<PAGE>
FILED PURSUANT TO
RULE NO. 424(b)(1)
REGISTRATION NO. 33-38481
PROSPECTUS
3,000,000 SHARES
RENAISSANCERE HOLDINGS LTD.
COMMON SHARES
--------------
Of the 3,000,000 Common Shares of the Company (the "Common Shares") offered
hereby, 2,400,000 shares are being offered in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 600,000 shares are being
offered concurrently outside the United States and Canada by the International
Underwriters (the "International Offering"). Such offerings are collectively
referred to as the "Offering." The 3,000,000 Common Shares to be sold in the
Offering are collectively referred to as the "Shares." The public offering
price and underwriting discount per share in the U.S. Offering and the
International Offering are identical. See "Underwriting."
All of the Shares offered hereby are being sold by Warburg, Pincus
Investors, L.P. ("Warburg"), GE Investment Private Placement Partners I--
Insurance, Limited Partnership ("GE Insurance"), and PT Investments, Inc. ("PT
Investments") and United States Fidelity and Guaranty Company ("USF&G")
(collectively, the "Selling Shareholders"). See "Principal and Selling
Shareholders" and "Underwriting." The Company will not receive any of the net
proceeds from the sale of the Shares by the Selling Shareholders in the
Offering.
Following the consummation of the Offering, Warburg, PT Investments, GE
Insurance, USF&G and Management (as defined herein) will own approximately
17.5%, 11.1%, 1.5%, 10.8% and 5.2%, respectively, of the outstanding Common
Shares, representing approximately 18.4%, 7.8%, 0.5%, 11.3% and 5.5%,
respectively, of the Company's voting power. The Selling Shareholders are
parties to an agreement among themselves and the Company providing them with
the ability, if they act in concert, to nominate a majority of the Board of
Directors. See "Risk Factors--Control by Selling Shareholders" and "Principal
and Selling Shareholders."
The full voting Common Shares are listed for quotation on The New York Stock
Exchange, Inc. (the "NYSE") under the symbol "RNR." On November 17, 1997, the
last sale price per share as reported on the NYSE was $42 5/8. See "Price
Range of Common Shares and Dividends."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE SHARES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT(1) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share..................... $42.00 $1.89 $40.11
- --------------------------------------------------------------------------------
Total(3)............................. $126,000,000 $5,670,000 $120,330,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company will pay all fees and expenses related to the Offering
estimated at $600,000.
(3) The Selling Shareholders have granted the U.S. Underwriters and the
International Underwriters 30-day options to purchase up to 360,000 and
90,000 additional Common Shares, respectively, solely for the purpose of
covering over-allotments, if any. If such options are exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Selling
Shareholders will be $144,900,000, $6,520,500 and $138,379,500,
respectively. See "Underwriting."
--------------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer
and to reject orders in whole or in part. It is expected that the delivery of
the Shares will be made in New York, New York on or about November 21, 1997.
--------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
LEHMAN BROTHERS
SALOMON BROTHERS INC
--------------
The date of this Prospectus is November 17, 1997.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON SHARES TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT. THE BUYER
IN NORTH CAROLINA UNDERSTANDS THAT NEITHER THE COMPANY NOR ITS SUBSIDIARIES
ARE LICENSED IN NORTH CAROLINA PURSUANT TO CHAPTER 58 OF THE NORTH CAROLINA
GENERAL STATUTES NOR COULD THEY MEET THE BASIC ADMISSIONS REQUIREMENTS IMPOSED
BY SUCH CHAPTER AT THE PRESENT TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at 450 Fifth Street, NW, Washington, D.C. 20549, and
at the following regional offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, NW,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
World Wide Web site (http://www.sec.gov) containing these reports, proxy
statements and other information. The Common Shares are listed on the New York
Stock Exchange, and these records and other information can also be inspected
at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all exhibits and amendments, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Shares offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect
to the Company and the Common Shares, reference is made to the Registration
Statement, including the exhibits and schedules thereto. The Registration
Statement may be inspected, without charge, at the Commission's principal
office at 450 Fifth Street, NW, Washington, D.C. 20549, and also at the
regional offices of the Commission listed above. Copies of such material may
also be obtained from the Commission upon the payment of prescribed rates. The
Registration Statement may also be accessed from the Commission's World Wide
Web site listed above.
Statements contained in the Prospectus as to any contracts, agreements or
other documents filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is hereby made to the
copy of such contract, agreement or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof, and
each such statement in the Prospectus is qualified in all respects by such
reference.
2
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES UNDER
UNITED STATES FEDERAL SECURITIES LAWS
The Company is organized pursuant to the laws of Bermuda. In addition,
certain of the directors and officers of the Company, as well as certain of
the experts named herein, reside outside the United States, and all or a
substantial portion of their assets and the assets of the Company are located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States upon such persons or to
realize against them in courts of the United States upon judgments of courts
of the United States predicated upon civil liabilities under the United States
federal securities laws.
The Company has been advised by its Bermuda counsel, Conyers, Dill &
Pearman, that the United States and Bermuda do not currently have a treaty
providing for reciprocal recognition and enforcement of judgments in civil and
commercial matters and that there is doubt (a) whether a final judgment for
the payment of money rendered by a federal or state court in the United States
based on civil liability, whether or not predicated solely upon the civil
liability provisions of the United States federal securities laws, would be
enforceable in Bermuda against the Company or the Company's officers and
directors and (b) whether an action could be brought in Bermuda against the
Company or the Company's officers and directors in the first instance on the
basis of liability predicated solely upon the provisions of the United States
federal securities laws. A Bermuda court may, however, impose civil liability
on the Company or its directors or officers in a suit brought in the Supreme
Court of Bermuda against the Company or such persons provided that the facts
alleged constitute or give rise to a cause of action under Bermuda law.
Certain remedies available under the laws of U.S. jurisdictions, including
certain remedies under the U.S. federal securities laws, would not be allowed
in Bermuda courts as contrary to public policy.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act and are hereby incorporated by reference into
this Prospectus:
(a) the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (the "1996 10-K");
(b) the Company's Proxy Statement relating to the Annual
Meeting of Shareholders held on May 8, 1997;
(c) the Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended March 31, 1997 and the Company's
Quarterly Reports on Form 10-Q for the quarterly periods ended
June 30, 1997 and September 30, 1997 (the "Forms 10-Q");
(d) the Company's Current Reports on Form 8-K filed with the
Commission on January 7, 1997, February 20, 1997, March 19,
1997, May 23, 1997 and July 11, 1997; and
(e) the description of the full voting Common Shares
contained in the Company's Registration Statement on Form 8-A
filed with the Commission under the Exchange Act on July 24,
1995 and any amendments or reports filed for the purpose of
updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering of the Shares offered hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents (provided, however, that the information
referred to in item 402(a)(8) of Regulation S-K of the Commission shall not be
deemed specifically incorporated by reference herein).
3
<PAGE>
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, upon
the written or oral request of any such person, a copy of any or all of the
documents incorporated by reference in this Prospectus (other than exhibits
and schedules thereto, unless such exhibits or schedules are specifically
incorporated by reference into the information that this Prospectus
incorporates). Written or oral requests for copies of these documents should
be directed to RenaissanceRe Holdings Ltd., Renaissance House, 8-12 East
Broadway, Pembroke HM 19 Bermuda, telephone (441) 295-4513, Attention:
Secretary.
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information (including financial
information) included elsewhere in this Prospectus, or incorporated by
reference herein. Unless the context requires otherwise, references herein to
"the Company" are to RenaissanceRe Holdings Ltd. and its subsidiaries. All
information in this Prospectus assumes that neither the Underwriters' over-
allotment options nor any stock options outstanding as of September 30, 1997
are exercised.
This Prospectus contains forward-looking statements which involve certain
material risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
The words "believes," "anticipated," "expects" and similar expressions are
intended to identify forward-looking statements. See "Business" and "Risk
Factors--Volatility of Financial Results." Insurance terms defined in the
"Glossary of Selected Insurance Terms" are printed in bold face type the first
time they appear in this Prospectus.
As used herein, the term "Common Shares" collectively refers to the Company's
(i) full voting Common Shares, par value $1.00 per share; (ii) Diluted Voting
Class I Common Shares, par value $1.00 per share (the "DVI Shares"); and (iii)
Diluted Voting Class II Common Shares, par value $1.00 per share (the "DVII
Shares"). The DVI Shares and the DVII Shares were issued to certain of the
Selling Shareholders in connection with an equity recapitalization of the
Company in December 1996. Pursuant to the Amended and Restated Bye-Laws of the
Company (the "Bye-Laws"), the DVI Shares and the DVII Shares have the same
rights and privileges as the full voting Common Shares, except with respect to
voting rights. See "Principal and Selling Shareholders." Purchasers of Shares
in the Offering will receive only full voting Common Shares.
THE COMPANY
OVERVIEW
RenaissanceRe Holdings Ltd. is a Bermuda company with its registered and
principal executive offices located at Renaissance House, 8-12 East Broadway,
Pembroke HM 19 Bermuda, telephone (441) 295-4513. The Company was formed in
June 1993 and is the parent of Renaissance Reinsurance Ltd., a Bermuda company
and a wholly-owned subsidiary ("Renaissance Reinsurance"), Glencoe Insurance
Ltd., a Bermuda company and a majority-owned subsidiary ("Glencoe"), and DeSoto
Insurance Company, a Florida company and a wholly-owned subsidiary of Glencoe
("DeSoto").
The Company's principal business is property catastrophe reinsurance, written
on a worldwide basis through Renaissance Reinsurance. Based on gross premiums
written, the Company is the largest Bermuda-based provider of property
catastrophe reinsurance and one of the largest providers of this coverage in
the world. The Company provides property catastrophe reinsurance coverage to
insurance companies and other reinsurers primarily on an excess of loss basis.
Excess of loss catastrophe coverage generally provides coverage for claims
arising from large natural catastrophes, such as earthquakes and hurricanes, in
excess of a specified loss. The Company is also exposed to claims arising from
other natural and man-made catastrophes such as winter storms, freezes, floods,
fires and tornadoes in connection with the coverages it provides.
The Company's principal operating objective is to utilize its capital
efficiently by focusing on the writing of property catastrophe insurance and
reinsurance contracts with superior risk/return characteristics, while
maintaining a low cost operating structure in the favorable regulatory and tax
environment of Bermuda. The Company's primary underwriting goal is to construct
a portfolio of insurance and reinsurance contracts that maximizes the return on
shareholders' equity subject to prudent risk constraints. The Company seeks to
moderate
5
<PAGE>
the volatility inherent in the property catastrophe reinsurance market through
the use of contract terms, portfolio selection methodology, diversification
criteria and probability analyses. While property catastrophe reinsurance
represented approximately 95% of the Company's gross premiums written in each
of 1996, 1995 and 1994 and continues to be the Company's primary focus, the
Company seeks to take advantage of perceived opportunities in both insurance
and other reinsurance markets. The Company is pursuing opportunities in the
United States to write catastrophe-exposed primary insurance. The Company
expects to write both personal and commercial coverages, on a primary basis,
where natural catastrophe exposures represent a significant component of the
overall exposure. In addition to the Company's Glencoe subsidiary, these
opportunities may be pursued through the development of new operations, such as
DeSoto, or the acquisition of other companies or books of business. There can
be no assurance, however, that such opportunities, if consummated, would
contribute materially to the Company's results of operations.
For the years ended December 31, 1996, 1995 and 1994, the Company achieved
returns on average shareholders' equity of 30.2%, 43.3% and 44.1%,
respectively, and combined ratios of 51.3%, 52.0% and 61.6%, respectively. The
Company achieved these results despite the occurrence of several major
catastrophes in 1996 and 1995 (which, according to industry trade sources, had
the fifth and third highest level of U.S. property catastrophe insured losses
on record, respectively) and the occurrence in January 1994 of the Northridge,
California earthquake, the second largest insured catastrophe loss in U.S.
history. The major catastrophes which occurred in 1996 were Hurricane Fran in
September, which produced an estimated $1.6 billion of insurance industry
losses, the Northeastern United States winter storms in January and the
Northwestern United States floods in December. The major catastrophes which
occurred in 1995 were Hurricanes Luis, Marilyn and Opal. For the nine-month
period ended September 30, 1997, the Company achieved an annualized return on
average shareholders' equity of 24.7% and a combined ratio of 48.1%. At
September 30, 1997, the Company had total assets of $1.0 billion and total
shareholders' equity of $595.7 million. There can be no assurance that the
Company will achieve similar results in the future. See "Risk Factors--
Volatility of Financial Results" and "Business."
The Company's experienced management team assesses underwriting decisions on
the basis of the expected incremental return on equity of each new reinsurance
contract in relation to the Company's overall portfolio of reinsurance
contracts. To facilitate this, the Company has developed REMS(C), a
proprietary, computer-based pricing and exposure management system. The Company
utilizes REMS(C) to assess property catastrophe risks, price treaties and limit
aggregate exposure. REMS(C) was developed with consulting assistance from
Tillinghast, an actuarial consulting unit of Towers, Perrin, Forster & Crosby,
Inc. ("Tillinghast"), and Applied Insurance Research, Inc. ("AIR"), the
developer of the CATMAP(TM) system. The Company combines the analyses generated
by REMS(C) with its own knowledge of the client submitting the proposed program
to assess the premium offered against the risk of loss which such program
presents. See "Business--Underwriting."
The Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company receives program submissions from a wide
variety of such brokers. The Company is highly selective in writing reinsurance
contracts. For the year ended December 31, 1996, the Company extended
reinsurance coverage on only 27.4% of the program submissions it received. See
"Business--Marketing."
The Company was founded by Warburg, Pincus Investors, L.P. ("Warburg"),
certain affiliates of GE Investment Private Placement Partners I--Insurance,
Limited Partnership ("GE Insurance") and PT Investments, Inc. ("PT
Investments") and United States Fidelity and Guaranty Company ("USF&G").
Following the consummation of the Offering, Warburg, PT Investments, GE
Insurance, USF&G and the Company's executive officers ("Management") will own
approximately 17.5%, 11.1%, 1.5%, 10.8% and 5.2%, respectively, of the
Company's outstanding Common Shares, representing approximately 18.4%, 7.8%,
0.5%, 11.3% and 5.5%, respectively, of the Company's outstanding voting power.
See "Principal and Selling Shareholders."
6
<PAGE>
STRATEGY
The principal components of the Company's strategy are to:
. Focus on the property catastrophe reinsurance business.
. Build a superior portfolio of property catastrophe reinsurance by
utilizing proprietary modeling capabilities.
. Utilize the Company's capital base efficiently while maintaining prudent
risk levels in the Company's reinsurance portfolio.
. Capitalize on the experience and skill of management.
. Build and maintain long-term relationships with brokers and clients.
. Maintain a low cost structure.
. Leverage the Company's modeling expertise by expanding into primary
insurance markets with significant natural catastrophe exposures.
INDUSTRY TRENDS
The high level of worldwide property catastrophe losses in terms of both
frequency and severity from 1987 to 1993 had a significant effect on the
results of property insurers and property catastrophe reinsurers and on the
worldwide property catastrophe reinsurance market, causing certain property
catastrophe reinsurers and certain underwriting syndicates at Lloyd's of London
("Lloyd's") to withdraw from the market or reduce their underwriting
commitments while also causing a substantial increase in market demand,
particularly in the United States, Japan and the United Kingdom. In particular,
these events included Hurricane Hugo (U.S. 1989), Hurricane Andrew (U.S. 1992),
Typhoon Mireille (No. 19) (Japan 1991) and Winter Storm Daria (90A) (Northern
Europe 1990).
The increase in demand for property catastrophe reinsurance was attributable
to several factors. The significant property catastrophe losses occurring
during 1987 through 1993 caused many insurers and reinsurers to reexamine their
assumptions regarding their need for reinsurance protection from catastrophe
exposures. In addition, rating agencies, such as Standard & Poor's Insurance
Ratings Services ("S&P"), and regulators increased their scrutiny of insurers
and reinsurers with respect to their catastrophe exposure. For example, Typhoon
Mireille (No. 19) resulted in greater scrutiny by the Minister of Finance of
Japan of insurers and reinsurers with respect to catastrophe exposure, thereby
increasing demand for property catastrophe reinsurance in Japan. In addition,
A.M. Best Company, Inc. ("A.M. Best") began to require completion of a
catastrophe loss analysis questionnaire dealing with expected claims resulting
from potential catastrophic events. Finally, a general increase in insured
property values in catastrophe-exposed areas contributed to increased demand
for property catastrophe insurance and reinsurance. This supply/demand
imbalance caused a significant increase in prevailing premium rates for
property catastrophe reinsurance worldwide in 1993.
In response to this imbalance, approximately $4.0 billion of capital entered
the Bermuda-basedproperty-catastrophe reinsurance market in 1992 and 1993. The
Bermuda property-catastrophe reinsurance market has subsequently grown
markedly, having aggregate capital of approximately $6.0 billion as of
September 30, 1997, and accounting for approximately 25% to 35% of the
worldwide property catastrophe gross premiums written in 1996, according to
industry trade reports. The increased property catastrophe reinsurance capacity
represented by the Bermuda market helped balance supply and demand in the
property catastrophe reinsurance market and, as a result thereof, premium rates
and other terms of trade in the property catastrophe reinsurance market
stabilized in 1994-1995. In each of 1996 and 1997, according to industry trade
sources, worldwide price levels decreased by an average of 10% to 15%. Based on
publicly available industry trade sources, price levels are expected to decline
at a similar pace in 1998. Rates have declined significantly in areas outside
the United States, where there has been favorable loss experience, while in the
United States, where the level of property catastrophe losses has generally
been higher than in international markets in recent years, rates have decreased
to a lesser degree. However, premium rates and retention levels have remained,
and Management believes are likely to remain, higher than those that existed in
1992. See "Business--Industry Trends."
7
<PAGE>
MANAGEMENT
James N. Stanard, Chairman of the Board, President and Chief Executive
Officer has 26 years experience in the insurance industry, primarily in
reinsurance. In October 1983, Mr. Stanard was one of two senior executives
primarily responsible for the formation of F&G Re, Inc. ("F&G Re"), a start-up
reinsurance subsidiary of USF&G. As Executive Vice President of F&G Re, Mr.
Stanard was responsible for underwriting, pricing and marketing activities,
including both U.S. and international property catastrophe reinsurance.
David A. Eklund, Senior Vice President--International Underwriting, has 13
years experience in the reinsurance industry and previously held positions in
casualty underwriting at Old Republic International Reinsurance Group, Inc.
("Old Republic") and in property catastrophe reinsurance at Berkshire Hathaway
Inc. ("Berkshire Hathaway"). Keith S. Hynes, President and Chief Executive
Officer of Glencoe and, until September 1997, Senior Vice President and Chief
Financial Officer of the Company, has 19 years experience in the insurance
industry, most recently as Senior Vice President and Chief Financial Officer of
Hartford Steam Boiler ("Hartford Steam"). John M. Lummis, Senior Vice President
and Chief Financial Officer, has 15 years of experience, previously serving as
Vice President-Business Development of USF&G Corporation from 1994 until August
1997, Vice President and Group General Counsel for USF&G Corporation from 1991
until 1995 and before that as a lawyer in private practice at Shearman &
Sterling. William I. Riker, Senior Vice President--North American Underwriting,
has over 13 years experience in the reinsurance industry and previously held
the position of Vice President at AIR, a consulting firm specializing in
property catastrophe modeling, and of Senior Vice President, Director of
Underwriting of American Royal Reinsurance Company ("American Royal").
THE OFFERING
Shares to be sold in
the Offering............ 3,000,000 Common Shares(1)
Common Shares to be
outstanding following
the consummation of the
Offering................ 22,447,110 Common Shares(2)
Use of Proceeds......... The Shares offered hereby will be sold on
behalf of the Selling Shareholders named
herein. The Company will not receive any of the
net proceeds from the Offering. See "Use of
Proceeds."
Dividend Policy......... The Board intends to declare, and the Company
intends to pay, quarterly dividends on the
Common Shares. The declaration and payment of
dividends are subject to the discretion of the
Board and will depend upon, among other things,
the financial condition of the Company and its
subsidiaries, general business conditions,
legal, contractual and regulatory restrictions
regarding the payment of dividends by the
Company and its subsidiaries and other factors
which the Board may in the future consider to
be relevant. The Board has declared a dividend
of $.25 per share payable on December 5, 1997
to shareholders of record as of November 20,
1997. See "Risk Factors--Holding Company
Structure; Limitations on Dividends" and
"Dividend Policy."
NYSE Symbol............. "RNR"
8
<PAGE>
- --------
(1) Consists of 2,400,000 Shares to be sold in the U.S. Offering and 600,000
Shares to be sold in the International Offering.
(2) Does not include (i) 1,300,374 Common Shares issuable upon the exercise of
options granted to employees pursuant to the Company's Second Amended and
Restated 1993 Stock Incentive Plan (the "Incentive Plan") as of September
30, 1997 or (ii) 24,000 Common Shares issuable upon the exercise of options
granted pursuant to the Company's Non-Employee Director Stock Plan as of
September 30, 1997.
RISK FACTORS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE SHARES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
9
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary financial data and other financial
information of the Company as of September 30, 1997 and December 31, 1996,
1995, 1994 and 1993, and for the nine months ended September 30, 1997, years
ended December 31, 1996, 1995, 1994 and the period June 7, 1993 (date of
incorporation) through December 31, 1993. The balance sheet data as of December
31, 1996, 1995, 1994 and 1993 and the statement of income data for the years
ended December 31, 1996, 1995 and 1994 and for the period June 7, 1993 through
December 31, 1993 were derived from the Company's Consolidated Financial
Statements which have been audited by Ernst & Young, the Company's independent
auditors. The balance sheet data as of September 30, 1997 and the statement of
income data for the period January 1, 1997 through September 30, 1997 were
derived from the unaudited interim financial statements of the Company. The
unaudited interim financial statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for that
period. The results of operations for any interim period are not necessarily
indicative of results for the full fiscal year. The summary financial data
should be read in conjunction with the Consolidated Financial Statements of the
Company and related Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1996 10-K and the Forms
10-Q incorporated herein by reference and all other information appearing
elsewhere in this Prospectus. See "Available Information" and "Documents
Incorporated by Reference." The Consolidated Financial Statements as of
December 31, 1996 and 1995 and for each of the three years ended December 31,
1996, 1995 and 1994, along with the interim financial statements as of
September 30, 1997 and 1996 and the nine-month periods ended September 30, 1997
and 1996, have also been included in this Prospectus.
<TABLE>
<CAPTION>
PERIOD JUNE 7, 1993
(DATE OF
YEARS ENDED DECEMBER 31, INCORPORATION)
NINE MONTHS ENDED ---------------------------- THROUGH
SEPTEMBER 30, 1997 1996 1995 1994 DECEMBER 31, 1993
------------------ -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Gross premiums written.. $215,574 $269,913 $292,607 $273,481 $66,118
Net premiums written.... 184,964 251,564 289,928 269,954 66,118
Net premiums earned..... 160,359 252,828 288,886 242,762 34,643
Net investment income... 36,994 44,170 32,320 14,942 2,725
Net realized gains
(losses) on sale
of investments......... 917 (2,938) 2,315 246 (7)
Claims and claim
expenses incurred...... 40,017 86,945 110,555 114,095 982
Acquisition costs....... 18,978 26,162 29,286 25,653 4,017
Underwriting expenses... 18,133 16,731 10,448 9,725 2,201
Pre-tax income.......... 107,850 156,160 165,322 109,298 31,281
Net income.............. 107,850 156,160 165,322 109,298 31,281
Net income available to
common shareholders.... 107,850 156,160 162,786 96,419 31,281
Net income per Common
Share(1)............... $ 4.66 $ 6.01 $ 6.75 $ 4.24 $ 1.37
Dividends per Common
Share.................. $ .75 $ .80 $ .16 -- --
Weighted average Common
Shares outstanding..... 23,137 25,994 24,121 22,750 22,750
OTHER DATA:
Claims/claim adjustment
expense ratio.......... 25.0% 34.3% 38.3% 47.0% 2.8%
Underwriting expense
ratio.................. 23.1 17.0 13.7 14.6 17.9
-------- -------- -------- -------- -------
Combined ratio.......... 48.1% 51.3% 52.0% 61.6% 20.7%
======== ======== ======== ======== =======
Return on average
shareholders' equity... 24.7%(2) 30.2% 43.3% 44.1% 32.7%(2)
</TABLE>
(footnotes appear on following page)
10
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -----------------------------------
1997 1996 1995 1994 1993
---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments
available for sale at
fair value, short-term
investments and cash and
cash equivalents......... $ 857,780 $802,466 $667,999 $437,542 $169,839
Total assets.............. 1,006,808 904,764 757,060 509,410 208,512
Reserve for claims and
claim adjustment
expenses................. 113,748 105,421 100,445 63,268 982
Reserve for unearned
premiums................. 103,407 65,617 60,444 59,401 31,475
Bank loan................. 50,000 150,000 100,000 60,000 --
Company obligated
mandatorily redeemable
capital securities of
a subsidiary trust
holding solely junior
subordinated debentures
of the Company(3)........ 100,000 -- -- -- --
Series B preference
shares................... -- -- -- 55,338 --
Total shareholders'
equity(4)................ 595,672 546,203 486,336 265,247 172,471
Book value per Common
Share(4)................. $ 26.54 $ 23.21 $ 18.99 $ 11.79 $ 7.67
Common Shares
outstanding(4)........... 22,447 23,531 25,605 22,500 22,500
</TABLE>
- --------
(1) Net income per share was calculated by dividing net income available to
common shareholders by the number of weighted average Common Shares and
Common Share equivalents outstanding. Common Share equivalents are
calculated on the basis of the treasury stock method.
(2) Return on average shareholders' equity for a period of less than a full
year is calculated by annualizing the net income available to Common
Shareholders for such period and dividing it by beginning shareholders'
equity; plus one-half of such annualized net income; less one-half of the
dividends paid or payable as of the balance sheet date adjusted by one-half
of the dollar value of the year-to-date capital transactions (i.e., share
issuances or repurchases).
(3) This item reflects $100.0 million aggregate liquidation amount of the
Capital Securities (as defined herein) issued by a subsidiary trust. The
sole assets of the trust are $103.1 million aggregate principal amount of
8.54% Junior Subordinated Debentures due March 1, 2027 issued by the
Company.
(4) Book value per Common Share was computed by dividing total shareholders'
equity by the number of outstanding Common Shares. After giving effect to
the estimated expenses associated with the Offering of $.6 million, total
shareholders' equity and book value per share as of September 30, 1997, as
adjusted, would have been $595.1 million and $26.51 per share,
respectively.
11
<PAGE>
RISK FACTORS
Prospective investors in the Shares offered hereby should carefully consider
the following risk factors, in addition to the other information appearing and
incorporated by reference in this Prospectus. This Prospectus and the
documents incorporated herein by reference contain forward-looking statements
which involve risks and uncertainties. The Company's actual results in the
future could differ significantly from the results discussed in such forward-
looking statements. The words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Factors that
cause or contribute to such a difference include, but are not limited to,
those discussed in "Risk Factors" as well as elsewhere in this Prospectus and
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1996 10-K and in the Company's periodic reports filed under
the Exchange Act and incorporated herein by reference.
VOLATILITY OF FINANCIAL RESULTS
Because the Company primarily underwrites property catastrophe reinsurance
and has large aggregate exposure to natural and man-made disasters, the
Company's operating results have historically been, and are expected to
continue to be, largely affected by relatively few events of high magnitude.
ATTACHMENT POINTS (the amount of loss above which excess of loss reinsurance
becomes operative) of the policies written by the Company generally require
insured industry losses in excess of several hundred million dollars for the
Company to experience significant claims, although the Company is also exposed
to smaller insured events. The occurrence of claims from catastrophic events
is likely to result in substantial volatility in the Company's financial
results for any fiscal quarter or year and could have a material adverse
effect on the Company's financial condition or results of operations and could
impact its ability to write new business. The Company expects that increases
in the values and concentrations of insured property and the effects of
inflation will increase the severity of such occurrences per year in the
future. See "Business--Reinsurance Products."
