Laurence B. Richardson II
Vice President
Renaissance Underwriting
Managers, Ltd.
63
RenaissanceRe Holdings Ltd. | Annual Report 2002
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.
2002 Price Range 2001 Price Range
High Low High Low
--------------------------------------------------------------------------
First Quarter $ 36.35 $ 28.90 $ 27.95 $ 21.18
Second Quarter 39.65 33.85 25.23 20.83
Third Quarter 39.40 31.30 29.64 22.87
Fourth Quarter 43.24 37.49 34.57 30.47
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
64
RenaissanceRe Holdings Ltd. | Annual Report 2002