The Company's property catastrophe reinsurance contracts cover unpredictable
events such as earthquakes, hurricanes, winter storms, freezes, floods, fires,
tornadoes and other man-made or natural disasters. The Company seeks to
diversify its reinsurance portfolio to moderate the volatility described in
the preceding paragraph. The principal means of diversification employed by
the Company are by type of reinsurance, geographic coverage, attachment point
and limit per program. The Company utilizes REMS(C), a proprietary, computer-
based pricing and exposure management system, to simulate 40,000 years of
catastrophe activity to obtain a probability distribution of potential
outcomes for its entire portfolio. In addition, the Company evaluates on a
deterministic basis its exposure to individual events to estimate the impact
of such events on the Company. See "Business--Underwriting." Nonetheless, a
single event or series of events could exceed the Company's estimates, either
of which could have a material effect on the Company's financial condition or
results of operation. See "Business--Reinsurance Products."
BUSINESS CONSIDERATIONS
Historically, property catastrophe reinsurers have experienced significant
fluctuations in operating results due to competition, frequency of occurrence
or severity of catastrophic events, levels of capacity, general economic
conditions and other factors. Demand for reinsurance is influenced
significantly by underwriting results of primary property insurers and
prevailing general economic conditions. The supply of reinsurance is related
to prevailing prices and levels of surplus capacity which, in turn, may
fluctuate in response to changes in rates of return being realized in the
reinsurance industry.
Based on data presented in industry trade publications, reports prepared by
reinsurance industry analysts, underwriting submissions and meetings with
clients and brokers, Management believes that the high level of worldwide
property catastrophe losses in terms of both frequency and severity from 1987
to 1993 had a significant effect on the results of property insurers and
property catastrophe reinsurers and on the worldwide property catastrophe
reinsurance market, causing some reinsurers to withdraw from the market or
reduce their underwriting commitments, while also causing a substantial
increase in market demand, particularly in the United
12
<PAGE>
States, Japan and the United Kingdom. Based on these sources, Management
believes that these developments from 1987 to 1993 created an imbalance
between the supply of and demand for property catastrophe reinsurance
worldwide in 1993, which in turn caused a significant increase in premium
rates and retentions for property catastrophe reinsurance during that year. In
response to this imbalance, approximately $4.0 billion of capital entered the
Bermuda-based property catastrophe reinsurance market in 1992 and 1993 and
that such capital had grown to approximately $6.0 billion as of September 30,
1997. Management believes this added capital helped to balance supply and
demand and, as a result, premium rates and other terms of trade in the
property catastrophe reinsurance market stabilized in 1994-1995. In each of
1996 and 1997, according to industry trade sources, worldwide price levels
decreased by an average of 10% to 15%. Based on publicly available industry
trade sources, price levels are expected to decline at a similar pace in 1998.
However, based upon underwriting submissions, industry trade publications and
insurance analyst reports, Management believes that current premium rates and
retention-levels have remained, and in the near future are likely to remain,
substantially higher than those that existed in 1992. There can be no
assurance, however, that premium rates or other terms and conditions of trade
will not vary in the future, that the present level of demand will continue or
that the present level of supply of reinsurance will not increase as a result
of capital provided by recent or future market entrants or by existing
property catastrophe reinsurers. See "Business--Industry Trends."
INDUSTRY DEVELOPMENTS
Management is aware of a number of new, proposed or potential legislative or
industry changes that may impact the worldwide demand for property catastrophe
reinsurance. In the United States, the states of Hawaii and Florida have
implemented arrangements whereby property insurance in catastrophe prone areas
is provided through state-sponsored entities. The California Earthquake
Authority, the first privately financed, publicly operated residential
earthquake insurance pool, provides earthquake insurance to California
homeowners. Currently before the U.S. Congress are two draft bills, the
Homeowners' Insurance Availability Act of 1997 and the Natural Disaster
Protection and Insurance Act of 1997, which would establish a federal program
to provide reinsurance for state disaster insurance programs and ensure the
availability and affordability of insurance against catastrophic natural
disasters, respectively, and could impact upon the demand for, and
availability of, traditional reinsurance. In the United Kingdom, the
government has enacted a bill to allow insurers to build claim equalization
reserves which might reduce the amount of property reinsurance necessary in
the marketplace. Management is also aware of many potential initiatives by
capital market participants to produce alternative products that may compete
with the existing catastrophe reinsurance markets. Management is unable to
predict the extent to which the foregoing new, proposed or potential
initiatives may affect the demand for the Company's products or the risks
which may be available for the Company to consider underwriting.
CLAIM RESERVES
At September 30, 1997, the Company had outstanding reserves for claims and
CLAIM ADJUSTMENT EXPENSES of $113.7 million, including a reserve for INCURRED
BUT NOT REPORTED losses of $61.0 million. The Company incurred claims and
claims adjustment expenses of $40.0 million for the nine month period ended
September 30, 1997 and $86.9 million, $110.6 million and $114.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
Under GAAP, the Company is not permitted to establish claim reserves with
respect to its property catastrophe reinsurance until an event that gives rise
to a claim occurs. Claims reserves represent estimates involving actuarial and
statistical projections at a given point in time of the Company's expectations
of the ultimate settlement and administration costs of claims incurred. The
Company utilizes both proprietary and commercially available models as well as
historical reinsurance industry loss development patterns to assist in the
establishment of appropriate claim reserves. In addition, when reviewing a
proposed reinsurance contract, the Company typically receives and evaluates
the insured's historical and projected loss experience with respect to certain
events. In connection with RETROCESSIONAL REINSURANCE, the Company may have
less timely information for establishing reserves. Reserve estimates by new
property catastrophe reinsurers, such as the Company, may be inherently less
reliable than the reserve estimates of reinsurers with a stable volume of
business and an
13
<PAGE>
established claim history. In contrast to casualty losses, which frequently
can be determined only through lengthy, unpredictable litigation, non-casualty
property losses tend to be reported promptly and usually are settled within a
shorter period of time. Nevertheless, actual claims and claim adjustment
expenses paid may deviate, perhaps substantially, from the reserve estimates
reflected in the Company's financial statements. If the Company's claim
reserves are subsequently determined to be inadequate, the Company will be
required to increase claim reserves with a corresponding reduction in the
Company's net income in the period in which the deficiency is identified.
There can be no assurances that claims in respect of events which have
occurred will not exceed the Company's claim reserves and have a material
adverse effect on the Company's financial condition or results of operations
in a particular period. See "Business--Underwriting," "--Reserves" and Note 5
to Consolidated Financial Statements.
COMPETITION; NON-ADMITTED STATUS
The property catastrophe reinsurance industry is highly competitive. The
Company competes, and will continue to compete, with major U.S. and non-U.S.
property catastrophe insurers, reinsurers and certain underwriting syndicates,
some of which have greater financial, marketing and management resources than
the Company. In addition, there may be established companies or new companies,
of which the Company is not aware, which may be planning to enter the property
catastrophe reinsurance market or existing property catastrophe reinsurers
which may be planning to raise additional capital. In addition, Lloyd's, in
contrast with prior practice, now allows its syndicates to accept capital from
corporate investors. Competition in the types of reinsurance business that the
Company underwrites is based on many factors, including premium charges and
other terms and conditions offered, services provided, ratings assigned by
independent rating agencies, speed of claims payment and reputation, perceived
financial strength and experience of the reinsurer in the line of reinsurance
to be written. Some of the reinsurers with whom the Company competes have or
could have more capital than the Company. This competition could affect the
Company's ability to attract business on terms having the potential to yield
appropriate levels of profits.
Renaissance Reinsurance is a registered Bermuda insurance company and is not
licensed or admitted as an insurer in any jurisdiction in the United States.
Because jurisdictions in the United States do not permit insurance companies
to take credit for reinsurance obtained from unlicensed or non-admitted
insurers on their statutory financial statements unless security is posted,
Renaissance Reinsurance's contracts generally require it to post a letter of
credit or provide other security after a reinsured reports a claim.
The Company does not believe that its non-admitted status in any U.S.
jurisdiction has, or should have, a material adverse effect on its ability to
compete in a large portion of the property catastrophe reinsurance market in
which it operates. However, there can be no assurances that increased
competitive pressure from current reinsurers and future market entrants,
Lloyd's decision to raise capital from corporate investors, and the Company's
non-admitted status will not adversely affect the Company. See "Business--
Competition."
HOLDING COMPANY STRUCTURE; LIMITATIONS ON DIVIDENDS
The Company is a holding company with no operations and accordingly relies
on cash dividends and other permitted payments from its subsidiaries to make
principal and interest payments on outstanding indebtedness of the Company and
to pay cash dividends, if any, to the Company's shareholders. In September
1997, the Company amended its credit facility with a syndicate of commercial
lenders (the "Revolving Credit Facility"). The Revolving Credit Facility
provides for borrowings thereunder of up to $200.0 million. As of September
30, 1997, $50.0 million was outstanding under the Revolving Credit Facility.
The Revolving Credit Facility contains certain covenants that restrict the
ability of the Company and its subsidiaries to pay dividends in certain
instances. In March 1997, the Company consummated an offering of $100.0
million aggregate liquidation amount of 8.54% Capital Securities (the "Capital
Securities") issued by RenaissanceRe Capital Trust, a Delaware statutory
business trust and wholly owned subsidiary of the Company (the "Trust"). The
proceeds of the Capital Securities offering were invested by the Trust in
$100.0 million aggregate principal amount of 8.54% Junior Subordinated
Debentures, due March 1, 2027 (the "Junior Subordinated Debentures"), issued
by the
14
<PAGE>
Company. Pursuant to its obligations with respect to the Capital Securities
and the Junior Subordinated Debentures, the Company shall not declare or pay
any dividends or distributions on, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of the Company's capital stock if the
Company shall be in default with respect to certain of its obligations under
the Capital Securities or if the Company shall have given, and not rescinded,
notice of its intention to defer its payment obligations with respect to the
Capital Securities. The payment of dividends to the Company by its
subsidiaries is limited under Bermuda law and regulations, including Bermuda
insurance law. The Insurance Act 1978 of Bermuda, amendments thereto and
related regulations (the "Insurance Act"), require the Company's subsidiaries
to maintain a minimum solvency margin and minimum liquidity ratio, and
prohibit dividends which would result in a breach of these requirements. See
"Dividend Policy" and "Business--Regulation" and Notes 6 and 14 to
Consolidated Financial Statements.
DEPENDENCE ON KEY EMPLOYEES
The Company's success has depended, and will continue to depend, in
substantial part upon the continued service of its senior management team and,
in particular, of James N. Stanard, the Company's Chairman, President and
Chief Executive Officer. The failure of the Company to retain the services of
Mr. Stanard could have a material adverse effect on the Company. Mr. Stanard
serves in his capacity with the Company pursuant to an employment agreement
expiring on July 1, 2001 or one year following a change of control. The
ability of the Company to execute its business strategy is dependent on its
ability to retain a staff of qualified underwriters and service personnel.
There can be no assurances that the Company will be successful in attracting
and retaining qualified employees. The Company does not currently maintain key
man life insurance policies with respect to any of its employees. See
"Management."
Under Bermuda law, non-Bermudians may not engage in any gainful occupation
in Bermuda without the specific permission of the appropriate government
authority. Such permission or a work permit for a specific period of time may
be extended upon showing that, after proper public advertisement, no Bermudian
(or spouse of a Bermudian) is available who meets the minimum standards for
the advertised position. Mr. Stanard's work permit expires in 1998. All of the
Company's executive officers, each of whom is a United States citizen, as well
as fourteen other employees, are working in Bermuda under work permits which
expire in 1998, 1999 or 2000. The Company is not aware of any difficulties in
connection with renewing the work permits for these officers and employees.
However, there can be no assurance that these work permits will be extended.
REINSURANCE BROKERS
The Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. Five brokerage firms accounted for 58.5%, 47.9% and 53.9%
of the Company's net premiums written for the years ended December 31, 1996,
1995 and 1994, respectively. See "Business--Marketing." Loss of all or a
substantial portion of the business provided by such intermediaries could have
a material adverse effect on the Company.
In accordance with industry practice, the Company frequently pays amounts
owing in respect of claims under its policies to reinsurance brokers, for
payment over to the ceding insurers. In the event that a broker failed to make
such a payment, depending on the jurisdiction, the Company might remain liable
to the ceding insurer for the deficiency. Conversely, in certain
jurisdictions, when premiums for such policies are paid to reinsurance brokers
for payment over to the Company, such premiums will be deemed to have been
paid and the ceding insurer will no longer be liable to the Company for those
amounts, whether or not actually received by the Company. Consequently, in
connection with the settlement of reinsurance balances, the Company assumes a
degree of credit risk associated with brokers around the world.
REGULATION
Renaissance Reinsurance is not licensed or admitted to do business in any
jurisdiction except Bermuda. The insurance laws of each state in the United
States and of many other countries regulate the sale of insurance and
reinsurance within their jurisdiction by alien insurers, such as Renaissance
Reinsurance, which is not admitted to do business within such jurisdiction.
Renaissance Reinsurance conducts its business from its office in Bermuda.
15
<PAGE>
There can be no assurances that inquiries or challenges relating to the
activities of Renaissance Reinsurance will not be raised in the future or that
Renaissance Reinsurance's location, regulatory status or restrictions on its
activities resulting therefrom will not adversely affect its ability to
conduct its business.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny in many jurisdictions, including the United
States and various states in the United States. It is not possible to predict
the future impact of changing law or regulation on the Company's operations of
Renaissance Reinsurance; such changes could have a material adverse effect on
the Company or the insurance industry in general.
Glencoe is a licensed, non-admitted insurer in 28 states and is subject to
the regulation and reporting requirements of these states. In accordance with
certain requirements of the National Association of Insurance Commissioners,
Glencoe has established, and is required to maintain, a trust funded with a
minimum of $15.0 million as a condition of its status as a licensed, non-
admitted insurer in the U.S. The Company's strategy to expand into additional
insurance markets could cause Glencoe or other U.S.-based subsidiaries to
become subject to regulation in additional jurisdictions. However, the Company
intends to conduct its operations so as to minimize the likelihood that
RenaissanceRe Holdings Ltd. or Renaissance Reinsurance will be subject to
U.S. regulation.
In general, the Bermuda statutes and regulations applicable to Renaissance
Reinsurance and Glencoe are less restrictive than those that would be
applicable to Renaissance Reinsurance and Glencoe were they subject to the
insurance laws of any state in the United States applicable to admitted
insurers. No assurances can be given that if Renaissance Reinsurance or
Glencoe were to become subject to any such laws of the United States or any
state thereof or of any other country at any time in the future, it would be
in compliance with such laws. See "Business--Regulation."
LIMITED OPERATING HISTORY
The Company commenced operations in June 1993 and has a limited operating
and claim history. Consequently, the financial data included herein at
September 30, 1997, December 31, 1996, 1995, 1994 and 1993 and for the nine-
month period ended September 30, 1997, the years ended December 31, 1996, 1995
and 1994 and the period June 7, 1993 (date of incorporation) through December
31, 1993 are not necessarily indicative of the financial condition or results
of operations of the Company in the future.
FOREIGN CURRENCY FLUCTUATIONS
The Company's functional currency is the U.S. dollar. A substantial portion
of the Company's premium is written in currencies other than the U.S. dollar
and the Company maintains a portion of its cash equivalent investments and
equity securities investments in currencies other than the U.S. dollar. In the
future, the Company may increase or decrease the portion of its investments
denominated in currencies other than the U.S. dollar. The Company may, from
time to time, experience significant exchange gains and losses and incur
underwriting losses in currencies other than the U.S. dollar, which will in
turn affect the Company's operating results. See Note 2 to Consolidated
Financial Statements.
TAX MATTERS
The Company believes that, to date, Renaissance Reinsurance and Glencoe have
operated and, in the future, will continue to operate their businesses in a
manner that will not cause either to be treated as being engaged in a trade or
business in the United States ("U.S. trade or business"). On this basis, the
Company does not expect Renaissance Reinsurance or Glencoe to be required to
pay U.S. corporate income tax. However, whether a corporation is engaged in a
U.S. trade or business is considered a factual question. Because there are no
definitive standards provided by the Internal Revenue Code of 1986, as amended
(the "Code"), existing or proposed regulations thereunder or judicial
precedent, and as the determination is inherently factual and not a legal
issue on which counsel can opine, there is considerable uncertainty as to
activities that constitute being engaged in a
16
<PAGE>
U.S. trade or business. As a result, there can be no assurance that the United
States Internal Revenue Service (the "IRS") could not successfully contend
that Renaissance Reinsurance or Glencoe is engaged in such a trade or
business. If the IRS did so contend, Renaissance Reinsurance or Glencoe would,
unless exempted from tax by the United States-Bermuda income tax treaty (the
"Treaty"), be subject to U.S. corporate income tax on that portion of its net
income treated as effectively connected with a U.S. trade or business, as well
as the U.S. corporate branch profits tax. The U.S. corporate income tax is
currently imposed at the rate of 35% on net corporate profits and the U.S.
corporate branch profits tax is imposed at the rate of 30% on a corporation's
after-tax profits deemed distributed as a dividend.
Even though the Company will take the position that neither Renaissance
Reinsurance nor Glencoe is engaged in a U.S. trade or business, Renaissance
Reinsurance has filed, and Glencoe intends to file, U.S. federal income tax
returns to avoid having all deductions disallowed in the event that either
Renaissance Reinsurance or Glencoe were held to be engaged in a U.S. trade or
business. In addition, filing U.S. tax returns will allow Renaissance
Reinsurance and Glencoe to claim benefits under the Treaty without penalty.
Even if the IRS were to contend successfully that Renaissance Reinsurance or
Glencoe was engaged in a U.S. trade or business, the Treaty could preclude the
United States from taxing Renaissance Reinsurance or Glencoe on its net
premium income except to the extent that such income were attributable to a
permanent establishment maintained by Renaissance Reinsurance or Glencoe in
the United States. Although the Company believes that neither Renaissance
Reinsurance nor Glencoe has a permanent establishment in the United States,
there can be no assurance that the IRS will not successfully contend that
Renaissance Reinsurance or Glencoe has such an establishment and therefore is
subject to taxation. See "Certain Tax Considerations--Taxation of the Company
and Renaissance Reinsurance--United States."
If Renaissance Reinsurance or Glencoe were considered to be engaged in a
U.S. trade or business and it were considered not to be entitled to the
benefits of the permanent establishment clause of the Treaty, and, thus,
subject to U.S. income tax, the Company's results of operations and cash flows
could be materially adversely affected.
Special provisions of the Code apply to U.S. citizens, residents, domestic
corporations, partnerships, estates or trusts, who, through their ownership of
Common Shares, are deemed to own 10% or more of the voting power of all
classes of stock of Renaissance Reinsurance. Under those provisions, such a
holder of Common Shares will be required to include in its income, based on
the extent of its interest in the Company, its pro rata share of Renaissance
Reinsurance's and Glencoe's subpart F income. See "Certain Tax
Considerations--Taxation of Shareholders--United States Taxation of U.S. and
Non-U.S. Shareholders." All of Renaissance Reinsurance's income is expected to
be subpart F income. Such holders of Common Shares that are taxed currently on
their pro rata share of Renaissance Reinsurance's and Glencoe's subpart F
income will not be taxed on dividends actually distributed by the Company that
are allocable to such income. Persons who own less than 10% of the voting
power of all classes of stock of Renaissance Reinsurance will not have to
include subpart F income in their income, except as described below in
connection with related person insurance income. See "Certain Tax
Considerations--Taxation of Shareholders."
Certain special subpart F provisions of the Code apply to persons who,
through their ownership of Common Shares, are indirect shareholders of
Renaissance Reinsurance if both (A) 25% or more of the value or voting power
of the Common Shares is owned or deemed owned (directly or indirectly through
foreign entities) by U.S. persons, as will be the case; and (B) (i) 20% or
more of either the voting power or the value of the Renaissance Reinsurance
stock is owned directly or indirectly by U.S. persons insured or reinsured by
Renaissance Reinsurance or by persons related to them; and (ii) Renaissance
Reinsurance has gross related person insurance income ("RPII"), determined on
a gross basis, equal to 20% or more of its gross insurance income. RPII is
income (investment income and premium income) from the direct or indirect
insurance or reinsurance of (i) the risk of any U.S. person who owns Common
Shares (directly or indirectly through foreign entities) or (ii) the risk of a
person related to such a U.S. person.
17
<PAGE>
Notwithstanding the foregoing, Management currently anticipates that less
than 20% of the gross insurance income of Renaissance Reinsurance for any
taxable year will constitute RPII. However, there can be no assurance that the
IRS will not assert that 20% or more of Renaissance Reinsurance's income is
RPII or that a taxpayer will be able to meet its burden of proving otherwise.
Moreover, upon a U.S. holder's sale or exchange of common shares at a gain, it
is likely that an amount of such gain equal to the allocable untaxed RPII will
be taxed as a dividend. For individuals, this would mean taxation of such
amount at the rates applicable to ordinary income rather than the lower rates
applicable to long-term capital gain. Similar considerations apply to Glencoe.
See "Certain Tax Considerations--Taxation of Shareholders--United States
Taxation of U.S. and Non-U.S. Shareholders."
CONTROL BY SELLING SHAREHOLDERS AND MANAGEMENT
Following the consummation of the Offering, Warburg, PT Investments, GE
Insurance, USF&G and Management will own 17.5%, 11.1%, 1.5%, 10.8% and 5.2%,
respectively, of the Common Shares then outstanding, representing
approximately 18.4%, 7.8%, 0.5%, 11.3% and 5.5%, respectively, of the
Company's outstanding voting power. The Selling Shareholders are parties to a
shareholders agreement among themselves and the Company providing them after
consummation of the Offering with the ability, if they act in concert, to
nominate a majority of the Board and to exert effective control over certain
actions requiring shareholder approval, including electing the Board of
Directors, adopting amendments to the Company's Memorandum of Association and
the Bye-Laws and approving a merger or consolidation, liquidation or sale of
all or substantially all of the assets of the Company. See "Principal and
Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Public
or private sales of substantial amounts of the Common Shares following the
Offering, or the perception that such sales could occur, could adversely
affect the market price of the Common Shares as well as the ability of the
Company to raise additional capital in the public equity markets at a
desirable time and price. The Shares sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act
by persons other than "affiliates" of the Company within the meaning of Rule
144 promulgated under the Securities Act. Following the consummation of the
Offering, the Selling Shareholders and Management will hold an aggregate of
10,333,956 Common Shares, all of which will be eligible for sale in the public
market, subject to compliance with Rule 144. Additionally, the Selling
Shareholders and Management have the right pursuant to a registration rights
agreement with the Company to cause the Company to register any Common Shares
held by them under the Securities Act. The Company may also provide for the
registration of shares currently held or acquired in the future by employees
pursuant to compensation arrangements, thereby permitting such shares to be
sold in the public market from time to time. Sales of substantial amounts of
the Common Shares in the public market following the Offering, or the
perception that such sales could occur, could adversely affect the market
price of the Common Shares and may make it more difficult for the Company to
sell its equity securities in the future at a time and price which it deems
appropriate. The directors and executive officers of the Company, the Company
and the Selling Shareholders have agreed that, for a period of 90 days after
the date of this Prospectus, they will not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), sell
or otherwise dispose of any Common Shares or any securities convertible into
or exercisable or exchangeable for any Common Shares; provided, that the
members of Management subject to the aforementioned agreement will be
permitted to sell up to 150,000 shares after the sixtieth day from the date of
this prospectus. See "Capitalization."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Bye-Laws have the effect of rendering
more difficult or discouraging unsolicited takeover bids from third parties.
While these provisions have the effect of encouraging persons seeking to
acquire control of the Company to negotiate with the Board, they could have
the effect of discouraging a prospective acquirer from making a tender offer
or otherwise attempting to attain control of the Company.
18
<PAGE>
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
The Company is a Bermuda company and certain of its officers and directors
are residents of various jurisdictions outside the United States. All or a
substantial portion of the assets of such officers and directors and of the
Company are or may be located in jurisdictions outside the United States.
Although the Company has irrevocably agreed that it may be served with process
in New York, New York with respect to actions based on offers and sales of the
Common Shares made hereby, it could be difficult for investors to effect
service of process within the United States on directors and officers of the
Company who reside outside the United States or to recover against the Company
or such directors and officers on judgments of United States courts predicated
upon civil liabilities under the United States federal securities laws. See
"Enforceability of Civil Liabilities Under United States Federal Securities
Law."
19
<PAGE>
USE OF PROCEEDS
The Shares offered hereby will be sold on behalf of the Selling Shareholders
named herein. The Company will not receive any of the net proceeds from the
Offering. See "Principal and Selling Shareholders."
PRICE RANGE OF COMMON SHARES AND DIVIDENDS
The full voting Common Shares began trading publicly on the Nasdaq National
Market (the "NNM") on July 26, 1995 under the symbol "RNREF." Prior to that
date, there was no public market for the Common Shares. The full voting Common
Shares have been listed on The New York Stock Exchange, Inc. (the "NYSE")
under the symbol "RNR" since July 24, 1996. The following table sets forth,
for the periods indicated, the reported (i) NNM per full voting Common Share
high ask and low bid information from July 26, 1995 through July 23, 1996 and
(ii) high and low NYSE per full voting Common Share closing sales prices from
July 24, 1996 through November 17, 1997, and the amount of cash dividends paid
per Common Share for each period set forth below.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
------ ------ ---------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1995
Third Quarter (commencing July 26).................... $25.38 $22.00 $--
Fourth Quarter........................................ 33.13 22.88 .16
Fiscal Year Ended December 31, 1996
First Quarter......................................... $31.88 $26.75 $.20
Second Quarter........................................ 31.25 26.88 .20
Third Quarter (through July 23)....................... 30.88 29.25 --
Third Quarter (commencing July 24).................... 30.88 26.75 .20
Fourth Quarter........................................ 36.00 27.75 .20
Fiscal Year Ending December 31, 1997
First Quarter......................................... $41.25 $32.50 $.25
Second Quarter........................................ 39.63 34.13 .25
Third Quarter......................................... 48.88 37.88 .25
Fourth Quarter (through November 17, 1997)............ 49.94 41.63 --
</TABLE>
As of October 20, 1997, there were approximately 3,000 holders of the Common
Shares of the Company.
The Board has declared a dividend of $.25 per share payable on December 5,
1997 to shareholders of record as of November 20, 1997.
20
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997. Because the Company will not receive any net
proceeds from the Offering, the Company's capitalization will not change as a
result thereof (other than as a result of the payment of all fees and expenses
of the Offering by the Company, estimated at $600,000, which will be paid out
of paid-in capital). See "Use of Proceeds." The following data should be read
in conjunction with the Consolidated Financial Statements of the Company and
the related Notes thereto included in the 1996 10-K and the Forms 10-Q, which
are incorporated herein by reference and all other information appearing
elsewhere in this prospectus. See "Available Information" and "Incorporation
of Certain Documents by Reference." The Consolidated Financial Statements as
of December 31, 1996 and 1995 and for each of the three years in the period
ended December 31, 1996 along with the interim financial statements as of
September 30, 1997 and the nine-month periods ended September 30, 1997 and
1996 have also been included in this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Bank loan................................................ $ 50.0
Company obligated, mandatorily redeemable capital
securities of a subsidiary trust holding solely junior
subordinated debentures of the Company (1).............. 100.0
Common shareholders' equity.............................. 595.7
------
Total capitalization................................... $745.7
======
</TABLE>
- --------
(1) This item reflects $100.0 million aggregate liquidation amount of the
Capital Securities issued by the Trust. The sole assets of the Trust are
$103.1 million aggregate principal amount of 8.54% Junior Subordinated
Debentures due March 1, 2027 issued by the Company.
DIVIDEND POLICY
The Board intends to declare, and the Company intends to pay, quarterly
dividends on the Common Shares. The declaration and payment of dividends by
the Company are subject to the discretion of the Board and there can be no
assurance that the Company will continue to pay dividends. Any determination
as to the payment of dividends will depend upon, among other things, the
financial condition of the Company, general business conditions, legal,
contractual and regulatory restrictions regarding the payment of dividends and
other factors which the Board may in the future consider to be relevant. The
Board has declared a dividend of $.25 per share payable on December 5, 1997 to
shareholders of record as of November 20, 1997.
The Revolving Credit Facility contains certain covenants that restrict the
ability of the Company and its subsidiaries to pay dividends in certain
instances. Payment of dividends by the Company is limited under the Revolving
Credit Facility to the amount by which the Company's total shareholders'
equity exceeds $300.0 million, and requires, among other things, that various
financial maintenance tests be met over the term of the facility.
In March 1997, the Company consummated an offering of $100.0 million
aggregate liquidation amount of the Capital Securities issued by the Trust.
The proceeds of the Capital Securities offering were invested by the Trust in
$100.0 million aggregate principal amount of the Junior Subordinated
Debentures issued by the Company. Pursuant to its obligations with respect to
the Capital Securities and the Junior Subordinated Debentures, the Company
shall not declare or pay any dividends or distributions on, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any of the
Company's capital stock if the Company shall be in default with respect to
certain of its obligations under the Capital Securities or if the Company
shall have given notice of its intention to defer its payment obligations with
respect to the Capital Securities and shall not have rescinded such notice.
21
<PAGE>
As a holding company, the Company will rely on cash dividends and other
permitted payments from its subsidiaries to make principal and interest
payments on outstanding indebtedness of the Company and to pay cash dividends,
if any, to the Company's shareholders. The payment of dividends by the
Company's subsidiaries to the Company is limited under Bermuda law and
regulations, including Bermuda insurance law. The Insurance Act requires the
Company's subsidiaries to maintain minimum solvency margins and minimum
liquidity ratios and prohibits dividends which would result in a breach of
these requirements. As of September 30, 1997, approximately $466.7 million was
available for the payment of dividends by Renaissance Reinsurance under the
Bermuda regulations without prior regulatory filing. See "Risk Factors--
Holding Company Structure; Limitations on Dividends" and "Business--
Regulation." See Note 14 to Consolidated Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected financial data and other financial
information of the Company as of September 30, 1997 and December 31, 1996,
1995, 1994 and 1993, and for the nine months ended September 30, 1997, years
ended December 31, 1996, 1995, 1994 and the period June 7, 1993 (date of
incorporation) through December 31, 1993. The balance sheet data as of
December 31, 1996, 1995, 1994 and 1993 and the statement of income data for
the years ended December 31, 1996, 1995 and 1994 and for the period June 7,
1993 through December 31, 1993 were derived from the Company's audited
Consolidated Financial Statements which have been audited by Ernst & Young,
the Company's independent auditors. The balance sheet data as of September 30,
1997 and the statement of income data for the period January 1, 1997 through
September 30, 1997 were derived from the unaudited interim financial
statements of the Company. The unaudited interim financial statements include
all adjustments, consisting of normal recurring accruals, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for that period. The results of operations for any
interim period are not necessarily indicative of results for the full fiscal
year. The selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1996 10-K and the Forms 10-Q incorporated herein by
reference and all other information appearing elsewhere in this Prospectus.
See "Available Information" and "Documents Incorporated by Reference." The
Consolidated Financial Statements as of December 31, 1996 and 1995 and for
each of the three years ended December 31, 1996, 1995 and 1994 along with the
interim financial statements as of September 30, 1997 and 1996 and the nine-
month periods ended September 30, 1997 and 1996, have also been included in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD JUNE 7, 1993
(DATE OF
YEARS ENDED DECEMBER 31, INCORPORATION)
NINE MONTHS ENDED ---------------------------- THROUGH
SEPTEMBER 30, 1997 1996 1995 1994 DECEMBER 31, 1993
------------------ -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Gross premiums written.. $215,574 $269,913 $292,607 $273,481 $66,118
Net premiums written.... 184,964 251,564 289,928 269,954 66,118
Net premiums earned..... 160,359 252,828 288,886 242,762 34,643
Net investment income... 36,994 44,170 32,320 14,942 2,725
Net realized gains
(losses) on sale
of investments......... 917 (2,938) 2,315 246 (7)
Claims and claim
expenses incurred...... 40,017 86,945 110,555 114,095 982
Acquisition costs....... 18,978 26,162 29,286 25,653 4,017
Underwriting expenses... 18,133 16,731 10,448 9,725 2,201
Pre-tax income.......... 107,850 156,160 165,322 109,298 31,281
Net income.............. 107,850 156,160 165,322 109,298 31,281
Net income available to
common shareholders.... 107,850 156,160 162,786 96,419 31,281
Net income per Common
Share(1)............... $ 4.66 $ 6.01 $ 6.75 $ 4.24 $ 1.37
Dividends per Common
Share.................. $ .75 $ .80 $ .16 -- --
Weighted average Common
Shares outstanding..... 23,137 25,994 24,121 22,750 22,750
OTHER DATA:
Claims/claim adjustment
expense ratio.......... 25.0% 34.3% 38.3% 47.0% 2.8%
Underwriting expense
ratio.................. 23.1 17.0 13.7 14.6 17.9
-------- -------- -------- -------- -------
Combined ratio.......... 48.1% 51.3% 52.0% 61.6% 20.7%
======== ======== ======== ======== =======
Return on average
shareholders' equity... 24.7%(2) 30.2% 43.3% 44.1% 32.7%(2)
</TABLE>
(footnotes appear on following page)
23
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -----------------------------------
1997 1996 1995 1994 1993
---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments
available for sale at
fair value, short-term
investments and cash and
cash equivalents......... $ 857,780 $802,466 $667,999 $437,542 $169,839
Total assets.............. 1,006,808 904,764 757,060 509,410 208,512
Reserve for claims and
claim adjustment
expenses................. 113,748 105,421 100,445 63,268 982
Reserve for unearned
premiums................. 103,407 65,617 60,444 59,401 31,475
Bank loan................. 50,000 150,000 100,000 60,000 --
Company obligated
mandatorily redeemable
capital securities of
a subsidiary trust
holding solely junior
subordinated debentures
of the Company(3)........ 100,000 -- -- -- --
Series B preference
shares................... -- -- -- 55,338 --
Total shareholders'
equity(4)................ 595,672 546,203 486,336 265,247 172,471
Book value per Common
Share(4)................. $ 26.54 $ 23.21 $ 18.99 $ 11.79 $ 7.67
Common Shares
outstanding(4)........... 22,447 23,531 25,605 22,500 22,500
</TABLE>
- --------
(1) Net income per share was calculated by dividing net income available to
common shareholders by the number of weighted average Common Shares and
Common Share equivalents outstanding. Common Share equivalents are
calculated on the basis of the treasury stock method.
(2) Return on average shareholders' equity for a period of less than a full
year is calculated by annualizing the net income available to Common
Shareholders for such period and dividing it by beginning shareholders'
equity; plus one-half of such annualized net income; less one-half of the
dividends paid or payable as of the balance sheet date adjusted by one-
half of the dollar value of the year-to-date capital transactions (i.e.,
share issuances or repurchases).
(3) This item reflects $100.0 million aggregate liquidation amount of the
Capital Securities issued by a subsidiary trust. The sole assets of the
trust are $103.1 million aggregate principal amount of 8.54% Junior
Subordinated Debentures due March 1, 2027 issued by the Company.
(4) Book value per Common Share was computed by dividing total shareholders'
equity by the number of outstanding Common Shares. After giving effect to
the estimated expenses associated with the Offering of $.6 million, total
shareholders' equity and book value per share as of September 30, 1997, as
adjusted, would have been $595.1 million and $26.51 per share,
respectively.
24
<PAGE>
BUSINESS
GENERAL
RenaissanceRe Holdings Ltd. is the parent of Renaissance Reinsurance and
Glencoe. The Company's principal business is property catastrophe reinsurance,
written on a worldwide basis through Renaissance Reinsurance. Based on
property catastrophe gross premiums written, the Company is the largest
Bermuda-based provider of property catastrophe reinsurance and one of the
largest providers of this coverage in the world. The Company provides property
catastrophe reinsurance coverage to insurance companies and other reinsurers
primarily on an excess of loss basis. Excess of loss catastrophe coverage
generally provides coverage for claims arising from large natural
catastrophes, such as earthquakes and hurricanes, in excess of a specified
loss. The Company is also exposed to claims arising from other natural and
manmade catastrophes such as winter storms, freezes, floods, fires and
tornadoes in connection with the coverages it provides.
The Company's principal operating objective is to utilize its capital
efficiently by focusing on the writing of property catastrophe reinsurance and
other insurance and reinsurance coverages with superior risk/return
characteristics, while maintaining a low cost operating structure in the
favorable regulatory and tax environment of Bermuda. The Company's primary
underwriting goal is to construct a portfolio of insurance and reinsurance
contracts that maximizes the return on shareholders' equity subject to prudent
risk constraints. The Company seeks to moderate the volatility inherent in the
property catastrophe reinsurance market through the use of contract terms,
portfolio selection methodology, diversification criteria and probability
analyses. While property catastrophe reinsurance represented approximately 95%
of the Company's gross premiums written in each of 1996, 1995 and 1994 and
continues to be the Company's primary focus, the Company may seek to take
advantage of perceived opportunities in both insurance and other reinsurance
markets.
For the years ended December 31, 1996, 1995 and 1994, the Company achieved
returns on average shareholders' equity of 30.2%, 43.3% and 44.1%,
respectively, and combined ratios of 51.3%, 52.0% and 61.6%, respectively. The
Company achieved these results despite the occurrence of several major
catastrophes in 1996 and 1995 (which, according to industry trade sources, had
the fifth and third highest level of U.S. property catastrophe insured losses
on record, respectively) and the occurrence in January 1994 of the Northridge,
California earthquake, the second largest insured catastrophe loss in U.S.
history. The major catastrophes which occurred in 1996 were Hurricane Fran in
September, which produced an estimated $1.6 billion of insurance industry
losses, the Northeastern United States winter storms in January and the
Northwestern United States floods in December. The major catastrophes which
occurred in 1995 were Hurricanes Luis, Marilyn and Opal. For the nine-month
period ended September 30, 1997, the Company achieved an annualized return on
average equity of 24.7% and a combined ratio of 48.1%. At September 30, 1997,
the Company had total assets of $1.0 billion and shareholders' equity of
$595.7 million. There can be no assurance that the Company will achieve
similar results in the future. See "Risk Factors--Volatility of Financial
Results."
In conjunction with the Company's strategy to identify and participate in
certain attractive insurance and reinsurance markets, the Company capitalized
Glencoe in January 1996 with a $50.0 million capital contribution and
subsequently sold a 29.9% interest in Glencoe for an aggregate of $15.1
million in cash to two strategic investors, one of whom sold its 9.9% interest
to RenaissanceRe Holdings Ltd. in August 1997 for $5.2 million in cash.
Glencoe seeks to employ in the primary insurance market the modeling,
underwriting, customer service and capital management approaches that
Renaissance Reinsurance employs with respect to its reinsurance policies.
Glencoe primarily writes property insurance on properties that are exposed to
natural catastrophes. Glencoe operates as a Bermuda-domiciled company and has
been approved to do business on an excess and surplus lines basis in 28
states, including California, where it has primarily written earthquake
exposure insurance. Glencoe will also consider submissions from insureds
located in other international jurisdictions where it has been approved with
respect to exposures for which it has underwriting expertise. As of September
30, 1997 the Company's equity in Glencoe was $42.7 million. For the year ended
December 31, 1996, Glencoe generated
25
<PAGE>
gross premiums written and net income of $1.6 million and $.9 million,
respectively, and accordingly did not contribute materially to the Company's
results of operations in 1996. For the nine months ended September 30, 1997,
Glencoe generated gross premiums written and net income of $5.2 million and
$2.4 million, respectively.
The Company was founded in June 1993 by Warburg, certain affiliates of GE
Insurance and PT Investments, and USF&G. Following the consummation of the
Offering, Warburg, PT Investments, GE Insurance, USF&G and Management will own
approximately 17.5%, 11.1%, 1.5%, 10.8% and 5.2%, respectively, of the
Company's outstanding Common Shares, representing approximately 18.4%, 7.8%,
0.5%, 11.3% and 5.5%, respectively, of the Company's outstanding voting power.
RATINGS
Renaissance Reinsurance has been assigned an "A" claims-paying ability
rating from S&P and A.M. Best, and Glencoe has been assigned an "A-" claims-
paying ability rating from A.M. Best, representing independent opinions of the
financial strength and ability of Renaissance Reinsurance and Glencoe to meet
their respective obligations to their policyholders. Such ratings may not
reflect the considerations applicable to an investment in the Company.
The "A" range ("A+," "A" and "A-") is the third highest of four ratings
ranges within what S&P considers the "secure" category. Insurance companies
assigned a claims-paying ability rating in the "A" range are believed by S&P
to provide good financial security, but their capacity to meet policyholder
obligations is somewhat susceptible to adverse economic and underwriting
conditions.
"A (Excellent)" and "A- (Excellent)" are the third and fourth highest of
A.M. Best's fifteen ratings designations. Insurance companies assigned an "A"
or "A-" rating by A.M. Best are companies which, in A.M. Best's opinion, have
demonstrated excellent overall performance when compared to the standards
established by A.M. Best and have a strong ability to meet their obligations
to policyholders over a long period of time.
STRATEGY
The principal components of the Company's business strategy are to:
. Focus on the property catastrophe reinsurance business. The Company's
primary focus is property catastrophe reinsurance, which represented
approximately 95% of the Company's gross premiums written in each of
1994, 1995 and 1996.
. Build a superior portfolio of property catastrophe reinsurance by
utilizing proprietary modeling capabilities. The Company assesses
underwriting decisions on the basis of the expected incremental return on
equity of each new reinsurance contract in relation to the Company's
overall portfolio of reinsurance contracts. To facilitate this, the
Company has developed REMS(C), a proprietary, computer-based pricing and
exposure management system. The Company utilizes REMS(C) to assess
property catastrophe risks, price treaties and limit aggregate exposure.
The Company combines the analyses generated by REMS(C) with its own
knowledge of the client submitting the proposed program to assess the
premium offered against the risk of loss that such program presents. See
"--Underwriting."
. Utilize the Company's capital base efficiently while maintaining prudent
risk levels in the Company's reinsurance portfolio. The Company manages
its risks through a variety of means, including the use of contract
terms, portfolio selection methodology, diversification criteria and
probability analyses. By using such measures and by employing its
proprietary modeling capabilities, the Company attempts to construct a
portfolio of reinsurance contracts which maximizes the use of its capital
while optimizing the risk-reward characteristics of its portfolio. The
Company relies less on traditional ratios, such as net premiums
26
<PAGE>
written to surplus, because the Company believes that such statistics do
not adequately reflect the risk in the property catastrophe reinsurance
business. Management believes the level of net premiums written relative
to surplus does not reflect the composition of a reinsurer's attachment
points, aggregate limits, geographic diversification, and other material
elements of the risk exposures embodied in a reinsurer's book of business.
. Capitalize on the experience and skill of management. The Company's
senior management team has extensive experience in the reinsurance and/or
insurance industries, with an average of approximately 20 years of
experience for each of the five senior executives of the Company. See
"Management." Additionally, senior management is supported by an officer
group, each with an average of approximately ten years of experience in
the reinsurance and/or insurance industries.
. Build and maintain long-term relationships with brokers and clients. The
Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company believes that its existing portfolio of
reinsurance business is a valuable asset given the renewal practices of
the reinsurance industry. The Company believes that it has established a
reputation with its brokers and clients for prompt response on
underwriting submissions, for fast claims payments and for the
development of customized reinsurance programs. See "--Marketing."
. Maintain a low cost structure. Management believes that as a result of
its ability to maintain a small staff and by basing operations in the
favorable regulatory and tax environment of Bermuda, the Company is able
to maintain low operating costs relative to its capital base and net
premiums earned. As of November 17, 1997, the Company had 32 employees.
. Leverage the Company's modeling expertise by expanding into primary
insurance markets with significant natural catastrophe exposures. The
Company is pursuing opportunities in the United States to write
catastrophe-exposed primary insurance. The Company expects to write both
personal and commercial coverages, on a primary basis, where natural
catastrophe exposures represent a significant component of the overall
exposure. In addition to the Company's Glencoe subsidiary, these
opportunities may be pursued through the development of new operations,
such as DeSoto, or the acquisition of other companies or books of
business. There can be no assurance, however, that the Company will
determine to pursue such opportunities or that such opportunities, if
consummated, would contribute materially to the Company's results of
operations.
INDUSTRY TRENDS
The high level of worldwide property catastrophe losses in terms of both
frequency and severity from 1987 to 1993 had a significant effect on the
results of property insurers and property catastrophe reinsurers and on the
worldwide property catastrophe reinsurance market, causing certain property
catastrophe reinsurers and certain underwriting syndicates at Lloyd's to
withdraw from the market or reduce their underwriting commitments while also
causing a substantial increase in market demand, particularly in the United
States, Japan and the United Kingdom. In particular, these events included
Hurricane Hugo (U.S.--1989), Hurricane Andrew (U.S.--1992), Typhoon Mireille
(No. 19) (Japan--1991) and Winter Storm Daria (90A) (Northern Europe--1990).
The increase in demand for property catastrophe reinsurance was attributable
to several factors. The significant property catastrophe losses occurring
during 1987 through 1993 caused many insurers and reinsurers to reexamine their
assumptions regarding their need for reinsurance protection from catastrophe
exposures. In addition, rating agencies, such as S&P, and regulators increased
their scrutiny of insurers and reinsurers with respect to their catastrophe
exposure. For example, Typhoon Mireille (No. 19) resulted in greater scrutiny
by the Ministry of Finance of Japan of insurers and reinsurers with respect to
catastrophe exposure, thereby increasing demand for property catastrophe
reinsurance in Japan. In addition, A.M. Best began to require completion of a
catastrophe loss analysis questionnaire dealing with expected claims resulting
from potential catastrophic events. Finally, a general increase in insured
property values in catastrophe-exposed areas contributed to increased demand
for property catastrophe insurance and reinsurance. This supply/demand
imbalance caused a significant increase in prevailing premium rates for
property catastrophe reinsurance worldwide in 1993.
27
<PAGE>
In response to this imbalance, approximately $4.0 billion of capital entered
the Bermuda-based property catastrophe reinsurance market in 1992 and 1993.
The Bermuda property catastrophe reinsurance market has subsequently grown
markedly, having aggregate capital of approximately $6.0 billion at September
30, 1997, and accounting for approximately 25% to 35% of the worldwide
property catastrophe gross premiums written in 1996, according to industry
trade reports. The increased property catastrophe reinsurance capacity
represented by the Bermuda market helped balance supply and demand in the
property catastrophe reinsurance market and, as a result thereof, premium
rates and other terms of trade in the property catastrophe reinsurance market
stabilized in 1994-1995. In each of 1996 and 1997, according to industry trade
sources, worldwide price levels decreased by an average of 10% to 15%,
although prices remained more stable in the United States, where the level of
property catastrophe losses in recent years has been generally higher than in
other markets. Based on publicly available industry trade data, price levels
are expected to decline at a similar pace in 1998. In particular, rates have
declined significantly in areas outside the United States, where there has
been favorable loss experience, while in the United States, where the level of
property catastrophe losses has generally been higher than in international
markets in recent years, rates have decreased to a lesser degree. However,
current premium rates and retention levels have remained, and Management
believes are likely to remain, higher than those that existed in 1992.
Premium rates or other terms or conditions of trade may vary in the future,
the present level of demand may not continue and the present level of supply
may increase as a result of capital provided by recent or future market
entrants or by existing property catastrophe reinsurers. Some of the property
catastrophe reinsurers who have entered the worldwide reinsurance markets (or
may enter them in the future) have or could have more capital than the
Company. The full effect of this additional capital on the property
catastrophe reinsurance market may not be known for some time. No assurance
can be given as to what impact this additional capital will ultimately have on
terms or conditions for reinsurance contracts of the types written by the
Company.
Management is aware of a number of new, proposed or potential legislative or
industry changes that may impact the worldwide demand for property catastrophe
reinsurance and other products offered by the Company. In the United States,
the states of Hawaii and Florida have implemented arrangements whereby
property insurance in catastrophe prone areas is provided through state-
sponsored entities. The California Earthquake Authority, the first privately
financed, publicly operated residential earthquake insurance pool, provides
earthquake insurance to California homeowners. Currently before the U.S.
Congress are two draft bills, the Homeowners' Insurance Availability Act of
1997 and the Natural Disaster Protection and Insurance Act of 1997, which
would establish a federal program to provide reinsurance for state disaster
insurance programs and ensure the availability and affordability of insurance
against catastrophic natural disasters, respectively, and could impact upon
the demand for, and availability of, traditional reinsurance. In the United
Kingdom, the government has enacted a bill to allow insurers to build claim
equalization reserves which might reduce the amount of property reinsurance
necessary in the marketplace. Management is also aware of many potential
initiatives by capital market participants to produce alternative products
that may compete with the existing catastrophe reinsurance markets. Management
is unable to predict the extent to which the foregoing new, proposed or
potential initiatives may affect the demand for the Company's products or the
risks which may be available for the Company to consider underwriting.
REINSURANCE PRODUCTS
The Company's property catastrophe reinsurance contracts are generally "all
risk" in nature. The Company's most significant exposure is to losses from
earthquakes and hurricanes, although the Company is also exposed to claims
arising from other natural and man-made catastrophes, such as winter storms,
freezes, floods, fires and tornadoes in connection with the coverages it
provides. The Company's predominant exposure under such coverage is to
property damage. However, other risks, including business interruption and
other non-property losses, may also be covered under the property reinsurance
contract when arising from a covered peril. In accordance with market
practice, the Company's property reinsurance contracts generally exclude
certain risks such as war, nuclear contamination or radiation.
Catastrophic events of significant magnitude have historically been
relatively infrequent, although the property catastrophe reinsurance market
experienced a high level of worldwide catastrophe losses in terms of
28
<PAGE>
both frequency and severity during the period from 1987 to 1996 as compared to
prior years. However, because of the wide range of the possible catastrophic
events to which the Company is exposed, and because of the potential for
multiple events to occur in the same time period, the Company's business is
volatile, and its results of operations will reflect such volatility. Further,
the Company's financial condition may be impacted by this volatility over time
or at any point in time. The effects of claims from one or a number of severe
catastrophic events could have a material adverse effect on the Company. The
Company expects that increases in the values and concentrations of insured
property and the effects of inflation will increase the severity of such
occurrences per year in the future. See "Risk Factors--Volatility of Financial
Results."
The Company seeks to moderate the volatility described in the preceding
paragraph through the use of contract terms, portfolio selection methodology,
diversification criteria and probability analyses.
Type of Reinsurance
The following table sets forth the Company's gross premiums written and
number of programs written by type of reinsurance.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1997 1996 1995 1994
----------------- ----------------- ----------------- -----------------
GROSS NUMBER GROSS NUMBER GROSS NUMBER GROSS NUMBER
PREMIUMS OF PREMIUMS OF PREMIUMS OF PREMIUMS OF
TYPE OF REINSURANCE WRITTEN PROGRAMS WRITTEN PROGRAMS WRITTEN PROGRAMS WRITTEN PROGRAMS
------------------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Catastrophe excess of
loss................... $144.1 253 $157.6 293 $146.8 271 $136.0 239
Excess of loss
retrocession........... 40.2 68 70.4 105 73.8 105 59.1 101
Proportional
retrocession
of catastrophe excess
of loss................ 19.3 9 33.3 11 56.7 12 59.8 10
Marine, aviation and
other.................. 6.8 17 7.0 25 15.3 35 18.6 44
------ --- ------ --- ------ --- ------ ---
Total Reinsurance...... $210.4 347 $268.3 434 $292.6 423 $273.5 394
====== === ====== === ====== === ====== ===
</TABLE>
Catastrophe Excess of Loss Reinsurance. Catastrophe excess of loss
reinsurance provides coverage when aggregate claims and claim adjustment
expenses from a single occurrence of a covered peril exceed the attachment
point specified in a particular contract. A portion of the Company's property
catastrophe excess of loss contracts limit coverage to one occurrence in a
contract year, but most such contracts provide for coverage of a second
occurrence after the payment of a reinstatement premium. The coverage provided
under excess of loss retrocessional contracts may be on a worldwide basis or
limited in scope to selected geographic areas. Coverage can also vary from
"all property" perils to limited coverage on selected perils, such as
"earthquake only" coverage.
Excess of Loss Retrocessional Reinsurance. The Company also enters into
retrocessional contracts pursuant to which it provides property catastrophe
coverage to other reinsurers or retrocedents. In providing retrocessional
reinsurance, the Company focuses on property catastrophe retrocessional
reinsurance which covers the retrocedent on an excess of loss basis when
aggregate claims and claim adjustment expenses from a single occurrence of a
covered peril and from a multiple number of reinsureds exceed a specified
attachment point. The coverage provided under excess of loss retrocessional
contracts may be on a worldwide basis or limited in scope to selected
geographic areas. Coverage can also vary from "all property" perils to limited
coverage on selected perils, such as "earthquake only" coverage. In general,
excess of loss retrocessional contracts are for a term of one year.
Retrocessional coverage is characterized by high volatility, principally
because retrocessional contracts expose a reinsurer to an aggregation of
losses from a single catastrophic event. In addition, the information
available to retrocessional underwriters concerning the original primary risk
can be less precise than the information received from primary companies
directly. Moreover, exposures from retrocessional business can change within a
contract term as the underwriters of a retrocedent alter their book of
business after retrocessional coverage has been bound.
29
<PAGE>
Proportional Retrocessional Reinsurance. The Company writes proportional
retrocessions of catastrophe excess of loss reinsurance treaties when it
believes that premium rates and volume are attractive. In such proportional
retrocessional reinsurance, the Company assumes a specified proportion of the
risk on a specified coverage and receives an equal proportion of the premium.
The ceding insurer receives a commission, based upon the premiums ceded to the
reinsurer, and may also be entitled to receive a profit commission based on
the ratio of losses, loss adjustment expense and the reinsurer's expenses to
premiums ceded. A proportional retrocessional catastrophe reinsurer is
dependent upon the ceding insurer's underwriting, pricing and claims
administration to yield an underwriting profit, although the Company generally
obtains detailed underwriting information concerning the exposures underlying
the proportional retrocessions of catastrophe excess of loss reinsurance
treaties which it writes. In addition, all of the Company's proportional
retrocessions of catastrophe excess of loss reinsurance contracts have
aggregate risk exposure limits per event.
Marine, Aviation and Other Reinsurance. The Company has also written short-
tail marine and aviation reinsurance and retrocessional reinsurance for
selected domestic and foreign insurers and reinsurers. Marine and aviation
risks involve primarily property damage, although certain marine and aviation
risks may involve casualty coverage arising from the same event causing the
property claim. Coverage is generally written in excess of a substantial
attachment point, so events likely to cause a claim will occur infrequently,
such as the destruction of a drilling platform, the loss of a satellite or the
loss of a sizable vessel and its contents. Although the Company focuses on
writing catastrophe excess of loss reinsurance, the Company also writes risk
excess of loss reinsurance and retrocessions. The risk excess of loss treaties
in which the Company participates generally contain limited reinstatement
provisions. In selected cases, the Company also writes customized financial
reinsurance contracts when the expected returns are particularly attractive.
PRIMARY INSURANCE OPERATIONS; GLENCOE AND DESOTO
The Company is pursuing opportunities in the United States to write
catastrophe-exposed primary insurance. The Company expects to write both
personal and commercial coverages, on a primary basis, where natural
catastrophe exposures represent a significant component of the overall
exposure. In September 1997, the Company promoted Keith S. Hynes, formerly the
Company's Chief Financial Officer, to the position of President and Chief
Executive Officer of Glencoe, to manage all aspects of the Company's
initiatives in the primary insurance business.
In January 1996 the Company incorporated Glencoe Insurance Ltd. in Bermuda
as an excess and surplus lines insurance company. Glencoe is pursuing
opportunities in the catastrophe-exposed primary insurance business in the
United States, and is writing policies that primarily are exposed to
earthquake and wind perils. Glencoe has been approved to do business in the
United States on an excess and surplus lines basis in 28 states. For the nine
months ended September 30, 1997, Glencoe generated gross premiums written of
$5.2 million and net income of $2.4 million. For the year ended December 31,
1996, Glencoe generated gross premiums written of $1.6 million and net income
of $.9 million. In September 1997, Glencoe organized DeSoto in Florida to
pursue the assumption of policies from the Florida Residential Property and
Casualty Joint Underwriting Association (the "JUA"). Initial approval of the
takeout plan has been received from the Board of the JUA, although DeSoto has
not yet committed to assume any policies. DeSoto has applied for an insurance
license and approval of its JUA assumption plan with the Florida Department of
Insurance. There can be no assurance that the Company will consummate the
contemplated JUA assumption plan, or that, in the event of the successful
consummation of such transaction, DeSoto will contribute materially to the
Company's results of operations.
30
<PAGE>
POTENTIAL DIVERSIFICATION
From time to time, the Company may consider opportunistic diversification
into new ventures, either through organic growth or the acquisition of other
companies or books of business. In evaluating such new ventures, the Company
seeks an attractive return on equity and the ability to develop or capitalize
on a competitive advantage. Accordingly, the Company regularly reviews
strategic transaction opportunities and periodically engages in discussions
regarding possible transactions. However, the Company has no definitive
agreements with respect to any material transaction and there can be no
assurance that the Company will enter into any such agreement in the future,
or that any consummated transaction would contribute materially to the
Company's results.
GEOGRAPHIC DIVERSIFICATION
The Company seeks to diversify its exposure across geographic zones. The
Company writes the majority of its business within the United States because
the returns obtained relative to the risks involved are currently most
attractive in the United States and because it is able to obtain the most
detailed underwriting information on U.S. risks. Within the United States, the
Company's zones of highest exposure are Southern California, Northern
California, metropolitan New York, New Madrid (midwestern United States) and
Southern Florida.
The following table sets forth the percentage of the Company's gross
reinsurance premiums written allocated to the territory of coverage exposure.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994
------------------- ------------------- ------------------- -------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
GROSS OF GROSS GROSS OF GROSS GROSS OF GROSS GROSS OF GROSS
PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS
GEOGRAPHIC AREA WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN
--------------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... $123.6 58.8% $126.6 46.9% $144.1 49.2% $129.3 47.3%
Worldwide............... 17.3 8.2 44.5 16.5 59.1 20.2 50.8 18.6
Worldwide (excluding
U.S.)(1)............... 31.3 14.9 38.7 14.3 41.3 14.1 38.5 14.1
Europe
(including U.K.)....... 20.0 9.5 31.5 11.7 25.4 8.7 26.1 9.5
Other................... 11.2 5.3 17.4 7.0 11.7 4.0 19.2 7.0
Australia and New
Zealand................ 7.0 3.3 9.6 3.6 11.0 3.8 9.6 3.5
------ ----- ------ ----- ------ ----- ------ -----
Total Reinsurance...... $210.4 100.0% $268.3 100.0% $292.6 100.0% $273.5 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- --------
(1) The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic zone (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe.
See Note 11 to Consolidated Financial Statements.
31
<PAGE>
Program Limits
The following table sets forth the number of the Company's programs in force
at September 30, 1997 by aggregate program limits.
<TABLE>
<CAPTION>
AGGREGATE
PROGRAM NUMBER OF
LIMIT PROGRAMS
--------- ---------
<S> <C>
$50-60 million................................................... 1
$40-50 million................................................... 2
$30-40 million................................................... 5
$20-30 million................................................... 13
$10-20 million................................................... 42
Less than $10 million............................................ 346
---
Total.......................................................... 409
===
</TABLE>
UNDERWRITING
The Company's primary underwriting goal is to construct a portfolio of
reinsurance and insurance contracts that maximizes the return on shareholders'
equity subject to prudent risk constraints.
Management assesses underwriting decisions on the basis of the expected
incremental return on equity of each new reinsurance contract in relation to
the Company's overall portfolio of reinsurance contracts. To facilitate this,
Management has developed REMS(C), a proprietary, computer-based pricing and
exposure management system. Management utilizes REMS(C) to assess property
catastrophe risks, price treaties and limit aggregate exposure. REMS was
developed with consulting assistance from Tillinghast, an actuarial consulting
unit of Towers, Perrin, Forster & Crosby, Inc., and AIR, the developer of the
CATMAP(TM) system. REMS(C) has analytic and modeling capabilities that assist
the Company's underwriters in assessing the catastrophe exposure risk and
return of each incremental reinsurance contract in relation to the Company's
overall portfolio of reinsurance contracts. The Company has licensed and
integrated into REMS(C) six commercially available catastrophe computer models
in addition to the Company's base model. The Company uses these models to
validate and stress test its base REMS(C) results. In addition, the Company
stress tests its exposures and potential future results by increasing the
frequency and severity of catastrophic events above the levels embedded in the
models purchased from the outside consultants. Management combines the
analyses generated by REMS(C) with its own knowledge of the client submitting
the proposed program to assess the premium offered against the risk of loss
which such program presents.
REMS(C) provides more precise exposure information than is generally
analyzed currently throughout the property catastrophe reinsurance industry.
REMS(C) combines computer-generated, statistical simulations that estimate
catastrophic event probabilities with exposure and coverage information on
each client's reinsurance contract to produce expected claims for reinsurance
programs submitted to the Company. REMS(C) then uses simulation techniques to
generate 40,000 years of catastrophic event activity, including events causing
in excess of $250 billion in insured industry losses. From this 40,000 year
simulation, the Company is able to obtain expected claims, expected profits
and a probability distribution of potential outcomes for each program in its
portfolio and for its total portfolio.
Management believes that REMS(C) provides the Company's underwriters with
several competitive advantages which are not generally available. These
include (i) the ability to simulate 40,000 years of catastrophic event
activity compared to a much smaller sample in generally available models,
allowing the Company to analyze its exposure to a greater number and
combination of potential events, (ii) the ability to analyze the incremental
impact of an individual reinsurance contract on the Company's overall
portfolio, and (iii) the ability to collect detailed data from a wide variety
of sources which allows the Company to measure geographic exposure at a
detailed level.
For its property catastrophe reinsurance business, the Company has developed
underwriting guidelines that limit the amount of exposure it will underwrite
directly for any one cedent, the exposure to claims from any single
catastrophic event and the exposure to losses from a series of catastrophic
events. The Company also attempts to distribute its exposure across a range of
attachment points.
32
<PAGE>
As part of its pricing and underwriting process, the Company also assesses a
variety of factors, including the reputation of the proposed cedent and the
likelihood of establishing a long-term relationship with the cedent; the
geographic area in which the cedent does business and its market share;
historical loss data for the cedent and, where available, for the industry as
a whole in the relevant regions, in order to compare the cedent's historical
catastrophe loss experience to industry averages; the cedent's pricing
strategies; and the perceived financial strength of the cedent.
MARKETING
The Company markets its reinsurance products worldwide exclusively through
reinsurance brokers. The Company focuses its marketing efforts on targeted
brokers and insurance and reinsurance companies, placing primary emphasis on
existing clients. Management believes that its existing portfolio of business
is a valuable asset given the renewal nature of the reinsurance industry and,
therefore, attempts to continually strengthen relationships with its existing
brokers and clients. The Company also targets prospects that are deemed likely
to enhance the risk/return composition of its portfolio, that are capable of
supplying detailed and accurate underwriting data and that potentially add
further diversification to the Company's book of business.
Management believes that primary insurers' and brokers' willingness to use a
particular reinsurer is based not just on pricing terms, but on the financial
security of the reinsurer, its claim paying ability ratings, perceptions of
the quality of a reinsurer's service, the reinsurer's willingness to design
customized programs, its long-term stability and its commitment to provide
reinsurance capacity. Management believes that the Company has established a
reputation with its brokers and clients for prompt response on underwriting
submissions and for fast claims payments. Since the Company selectively writes
large lines on a limited number of property catastrophe reinsurance contracts,
it can establish reinsurance terms and conditions on these contracts that are
attractive in its judgment, make large commitments to the most attractive
programs and provide superior client responsiveness. In addition, the Company
acts as sole reinsurer on certain property catastrophe reinsurance contracts,
which allows the Company to take advantage of its ability to develop
customized reinsurance programs. Management believes that such customized
programs help the Company to develop long-term relationships with brokers and
clients.
The Company's brokers perform data collection, contract preparation and
other administrative tasks, enabling the Company to market its reinsurance
products cost effectively by maintaining a smaller staff. The Company believes
that by maintaining close relationships with brokers, it is able to obtain
access to a broad range of potential reinsureds. Subsidiaries and affiliates
of Marsh & McLennan, Incorporated, E.W. Blanch Co., Inc., Greig Fester
Limited, Alexander Howden Reinsurance Brokers Ltd. and Bates Turner, Inc.
accounted for approximately 15.2%, 14.9%, 11.5%, 10.1% and 6.8%, respectively,
of the Company's net premiums written in 1996. During such period, the Company
issued authorization for coverage on programs submitted by 65 brokers
worldwide. The Company received approximately 1,584 program submissions during
1996. The Company is highly selective and, from such submissions, the Company
issued authorizations for coverage for only 434 programs, or 27.4% of the
program submissions received.
RESERVES
The Company's policy is to establish claim reserves for the settlement costs
of all claims and claim adjustment expenses incurred by the Company when an
event occurs. The Company incurred claims of approximately $86.9 million,
$110.6 million and $114.1 million for the years ended December 31, 1996, 1995
and 1994, respectively.
Under GAAP, the Company is not permitted to establish claim reserves with
respect to its property catastrophe reinsurance policies until an event which
gives rise to a claim occurs. Generally, reserves will be established without
regard to whether any future claim may subsequently be contested by the
Company. Any reserve for claims and claim expenses may also include reserves
for unpaid reported claims and claim expenses and reserves for estimated
losses that have been incurred but not reported to the Company. Such reserves
are
33
<PAGE>
estimated by Management based upon reports received from ceding companies, as
supplemented by the Company's own estimates of reserves on such reported
losses as well as reserves for losses that are incurred but not reported. The
Company utilizes both proprietary and commercially available models as well as
historical reinsurance industry loss development patterns to assist in the
establishment of appropriate claim reserves. In addition, when reviewing a
proposed reinsurance contract, the Company typically receives and evaluates
the insured's historical and projected loss experience with respect to certain
events. The Company's reserve estimates will be continually reviewed and, in
accordance with GAAP, as adjustments to these reserves become necessary, such
adjustments will be reflected in current operations.
Claim reserves represent estimates, including actuarial and statistical
projections at a given point in time, of an insurer's or reinsurer's
expectations of the ultimate settlement and administration costs of claims
incurred, and it is possible that the ultimate liability may exceed or be 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. During the claim settlement period, it often becomes necessary
to refine and adjust the estimates of liability on a claim either upward or
downward. Even after such adjustments, ultimate liability may exceed or be
less than the revised estimates. Reserve estimates by new property catastrophe
reinsurers, such as the Company, may be inherently less reliable than the
reserve estimates of a reinsurer with a stable volume of business and an
established claim history. See Note 5 to Consolidated Financial Statements.
INVESTMENTS
The Company's strategy is to maximize its underwriting profitability and
fully deploy its capital through its underwriting activities; consequently,
the Company has established an investment policy which it considers to be
conservative. The Company's investment guidelines, which are established by
Management and approved by the Company's Board of Directors, stress
diversification of risk, preservation of capital and market liquidity.
Notwithstanding the foregoing, the Company's investments are subject to
market-wide risks and fluctuations, as well as to risks inherent in particular
securities. The primary objective of the portfolio, as set forth in such
guidelines, is to maximize investment returns consistent with these policies.
To achieve this objective, the Company's current fixed income investment
guidelines call for an average credit quality of AA and a target duration of
two years.
During 1996, the Company developed a multi-currency asset/liability
optimization model in conjunction with Tillinghast and Falcon Asset Management
to integrate asset, liability and capital decisions. As a result of the
analysis generated by this model, the Company determined that it could
diversify its investment portfolio by investing in common stocks with only a
minimal increase in overall risk. The analysis demonstrated that the benefits
of this diversification would substantially offset the volatility inherent in
equity investments, and would therefore not require significant amounts of
additional capital to support the Company's underwriting activities.
Accordingly, in 1997 the Company reallocated $50.0 million of its fixed
maturity investments to non-U.S. equity securities. At September 30, 1997, the
market value of the Company's investments in equity securities was $55.5
million.
Investment Advisers
The Company has entered into investment advisory agreements (the "Investment
Advisory Agreements") with each of Warburg, Pincus Investments International
(Bermuda), Ltd. ("WPII"), an affiliate of Warburg, GE Investments (U.S.)
Limited ("GE Investments"), an affiliate of PT Investments and GE Insurance,
the Bank of N.T. Butterfield & Son Limited ("Butterfield Bank") and Falcon
Asset Management (Bermuda) ("Falcon"), an affiliate of USF&G. The terms of the
Investment Advisory Agreements were determined in arms' length negotiations.
The performance of, and the fees paid to, WPII, GE Investments, Falcon and
Butterfield Bank under the Investment Advisory Agreements are reviewed
periodically by the Investment Committee of the Board of Directors of the
Company.
34
<PAGE>
The following table summarizes the fair value of the investments and cash
and cash equivalents of the Company as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF INVESTMENT SEPTEMBER 30, 1997 1996 1995 1994
------------------ ------------------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed Maturities Available for Sale:
Non-U.S. sovereign government bonds.. $141.6 $239.4 $201.9 $ 64.0
Non-U.S. corporate debt securities... 525.8 329.6 299.5 128.6
Non-U.S. mortgage backed securities.. 11.0 34.5 22.4 14.4
------ ------ ------ ------
Subtotal........................... 678.4 603.5 523.8 207.0
Equity Securities.................... 55.5 -- -- --
Short-term investments................. -- -- 5.0 77.5
Cash and cash equivalents.............. 123.8 199.0 139.2 153.0
------ ------ ------ ------
Total fixed maturity investments,
equity securities, short-term
investments and cash and cash
equivalents....................... $857.7 $802.5 $668.0 $437.5
====== ====== ====== ======
</TABLE>
The following table summarizes the fair value by contractual maturities of
the Company's fixed maturity investment portfolio as of the dates indicated.
All mortgage-backed securities mature within five years.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
MATURITY SEPTEMBER 30, 1997 1996 1995 1994
-------- ------------------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Due in less than one year.............. $261.1 $ 56.1 $ 75.1 --
Due after one through five years....... 292.6 457.1 358.3 $154.3
Due after five through ten years....... 90.3 90.3 90.4 52.7
Due after ten years.................... 34.4 -- -- --
------ ------ ------ ------
Total................................ $678.4 $603.5 $523.8 $207.0
====== ====== ====== ======
</TABLE>
Maturity and Duration of Fixed Maturity Portfolio
Currently, the Company maintains a target duration of two years on a
weighted average basis, reflecting Management's belief that it is important to
maintain a liquid, shorter-duration portfolio to better assure the Company's
ability to pay claims on a timely basis. The actual portfolio duration may not
exceed the target duration by more than two years. The Company expects to
reevaluate the target duration in light of estimates of the duration of its
liabilities and market conditions, including the level of interest rates, from
time to time.
Quality of Debt Securities in Portfolio
The Company's investment guidelines stipulate that the minimum credit rating
for securities purchased for the Company's portfolio is BB, that a maximum of
10% of the portfolio be rated BBB or below and that the overall average rating
of the portfolio, including cash and cash equivalents, be at least AA.
35
<PAGE>
The following table summarizes the composition of the fair value of the
fixed maturity portfolio as of the dates indicated by rating as assigned by
S&P or, with respect to non-rated issues, as estimated by the Company's
investment managers.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
RATING SEPTEMBER 30, 1997 1996 1995 1994
------ ------------------ ----- ----- -----
<S> <C> <C> <C> <C>
AAA.................................. 26.5% 28.1% 39.5% 12.9%
AA................................... 38.2 50.1 41.6 45.0
A.................................... 25.1 20.2 15.3 35.3
BBB.................................. 7.9 1.6 3.6 6.8
BB................................... 2.3 -- -- --
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Equity Securities
The Company's investments in equity securities, managed by GE Investments,
currently consist entirely of common stock, preferred stock or other forms of
non-U.S. securities of established companies listed on foreign exchanges. The
portfolio also includes American Depositary Receipts of non-U.S. issuers.
Real Estate
The Company's portfolio does not contain any direct investments in real
estate or mortgage loans.
Foreign Currency Exposures
All of the Company's fixed maturities are currently invested in securities
denominated in U.S. dollars. The Company's investments in equity securities
are primarily invested in securities which are denominated in currencies other
than the U.S. dollar. The Company's fixed maturity portfolio is generally not
invested so as to hedge exposures to various currencies. The Company maintains
a portion of its foreign currency premiums in the original currency as cash
investments in anticipation of known claims or other foreign currency
liabilities.
Diversification and Liquidity
Pursuant to the investment guidelines of the Company, there is no limit on
the percentage of the Company's fixed income portfolio that may be invested in
the securities of any sovereign government or agency issuing in its own
currency. No more than 20% of the portfolio may be invested in securities
issued by any single issuer, maturing in one year or less or in obligations of
any single issuer that is rated AA or AAA by S&P, or Aa or Aaa by Moody's and
is either (i) a sovereign (or guaranteed by a sovereign) issuing in a currency
other than its own, (ii) a local government entity or (iii) a supranational
entity. Each investment adviser has limitations as follows: up to 10% of the
portfolio may be invested in obligations of any individual issuer not
described above, but with ratings of AA or AAA by S&P, or Aa or Aaa by
Moody's; up to 7% of the portfolio may be invested in obligations of any
individual A issuer, as rated by S&P or by Moody's; up to 5% of the portfolio
may be invested in obligations of any individual BBB issuer as rated by S&P or
Baa issuer as rated by Moody's; and up to 3% of the portfolio may be invested
in obligations of any individual BB issuer as rated by S&P or Ba as rated by
Moody's. In addition, no more than 15% of each investment advisor's portfolio
may be rated lower than BBB- by S&P or Baa3 by Moody's. The minimum average
credit quality for each portfolio is A.
Pursuant to the Company's equity securities investment guidelines, no more
than 15% of the equity securities portfolio may be invested in non-EAFE
countries (Europe, Australasia, Far-East), nor may more than 5% of the
portfolio be invested in any one emerging market country. Individual company
investments are limited to 5%. All investments must be marketable and traded
on a recognized exchange.
COMPETITION
The property catastrophe reinsurance industry is highly competitive and is
undergoing a variety of challenging developments, including a marked trend
toward greater consolidation. The Company competes, and will continue to
compete, with major U.S. and non-U.S. property catastrophe insurers,
reinsurers, and certain
36
<PAGE>
underwriting syndicates. Many of these competitors have greater financial,
marketing and management resources than the Company. In addition, new
companies may enter the property catastrophe reinsurance market or existing
reinsurers may deploy additional capital in the property catastrophe
reinsurance market. The Company cannot predict what effect any of these
developments may have on the Company and its business.
Competition in the types of reinsurance business that the Company
underwrites is based on many factors, including premium charges and other
terms and conditions offered, services provided, speed of claims payment,
ratings assigned by independent rating agencies, the perceived financial
strength and the experience of the reinsurer in the line of reinsurance to be
written. The number of jurisdictions in which a reinsurer is licensed or
authorized to do business is also a factor. Some of the reinsurers who have
entered the Bermuda and London-based reinsurance markets have or could have
greater financial, marketing or managerial resources than the Company.
Ultimately, increasing competition could affect the Company's ability to
attract business on terms having the potential to yield an attractive return
on equity.
Management is also aware of many potential initiatives by capital market
participants to produce alternative products that may compete with the
existing catastrophe reinsurance markets. Management is unable to predict the
extent to which the foregoing new, proposed or potential initiatives may
affect the demand for the Company's products or the risks which may be
available for the Company to consider underwriting.
EMPLOYEES
As of November 17, 1997, the Company employed 32 people, all of whom are
either shareholders or optionholders of the Company. The Company believes that
its employee relations are satisfactory. None of the Company's employees are
subject to collective bargaining agreements, and the Company knows of no
current efforts to implement such agreements at the Company.
REGULATION
Bermuda
The Insurance Act 1978, as amended, and Related Regulations. The Insurance
Act, which regulates the business of Renaissance Reinsurance and Glencoe,
provides that no person shall carry on an insurance business in or from within
Bermuda unless registered as an insurer under the Act by the Minister.
Renaissance Reinsurance and Glencoe are registered as a Class 4 and a Class 3
insurer under the Insurance Act, respectively. The Minister, in deciding
whether to grant registration, has broad discretion to act as he thinks fit in
the public interest. The Minister is required by the Insurance Act to
determine whether the applicant is a fit and proper body to be engaged in the
insurance business and, in particular, whether it has, or has available to it,
adequate knowledge and expertise. In connection with the applicant's
registration, the Minister may impose conditions relating to the writing of
certain types of insurance.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions and sub-committees
thereof supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set forth below.
Cancellation of Insurer's Registration. An insurer's registration may be
canceled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with a requirement made of it under
the Insurance Act or, if in the opinion of the Minister after consultation
with the Insurance Advisory Committee, the insurer has not been carrying on
business in accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, the
latter of which is required to be filed annually with the Registrar of
Companies (the "Registrar"), who is the
37
<PAGE>
chief administrative officer under the Insurance Act. The auditor must be
approved by the Minister as the independent auditor of the insurer. The
approved auditor may be the same person or firm which audits the insurer's
financial statements and reports for presentation to its shareholders.
Loss Reserve Specialist. Every Registered Class 3 and Class 4 insurer is
required to submit an annual loss reserve opinion when filing the Annual
Statutory Financial Return. This opinion must be issued by a Loss Reserve
Specialist. The Loss Reserve Specialist, who will normally be a qualified
casualty actuary, must be approved by the Minister.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation
and substance of such Statutory Financial Statements (which include, in
statutory form, a balance sheet, income statement, and a statement of capital
and surplus, and detailed notes thereto). The insurer is required to give
detailed information and analyses regarding premiums, claims, reinsurance and
investments. The Statutory Financial Statements are not prepared in accordance
with GAAP and are distinct from the financial statements prepared for
presentation to the insurer's shareholders under the Companies Act 1981 of
Bermuda, which financial statements may be prepared in accordance with GAAP.
See Note 14 to the Consolidated Financial Statements contained in the Annual
Report and incorporated herein by reference thereto for information with
respect to the Company's statutory financial statements. The insurer is
required to submit the Annual Statutory Financial Statements as part of the
Annual Statutory Financial Return.
Minimum Solvency Margin. The Insurance Act provides that the statutory
assets of an insurer must exceed its statutory liabilities by an amount
greater than the prescribed minimum solvency margin which varies with the type
of business of the insurer and the insurer's net premiums written and loss
reserve level. The minimum solvency margin for a Class 4 insurer is the
greatest of $100.0 million, 50% of net premiums written (with a credit for
reinsurance ceded not exceeding 25% of gross premiums) and 15% of loss and
loss expense provisions and other insurance reserves. The minimum solvency
margin for a Class 3 insurer is the greatest of $1.0 million, 20% of the first
$6.0 million of net premiums written plus 15% of net premiums written in
excess of $6.0 million, and 15% of loss and loss expense provisions and other
insurance reserves. See Note 14 to the Consolidated Financial Statements
included in the Annual Report and incorporated by reference herein.
Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity
ratio for general business. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than 75% of the
amount of its relevant liabilities. Relevant assets include cash and time
deposits, quoted investments, unquoted bonds and debentures, first liens on
real estate, investment income due and accrued, accounts and premiums
receivable and reinsurance balances receivable. There are certain categories
of assets which, unless specifically permitted by the Minister, do not
automatically qualify as relevant assets, such as unquoted equity securities,
investments in and advances to affiliates, real estate and collateral loans.
The relevant liabilities are total general business insurance reserves and
total other liabilities less deferred income tax and sundry liabilities (by
interpretation, those not specifically defined).
Annual Statutory Financial Return. An insurer is required to file with the
Registrar a Statutory Financial Return no later than four months from the
insurer's financial year end (unless specifically extended). The Statutory
Financial Return includes, among other matters, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the Statutory
Financial Statements themselves; the opinion of the approved Loss Reserve
Specialist and certain details concerning ceded reinsurance. The solvency
certificate and the declaration of the statutory ratios must be signed by the
principal representative and at least two directors of the insurer who are
required to state whether the Minimum Solvency Margin and, in the case of the
solvency certificate, the Minimum Liquidity Ratio, have been met, and the
independent approved auditor is required to state whether in its opinion it
was reasonable for them to so state and whether the declaration of the
statutory ratios complies with the requirements of the Insurance Act. The
Statutory Financial Return must include the opinion of a Loss Reserve
Specialist in respect of the loss and loss expense provisions of the insurer.
Where an insurer's accounts have been audited for any
38
<PAGE>
purpose other than compliance with the Insurance Act, a statement to that
effect must be filed with the Statutory Financial Return.
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if
the Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new
insurance business; not to vary any insurance contract if the effect would be
to increase the insurer's liabilities; not to make certain investments; to
realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; not to declare or pay any dividends
or other distributions or to restrict the making of such payments and/or to
limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of the Company and its Subsidiaries is
at the Company's offices at Renaissance House, 8-12 East Broadway, Pembroke HM
19 Bermuda and Mr. Keith S. Hynes, the Company's Senior Vice President, and
Mr. John D. Nichols, Jr., the Company's Vice President, Treasurer and
Secretary, are the principal representatives of Renaissance Reinsurance and
Glencoe, respectively. Without a reason acceptable to the Minister, an insurer
may not terminate the appointment of its principal representative, and the
principal representative may not cease to act as such, unless thirty days'
notice in writing to the Minister is given of the intention to do so. It is
the duty of the principal representative, within thirty days of his reaching
the view that there is a likelihood of the insurer for which he acts becoming
insolvent or its coming to his knowledge, or his having reason to believe,
that an event has occurred, to make a report in writing to the Minister
setting out all the particulars of the case that are available to him.
Examples of such an event include failure by the insurer to comply
substantially with a condition imposed upon the insurer by the Minister
relating to a solvency margin or a liquidity or other ratio.
United States and Other
Renaissance Reinsurance is not admitted to do business in any jurisdiction
except Bermuda. The insurance laws of each state of the United States and of
many other countries regulate the sale of insurance and reinsurance within
their jurisdictions by alien insurers, such as Renaissance Reinsurance, which
are not admitted to do business within such jurisdiction. With some
exceptions, such sale of insurance or reinsurance within a jurisdiction where
the insurer is not admitted to do business is prohibited. Renaissance
Reinsurance does not intend to maintain an office or to solicit, advertise,
settle claims or conduct other insurance activities in any jurisdiction other
than Bermuda where the conduct of such activities would require that
Renaissance Reinsurance be so admitted. Glencoe is a licensed, non-admitted
insurer in 28 states and is subject to the regulation and reporting
requirements of these states. In accordance with certain requirements of the
National Association of Insurance Commissioners, Glencoe has established, and
is required to maintain, a trust funded with a minimum of $15.0 million as a
condition of its status as a licensed, non-admitted insurer in the U.S. In
addition, DeSoto has applied to be a licensed insurer in Florida. The
Company's strategy to expand into additional insurance markets could cause
Glencoe or other U.S.-based subsidiaries to become subject to regulation in
additional jurisdictions. However, the Company intends to continue to conduct
its operations so as to minimize the likelihood that RenaissanceRe Holdings
Ltd. or Renaissance Reinsurance will become subject to U.S. regulation.
OTHER AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. For further information regarding the
Company, reference is made to such reports, proxy statements and other
information which are available as described under "Available Information" and
"Incorporation of Certain Documents by Reference."
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<PAGE>
MANAGEMENT
The table below sets forth the names, ages and titles of the persons who
were directors of the Company and executive officers of the Company as of
November 17, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James N. Stanard....................... 49 Chairman of the Board, President and
Chief Executive Officer
David A. Eklund........................ 38 Senior Vice President
Keith S. Hynes......................... 45 Senior Vice President of the Company
and President and Chief Executive
Officer of Glencoe
John M. Lummis......................... 40 Senior Vice President, Chief
Financial Officer and Director
William I. Riker....................... 38 Senior Vice President
Arthur S. Bahr......................... 66 Director
Thomas A. Cooper....................... 61 Director
Edmund B. Greene....................... 59 Director
Dan L. Hale*........................... 53 Director
Gerald L. Igou......................... 63 Director
Kewsong Lee............................ 32 Director
Howard H. Newman....................... 50 Director
Scott E. Pardee........................ 61 Director
John C. Sweeney........................ 53 Director
David A. Tanner........................ 38 Director
</TABLE>
- --------
* Mr. Hale is not currently a director but has been nominated by USF&G to
serve as its designee on the Board under the Shareholders Agreement (as
defined below). Mr. Hale is expected to be elected and qualified at the
Company's next regularly scheduled Board meeting.
James N. Stanard has served as Chairman of the Board, President and Chief
Executive Officer since the Company's formation in June 1993. From 1991
through June 1993, Mr. Stanard served as Executive Vice President of USF&G and
was a member of a three-person Office of the President. As Executive Vice
President of USF&G, he was responsible for USF&G's underwriting, claims and
ceded reinsurance. From October 1983 to 1991, Mr. Stanard was an Executive
Vice President of F&G Re, a start-up reinsurance subsidiary of USF&G. Mr.
Stanard was one of two senior officers primarily responsible for the formation
of F&G Re, where he was responsible for the underwriting, pricing and
marketing activities of F&G Re during its first seven years of operation. As
Executive Vice President of F&G Re, Mr. Stanard was personally involved in the
design of pricing procedures, contract terms and analytical underwriting tools
for all types of treaty reinsurance, including both U.S. and international
property catastrophe reinsurance.
David A. Eklund has served as Senior Vice President of the Company since
February 1996. Mr. Eklund served as Vice President-Underwriting of the Company
from September 1993 until February 1996. From November 1989 through September
1993, Mr. Eklund held various positions in casualty underwriting at Old
Republic, where he was responsible for casualty treaty underwriting and
marketing. From March 1988 to November 1989, Mr. Eklund held various positions
in catastrophe reinsurance at Berkshire Hathaway, where he was responsible for
underwriting and marketing finite risk and property catastrophe reinsurance.
Keith S. Hynes has served as President and Chief Executive Officer of
Glencoe since September 1997, and has served as Senior Vice President of the
Company since June 1994. From June 1994 to September 1997, Mr. Hynes served as
the Company's Chief Financial Officer. Mr. Hynes was employed by Hartford
Steam from January 1983 to January 1994. From April 1992 to January 1994, he
served as Hartford Steam's Senior Vice President and Chief Financial Officer.
From November 1986 to April 1992, Mr. Hynes worked in Hartford Steam's
Underwriting Department, advancing to Senior Vice President and Chief
Underwriting Officer, where
40
<PAGE>
he managed Hartford Steam's underwriting and ceded reinsurance activities,
from April 1990 to April 1992. From January 1983 to November 1986, Mr. Hynes
was Hartford Steam's Chief Investment Officer. Mr. Hynes held several
investment management positions with Aetna Insurance Company from June 1978 to
January 1983.
John M. Lummis has served as Senior Vice President and Chief Financial
Officer of the Company since September 1997 and as a director of the Company
since July 1993. Mr. Lummis served as Vice President-Business Development of
USF&G Corporation from 1994 until August 1997 and served as Vice President and
Group General Counsel for USF&G Corporation from 1991 until 1995. USF&G
Corporation is the parent company of USF&G. From 1982 until 1991, Mr. Lummis
was engaged in the private practice of law with the law firm of Shearman &
Sterling. In connection with his appointment as an officer of the Company, Mr.
Lummis intends to resign as a director at the Company's next regularly
scheduled Board meeting, after his successor has been duly elected and
qualified.
William I. Riker was appointed Senior Vice President of the Company in March
1995 and served as Vice President-Underwriting of the Company from November
1993 until such time. From March 1993 through October 1993, Mr. Riker served
as Vice President of Applied Insurance Research, Inc. Prior to that, Mr. Riker
held the position of Senior Vice President, Director of Underwriting at
American Royal. Mr. Riker was responsible for developing various analytical
underwriting tools while holding various positions at American Royal from 1984
through 1993.
Arthur S. Bahr has served as a director of the Company since its formation
in June 1993. Mr. Bahr served as Director and Executive Vice President-
Equities of General Electric Investment Corporation ("GEIC"), a subsidiary of
General Electric Company and registered investment adviser, from 1987 until
December 1993. Mr. Bahr served GEIC in various senior investment positions
since 1978 and was a Trustee of General Electric Pension Trust from 1976 until
December 1993. Mr. Bahr served as Director and Executive Vice President of GE
Investment Management Incorporated, a subsidiary of General Electric Company
and a registered investment adviser, from 1988 until his retirement in
December 1993. From December 1993 until December 1995, Mr. Bahr served as a
consultant to GEIC.
Thomas A. Cooper has served as a director of the Company since August 7,
1996. From August 1993 until August 1996 Mr. Cooper served as Chairman and
Chief Executive Officer of TAC Bancshares, Inc. and as Chairman and Chief
Executive Officer of Chase Federal Bank FSB. From June 1992 until July 1993,
Mr. Cooper served as principal of TAC Associates, a financial investment
company. From April 1990 until May 1992 Mr. Cooper served as Chairman and
Chief Executive Officer of Goldome FSB. From 1986 to April 1990, Mr. Cooper
served as Chairman and Chief Executive Officer of Investment Services of
America, one of the largest full service securities brokerage and investment
companies in the United States. Prior thereto, Mr. Cooper served as President
of Bank of America from February 1983 to April 1986. From 1980 to 1982 Mr.
Cooper served as Vice Chairman of Mellon Bank. From 1978 to 1982, Mr. Cooper
was President of Girard Bank in Philadelphia.
Edmund B. Greene has served as a director of the Company since its formation
in June 1993. Mr. Greene has served as Deputy Treasurer-Insurance of General
Electric Company since March 1995. Prior to that, Mr. Greene was Manager-
Corporate Insurance Operation of General Electric Company since 1985, and
previously served in various financial management assignments since 1962.
Dan L. Hale has served as an Executive Vice President of USF&G since 1991
and as Chief Financial Officer of USF&G since 1993. Mr. Hale previously served
as President of Chase Commercial Corp. from March 1988 to February 1991 and
before that as a Managing Director of Kidder Peabody Group, Inc. Prior
thereto, Mr. Hale served as Senior Vice President and Division General Manager
of General Electric Credit Corporation.
Gerald L. Igou has served as a director of the Company since its formation
in June 1993. Mr. Igou has served as a Vice President-Investment Analyst for
GEIC since September 1993. He is a Certified Financial Analyst and has served
GEIC in the capacities of investment analyst and sector portfolio manager
since 1968. Prior to joining General Electric, Mr. Igou was an analyst with
the Wall Street firms of Smith Barney Inc. and Dean Witter & Co.
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<PAGE>
Kewsong Lee has served as a director of the Company since December 1994. Mr.
Lee has served as a Member and Managing Director of E.M. Warburg, Pincus &
Co., LLC ("EMW LLC") and a general partner of Warburg, Pincus & Co. ("WP")
since January 1, 1997. Mr. Lee served as a Vice President of Warburg, Pincus
Ventures, Inc. ("WPV") from January 1995 to December 1996, and an associate at
E.M. Warburg, Pincus & Co., Inc. ("EMW") from 1992 until December 1994. Prior
to joining EMW, Mr. Lee was a consultant at McKinsey & Company, Inc., a
management consulting company, from 1990 to 1992. Mr. Lee is a director of
Knoll, Inc. and several privately held companies.
Howard H. Newman has served as a director of the Company since its formation
in June 1993. Mr. Newman has served as a Member and Managing Director of EMW
LLC (and its predecessor) and a general partner of WP since 1987. Mr. Newman
is a director of ADVO, Inc., Newfield Exploration Company, Cox Insurance
Holdings Plc, Comcast UK Cable Partners Limited and several privately held
companies.
Scott E. Pardee has served as a director of the Company since February 1997.
Mr. Pardee served as Chairman of Yamaichi International (America), Inc., a
financial services company, from 1989 to 1994. Mr. Pardee previously served as
Executive Vice President and a member of the Board of Directors of Discount
Corporation of New York, a primary dealer in U.S. government securities, and
as Senior Vice President and Manager of the Federal Reserve Bank of New York.
John C. Sweeney has served as a director of the Company since December 1996.
Mr. Sweeney has served as Senior Vice President and Chief Investment Officer
of USF&G since 1992, and as Chairman of Falcon Asset Management since 1992.
Prior thereto, Mr. Sweeney served as Principal and Practice Director of Towers
Perrin Consulting Services from 1985 to 1992, and as Chief Investment Officer
of McM/Occidental Peninsular Insurance Companies from 1981 to 1984. Mr.
Sweeney also serves as a Director of USF&G Pacholder Fund, Inc.
David A. Tanner has served as a director of the Company since December 1996.
Mr. Tanner has served as a Member and Managing Director of EMW LLC (and its
predecessor) and a general partner of WP since January 1, 1993. Mr. Tanner
served as a Vice President of EMW from January 1, 1991 to 1993. Mr. Tanner is
a director of Golden Books Family Entertainment, Inc. and several privately
held companies. Mr. Tanner previously served as a director of the Company from
December 1994 through May 1996.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table set forth below shows information as of November 17, 1997 with
respect to the number of (i) full voting Common Shares, (ii) DVI Shares and
(iii) DVII Shares of the Company held by each Selling Shareholder, and the
applicable voting rights attaching to such share ownership.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY OWNED COMMON SHARES
PRIOR TO THE COMMON BENEFICIALLY OWNED
OFFERING(1) SHARES AFTER THE OFFERING(1)
----------------------- TO BE -----------------------
PERCENTAGE OF SOLD IN PERCENTAGE OF
NAME(1) NUMBER VOTING RIGHTS THE OFFERING NUMBER VOTING RIGHTS
- ------- --------- ------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Warburg, Pincus 5,594,819 28.0% 1,662,500(3) 3,932,319 18.4%
Investors, L.P.(2).....
466 Lexington Avenue
New York, NY 10017
PT Investments, 3,370,691 6.8 890,625(6) 2,480,066 7.8
Inc.(4)(5).............
3003 Summer Street
Stamford, CT 06904
GE Investment Private
Placement Partners 625,609 1.0 296,875(8) 328,734 *
I-Insurance, Limited
Partnership(4)(7)......
3003 Summer Street
Stamford, CT 06904
United States Fidelity
and Guaranty Company... 2,576,137 12.9 150,000(9) 2,426,137 11.3
6225 Smith Avenue
Baltimore, MD 21209
</TABLE>
- --------
* Less than 1%.
(1) Pursuant to the regulations of the Commission, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly
has or shares the power to vote or dispose of such shares whether or not
such person has any pecuniary interest in such shares or the right to
acquire the power to vote or dispose of such shares within 60 days,
including any right to acquire through the exercise of any option,
warrant or right.
(2) The sole general partner of Warburg is WP. EMW LLC manages Warburg. The
members of EMW LLC are substantially the same as the partners of WP.
Lionel I. Pincus is the managing partner of WP and the managing member of
EMW LLC, and may be deemed to control both WP and EMW LLC. WP, as the
sole general partner of Warburg, has a 20% interest in the profits of
Warburg. WP and EMW LLC may be deemed to beneficially own the Common
Shares owned by Warburg within the meaning of Rule 13d-3 under the
Exchange Act. Howard H. Newman, David A. Tanner and Kewsong Lee,
directors of the Company, are Managing Directors and members of EMW LLC
and general partners of WP. As such, Messrs. Newman, Tanner and Lee may
be deemed to have an indirect pecuniary interest (within the meaning of
Rule 16a-1 under the Exchange Act) in an indeterminate portion of the
shares beneficially owned by Warburg. Messrs. Newman, Tanner and Lee
disclaim beneficial ownership of these shares for purposes of the
Exchange Act or otherwise.
(3) If the Underwriters exercise their over-allotment options in full,
Warburg will own 3,669,819 Common Shares, or approximately 16.3% of the
outstanding Common Shares, or 17.0% of the Company's outstanding voting
power.
(4) Does not include any Common Shares indirectly held by Trustees of General
Electric Pension Trust ("GE Pension Trust") by virtue of GE Pension
Trust's limited partnership interest in Warburg or as a result of GE
Pension Trust's indirect interest in USF&G by virtue of GE Pension
Trust's and certain of its affiliates' holdings of 3,315,348 shares of
common stock of USF&G Corporation, the parent company of USF&G. PT
Investments is a wholly-owned subsidiary of GE Pension Trust. As a
result, GE Pension Trust may be deemed to be the beneficial owner of the
Common Shares owned by PT Investments. GE Investment Management
Incorporated ("GEIM") is the general partner of GE Insurance and a wholly
owned subsidiary of General Electric Company ("GEC"). As a result, each
of GEIM and GEC may be deemed to be the beneficial owner of the Common
Shares owned by GE Insurance.
43
<PAGE>
(5) Consists solely of DVI Shares. DVI Shares entitle the holder thereof to a
voting interest in the Company of up to a maximum of 9.9% of all
outstanding voting rights attached to the full voting Common Shares,
inclusive of the percentage interest in the Company represented by full
voting Common Shares owned directly, indirectly, or constructively by
such holder within the meaning of Section 958 of the Code and applicable
rules and regulations thereunder (the "Controlled Common Shares"), but in
no event greater than one vote for each DVI Share so held. The Company,
the Selling Shareholders and the Underwriters have agreed that,
immediately upon the consummation of the Offering, the DVI Shares to be
sold in the Offering will be converted by the Underwriters into an equal
number of full voting Common Shares on a one-for-one basis.
(6) If the Underwriters exercise their over-allotment options in full, PT
Investments will own 2,339,441 Common Shares, or approximately 10.4% of
the Common Shares outstanding, or 8.0% of the Company's outstanding
voting power.
(7) Consists solely of DVII Shares. DVII Shares entitle the holder thereof to
one-third of a vote for each DVII Share; provided, that in no event shall
a holder of DVII Shares have greater than 9.9% of all outstanding voting
rights attached to the full voting Common Shares, inclusive of the
percentage interest in the Company represented by Controlled Common
Shares. The Company, the Selling Shareholders and the Underwriters have
agreed that, immediately upon the consummation of the Offering, the DVII
Shares to be sold in the Offering will be converted by the Underwriters
into an equal number of full voting Common Shares on a one-for-one basis.
(8) If the Underwriters exercise their over-allotment options in full, GE
Insurance will own 281,859 Common Shares, or approximately 1.2% of the
Common Shares outstanding, or 0.4% of the Company's outstanding voting
power.
(9) If the Underwriters exercise their over-allotment options in full, USF&G
will own 2,426,137 Common Shares, or approximately 10.8% of the Common
Shares outstanding, or 11.2% of the Company's outstanding voting power.
Shareholders Agreement
The Selling Shareholders are parties to an amended and restated shareholders
agreement (the "Shareholders Agreement") among themselves and the Company
which provides them with the ability, if they act in concert, to nominate a
majority of the Board and to exert effective control over certain actions
requiring shareholder approval, including electing the Board of Directors,
adopting amendments to the Bye-Laws and approving a merger or consolidation,
liquidation or sale of all or substantially all of the assets of the Company.
Pursuant to the Shareholders Agreement, the number of directors serving on the
Board is fixed at 11.
Pursuant to the terms of the Shareholders Agreement, the Board presently
includes three members designated by Warburg, one member designated by PT
Investments, one member designated by GE Insurance and one member designated
by USF&G.
At such time as Warburg owns less than 3,706,146 Common Shares, but at least
1,853,073 Common Shares, the number of directors that Warburg shall be
entitled to nominate shall be reduced to two. At such time as Warburg owns
less than 1,853,073 Common Shares, but at least 741,229 Common Shares, the
number of directors that Warburg shall be entitled to nominate shall be
reduced to one. At such time as any one of Warburg, PT Investments or USF&G
shall own less than 741,229 Common Shares, then such party shall no longer be
entitled to nominate any director to the Board. If the Underwriters exercise
their over-allotment options in full, Warburg will own less than 3,706,146
Common Shares and, accordingly, the number of directors Warburg shall be
entitled to nominate under the Shareholders Agreement shall be reduced to two.
GE Insurance, so long as it owns any Common Shares, shall be entitled to
nominate one director to the Board. At such time as PT Investments and GE
Insurance shall, in the aggregate, own less than 1,853,073 Common Shares, PT
Investments shall not have any right to nominate a director and GE Insurance
shall have the right to nominate one director. At such time as GE Insurance
shall own no Common Shares and PT Investments shall own at least 741,229
Common Shares, GE Insurance shall not have the right to nominate a director
and PT Investments shall have the right to nominate one director to the Board.
44
<PAGE>
CERTAIN TAX CONSIDERATIONS
The following discussion of the taxation of the Company and Renaissance
Reinsurance and of the taxation of shareholders of the Company is based (i)
upon the opinion of Conyers Dill & Pearman, Hamilton, Bermuda, with respect to
the matters discussed under "Taxation of the Company and Renaissance
Reinsurance" and "Taxation of Shareholders--Bermuda Taxation" and (ii) upon
the opinion of Willkie Farr & Gallagher, New York, New York, with respect to
the matters discussed under "Taxation of the Company and Renaissance
Reinsurance" and "Taxation of Shareholders--United States Taxation of U.S. and
non-U.S. Shareholders." The opinions of such firms do not address, and do not
include, opinions as to whether the Company, Renaissance Reinsurance or
Glencoe has a permanent establishment in the United States, any factual or
accounting matters, determinations or conclusions such as to whether the
Company, Renaissance Reinsurance or Glencoe is engaged in a U.S. trade or
business, RPII amounts and computations and components thereof (for example,
amounts or computations of income or expense items or reserves entering into
RPII computations) or facts relating to the business or activities of the
Company, Renaissance Reinsurance or Glencoe, all of which are matters and
information determined and provided by the Company. The following discussion
is based upon current law and describes the material U.S. federal and Bermuda
tax consequences as of the date of this Prospectus and is for general
information only. The tax treatment of a holder of Common Shares, or a person
treated as a holder of Common Shares for U.S. federal income, state, local or
non-U.S. tax purposes may vary depending on the holder's particular tax
situation. Legislative, judicial or administrative changes or interpretations
may be forthcoming that could be retroactive and could affect the tax
consequences to holders of Common Shares. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND NON-
U.S. TAX CONSEQUENCES TO THEM OF OWNING COMMON SHARES.
TAXATION OF THE COMPANY, RENAISSANCE REINSURANCE AND GLENCOE
Bermuda
The Company, Renaissance Reinsurance and Glencoe have each received from the
Minister of Finance of Bermuda an assurance under the Exempted Undertakings
Tax Protection Act 1966 of Bermuda, to the effect that in the event of there
being enacted in Bermuda any legislation imposing tax computed on profits or
income, or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then the imposition of any such
tax shall not be applicable to the Company, Renaissance Reinsurance and
Glencoe or to any of their operations or the shares, debentures or other
obligations of the Company, Renaissance Reinsurance or Glencoe until March 28,
2016. These assurances are subject to the proviso that they are not construed
so as to prevent the application of any tax or duty to such persons as are
ordinarily resident in Bermuda or to prevent the application of any tax
payable in accordance with the provisions of The Land Tax Act 1967 of Bermuda
or otherwise payable in relation to the land leased to Renaissance Reinsurance
or Glencoe. The Company, Renaissance Reinsurance and Glencoe are required to
pay certain annual Bermuda government fees. Additionally, Renaissance
Reinsurance and Glencoe are required to pay certain insurance registration
fees as an insurer under the Insurance Act. Under current rates, the Company
pays a fixed fee of $15,000 and Renaissance Reinsurance and Glencoe pay a fee
of $30,000 and $10,900 per year, respectively (which is the applicable annual
Bermuda government fee and the annual insurance registration fee for each
company). Currently there is no Bermuda withholding tax on dividends that may
be paid by Renaissance Reinsurance or Glencoe to the Company.
United States
The Company believes that, to date, Renaissance Reinsurance and Glencoe have
operated and, in the future, will continue to operate their businesses in a
manner that will not cause either to be treated as being engaged in a U.S.
trade or business. On this basis, the Company does not expect Renaissance
Reinsurance or Glencoe to be required to pay U.S. corporate income tax.
However, whether a corporation is engaged in a U.S. trade or business is
considered a factual question. Because there are no definitive standards
provided by the Code, existing or proposed regulations thereunder or judicial
precedent, and as the determination is inherently factual and not a
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legal issue on which counsel can opine, there is considerable uncertainty as
to activities that constitute being engaged in a U.S. trade or business. As a
result, there can be no assurance that the IRS could not successfully contend
that Renaissance Reinsurance or Glencoe is engaged in such a trade or
business. If the IRS did so contend, Renaissance Reinsurance or Glencoe would,
unless exempted from tax by the Treaty, discussed below, be subject to U.S.
corporate income tax on that portion of its net income treated as effectively
connected with a U.S. trade or business, as well as the U.S. corporate branch
profits tax. The U.S. corporate income tax is currently imposed at the rate of
35% on net corporate profits and the U.S. corporate branch profits tax is
imposed at the rate of 30% on a corporation's after-tax profits deemed
distributed as a dividend.
Even though the Company will take the position that Renaissance Reinsurance
and Glencoe are not engaged in U.S. trades or businesses, Renaissance
Reinsurance has filed and intends to continue to file, and Glencoe intends to
file, U.S. federal income tax returns to avoid having all deductions
disallowed in the event that either Renaissance Reinsurance or Glencoe were
held to be engaged in a U.S. trade or business. In addition, filing U.S. tax
returns will allow Renaissance Reinsurance and Glencoe to claim benefits under
the Treaty without penalty.
Even if the IRS were to contend successfully that Renaissance Reinsurance or
Glencoe was engaged in a U.S. trade or business, the Treaty could preclude the
United States from taxing Renaissance Reinsurance or Glencoe on its net
premium income except to the extent that such income were attributable to a
permanent establishment maintained by Renaissance Reinsurance or Glencoe in
the United States. Although the Company believes neither Renaissance
Reinsurance nor Glencoe has a permanent establishment in the United States,
there can be no assurance that the IRS will not successfully contend that
Renaissance Reinsurance or Glencoe has such an establishment and therefore is
subject to taxation.
Benefits of the Treaty are available to Renaissance Reinsurance only if more
than 50% of the Company's shares (assuming that all of Renaissance
Reinsurance's outstanding shares are held by the Company) are beneficially
owned, directly or indirectly, by individuals who are Bermuda residents or
U.S. citizens or residents. The Company expects that more than 50% of its
shares will be so owned after the Offering, and the Company intends to obtain
periodic certification as to ownership from various shareholders of the
Company so as to monitor compliance with this beneficial ownership
requirement. Similar considerations will apply to Glencoe.
If Renaissance Reinsurance or Glencoe were considered to be engaged in a
U.S. trade or business and it were considered not to be entitled to the
benefits of the permanent establishment clause of the Treaty, and, thus,
subject to U.S. income tax, the Company's results of operations and cash flows
could be materially adversely affected.
The Treaty does not apply to dividends and interest received by Renaissance
Reinsurance or Glencoe. However, the Revenue Act of 1987 amended section 864
of the Code to provide that foreign source subpart F income (such as dividends
and interest) of property and casualty companies will not be taxed as
effectively connected with a U.S. trade or business. Such a rule already
existed with respect to life insurance companies. Thus, foreign source income
received by Renaissance Reinsurance or Glencoe will not be taxed in the United
States so long as Renaissance Reinsurance or Glencoe is deemed to be a
controlled foreign corporation ("CFC") and the foreign source income
constitutes subpart F income. As explained below, Renaissance Reinsurance and
Glencoe currently are CFCs, but such status may not be maintained in the
future. Furthermore, Renaissance Reinsurance and Glencoe presently intend, for
at least so long as such CFC status is maintained, to invest predominantly in
assets that yield foreign source income that should also constitute subpart F
income.
Notwithstanding the foregoing discussion, Notice 89-96, 1989-2 C.B. 417,
states that under Code section 842 (which requires that foreign insurance
companies carrying on an insurance business within the United States have a
certain minimum amount of effectively connected net investment income), U.S.
corporate tax can be imposed on such a portion of foreign insurance companies'
foreign source subpart F income. A notice is not binding authority on a court
and is intended for the reliance of taxpayers. A notice also does not
necessarily represent the final substantive position of the IRS. In the
opinion of counsel, the position in Notice 89-96 conflicts with the
Congressional intent (in extending Code section 864 to foreign source income
of foreign
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property and casualty companies) as expressed in the Conference Committee
Report of the Revenue Act of 1987. No regulations on the subject have been
issued or proposed, and the current regulations as to life insurance companies
exempt a life insurance company's foreign source subpart F income from
corporate tax. Nevertheless, if the IRS issues regulations consonant with
Notice 89-96 and those regulations are upheld by the courts, Renaissance
Reinsurance or Glencoe could incur U.S. corporate income and branch profits
taxes on at least some of its foreign source investment income.
The Company's principal source of income is dividends from Renaissance
Reinsurance, which income should not incur U.S. tax.
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located
in the United States. Insurance and reinsurance premiums paid to foreign
insurers or reinsurers with respect to risks located outside the United States
should not be subject to this excise tax. The rate of tax currently applicable
to reinsurance premiums paid to foreign reinsurers such as Renaissance
Reinsurance, with respect to risks located in the United States, is 1% of
gross premiums. Congress has in the past, however, considered legislation that
would increase the excise tax rate on reinsurance premiums paid to foreign
reinsurers to 4%. Although no such legislation has to date been enacted,
hearings on the subject were held in 1993, and it is uncertain whether, or in
what form, such legislation may ultimately be enacted. The rate of tax
currently applicable to insurance premiums paid to foreign insurers such as
Glencoe with respect to risks located in the U.S. is 4% of gross premiums.
TAXATION OF SHAREHOLDERS
Bermuda Taxation
Currently, there is no Bermuda withholding tax on dividends paid by the
Company.
United States Taxation of U.S. and Non-U.S. Shareholders
Classification of Renaissance Reinsurance and Glencoe as CFCs. Section
951(b) of the Code defines a United States shareholder ("U.S. Shareholder") as
any U.S. citizen or resident, domestic corporation, partnership, estate or
trust that owns (directly or indirectly through certain deemed ownership
rules) 10% or more of the voting power of all classes of stock of a foreign
corporation. If, in the case of insurance companies such as Renaissance
Reinsurance and Glencoe, U.S. Shareholders own or are considered to own more
than 25% of the voting power or value of its shares, the corporation is
classified as a CFC.
Warburg and USF&G are U.S. Shareholders of Renaissance Reinsurance because
each of them is considered to indirectly own at least 10% of the voting power
of Renaissance Reinsurance. Because collectively they are considered to
indirectly own more than 25% of the voting power and value of Renaissance
Reinsurance, and will continue to indirectly own more than 25% of the voting
power and value of Renaissance Reinsurance after the Offering, in the opinion
of counsel Renaissance Reinsurance has been a CFC and will continue to be
classified a CFC following the completion of the Offering. Similarly, Glencoe
has been and will continue to be classified a CFC following completion of the
Offering. Relatively modest sales or dispositions of Common Shares by U.S.
Shareholders or the exchange of DVI Shares held by certain of the Selling
Shareholders for full voting Common Shares in the future could cause
Renaissance Reinsurance or Glencoe to cease to be a CFC. Accordingly, such
status may not be maintained in the future.
The effect of Renaissance Reinsurance and Glencoe being CFCs is twofold. As
described above, Renaissance Reinsurance's and Glencoe's status as a CFC may
result in their not incurring U.S. corporate income tax on their foreign
source investment income. Additionally, such status results in each U.S.
Shareholder being required to include in its income, based on the extent of
its interest in the Company, its pro rata share of Renaissance Reinsurance's
and Glencoe's subpart F income. U.S. Shareholders taxed currently on their pro
rata share of Renaissance Reinsurance's and Glencoe's subpart F income will
not be taxed on dividends actually distributed by the Company that are
allocable to such income. All of Renaissance Reinsurance's and Glencoe's
income is expected to be subpart F income. Persons who are not U.S.
Shareholders will not have to include subpart F income in their income, except
as described below in connection with the Related Person Insurance Income
Rules.
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Each prospective investor should consult its own tax advisor to determine
whether its ownership interest in the Company would cause it to become a U.S.
Shareholder of the Company, Renaissance Reinsurance and Glencoe or of any
subsidiary which may be created by the Company or Renaissance Reinsurance and
to determine the impact of such a classification of such investor.
Related Person Insurance Income ("RPII") Rules. Certain special subpart F
provisions of the Code will apply to persons who, through their ownership of
Common Shares, are indirect shareholders of Renaissance Reinsurance if both
(A) 25% or more of the value or voting power of the Common Shares is owned or
deemed owned (directly or indirectly through foreign entities) by U.S.
persons, as will be the case; and (B)(i) 20% or more of either the voting
power or the value of the stock of Renaissance Reinsurance and Glencoe is
owned directly or indirectly by U.S. persons insured or reinsured by
Renaissance Reinsurance or Glencoe or by persons related to them; and (ii)
Renaissance Reinsurance or Glencoe has RPII, determined on a gross basis,
equal to 20% or more of its gross insurance income. RPII is income (investment
income and premium income) from the direct or indirect insurance or
reinsurance of (i) the risk of any U.S. person who owns Common Shares
(directly or indirectly through foreign entities) or (ii) the risk of a person
related to such a U.S. person.
Renaissance Reinsurance may be considered to indirectly reinsure the risk of
a holder of Common Shares that is a U.S. person, and thus generate RPII, if an
unrelated company that insured such risk in the first instance reinsures the
risk with Renaissance Reinsurance. There is a suggestion in the proposed
Treasury Regulations that in order for this rule to be applied there must be a
prearrangement to reinsure the risk with the company in which the insured is a
shareholder (so-called "fronting"), but the proposed Treasury Regulations do
not explicitly limit the application of the rule to a fronting situation.
The Company does not expect Renaissance Reinsurance or Glencoe,
respectively, to knowingly enter into reinsurance or insurance arrangements
where the ultimate risk insured is that of a holder of Common Shares that is a
U.S. person or person related to such a U.S. person. However, unless the
proposed Treasury Regulations are clarified so that this rule would apply only
if the unrelated insurer is fronting for the party related to the insured,
there can be no assurance that the IRS will not require a holder of Common
Shares that is a U.S. person or person related to such a U.S. person to
demonstrate that the Company has not indirectly (albeit unknowingly) reinsured
risks of such a holder of Common Shares. If the IRS requires a holder of
Common Shares that is a U.S. person or person related to such a U.S. person to
demonstrate that the risks reinsured by the Company were not risks of related
parties, while the Company will cooperate in providing information regarding
its shareholders and the insurance and reinsurance arrangements of Renaissance
Reinsurance and Glencoe, it may not be in a position to identify the names of
many of its shareholders or the names of the persons whose risks it indirectly
reinsures. Therefore, each prospective investor should consult with his own
tax advisor to evaluate the risk that the IRS would take this position and the
tax consequences that might arise.
Notwithstanding the foregoing discussion it is anticipated (although not
assured) that less than 20% of the gross insurance income of Renaissance
Reinsurance or Glencoe for any taxable year will constitute RPII. However,
there can be no assurance that the IRS will not assert that 20% or more of the
income of Renaissance Reinsurance or Glencoe RPII or that a taxpayer will be
able to meet its burden of proving otherwise. If 20% or more of the gross
insurance income of Renaissance Reinsurance or Glencoe for any taxable year
constitutes RPII and 20% or more of the voting power or value of the stock of
Renaissance Reinsurance or Glencoe is held, directly or indirectly, by U.S.
insureds or reinsureds or by persons related thereto, each direct and indirect
U.S. holder of Common Shares will be taxable currently on its allocable share
of the RPII of Renaissance Reinsurance or Glencoe. In that case, RPII will be
taxable to each U.S. holder of Common Shares regardless of whether such holder
is a U.S. Shareholder and regardless of whether such holder is an insured or
related to an insured. For this purpose, all of the RPII of Renaissance
Reinsurance or Glencoe would be allocated solely to U.S. holders, but not in
excess of a holder's ratable share, based on the extent of its interest in the
Company, of the total income of Renaissance Reinsurance or Glencoe.
Under proposed Treasury Regulations, RPII that is taxed to a U.S. holder
will increase such holder's tax basis in the Common Shares to which it is
allocable. Dividends distributed by Renaissance Reinsurance or Glencoe to the
Company and by the Company to U.S. persons who are not U.S. Shareholders will,
under such regulations, be deemed to come first out of taxed RPII and to that
extent will not constitute income to the holder.
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This will be the result whether the dividend is distributed in the same year
in which the RPII is taxed or a later year. The untaxed dividend will decrease
the holder's tax basis in such holder's Common Shares. U.S. Shareholders will
be taxed under the general Subpart F Rules and will be entitled to exclude the
actual distributions as well.
Computation of RPII. In an effort to determine how much RPII Renaissance
Reinsurance and Glencoe have earned in each fiscal year, the Company monitors
the percentage of gross premiums that are received by Renaissance Reinsurance
and Glencoe from U.S. persons and persons related to U.S. persons. Beyond
that, it will use its reasonable best efforts to secure such additional
information relevant to determining the amount of such income that is RPII as
it believes advisable, but there can be no assurance that such information
will be sufficient to enable a holder of Common Shares to clearly establish
such amount. For any year that the Company determines that the gross RPII of
Renaissance Reinsurance or Glencoe is 20% or more of its gross insurance
income for the year, the Company may also seek information from its
shareholders as to whether beneficial owners of Common Shares at the end of
the year are U.S. persons, so that RPII may be apportioned among such persons.
To the extent the Company is unable to determine whether a beneficial owner of
shares is a U.S. person, the Company may assume that such owner is not a U.S.
person for purposes of apportioning RPII, thereby increasing the per share
RPII amount for all known U.S. holders of Common Shares.
Unrelated Business Taxable Income of Tax-Exempt Shareholders. Legislation
has been enacted that requires tax exempt entities owning at least ten percent
of the combined voting power of all classes of Company stock to treat certain
subpart F insurance income as unrelated business taxable income ("UBTI") under
Code section 512 to the extent it would have been UBTI had it been earned
directly. All prospective investors that are tax-exempt entities are urged to
consult their tax advisors as to the potential application of these
provisions.
Disposition of Common Shares by U.S. Persons Generally. Subject to the
discussions below relating to Disposition of Common Shares by U.S. Persons Who
are not U.S. Shareholders and Disposition of Common Shares by U.S.
Shareholders, U.S. Persons will, upon the sale or exchange of Common Shares,
generally recognize gain or loss for federal income tax purposes equal to the
excess of the amount realized upon such sale or exchange over such person's
federal income tax basis for the Common Shares disposed of. However, as
described below, gain may be recharacterized, in whole or in part, as a
dividend in certain circumstances pursuant to Section 1248(a) of the Code.
Disposition of Common Shares by United States Persons Who are Not U.S.
Shareholders. As noted above, in the case of a U.S. person who owns Common
Shares but is considered to own less than 10% of the voting power of the
Company and therefore is not a U.S. Shareholder, RPII may be allocable to such
holder's Common Shares during his period of ownership but not taxed to him
because less than 20% of the Common Stock is owned by persons generating RPII
or less than 20% of the gross insurance income of Renaissance Reinsurance and
Glencoe is RPII. Upon such holder's sale or exchange of Common Shares at a
gain, however, Code section 1248(a) will in all probability tax as a dividend
an amount of such gain equal to the allocable untaxed RPII. Moreover, the IRS
could take the position that the amount of gain taxed as a dividend under Code
section 1248(a) will be equal to the allocable earnings and profits during the
period that such U.S. holder held the Common Shares (whether or not
Renaissance Reinsurance or Glencoe has RPII). In the opinion of counsel, this
position is not correct, but in the absence of regulations, there can be no
assurance that the IRS will agree. For individuals, this would mean that the
amount of gain taxed as a dividend would incur tax at the rates applicable to
ordinary income rather than at the lower rates applicable to long-term capital
gain.
If, as the Company believes, Code section 1248(a) only applies to tax as a
dividend an amount of gain equal to allocable untaxed RPII, the selling
shareholder nevertheless has the burden of showing the amount of untaxed RPII
allocable to the Common Shares sold. The Company will keep records showing
what it believes to be the untaxed RPII allocable to each Common Share. The
Company will provide the information on untaxed RPII allocable to each Common
Share to any owner or prior owner of the Common Shares.
Disposition of Common Shares by U.S. Shareholders. Since all the income of
Renaissance Reinsurance and Glencoe is expected to be subpart F income, U.S.
Shareholders will be taxable currently on all earnings of
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Renaissance Reinsurance and Glencoe, whether or not such earnings constitute
RPII. For that reason, Code section 1248(a) will apply to recharacterize gain
as a dividend only in respect of earnings and profits during the year of sale.
Foreign Tax Credit. In the event that, as expected, U.S. persons own at
least 50% of the Common Shares, only a portion of both the dividends paid by
the Company and subpart F income of Renaissance Reinsurance and Glencoe will
be treated as foreign source income for purposes of determining a
shareholder's U.S. foreign tax credit limitation. That portion will be the
ratio of the foreign source income of Renaissance Reinsurance or Glencoe
earnings to their total earnings. It is likely that substantially all of the
RPII and dividends that are foreign source income will constitute either
"passive" or "financial services" income for foreign tax credit limitation
purposes. Thus, it may not be possible for many U.S. persons to utilize excess
foreign tax credits to reduce U.S. tax on such income.
Passive Foreign Investment Companies. Sections 1291 through 1297 of the Code
contain special rules applicable with respect to foreign corporations that are
"passive foreign investment companies" ("PFICs"). In general, a foreign
corporation will be a PFIC if 75% or more of its income constitutes passive
income or 50% or more of its assets produce passive income. If the Company
were to be characterized as a PFIC, U.S. holders of Common Shares would be
subject to a penalty tax at the time of their sale of (or receipt of an
"excess distribution" with respect to) its shares. In general, a U.S. holder
of Common Shares receives an "excess distribution" if the amount of the
distribution is more than 125% of the average distribution with respect to the
Common Shares during the three preceding taxable years (or the taxpayer's
holding period if it is less than three years). In general, the penalty tax is
equivalent to an interest charge on taxes that are deemed due during the
taxpayer's holding period but not paid, computed by assuming that the excess
distribution or gain (in the case of a sale) with respect to the Common Shares
was received ratably throughout the holding period. The interest charge is
equal to the applicable rate imposed on underpayments of U.S. federal income
tax for such period.
The Code contains an express exception for income "derived in the active
conduct of an insurance business by a corporation which is predominantly
engaged in an insurance business." This exception is intended to ensure that
income derived by a bona fide insurance company is not treated as passive
income, except to the extent such income is attributable to financial reserves
in excess of the reasonable needs of the insurance business. In the Company's
view, the Company, Renaissance Reinsurance and Glencoe, taken together, are
predominantly engaged in an insurance business and do not have financial
reserves in excess of the reasonable needs of their insurance business. The
Code contains a look-through rule which states that, for purposes of
determining whether a foreign corporation is a PFIC, such foreign corporation
shall be treated as if it "received directly its proportionate share of the
income" and as if it "held its proportionate share of the assets" of any other
corporation in which it owns at least 25% of the stock. In the opinion of
counsel, under the look-through rule, the Company would be deemed to own the
assets and to have received the income of Renaissance Reinsurance and Glencoe
directly for the purposes of determining whether the Company qualifies for the
insurance exception described above. The Company believes that its
interpretation of the look-through rule is consistent with the general
legislative intention to exclude bona fide insurance companies from the
operation of the PFIC provisions, but there can be no assurance the IRS or a
court will take the same position in the future.
No regulations concerning the application of the PFIC provisions to
insurance companies have yet been issued. Each U.S. person who is considering
an investment in the Common Shares is therefore advised to consult its tax
advisor as to the effects of the PFIC rules.
Other. Dividends paid by the Company to U.S. corporate shareholders will not
be eligible for the dividends received deduction provided by section 243 of
the Code.
Except as discussed below with respect to backup withholding, dividends paid
by the Company will not be subject to a U.S. withholding tax.
Persons who are not citizens of or domiciled in the United States will not
be subject to U.S. estate tax with respect to Common Shares.
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Information reporting to the IRS by paying agents and custodians located in
the United States will be required with respect to payments of dividends on
the Common Shares to U.S. persons. In addition, a holder of Common Shares may
be subject to backup withholding at the rate of 31% with respect to dividends
paid to such persons, unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The backup withholding tax is
not an additional tax and may be credited against a holder's regular U.S.
federal income tax liability.
Subject to certain exceptions, persons that are not U.S. persons will be
subject to U.S. federal income tax on dividend distributions with respect to,
and gain realized from the sale or exchange of, Common Shares if such
dividends or gains are effectively connected with the conduct of a U.S. trade
or business.
CERTAIN BERMUDA LAW CONSIDERATIONS
The Company has been designated as a non-resident for exchange control
purposes by the Bermuda Monetary Authority, Controller of Foreign Exchange
(the "BMA"). The permission of the Controller of Foreign Exchange for the free
transferability of Common Shares between such persons has been obtained.
Approvals or permissions received from the BMA do not constitute a guarantee
by the BMA as to the performance of the scheme or creditworthiness of the
Company. Furthermore, in giving such approvals or permissions, the BMA shall
not be liable for the performance or default of the scheme or for the
correctness of any opinions or statements expressed.
There are no limitations on the rights of persons who own Common Shares
regarded as non-residents of Bermuda for foreign exchange control purposes
owning Common Shares to hold or vote their Common Shares. Because the Company
has been designated as a non-resident for Bermuda exchange control purposes,
there are no restrictions on its ability to transfer funds in and out of
Bermuda or to pay dividends to U.S. residents who are holders of Common
Shares, other than restrictions on payments in the local Bermuda currency.
Share certificates are usually issued only in the names of corporations,
partnerships or individuals. In the case of an applicant acting in a special
capacity (for example, as an executor or trustee), certificates may, at the
request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the
Company is not bound to investigate or incur any responsibility in respect of
the proper administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its Common
Shares whether or not it had notice of such trust.
As an "exempted company," the Company is exempt from Bermuda laws
restricting the percentage of share capital that may be held by non-
Bermudians, but as an "exempted company" the Company may not participate in
certain business transactions, including: (i) the acquisition or holding of
land in Bermuda (except that required for its business and held by way of
lease or tenancy agreement for a term not exceeding 21 years); (ii) the taking
of mortgages on land in Bermuda to secure an amount in excess of $50,000
without the consent of the Minister of Finance of Bermuda or (iii) the
carrying on of business of any kind in Bermuda, except in furtherance of the
business of the Company carried on outside Bermuda, under a license granted by
the Minister of Finance of Bermuda or reinsuring risks undertaken by any
company incorporated in Bermuda and permitted to engage in insurance and
reinsurance business.
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The Bermuda government actively encourages foreign investment in "exempted"
entities, like the Company, that are based in Bermuda but do not operate in
competition with local business. In addition to having no restrictions on the
degree of foreign ownership, the Company is subject neither to taxes on its
income or dividends, nor to any foreign exchange controls in Bermuda, having
been designated as non-resident for Bermuda exchange control purposes. In
addition, the Company is not subject to capital gains tax in Bermuda, and
profits can be accumulated by the Company, as required, without limitation.
Under Bermuda law, non-Bermudians may not engage in any gainful occupation
in Bermuda without the specific permission of the appropriate government
authority. Such permission or a work permit for a specific period of time, may
be extended, upon showing that, after proper public advertisement, no
Bermudian (nor spouse of a Bermudian) is available who meets the minimum
standards for the advertised position. All of the Company's executive
officers, each of whom is a United States citizen, as well as nine other
employees of the Company, are working in Bermuda under work permits which
expire in 1998, 1999 or 2000. The Company is not aware of any difficulties in
connection with renewing the work permits for these officers and employees.
However, there can be no assurance that these work permits will be extended.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the U.S. purchase agreement
(the "U.S. Purchase Agreement") among the Company, the Selling Shareholders,
and each of the underwriters named below (the "U.S. Underwriters"), and
concurrently with the sale of 600,000 Common Shares to the International
Underwriters, the Selling Shareholders have agreed to sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters has severally agreed to
purchase, the aggregate number of Common Shares set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER COMMON SHARES
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................... 375,000
BT Alex. Brown Incorporated.................................... 375,000
Lehman Brothers Inc. .......................................... 375,000
Salomon Brothers Inc........................................... 375,000
BancAmerica Robertson Stephens................................. 75,000
Chase Securities Inc. ......................................... 75,000
CIBC Oppenheimer Corp. ........................................ 75,000
Conning & Company.............................................. 75,000
Credit Suisse First Boston Corporation......................... 75,000
Deutsche Morgan Grenfell Inc. ................................. 75,000
Donaldson, Lufkin & Jenrette Securities Corporation............ 75,000
Dowling & Partners Securities, LLC............................. 75,000
Fox-Pitt, Kelton Inc. ......................................... 75,000
Janney Montgomery Scott Inc. .................................. 75,000
J.P. Morgan Securities Inc. ................................... 75,000
Nesbitt Burns Securities Inc. ................................. 75,000
---------
Total................................................. 2,400,000
=========
</TABLE>
The Shares to be sold in the Offering consist of full voting Common Shares,
DVI Shares and DVII Shares. The Company, the Selling Shareholders and the
Underwriters have agreed that immediately upon the consummation of the
Offering, the DVI Shares and the DVII Shares to be sold in the Offering by
certain of the Selling Shareholders will be converted into an equal number of
full voting Common Shares on a one-for-one basis. Purchasers of Shares in the
Offering will receive only full voting Common Shares. See "Principal and
Selling Shareholders."
Merrill Lynch, BT Alex. Brown Incorporated, Lehman Brothers Inc. and Salomon
Brothers Inc are acting as representatives (the "U.S. Representatives") of the
several U.S. Underwriters.
The Company and the Selling Shareholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Underwriters" and, together with the U.S. Underwriters, the "Underwriters")
for whom Merrill Lynch International, BT Alex. Brown International, division
of Bankers Trust International PLC, Lehman Brothers International (Europe) and
Salomon Brothers International Limited are acting as representatives (the
"International Representatives" and, together with the U.S. Representatives,
the "Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of 2,400,000
Shares to the U.S. Underwriters, the Selling Shareholders have agreed to sell
to the International Underwriters, and the International Underwriters
severally have agreed to purchase, an aggregate of 600,000 Shares. The public
offering price per Share and the underwriting discount per Share are identical
under the U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement, the several U.S. Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Shares being sold pursuant to such Agreement if any of the Shares being sold
pursuant to such Agreement are purchased. In the International Purchase
Agreement, the
53
<PAGE>
several International Underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase all of the Shares being sold
pursuant to such Agreement if any of the Shares being sold pursuant to such
Agreement are purchased. Each Agreement provides that in the event of a
default by an Underwriter, the purchase commitments of non-defaulting
Underwriters may in certain circumstances be increased. The closings with
respect to the sale of the Shares to be purchased by the U.S. Underwriters and
the International Underwriters are conditioned upon one another.
The U.S. Underwriters propose initially to offer the Shares to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers (who may include U.S. Underwriters) at such price less a
concession not in excess of $1.10 per share. The U.S. Underwriters may allow,
and such dealers may re-allow, a discount not in excess of $.10 per share to
certain other dealers. After the Offering, the public offering price,
concession and discount may be changed.
The Selling Shareholders have granted to the U.S. Underwriters an option to
purchase up to an aggregate of 360,000 additional Shares, and to the
International Underwriters an option to purchase up to an aggregate of 90,000
additional Shares, in each case exercisable for 30 days after the date hereof,
to cover over-allotments, if any, at the public offering price set forth on
the cover page of this Prospectus, less the underwriting discount. To the
extent that the U.S. Underwriters exercise this option, each of the U.S.
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such Shares that the number of
Shares to be purchased by it shown in the foregoing table bears to the total
number of Shares initially offered to the U.S. Underwriters hereby.
The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of Shares as may be mutually agreed.
The price of any Shares so sold shall be the public offering price, less an
amount not greater than the selling concession. Under the terms of the
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they
sell Shares will agree to offer to sell or sell Shares to persons who are
United States or Canadian persons (as defined in the Intersyndicate Agreement)
or to persons they believe intend to resell to persons who are United States
or Canadian persons, and the International Underwriters and any dealer to whom
they sell Shares will not offer to sell or sell Shares to United States or
Canadian persons or to persons they believe intend to resell to United States
or Canadian persons, except, in each case, for transactions pursuant to the
Intersyndicate Agreement.
The Company, the Selling Shareholders and certain officers and directors of
the Company have agreed not to sell or otherwise dispose of any Common Shares
or securities convertible into or exchangeable or exercisable for Common
Shares for a period of 90 days after the date of this Prospectus, without the
prior written consent of Merrill Lynch; provided, that the members of
Management subject to the aforementioned agreement will be permitted to sell
up to 150,000 shares after the sixtieth day from the date of this Prospectus.
Upon the consummation of the Offering, it is expected that such lock-up
agreements will cover an aggregate of approximately 10,333,956 Common Shares.
There are no known formal or informal plans, arrangements, agreements or
understandings regarding any intention to seek the consent of Merrill Lynch to
release any of the foregoing restrictions at this time. It is generally the
policy of Merrill Lynch to review any such requested consent on a case by case
basis in light of the applicable circumstances.
The Company has agreed to indemnify the U.S. Underwriters and the
International Underwriters against certain civil liabilities, including
liabilities under the Securities Act, or to contribute to payments the U.S.
Underwriters and the International Underwriters may be required to make in
respect thereof.
The Underwriters do not intend to confirm sales of the Common Shares offered
hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Shares to be sold in the Offering is
completed, rules of the Commission may limit the ability of the Underwriters
to bid for and purchase the Common Shares. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize
the price of the Common Shares. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
54
<PAGE>
If the Underwriters create a short position in the Common Shares in
connection with the initial resale of the Shares to be sold in the Offering,
i.e., if they sell more Common Shares than are set forth on the cover page of
this Prospectus, the Underwriters may reduce such short position by purchasing
Common Shares in the open market. The Underwriters may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase Common Shares in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Shares,
they may reclaim the amount of the selling concession from the Underwriters
and selling group members who initially resold such shares.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that any transaction
described above may have on the price of the Common Shares. In addition,
neither the Company nor any Underwriter makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Merrill Lynch has acted as the Company's financial advisor with respect to
certain prior transactions and received commercially customary compensation in
connection therewith. Any or all of the Underwriters may serve as a financial
advisor to the Company from time to time in the future. Certain Underwriters
or their affiliates may lend to or participate on a regular basis in various
general financing and banking transactions with the Company.
55
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Willkie Farr & Gallagher, New York, New York, who will rely
as to Bermuda law upon the opinion of Conyers, Dill & Pearman, Hamilton,
Bermuda. The validity of the issuance of the Shares offered hereby is being
passed upon for the Company by Conyers, Dill & Pearman. Certain legal matters
will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
Certain Bermuda tax matters will be passed upon by Conyers, Dill & Pearman.
The description of United States tax laws will be passed upon by Willkie Farr
& Gallagher.
EXPERTS
The consolidated financial statements and schedules of RenaissanceRe
Holdings Ltd. and its subsidiaries as of December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996 appearing or
incorporated by reference in this Prospectus and Registration Statement have
been audited by Ernst & Young, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement
or incorporated by reference. Such consolidated financial statements and
schedules are included herein or incorporated herein by reference in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
56
<PAGE>
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.
Catastrophe excess of loss
reinsurance................. A form of excess of loss reinsurance that,
subject to a specified limit, indemnifies the
ceding company for the amount of loss in excess
of a specified retention with respect to an
accumulation of losses resulting from a
catastrophic event or a series of catastrophic
events.
Cede; Cedent; Ceding
company..................... When a party reinsures its liability with
another, it "cedes" business and is referred to
as the "cedent" or "ceding company."
Claim adjustment expenses.... The expenses of settling claims, including
legal and other fees and the portion of general
expenses allocated to claim settlement costs.
Claim reserves............... Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims payments and the related expenses that
the insurer or reinsurer will ultimately be
required to pay in respect of insurance or
reinsurance it has written. Reserves are
established for losses and for claim adjustment
expenses.
Excess of loss reinsurance... A generic term describing reinsurance that
indemnifies 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 band 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 prenegotiated 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.
Generally accepted
accounting
principles ("GAAP")......... Accounting principles as set forth in opinions
of the Accounting Principles Board of the
American Institute of Certified Public
Accountants and/or statements of the Financial
Accounting Standards Board and/or their
respective successors and which are applicable
in the circumstances as of the date in
question.
57
<PAGE>
Incurred but not reported
("IBNR").................... Reserves for estimated losses that have been
incurred by insureds and reinsureds but not yet
reported to the insurer or reinsurer including
unknown future developments on losses which are
known to the insurer or reinsurer.
Layer........................ The interval between the retention or
attachment point and the maximum limit of
indemnity for which a reinsurer is responsible.
Net premiums written......... Gross premiums written for a given period less
premiums ceded to reinsurers and
retrocessionaires during such period.
Proportional reinsurance..... A generic term describing all forms of
reinsurance in which the reinsurer shares a
proportional part of the original premiums and
losses of the reinsured. (Also known as pro
rata reinsurance, quota share reinsurance or
participating reinsurance.) In proportional
reinsurance the reinsurer generally pays the
ceding company a ceding commission. The ceding
commission generally is based on the ceding
company's cost of acquiring the business being
reinsured (including commissions, premium
taxes, assessments and miscellaneous
administrative expense) and also may include a
profit factor.
Reinstatement premium........ The premium charged for the restoration of the
reinsurance limit of a catastrophe contract to
its full amount after payment by the reinsurer
of losses as a result of an occurrence.
Reinsurance.................. An arrangement in which an insurance company,
the reinsurer, agrees to indemnify another
insurance or reinsurance company, the ceding
company, against all or a portion of the
insurance or reinsurance risks underwritten by
the ceding company under one or more policies.
Reinsurance can provide a ceding company with
several benefits, including a reduction in net
liability on individual risks and catastrophe
protection from large or multiple losses.
Reinsurance also provides a ceding company with
additional underwriting capacity by permitting
it to accept larger risks and write more
business than would be possible without a
concomitant increase in capital and surplus,
and facilitates the maintenance of acceptable
financial ratios by the ceding company.
Reinsurance does not legally discharge the
primary insurer from its liability with respect
to its obligations to the insured.
Retention.................... The amount or portion of risk that an insurer
retains for its own account. Losses in excess
of the retention level are paid by the
reinsurer. In proportional treaties, the
retention may be a percentage of the original
policy's limit. In excess of loss business, the
retention is a dollar amount of loss, a loss
ratio or a percentage.
Retrocessional Reinsurance;
Retrocessionaire............ A transaction whereby a reinsurer cedes to
another reinsurer, the retrocessionaire, all or
part of the reinsurance that the first
reinsurer has assumed. Retrocessional
reinsurance does not legally discharge the
ceding reinsurer from its liability with
respect to its obligations to the reinsured.
Reinsurance companies cede risks to
58
<PAGE>
retrocessionaires for reasons similar to those
that cause primary insurers to purchase
reinsurance: to reduce net liability on
individual risks, to protect against
catastrophic losses, to stabilize financial
ratios and to obtain additional underwriting
capacity.
Risk excess of loss
reinsurance................. A form of excess of loss reinsurance that
covers a loss of the reinsured on a single
"risk" in excess of its retention level of the
type reinsured, rather than to aggregate losses
for all covered risks, as does catastrophe
excess of loss reinsurance. A "risk" in this
context might mean the insurance coverage on
one building or a group of buildings or the
insurance coverage under a single policy, which
the reinsured treats as a single risk.
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.
59
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. F-3
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994............................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995
and 1994................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994...................................................... F-6
Notes to the Consolidated Financial Statements............................ F-7
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996........................................................ F-18
Consolidated Statements of Operations for the nine-month periods ended
September 30, 1997 and September 30, 1996 (unaudited).................... F-19
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1997 and September 30, 1996 (unaudited).................... F-20
Notes to the Consolidated Financial Statements (unaudited)................ F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
RenaissanceRe Holdings Ltd.
We have audited the accompanying consolidated balance sheets of
RenaissanceRe Holdings Ltd. and Subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
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, 1996 and
1995 and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG
Hamilton, Bermuda
January 15, 1997
F-2
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER 1996 1995
SHARE AMOUNTS) -------- --------
<S> <C> <C>
ASSETS
Investments available for sale, at fair value (amortized cost
$601,907 and $521,149, at December 31, 1996 and 1995,
respectively) (Note 3)...................................... $603,484 $523,848
Short-term investments (Note 3).............................. -- 4,988
Cash and cash equivalents.................................... 198,982 139,163
Reinsurance premiums receivable.............................. 56,685 62,773
Ceded reinsurance balances................................... 19,783 2,027
Accrued investment income.................................... 13,913 14,851
Deferred acquisition costs................................... 6,819 6,163
Other assets................................................. 5,098 3,247
-------- --------
TOTAL ASSETS............................................... $904,764 $757,060
======== ========
LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for claims and claim adjustment expenses (Note 5).... $105,421 $100,445
Reserve for unearned premiums................................ 65,617 60,444
Bank loan (Note 6)........................................... 150,000 100,000
Reinsurance balances payable................................. 18,072 7,254
Other........................................................ 4,215 2,581
-------- --------
TOTAL LIABILITIES.......................................... 343,325 270,724
-------- --------
MINORITY INTERESTS........................................... 15,236 --
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
SHAREHOLDERS' EQUITY (NOTES 7 AND 9)
Common Shares: $1 par value-authorized 200,000,000 shares
issued and outstanding at December 31, 1996--23,530,616
shares (1995--25,605,000 shares)............................ 23,531 25,605
Additional paid-in capital................................... 102,902 174,370
Loans to officers and employees (Note 13).................... (3,868) (2,728)
Net unrealized appreciation on investments (Note 3).......... 1,577 2,699
Retained earnings............................................ 422,061 286,390
-------- --------
TOTAL SHAREHOLDERS' EQUITY................................. 546,203 486,336
-------- --------
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS'
EQUITY.................................................... $904,764 $757,060
======== ========
BOOK VALUE PER COMMON SHARE.................................. $ 23.21 $ 18.99
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, 1996 1995 1994
EXCEPT PER SHARE AMOUNTS) -------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gross premiums written............................ $269,913 $292,607 $273,481
-------- -------- --------
Net premiums written.............................. $251,564 $289,928 $269,954
Decrease (increase) in unearned premium........... 1,264 (1,042) (27,192)
-------- -------- --------
Net premiums earned............................... 252,828 288,886 242,762
Net investment income (Note 3).................... 44,170 32,320 14,942
Foreign exchange gains............................ 789 3,045 3,001
Net realized gains (losses) on sale of investments
(Note 3)......................................... (2,938) 2,315 246
Other insurance fees.............................. -- -- 441
-------- -------- --------
TOTAL REVENUES.................................. 294,849 326,566 261,392
-------- -------- --------
EXPENSES:
Claims and claim expenses incurred (Note 5)....... 86,945 110,555 114,095
Acquisition costs................................. 26,162 29,286 25,653
Operational expenses.............................. 16,731 10,448 9,725
Corporate expenses................................ 2,298 4,531 2,429
Interest expense.................................. 6,553 6,424 192
-------- -------- --------
TOTAL EXPENSES.................................. 138,689 161,244 152,094
-------- -------- --------
Income before income taxes........................ 156,160 165,322 109,298
Income tax expense (Note 10)...................... -- -- --
-------- -------- --------
Net income........................................ 156,160 165,322 109,298
Net income allocable to Series B Preference
Shares........................................... -- 2,536 12,879
-------- -------- --------
Net income available to Common Shareholders....... $156,160 $162,786 $ 96,419
-------- -------- --------
NET INCOME PER COMMON SHARE....................... $ 6.01 $ 6.75 $ 4.24
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
YEARS ENDED DECEMBER 31, LOANS TO APPRECIATION
1996, 1995 AND 1994 SERIES A ADDITIONAL OFFICERS (DEPRECIATION) TOTAL
(EXPRESSED IN THOUSANDS PREFERENCE COMMON PAID-IN AND OF RETAINED SHAREHOLDERS'
OF SHARES SHARES CAPITAL EMPLOYEES INVESTMENTS EARNINGS EQUITY
UNITED STATES DOLLARS) ---------- ------- ---------- --------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993................... $ 141,200 $ 1 -- -- $ (11) $ 31,281 $172,471
Net income.............. -- -- -- -- -- 109,298 109,298
Income allocated to
Series B Preference
Shares................. -- -- -- -- -- (12,879) (12,879)
Net unrealized
depreciation of
investments............ -- -- -- -- (3,643) -- (3,643)
--------- ------- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31,
1994................... 141,200 1 -- -- (3,654) 127,700 265,247
--------- ------- -------- ------- ------- -------- --------
Net income.............. -- -- -- -- -- 165,322 165,322
Income allocated to
Series B Preference
Shares................. -- -- -- -- -- (2,536) (2,536)
Net unrealized
appreciation of
investments............ -- -- -- -- 6,353 -- 6,353
Conversion of Series A
Preference Shares...... (141,200) 14,025 $127,175 -- -- -- --
Exercise of options,
share grants and
related items.......... -- 974 3,506 -- -- -- 4,480
Stock dividend to Common
Shareholders........... -- 7,500 (7,500) -- -- -- --
Issuance of Common
Shares................. -- 3,105 51,189 -- -- -- 54,294
Loans to officers and
employees.............. -- -- -- $(2,728) -- -- (2,728)
Dividends declared and
paid to Common
Shareholders (Note 9).. -- -- -- -- -- (4,096) (4,096)
--------- ------- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31,
1995................... -- 25,605 174,370 (2,728) 2,699 286,390 486,336
--------- ------- -------- ------- ------- -------- --------
Net income.............. -- -- -- -- -- 156,160 156,160
Net unrealized
depreciation of
investments............ -- -- -- -- (1,122) -- (1,122)
Repurchase of Common
Shares................. -- (2,085) (71,375) -- -- -- (73,460)
Exercise of options and
related items.......... -- 11 (93) -- -- -- (82)
Dividends declared and
paid to Common
Shareholders (Note 9).. -- -- -- -- -- (20,489) (20,489)
Loans to officers and
employees.............. -- -- -- (1,140) -- -- (1,140)
--------- ------- -------- ------- ------- -------- --------
BALANCE, DECEMBER 31,
1996................... $ -- $23,531 $102,902 $(3,868) $ 1,577 $422,061 $546,203
========= ======= ======== ======= ======= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(EXPRESSED IN THOUSANDS OF UNITED STATES 1996 1995 1994
DOLLARS) --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income................................... $ 156,160 $ 165,322 $ 109,298
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization................ 296 548 511
Realized loss (gain) on sale of investments,
net......................................... 2,938 (2,315) (246)
Minority share of income..................... 110 -- --
Reinsurance balances, net.................... 16,906 (5,440) (22,840)
Ceded reinsurance balances................... (17,756) (1,293) (734)
Accrued investment income.................... 938 (6,117) (7,286)
Reserve for unearned premiums................ 5,173 1,043 27,926
Reserve for claims and claim adjustment
expenses.................................... 4,976 37,177 62,286
Non-cash compensation and other (income)
charges..................................... (354) 3,480 750
Other, net................................... 5,430 2,802 3,036
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.... 174,817 195,207 172,701
--------- --------- ---------
CASH FLOWS APPLIED TO INVESTING ACTIVITIES:
Proceeds from maturities and sales of
investments................................. 317,582 268,575 118,759
Purchase of investments available for sale... (404,888) (579,764) (201,218)
Net sales (purchases) of short-term
investments................................. 4,988 72,547 (71,542)
Purchase of furniture and equipment.......... (2,989) (349) (371)
Proceeds from sale of minority interest in
Glencoe..................................... 15,126 -- --
--------- --------- ---------
NET CASH APPLIED TO INVESTING ACTIVITIES..... (70,181) (238,991) (154,372)
--------- --------- ---------
CASH FLOWS PROVIDED BY (APPLIED TO) FINANCING
ACTIVITIES:
Repurchase of Common Shares.................. (73,460) -- --
Proceeds from issue of Common Shares......... -- 54,496 --
Net proceeds from bank loan.................. 50,000 40,000 60,000
Redemption of Series B 15% Cumulative
Redeemable Voting Preference Shares......... -- (57,874) (57,541)
Proceeds of Series B 15% Cumulative
Redeemable Voting Preference Shares......... -- -- 100,000
Dividends paid............................... (20,489) (4,096) --
Loans to officers and employees.............. (868) (2,728) --
Deferred registration costs.................. -- -- (767)
Proceeds from exercise of options............ -- 100 --
--------- --------- ---------
NET CASH PROVIDED BY (APPLIED TO) FINANCING
ACTIVITIES.................................. (44,817) 29,898 101,692
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 59,819 (13,886) 120,021
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR........................................ 139,163 153,049 33,028
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR....... $ 198,982 $ 139,163 $ 153,049
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
RenaissanceRe Holdings Ltd. ("RenaissanceRe"), formerly Renaissance Holdings
Ltd., was formed under the laws of Bermuda on June 7, 1993 and serves as the
holding company for its wholly-owned subsidiary, Renaissance Reinsurance Ltd.
("Renaissance Reinsurance") and its majority-owned subsidiary, Glencoe
Insurance Ltd. ("Glencoe"), both of which are also incorporated under the laws
of Bermuda.
Renaissance Reinsurance primarily provides property catastrophe reinsurance
coverage to insurers and reinsurers on a worldwide basis. Renaissance
Reinsurance commenced its reinsurance underwriting operations on June 15,
1993. Glencoe primarily provides catastrophe exposed property coverage on an
insurance and reinsurance basis. Glencoe commenced its insurance underwriting
operations on January 2, 1996.
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 subsidiaries, Renaissance Reinsurance
and Glencoe. RenaissanceRe, Renaissance Reinsurance and Glencoe 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 Glencoe. Certain comparative information has been
reclassified to conform to current presentation.
Use of estimates in financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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 from those estimates.
Premium revenues 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 estimated based on information received from ceding companies and
any subsequent differences arising on such estimates are recorded in the
period in which they are determined. Unearned premium reserves represent 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 adjustment
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.
Claims and claim adjustment expenses
The reserve for claims and claim adjustment expenses includes estimates for
unpaid claims and claim adjustment expenses on reported losses as well as an
estimate of losses incurred but not reported. The reserve is based on reports
and individual case estimates received from ceding companies as well as
management estimates of ultimate losses. Inherent in the estimates of ultimate
losses are expected trends in claim severity and frequency and other factors
which could vary significantly as claims are settled. Accordingly, ultimate
losses may vary materially from the amounts provided in the 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 results of operations in the period
in which they become known and are accounted for as changes in estimates.
F-7
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments
Fixed maturity investments are considered available for sale and are
reported at fair value. The net unrealized appreciation or depreciation on
investments available for sale is included as a separate component of
shareholders' equity. Investment transactions are recorded on the trade date
with balances pending settlement reflected separately in the balance sheet.
Short-term investments, which have a maturity of one year or less when
purchased, are carried at cost, which approximates fair value.
Realized gains or losses on the sale or maturity of investments are
determined on the basis of the specific identification method. Investments
which are considered to have permanently declined in value are written down to
estimated realizable values. Net investment income, consisting of interest,
net of investment expenses, is recognized when earned. 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 necessary, based on the market value of
securities with similar terms and quality.
Fair value of financial instruments
Fair value disclosures with respect to certain financial instruments are
included separately herein where appropriate. The carrying values of other
financial instruments, including the bank loan payable, reinsurance premiums
receivable and accrued investment income, approximate their fair value due to
the short-term nature of the balances.
Earnings per share
Earnings per share was calculated by dividing net income available to Common
Shareholders by weighted average common and common equivalent shares
outstanding. For the years ended December 31, 1996, 1995, and 1994, weighted
average common and common equivalent shares outstanding were 26.0 million,
24.1 million, and 22.8 million, respectively. Weighted average shares for the
years ended December 31, 1996, 1995, and 1994 included 25.5 million, 23.8
million and 22.5 million weighted average Common Shares outstanding,
respectively. Common equivalent shares are calculated on the basis of the
treasury stock method.
Foreign exchange
The Company's functional currency is the United States dollar. Monetary
assets and liabilities denominated in foreign currencies are translated at
exchange rates in effect at the balance sheet date. Revenues and expenses
denominated in foreign currencies are translated at the prevailing exchange
rate at the transaction date. Exchange gains and losses are included in the
determination of net income.
Cash and cash equivalents
For the purposes of the statements of cash flows, cash equivalents include
money market instruments with an original maturity of ninety days or less.
Stock incentive compensation plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. The alternative
fair value accounting provided for under Statement of Financial Accounting
Standards No. 123 ("FAS 123") requires the use of option valuation models that
were not developed for use in valuing employee stock options. It is the
opinion of management that disclosure of the pro forma impact of fair values,
if material, provides a more relevant and informative presentation of the
impact of stock options issued to employees than financial statement
recognition of such amounts. Under APB 25, the Company recognizes compensation
expense for stock option grants to the extent that the fair value of the stock
exceeds the stock option exercise price at the date of grant.
F-8
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. INVESTMENTS
The amortized cost, fair value and related unrealized gains and losses on
investments available for sale are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
DECEMBER 31, 1996 AMORTIZED UNREALIZED UNREALIZED FAIR
(AMOUNTS EXPRESSED IN THOUSANDS COST GAINS LOSSES VALUE
OF U.S. DOLLARS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Non-U.S. sovereign government
bonds........................... $239,019 $1,338 $(1,001) $239,356
Non-U.S. corporate bonds......... 328,398 2,110 (933) 329,575
Non-U.S. mortgage-backed
securities...................... 34,490 63 -- 34,553
-------- ------ ------- --------
$601,907 $3,511 $(1,934) $603,484
======== ====== ======= ========
<CAPTION>
GROSS GROSS
DECEMBER 31, 1995 AMORTIZED UNREALIZED UNREALIZED FAIR
(AMOUNTS EXPRESSED IN THOUSANDS COST GAINS LOSSES VALUE
OF U.S. DOLLARS) --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Non-U.S. sovereign government
bonds........................... $200,037 $3,079 $(1,162) $201,954
Non-U.S. corporate bonds......... 298,683 3,233 (2,410) 299,506
Non-U.S. mortgage-backed
securities...................... 22,429 20 (61) 22,388
-------- ------ ------- --------
$521,149 $6,332 $(3,633) $523,848
======== ====== ======= ========
</TABLE>
Contractual maturities of fixed maturity securities are shown below.
Expected maturities, which are best estimates, will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties. All mortgage-backed securities
mature within five years.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
AMORTIZED FAIR
COST VALUE
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) --------- --------
<S> <C> <C>
Due within one year...................................... $ 56,174 $ 56,043
Due after one through five years......................... 455,999 457,105
Due after five through ten years......................... 89,734 90,336
-------- --------
$601,907 $603,484
======== ========
</TABLE>
The weighted average contractual maturity of the total carrying value of
fixed maturity investments available for sale as of December 31, 1996 and 1995
was 3.7 years and 4.2 years, respectively.
The following table summarizes the composition of the fair value of the
fixed maturity portfolio by ratings assigned by rating agencies (e.g. Standard
& Poor's Corporation) or, with respect to non-rated issues, as estimated by
the Company's investment managers.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
AAA................................................... 28.1% 39.5%
AA.................................................... 50.1 41.6
A..................................................... 20.2 15.3
BBB................................................... 1.6 3.6
------- -------
100.0% 100.0%
======= =======
</TABLE>
F-9
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment income
The components of net investment income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1996 1995 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) ------- ------- -------
<S> <C> <C> <C>
Fixed maturities................................... $36,225 $25,936 $10,205
Short-term investments............................. 53 2,974 3,986
Cash and cash equivalents.......................... 9,460 5,122 1,846
------- ------- -------
45,738 34,032 16,037
Investment expenses................................ 1,568 1,712 1,095
------- ------- -------
NET INVESTMENT INCOME.............................. $44,170 $32,320 $14,942
======= ======= =======
</TABLE>
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. 1996 1995 1994
DOLLARS) ------- ------ -------
<S> <C> <C> <C>
Gross realized gains........................... $ 1,240 $2,488 $ 666
Gross realized losses.......................... (4,178) (173) (420)
------- ------ -------
Net realized gains (losses) on sale of
investments................................... (2,938) 2,315 246
Unrealized gains (losses)...................... (1,122) 6,353 (3,643)
------- ------ -------
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS................................... $(4,060) $8,668 $(3,397)
======= ====== =======
</TABLE>
Proceeds from maturities and sales of fixed maturity investments were $317.6
million, $268.6 million and $118.8 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company's investments are primarily invested in U.S. dollar denominated
foreign investments. At December 31, 1996, the Company's investments in cash
and cash equivalents included $25.3 million of investments in non-U.S. dollar
currencies, representing approximately 3.2% of invested assets. At December
31, 1995, cash and cash equivalents included $29.5 million of investments in
non-U.S. dollar currencies, representing approximately 4.4% of invested
assets.
NOTE 4. CEDED REINSURANCE
The Company utilizes reinsurance to reduce its exposure to large losses in
peak zones. 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. If reinsurers are unable to
meet their obligations under the agreements, the Company would remain liable
to the extent that any reinsurance company fails to meet its obligation. To
date, there have been no losses reported to indicate that the Company's
reinsurance coverage will be reached, and there are no amounts recoverable for
claims and claim expenses from reinsurers.
NOTE 5. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Estimates of claims and claim adjustment expenses are based in part upon the
prediction of claims resulting from catastrophic events. Estimation by the
Company of claims resulting from catastrophic events based upon its own
historical claim experience is inherently difficult because of the Company's
short operating history and the severity of property catastrophe claims.
Therefore, the Company utilizes both proprietary and commercially available
models, as well as historical reinsurance industry property catastrophe claims
experience, for purposes of evaluating future trends and providing an estimate
of ultimate claims costs. As the Company's book of
F-10
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
business matures and property catastrophe claims data improves, the Company
anticipates that its process of establishing reserves may improve and may
result in more refined estimates of claims and claim adjustment expenses.
Activity in the liability for unpaid claims and claim adjustment expense is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) -------- -------- -------
<S> <C> <C> <C>
Balance as of January 1......................... $100,445 $ 63,268 $ 982
Incurred related to:
Current year.................................. 74,809 80,939 114,095
Prior years................................... 11,827 29,616 --
-------- -------- -------
Total incurred.............................. 86,636 110,555 114,095
Paid related to:
Current year.................................. 26,415 29,253 51,809
Prior years................................... 55,554 44,125 --
-------- -------- -------
Total paid.................................. 81,969 73,378 51,809
Effect of foreign exchange...................... 309 -- --
-------- -------- -------
BALANCE AS OF DECEMBER 31....................... $105,421 $100,445 $63,268
======== ======== =======
</TABLE>
During 1996, the Company incurred $11.8 million of claims and claim expenses
for 1995 and prior periods primarily as a result of reserve increases for
claims related to the Northridge, California earthquake and a retrocessional
quota share contract. The additional development on both of these claims was
partially offset by additional premiums received under the reinsured
contracts. During 1995, the Company incurred $29.6 million of claims and claim
expenses for 1994 and prior periods primarily as a result of reserve increases
for claims related to the Northridge, California earthquake, reserve changes
related to a retrocessional quota share contract and a large industrial
catastrophe that occurred late in 1994. The additional development on these
claims was partially offset by additional premiums received under the
reinsured contracts. The Company's total reserve for incurred but not reported
claims was $42.7 million at the end of 1996 compared to $29.1 million at the
end of 1995.
NOTE 6. BANK LOAN PAYABLE
On December 12, 1996, the Company amended and restated its Revolving Credit
Facility with a syndicate of commercial banks. The amended and restated credit
facility provides for the borrowing of up to $200 million on terms generally
extended to prime borrowers, at an interest rate, at the Company's option, of
either the base rate of the lead bank or the LIBOR rate plus a spread ranging
from 25 to 50 basis points. The full amount of the Revolving Credit Facility
is available until December 1, 1999 with two optional one year extensions, if
requested by the Company and approved by the lenders. As of December 31, 1996,
$150 million was outstanding under this agreement.
The credit agreement limits the payment of dividends by the Company to the
amount by which the Company's total shareholders' equity exceeds $300 million
and requires, among other things, that various financial maintenance tests be
met over the term of the agreement.
Interest payments on the Company's credit facility totaled $6.9 million,
$5.8 million and $0.1 million for the years ended December 31, 1996, 1995 and
1994 respectively.
F-11
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. SHAREHOLDERS' EQUITY
The Company's 200,000,000 authorized $1.00 par value Common Shares consists
of three separate series with differing voting rights as follows:
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED OUTSTANDING
----------- -----------
<S> <C> <C>
Full Voting Common Shares (the Common Shares)
(includes all shares registered and available to
the public)...................................... 181,570,583 17,877,316
----------- ----------
Diluted Voting Class I Common Shares (the Diluted
Voting I Shares)................................. 16,789,776 4,199,191
----------- ----------
Diluted Voting Class II Common Shares (the Diluted
Voting II Shares)................................ 1,639,641 1,454,109
----------- ----------
200,000,000 23,530,616
=========== ==========
</TABLE>
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 and subsequent to the authorization,
affiliates of General Electric Investment Corporation (GEI) exchanged 5.7
million Common Shares for 4.2 million Diluted Voting I Shares and 1.5 million
Diluted Voting II Shares, and as such are the sole holders of such diluted
voting securities.
The Diluted Voting Shareholders vote together with the Common Shareholders.
The Diluted Voting I Shares are limited to a fixed voting interest in the
Company of up to 9.9 percent. Each Diluted Voting II Share has a one-third
vote 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.
On December 13, 1996, the Board of Directors approved a Capital Plan which
is comprised of two components. First, the Company purchased an aggregate of
2,085,361 Common Shares at $34.50 per share for an aggregate price of $71.9
million on a pro rata basis from its founding institutional investors. Second,
the Company commenced a tender offer for 813,190 Common Shares at $34.50 per
share for an aggregate price of $28.1 million. The two transactions that
comprise the capital plan are expected to return a total of $100 million to
shareholders through the repurchase and cancellation of Common Shares.
In February 1996, the Company paid for the costs of a secondary offering of
the Company's Common Shares sold by the founding institutional investors
pursuant to the registration rights agreement by and among the Company, the
founding institutional investors and certain officers and employees of the
Company. The Company incurred costs of $0.5 million with respect to the
registration of shares which is reflected as a reduction to additional paid-in
capital on the balance sheet.
On July 26, 1995, the Company issued 3,105,000 Common Shares for proceeds,
net of fees, discounts and commissions, of approximately $56.3 million in an
initial public offering (the IPO). Costs associated with the IPO, totaling
approximately $2.0 million were deducted from the related proceeds. The net
amount received in excess of Common Share par value was recorded as additional
paid-in capital.
In March 1995, the Company adopted a plan of recapitalization (the
Recapitalization) and completed certain other transactions designed to produce
a capital structure comprised entirely of Common Shares. In connection
therewith:
F-12
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. The Company effected a consolidation and subdivision of its authorized
share capital allocated to Common Shares of U.S. $1.00 par value each and
reallocated the entire $200 million authorized capital of the Company to
its Common Shares. The Company issued a stock dividend of one fully-paid
Common Share for each two issued and outstanding Common Shares (the
"Stock Dividend"). This issuance reclassified $7.5 million to the
Company's Common Shares from additional paid-in capital.
. The Series A Preference Shares were converted into 21,037,500 Common
Shares.
. 673,500 Common Shares were issued to USF&G in the form of a stock
dividend. 575,584 of such shares were issued to restore USF&G's economic
position in the Company (i.e., ownership percentage) to the level
immediately preceding the Recapitalization. 99,416 of such shares were
granted in the form of a special stock dividend, in exchange for USF&G's
surrender of certain rights as holder of all the then-outstanding Common
Shares in connection with conversion of the Series A Preference Shares.
In connection with the 99,416 shares granted, the approximately $1.2
million fair value of such shares, as determined by the Company's Board
of Directors, has been reflected in the financial statements as a non-
cash organizational expense for the year ended December 31, 1995.
In May, 1994 the Company received $100 million with respect to the issuance
of 1,000,000 Series B Preference Shares at a price of U.S. $100 each to the
founding institutional investors. Dividends related to the Series B Preference
Shares amounted to $2.5 million and $12.9 million in 1995 and 1994,
respectively. In December, 1994 the Company redeemed 575,414 Series B
Preference Shares, and in April 1995 all remaining Series B Preference Shares
and accumulated dividends were redeemed.
NOTE 8. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
The Company has in force several treaties with USF&G, subsidiaries of USF&G
and affiliates of GEI covering property catastrophe risks in several
geographic zones. The terms of these treaties were determined in arms-length
negotiations and the Company believes that such terms are comparable to terms
the Company would expect to negotiate in similar transactions with unrelated
parties. For the years ended December 31, 1996, 1995 and 1994, the Company
received $27.9 million, $45.7 million and $28.1 million in reinsurance
premiums and deposits related to these treaties, respectively.
Renaissance Reinsurance has entered into Investment Advisory Agreements with
each of Warburg, Pincus Investment Counsellors, Inc., ("Counsellors"), an
affiliate of E.M. Warburg, Pincus & Co., LLC and GE Investment Management, an
affiliate of GEI. Counsellors and GE Investment Management currently each
manage approximately 40% of Renaissance Reinsurance's investment portfolio,
subject to Renaissance Reinsurance's investment guidelines. The terms of the
Investment Advisory Agreements were determined in arms-length negotiations.
The performance of, and the fees paid to, Counsellors and GE Investment
Management under the Investment Advisory Agreements are reviewed periodically
by the Board. Such fees paid to Counsellors and GE Investment Management
aggregated $0.5 million and $0.6 million, respectively for the year ended
December 31, 1996, respectively.
During the years ended December 31, 1996, 1995 and 1994, the Company
received 58.5%, 47.9%, and 53.9%, respectively, of its premium assumed from
its five largest reinsurance brokers. Subsidiaries and affiliates of Marsh &
McLennan, Incorporated, E. W. Blanch Co., Inc., Greig Fester Limited,
Alexander Howden Reinsurance Brokers, Ltd. and Bates, Turner Inc. (a GE
Capital Services Company, an affiliate of GEI) accounted for approximately
15.2%, 14.9%, 11.5%, 10.1% and 6.8%, respectively, of the Company's net
premiums written in 1996.
F-13
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. DIVIDENDS
During 1996, four regular quarterly dividends of $0.20 per share were paid
to shareholders of record as of February 20, May 16, August 20, and November
19. During 1995 the Company paid a dividend of $0.16 per share, payable to
shareholders of record as of November 21. The total amount of dividends paid
in 1996 and 1995 were $20.5 million and $4.1 million, respectively.
NOTE 10. TAXATION
Under current Bermuda law, neither RenaissanceRe, Renaissance Reinsurance
nor Glencoe are required to pay taxes in Bermuda on either income or capital
gains.
NOTE 11. SEGMENT INFORMATION
Financial information relating to gross premiums assumed from ceding
companies by geographic area is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS) -------- -------- --------
<S> <C> <C> <C>
United States.................................. $126,611 $144,077 $129,246
Worldwide...................................... 44,460 59,137 50,805
Worldwide (excluding U.S.)..................... 38,746 41,311 38,534
Europe (including the United Kingdom).......... 31,534 25,365 26,062
Other.......................................... 18,958 11,720 19,200
Australia and New Zealand...................... 9,604 10,997 9,634
-------- -------- --------
TOTAL GROSS PREMIUMS WRITTEN.................. $269,913 $292,607 $273,481
======== ======== ========
</TABLE>
The category "Worldwide (excluding U.S.)" consists of contracts that cover
more than one geographic zone (other than the U.S.). The exposure in this
category for gross premiums written to date is predominantly from Europe and
Japan.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company's employees that are not subject to U.S. taxation may
participate in a contributory savings and investment plan. Each employee in
the non-U.S. plan may contribute to the plan. Employee contributions are
matched at a rate of 100 percent of the first six percent of compensation
contributed to the plan.
The Company's employees that are subject to U.S. taxation participate in a
defined contribution savings and investment plan. Employee contributions are
matched at a rate of 50 percent, subject to IRS and ERISA regulations. In
addition the Company provides a health benefit plan providing hospital,
medical and other health benefits.
NOTE 13. STOCK INCENTIVE COMPENSATION PLANS
The Company adopted the disclosure-only option under FAS 123, as of December
31, 1996. The pro forma impacts of the fair value accounting provisions of FAS
123 were immaterial on 1996 and 1995 net income.
The Company has a stock option plan under which all employees of the Company
and its subsidiaries may be granted stock options. A stock option award under
the Company's stock option plan allows for the purchase of the Company's
Common Shares at a price that is generally equal to the market price of the
Common Shares on the date of grant. Options to purchase Common Shares are
granted periodically by the Board of Directors and generally expire ten years
from the date of grant.
Information with respect to stock options follows:
F-14
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
--------- ----------- --------
<S> <C> <C> <C>
Balance, December 31, 1994...................... -- 100,000 $ 1.00
Authorized.................................... 2,900,000
Options granted:
Exercise price at market price.............. (877,650) 877,650 $13.43
Exercise price below market price........... (24,000) 24,000 $19.50
Options exercised............................. (100,000) $ 1.00
--------- --------- ------
Balance, December 31, 1995...................... 1,998,350 901,650 $13.59
Options granted:
Exercise price at market price.............. (424,349) 424,349 $29.41
Options exercised............................. (28,738) $14.91
--------- --------- ------
Balance, December 31, 1996...................... 1,574,001 1,297,261 $18.74
========= ========= ======
TOTAL OPTIONS EXERCISABLE AT END OF YEAR...... 470,650
=========
</TABLE>
In 1996, the Company established a Non-Employee Director Stock Plan to issue
stock options and shares of restricted stock. The maximum number of shares
which may be issued under the Plan shall not exceed 100,000 Common Shares.
Under this plan, 6,000 options to purchase Common Shares and 546 restricted
Common Shares were issued in 1996.
Under the Company's 1993 Stock Incentive Plan, options for 100,000 Common
Shares (base options) were issued to employees. The exercise price of the base
options was one U.S. dollar per share, which approximated fair value at the
date of grant for 85,000 of the base options. The remaining 15,000 base
options were granted when the exercise price of one U.S. dollar per share was
below estimated fair value per share, and, as such, the difference of
approximately $1 million between the estimated $11.83 per share fair value at
the date of grant, as determined by the Company's Board of Directors and the
$1.00 exercise price was reflected in the accompanying financial statements as
a non-cash compensation charge. In connection with the Recapitalization, the
base option plan was amended to allow for the immediate exercise of all base
options into 787,500 restricted Common Shares with a vesting schedule
identical to the original base option plan. In connection with the issuance of
the restricted Common Shares in 1995, the $2.5 million fair value of such
shares, based on fair value as determined by the Company's Board of Directors,
has been reflected in the financial statements as a non-cash compensation
expense.
Compensation expense for these plans in 1995 and 1994 was $2.8 million and
$0.8 million, respectively. There was no compensation expense related to
employee stock option plans in 1996.
In addition, the Company provides certain employees the ability to borrow,
at current market rates, such amounts necessary to satisfy the tax obligations
on certain stock awards. The loans mature no later than the date that the
grants that gave rise to the tax liability expire. All such loans are
reflected as a separate component of shareholders' equity.
NOTE 14. STATUTORY REQUIREMENTS
Under the Insurance Act, 1978, amendments thereto and related regulations of
Bermuda ("The Act"), Renaissance Reinsurance and Glencoe are required to
prepare statutory financial statements and to file in Bermuda a statutory
financial return. The Act also requires Renaissance Reinsurance and Glencoe to
maintain certain measures of solvency and liquidity during the period. As at
December 31, 1996 the statutory capital and
F-15
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
surplus of the Company's subsidiaries was $604.9 million and the amount
required to be maintained was $124.5 million.
Under the Act, Renaissance Reinsurance is classified as a Class 4 insurer,
and is therefore restricted to the payment of dividends in the amount of 25%
of the prior years statutory capital and surplus, unless the directors of
Renaissance Reinsurance attest that a dividend in excess of this amount would
not cause Renaissance Reinsurance to fail to meet its relevant margins. During
1996, Renaissance Reinsurance paid aggregate cash dividends of $135.6 million
to RenaissanceRe Holdings Ltd.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Lease commitments and fixed assets
The Company is finalizing an operating lease with respect to its offices.
Future minimum rental payments are expected to approximate $600,000 per annum
and will continue through September 30, 2001. In addition, the Company is
party to certain lease commitments with respect to housing on behalf of
certain officers of the Company.
Financial instruments with off-balance sheet risk
As of December 31, 1996, the Company did not maintain any financial
instruments that exposed the Company to any off-balance sheet risks.
Concentration of credit risk
None of the Company's investments exceeded 10% of shareholders' equity at
December 31, 1996.
Letters of credit
Effective as of December 31, 1996 the Company's bankers have issued letters
of credit of approximately $62.1 million in favor of certain ceding companies.
The letters of credit are secured by cash and cash equivalents of similar
amounts.
Employment agreements
The Board of Directors has authorized the execution of employment agreements
between the Company and its executive officers for periods up to December 31,
1997. These agreements provide for compensation in the form of salary, bonus,
options to purchase shares in the Company, participation in benefit plans and
reimbursement of certain expenses.
F-16
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(CERTAIN AMOUNTS HAVE BEEN RECLASSIFIED)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
(AMOUNTS EXPRESSED IN MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
THOUSANDS OF U.S. ------------------ ---------------- ---------------- ----------------
DOLLARS, EXCEPT PER SHARE 1996 1995 1996 1995 1996 1995 1996 1995
AMOUNTS) -------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.. $140,548 $156,175 $39,018 $40,035 $73,591 $81,140 $16,756 $15,257
======== ======== ======= ======= ======= ======= ======= =======
Net premiums written.... $138,715 $155,516 $32,682 $39,959 $65,238 $80,278 $14,929 $14,175
Decrease (increase) in
unearned premiums...... (77,016) (88,930) 29,333 30,364 (1,785) (2,558) 50,732 60,082
-------- -------- ------- ------- ------- ------- ------- -------
Net premiums earned..... 61,699 66,586 62,015 70,323 63,453 77,720 65,661 74,257
Net investment income... 10,058 7,014 10,256 7,418 12,524 8,768 11,332 9,120
Net foreign exchange
gains (losses)......... (94) 1,428 (558) 2,020 266 (716) 1,175 313
Net realized investment
gains (losses)......... (617) 566 (1,514) (40) (660) 1,164 (147) 625
-------- -------- ------- ------- ------- ------- ------- -------
TOTAL REVENUES......... 71,046 75,594 70,199 79,721 75,583 86,936 78,021 84,315
-------- -------- ------- ------- ------- ------- ------- -------
Claims and claim
adjustment expenses.... 19,981 20,863 19,336 25,408 26,298 31,947 21,330 32,337
Acquisition costs....... 6,322 6,709 6,090 7,066 6,606 8,259 7,144 7,252
Underwriting costs...... 3,301 2,094 3,837 2,789 4,456 2,650 5,137 2,915
Corporate expenses...... 687 3,875 446 739 307 149 858 (232)
Interest expenses....... 1,584 1,078 1,209 1,594 1,453 1,996 2,307 1,756
-------- -------- ------- ------- ------- ------- ------- -------
TOTAL EXPENSES......... 31,875 34,619 30,918 37,596 39,120 45,001 36,776 44,028
-------- -------- ------- ------- ------- ------- ------- -------
Net income.............. 39,171 40,975 39,281 42,125 36,463 41,935 41,245 40,287
Series B dividend....... -- 1,941 -- 595 -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS.... $ 39,171 $ 39,034 $39,281 $41,530 $36,463 $41,935 $41,245 $40,287
======== ======== ======= ======= ======= ======= ======= =======
Earning per share....... $ 1.50 $ 1.72 $ 1.51 $ 1.83 $ 1.40 $ 1.68 $ 1.60 $ 1.55
Weighted average
shares................. 26,088 22,750 26,076 22,750 26,084 24,980 25,732 26,054
Claims and claim
adjustment expense
ratio.................. 32.4% 31.4% 31.2% 36.2% 41.5% 41.1% 32.5% 43.5%
Underwriting expense
ratio.................. 15.6% 13.2% 16.0% 14.1% 17.4% 13.9% 18.7% 13.7%
-------- -------- ------- ------- ------- ------- ------- -------
COMBINED RATIO.......... 48.0% 44.6% 47.2% 50.3% 58.9% 55.0% 51.2% 57.2%
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
F-17
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS AT
--------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturities available for sale, as fair value
(Amortized cost $674,496 and $601,907, at September
30, 1997 and December 31, 1996, respectively)...... $ 678,408 $603,484
Equity securities at market (cost $49,169).......... 55,544 --
---------- --------
Total investments................................. 733,952 603,484
Cash and cash equivalents........................... 123,828 198,982
Reinsurance premiums receivable..................... 88,603 56,685
Ceded reinsurance balances.......................... 22,512 19,783
Accrued investment income........................... 16,686 13,913
Deferred acquisition costs.......................... 10,656 6,819
Other assets........................................ 10,571 5,098
---------- --------
Total assets...................................... $1,006,808 $904,764
========== ========
LIABILITIES, CAPITAL SECURITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for claims and claim adjustment expenses.... $ 113,748 105,421
Reserve for unearned premiums....................... 103,407 65,617
Bank loan........................................... 50,000 150,000
Reinsurance balances payable........................ 27,762 18,072
Other............................................... 5,547 4,215
---------- --------
Total liabilities................................. 300,464 343,325
---------- --------
Company obligated mandatorily redeemable capital
securities of a subsidiary trust holding solely
junior subordinated debentures of the Company (Note
7)................................................. 100,000 --
Minority Interest in Consolidated Subsidiary........ 10,672 15,236
SHAREHOLDERS' EQUITY
Common shares....................................... 22,447 25,531
Additional paid-in capital.......................... 53,423 102,902
Loans to officers and employees..................... (3,364) (3,868)
Net unrealized appreciation on investments.......... 10,287 1,577
Retained earnings................................... 512,879 422,061
---------- --------
Total shareholders' equity........................ 595,672 546,203
---------- --------
Total liabilities, capital securities, minority
interest and shareholders' equity................ $1,006,808 $904,764
========== ========
BOOK VALUE PER COMMON SHARE......................... $ 26.54 $ 23.21
========== ========
COMMON SHARES OUTSTANDING........................... 22,447 23,531
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNITED STATES DOLLARS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
GROSS PREMIUMS WRITTEN............................. $215,574 $253,157
======== ========
REVENUES
Net premiums written............................. $184,964 $236,635
Increase in unearned premiums.................... (24,605) (49,468)
-------- --------
Net premiums earned.............................. 160,359 187,167
Net investment income............................ 36,994 32,945
Net foreign exchange losses...................... (1,520) (386)
Net realized gains (losses) on investments....... 917 (2,791)
-------- --------
Total revenues................................. 196,750 216,935
-------- --------
EXPENSES
Claims and claim expenses incurred............... 40,017 65,615
Acquisition costs................................ 18,978 19,018
Operating expenses............................... 18,133 11,594
Corporate expenses............................... 2,857 1,440
Interest expense................................. 3,488 4,246
-------- --------
Total expenses................................. 83,473 101,913
-------- --------
Income before minority interests and taxes......... 113,277 115,022
Minority Interest--Company obligated mandatorily
redeemable capital securities of a subsidiary
trust holding solely junior subordinated
debentures of the Company (Note 7)................ (4,816) --
Minority interest--Glencoe......................... (611) (107)
-------- --------
Income before taxes................................ 107,850 114,915
Income tax expense................................. -- --
-------- --------
Net income..................................... $107,850 $114,915
======== ========
NET INCOME PER COMMON SHARE........................ $ 4.66 $ 4.41
======== ========
Weighted average Common Shares and common
equivalent shares outstanding..................... 23,137 26,082
======== ========
Claims and claim expense ratio..................... 25.0% 35.1%
Expense ratio...................................... 23.1% 16.3%
-------- --------
Combined ratio..................................... 48.1% 51.4%
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $107,850 $114,915
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
Amortization and depreciation...................... 797 398
Realized investment (gains) losses................. (917) 2,791
Minority share of income........................... 611 107
Change in:
Reinsurance balances, net........................ (22,228) (22,568)
Ceded reinsurance balances receivable............ (2,729) (21,347)
Deferred acquisition costs....................... (3,837) (5,390)
Reserve for claims and claim adjustment
expenses........................................ 8,327 5,729
Reserve for unearned premiums.................... 37,790 49,467
Other............................................ (337) 6,862
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES.......... 125,327 130,964
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments................ 359,530 271,343
Purchase of investments available for sale....... (483,438) (344,480)
Proceeds from sale of (purchase of) minority
interest in Glencoe............................. (5,185) 15,126
-------- --------
CASH APPLIED TO INVESTING ACTIVITIES........... (129,093) (58,011)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Company obligated
mandatorily redeemable capital securities of a
subsidiary trust holding solely junior
subordinated debentures of the Company (Note
7).............................................. 98,500 --
Proceeds from (repayment of) bank loan........... (100,000) 50,000
Dividends paid................................... (17,031) (15,366)
Proceeds from repayment of officer loan.......... 601 --
Purchase of Common Shares........................ (53,458) (787)
-------- --------
CASH PROVIDED BY (APPLIED TO) FINANCING
ACTIVITIES.................................... (71,388) 33,847
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (75,154) 106,800
CASH AND CASH EQUIVALENTS, BALANCE AT BEGINNING OF
PERIOD............................................ 198,982 139,163
-------- --------
CASH AND CASH EQUIVALENTS, BALANCE AT END OF
PERIOD............................................ $123,828 $245,963
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
RENAISSANCERE HOLDINGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS)
(UNAUDITED)
1. The consolidated financial statements have been prepared on the basis of
United States generally accepted accounting principles ("GAAP") and include
the accounts of RenaissanceRe Holdings Ltd. (the "Company") and its
subsidiaries, including Renaissance Reinsurance Ltd. ("Renaissance
Reinsurance") and Glencoe Insurance Ltd. ("Glencoe"). In the opinion of
management, these financial statements reflect all the normal recurring
adjustments necessary for a fair presentation of the Company's financial
position at September 30, 1997, its results of operations and cash flows for
the nine month periods ended September 30, 1997 and 1996. These consolidated
financial statements should be read in conjunction with the 1996 audited
consolidated financial statements and related notes thereto. Certain
comparative information has been reclassified to conform to current
presentation. Because of the seasonality of the Company's business the results
of operations for any interim period will not necessarily be indicative of
results of operations for the full fiscal year.
2. Earnings Per Share is calculated by dividing net income by the weighted
average number of common shares and common share equivalents outstanding.
For the nine months ended September 30, 1997, the Company had 23,137,000
weighted average common shares outstanding, consisting of 22,704,000 weighted
average common shares and 433,000 weighted average common share equivalents
issuable pursuant to the Company's stock option plans. For the nine months
ended September 30, 1996, the Company had 26,082,000 weighted average common
shares outstanding, consisting of 25,609,000 weighted average common shares
and 473,000 weighted average common share equivalents issuable pursuant to the
Company's stock option plans. Total Common Shares outstanding as at September
30, 1997 and 1996 were 22,447,110 and 25,615,977, respectively.
3. The Board of Directors of the Company declared, and the Company paid,
dividends of $.25 per share to shareholders of record on each of August 20,
May 22, and February 19, 1997. On October 22, 1997, the Board of Directors of
the Company declared a dividend of $.25 per share payable on December 5, 1997
to shareholders of record on November 20, 1997.
4. During the third quarter of 1997, the Company executed the First
Amendment to the Third Amended and Restated Credit Agreement dated as of
December 12, 1996 (the "Credit Facility"). The amendments became effective on
September 8, 1997, except for the amendments relating to invested assets,
which were effective on June 30, 1997. The Credit Facility was amended to a)
extend the termination date from December 1, 1999 to December 1, 2001, b)
specifically define the Capital Securities as a component of Net Worth, c)
amend the definition of invested assets and the covenants related to invested
assets, d) amend certain restrictions regarding acquisitions and e) amend
certain fee schedules.
5. During the third quarter of 1997 the Company increased its ownership of
Glencoe through the purchase of an additional 9.9 percent interest in Glencoe.
The Company paid $5.2 million for the additional shares in Glencoe and
increased its ownership from 70.1 percent to 80 percent.
6. On June 23, 1997 the Company completed a secondary offering of 3.4
million common shares at $38.00 per share. All shares sold were owned by the
Company's founding institutional shareholders or their successors, and the
Company did not receive any of the proceeds of the offering. Concurrent with
the secondary offering on June 23, 1997, the Company also purchased, for
cancellation, an aggregate of 700,000 common shares at $36.29 per share or an
aggregate purchase price of $25.4 million from the Company's founding
institutional shareholders or their successors (the "Company Purchase").
Expenses of $700,000 related to the offerings were charged to additional paid
in capital during the second quarter of 1997.
F-21
<PAGE>
7. On March 7, 1997 the Company completed the sale of $100 million of
"Company Obligated, Mandatorily Redeemable Capital Securities of a Subsidiary
Trust holding solely $103,092,783.51 of the Company's 8.54% Junior
Subordinated Debentures due March 1, 2027" ("Capital Securities") issued by
RenaissanceRe Capital Trust (the "Trust"), a newly created subsidiary business
trust of the Company. The Capital Securities pay cumulative cash distributions
at an annual rate of 8.54 percent, payable semi-annually commencing September
1, 1997. Proceeds from the offering were used to repay a portion of the
Company's outstanding indebtedness. Effective September 11, 1997 the Trust
exchanged the Capital Securities for substantially the same securities
registered under the Securities Act of 1933.
The Trust is a wholly owned subsidiary of the Company. The financial
statements of the Trust are consolidated into the Company's consolidated
financial statements, and the Capital Securities and the related accrued
dividends are reflected in the financial statements as minority interest.
8. In January 1997, the Company completed a fixed price tender offer and
repurchased and cancelled 813,190 Common Shares from its public shareholders
at $34.50 per share, or an aggregate purchase price of $28.1 million (the
"Tender Offer").
9. Interest paid was $3.1 million for the nine months ended September 30,
1997 and $4.2 million for the same period in the previous year. On September
1, 1997 the Company paid $4.1 million of dividends on the Capital Securities.
10. During 1997 the Company renegotiated and extended employment agreements
with certain key employees.
11. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings per
Share. SFAS No. 128 simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15, Earnings per Share. It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures. Management
does not believe this new pronouncement will materially affect the Company's
current disclosures as the Company's capital structure is not considered
complex nor is there significant dilution from other securities or other
contracts to issue common stock.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods and requires restatement of
all prior-period EPS data presented. Earlier application is not permitted.
If SFAS No. 128 had been effective for the current reporting period, the
pro-forma affects would be as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
--------------------- -------------------
1997 1996 1996 1995
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Basic EPS............................ $4.75 $4.49 $6.12 $6.84
Diluted EPS.......................... $4.66 $4.41 $6.01 $6.75
</TABLE>
In June 1997 the Financial Accounting Standards Board issued SFAS 130 and
SFAS 131.
SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. This statement
F-22
<PAGE>
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
The Company is presently considering its disclosure alternatives.
SFAS 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 131 is effective for financial periods beginning after December 15,
1997. The Company is presently considering its disclosure alternatives.
F-23
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Enforceability of Civil Liabilities under United States Federal
Securities Laws......................................................... 3
Incorporation of Certain Documents
by Reference............................................................ 3
Summary.................................................................. 5
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 20
Price Range of Common Shares and Dividends............................... 20
Capitalization........................................................... 21
Dividend Policy.......................................................... 21
Selected Financial Data.................................................. 23
Business................................................................. 25
Management............................................................... 40
Principal and Selling Shareholders....................................... 43
Certain Tax Considerations............................................... 45
Certain Bermuda Law Considerations....................................... 51
Underwriting............................................................. 53
Legal Matters............................................................ 56
Experts.................................................................. 56
Glossary of Selected Insurance Terms..................................... 57
Consolidated Financial Statements........................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF RENAISSANCERE HOLDINGS APPEARS HERE]
3,000,000 SHARES
RENAISSANCERE HOLDINGS LTD.
COMMON SHARES
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
LEHMAN BROTHERS
SALOMON BROTHERS INC
NOVEMBER 17, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
3,000,000 SHARES
RENAISSANCERE HOLDINGS LTD.
COMMON SHARES
--------------
Of the 3,000,000 Common Shares of the Company (the "Common Shares") offered
hereby, 600,000 shares are being offered outside the United States and Canada
by the International Underwriters (the "International Offering") and 2,400,000
shares are being offered concurrently in the United States and Canada by the
U.S. Underwriters (the "U.S. Offering"). Such offerings are collectively
referred to as the "Offering." The 3,000,000 Common Shares to be sold in the
Offering are collectively referred to as the "Shares." The public offering
price and underwriting discount per share in the International Offering and
the U.S. Offering are identical. See "Underwriting."
All of the Shares offered hereby are being sold by Warburg, Pincus
Investors, L.P. ("Warburg"), GE Investment Private Placement Partners I--
Insurance, Limited Partnership ("GE Insurance"), and PT Investments, Inc. ("PT
Investments") and United States Fidelity and Guaranty Company ("USF&G")
(collectively, the "Selling Shareholders"). See "Principal and Selling
Shareholders" and "Underwriting." The Company will not receive any of the net
proceeds from the sale of the Shares by the Selling Shareholders in the
Offering.
Following the consummation of the Offering, Warburg, PT Investments, GE
Insurance, USF&G and Management (as defined herein) will own approximately
17.5%, 11.1%, 1.5%, 10.8% and 5.2%, respectively, of the outstanding Common
Shares, representing approximately 18.4%, 7.8%, 0.5%, 11.3% and 5.5%,
respectively, of the Company's voting power. The Selling Shareholders are
parties to an agreement among themselves and the Company providing them with
the ability, if they act in concert, to nominate a majority of the Board of
Directors. See "Risk Factors--Control by Selling Shareholders" and "Principal
and Selling Shareholders."
The full voting Common Shares are listed for quotation on The New York Stock
Exchange, Inc. (the "NYSE") under the symbol "RNR." On November 17, 1997, the
last sale price per share as reported on the NYSE was $42 5/8. See "Price
Range of Common Shares and Dividends."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE SHARES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT(1) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share..................... $42.00 $1.89 $40.11
- --------------------------------------------------------------------------------
Total(3)............................. $126,000,000 $5,670,000 $120,330,000
</TABLE>
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- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) The Company will pay all fees and expenses related to the Offering
estimated at $600,000.
(3) The Selling Shareholders have granted the International Underwriters and
the U.S. Underwriters 30-day options to purchase up to 90,000 and 360,000
additional Common Shares, respectively, solely for the purpose of covering
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Selling
Shareholders will be $144,900,000, $6,520,500 and $138,379,500,
respectively. See "Underwriting."
--------------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify such offer
and to reject orders in whole or in part. It is expected that the delivery of
the Shares will be made in New York, New York on or about November 21, 1997.
--------------
MERRILL LYNCH INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL
LEHMAN BROTHERS
SALOMON BROTHERS INTERNATIONAL LIMITED
--------------
The date of this Prospectus is November 17, 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement (the "International Purchase Agreement") among the Company, the
Selling Shareholders, and each of the underwriters named below (the
"International Underwriters"), and concurrently with the sale of 2,400,000
Shares to the U.S. Underwriters, the Selling Shareholders have agreed to sell
to each of the International Underwriters, and each of the International
Underwriters has severally agreed to purchase, the aggregate number of Shares
set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL UNDERWRITER SHARES
------------------------- ---------
<S> <C>
Merrill Lynch International ..................................... 150,000
BT Alex. Brown International, division of Bankers Trust
International PLC............................................... 150,000
Lehman Brothers International (Europe)........................... 150,000
Salomon Brothers International Limited........................... 150,000
-------
Total....................................................... 600,000
=======
</TABLE>
The Shares to be sold in the Offering consist of full voting Common Shares,
DVI Shares and DVII Shares. The Company, the Selling Shareholders and the
Underwriters have agreed that immediately upon the consummation of the
Offering, the DVI Shares and the DVII Shares to be sold in the Offering by
certain of the Selling Shareholders will be converted into an equal number of
full voting Common Shares on a one-for-one basis. Purchasers of Shares in the
Offering will receive only full voting Common Shares. See "Principal and
Selling Shareholders."
Merrill Lynch International, BT Alex. Brown International, division of
Bankers Trust International PLC, Lehman Brothers International (Europe) and
Salomon Brothers International Limited are acting as representatives (the
"International Representatives") of the several U.S. Underwriters.
The Company and the Selling Shareholders have also entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters
in the United States and Canada (the "U.S. Underwriters" and, together with
the International Underwriters, the "Underwriters") for whom Merrill Lynch, BT
Alex. Brown Incorporated, Lehman Brothers Inc. and Salomon Brothers Inc are
acting as representatives (the "U.S. Representatives" and, together with the
International Representatives, the "Representatives"). Subject to the terms
and conditions set forth in the U.S. Purchase Agreement, and concurrently with
the sale of 600,000 Shares to the International Underwriters, the Selling
Shareholders have agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase, an aggregate of 2,400,000
Shares. The public offering price per Share and the underwriting discount per
Share are identical under the International Purchase Agreement and the U.S.
Purchase Agreement.
In the International Purchase Agreement, the several International
Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Shares being sold pursuant to such Agreement
if any of the Shares being sold pursuant to such Agreement are purchased. In
the U.S. Purchase Agreement, the several U.S. Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Shares being sold pursuant to such Agreement if any of the Shares being sold
pursuant to such Agreement are purchased. Each such Agreement provides that in
the event of a default by an Underwriter, the purchase commitments of non-
defaulting Underwriters may in certain circumstances be increased. The
closings with respect to the sale of the Shares to be purchased by the
International Underwriters and the U.S. Underwriters are conditioned upon one
another.
The International Underwriters propose initially to offer the Shares to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers (who may include International Underwriters)
at such price less a concession not in excess of $1.10 per share. The
International Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $.10 per share to certain other dealers. After the
Offering, the public offering price, concession and discount may be changed.
53
<PAGE>
The Selling Shareholders have granted to the International Underwriters an
option to purchase up to an aggregate of 90,000 additional Shares, and to the
U.S. Underwriters an option to purchase up to an aggregate of 360,000
additional Shares, in each case exercisable for 30 days after the date hereof,
to cover over-allotments, if any, at the public offering price set forth on
the cover page of this Prospectus, less the underwriting discount. To the
extent that the International Underwriters exercise this option, each of the
International Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of such Shares that
the number of Shares to be purchased by it shown in the foregoing table bears
to the total number of Shares initially offered to the International
Underwriters hereby.
The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of Shares as may be mutually agreed. The
price of any Shares so sold shall be the public offering price, less an amount
not greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the International Underwriters and any dealer to whom they sell
Shares will agree to offer to sell or sell Shares to persons who are not
United States or Canadian persons (as defined in the Intersyndicate Agreement)
or to persons they believe intend to resell to persons who are not United
States or Canadian persons, and the U.S. Underwriters and any dealer to whom
they sell Shares will not offer to sell or sell Shares to United States or
Canadian persons or to persons they believe intend to resell to United States
or Canadian persons, except, in each case, for transactions pursuant to the
Intersyndicate Agreement.
The Company, the Selling Shareholders and certain officers and directors of
the Company have agreed not to sell or otherwise dispose of any Common Shares
or securities convertible into or exchangeable or exercisable for Common
Shares for a period of 90 days after the date of this Prospectus without the
prior written consent of Merrill Lynch; provided, that the members of
Management subject to the aforementioned agreement will be permitted to sell
up to 150,000 shares after the sixtieth day from the date of this Prospectus.
Upon the consummation of the Offering, it is expected that such lock-up
agreements will cover an aggregate of approximately 10,333,956 Common Shares.
There are no known formal or informal plans, arrangements, agreements or
understandings regarding any intention to seek the consent of Merrill Lynch to
release any of the foregoing restrictions at this time. It is generally the
policy of Merrill Lynch to review any such requested consent on a case by case
basis in light of the applicable circumstances.
The Company has agreed to indemnify the International Underwriters and the
U.S. Underwriters against certain civil liabilities, including liabilities
under the Securities Act, or to contribute to payments the International
Underwriters and the U.S. Underwriters may be required to make in respect
thereof.
The Underwriters do not intend to confirm sales of the Common Shares offered
hereby to any accounts over which they exercise discretionary authority.
Until the distribution of the Shares to be sold in the Offering is
completed, rules of the Commission may limit the ability of the Underwriters
to bid for and purchase the Common Shares. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize
the price of the Common Shares. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the initial resale of the Shares to be sold in the Offering,
i.e., if they sell more Common Shares than are set forth on the cover page of
this Prospectus, the Underwriters may reduce such short position by purchasing
Common Shares in the open market. The Underwriters may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchases Common Shares in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Shares,
they may reclaim the amount of the selling concession from the Underwriters
and selling group members who initially resold such shares.
54
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that any transaction
described above may have on the price of the Common Shares. In addition,
neither the Company nor any Underwriter makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Merrill Lynch has acted as the Company's financial advisor with respect to
certain prior transactions and received commercially customary compensation in
connection therewith. Any or all of the Underwriters may serve as a financial
advisor to the Company from time to time in the future. Certain Underwriters
or their affiliates may lend to or participate on a regular basis in various
general financing and banking transactions with the Company.
Each International Underwriter has agreed that (i) it has not offered or
sold and, prior to the expiration of the period of six months from the Closing
Date, will not offer or sell any Common Shares to persons in the United
Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Shares in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of Common
Shares to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or is a person to whom such document may otherwise lawfully be issued or
passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the Shares, or the
possession, circulation or distribution of this Prospectus or any other
material relating to the Company, the Selling Shareholders or the Shares in
any jurisdiction where action for that purpose is required. Accordingly, the
Shares may not be offered or sold, directly or indirectly, and neither this
Prospectus nor any other offering material or advertisements in connection
with the Shares may be distributed or published, in or from any country or
jurisdiction except in compliance with any applicable rules and regulations of
any such country or jurisdiction.
Purchasers of the Shares may be required to pay stamp taxes and other
charges in accordance with the laws and practices of the country of purchase
in addition to the public offering price set forth on the cover page hereof.
55
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE COMMON SHARES OFFERED
HEREBY IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE FINANCIAL
SERVICES ACT 1986 AND THE PUBLIC OFFERS OF SECURITIES REGULATION 1995 WITH
RESPECT TO ANYTHING DONE BY ANY PERSON IN RELATION TO THE COMMON SHARES IN,
FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH. SEE
"UNDERWRITING."
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Enforceability of Civil Liabilities under United States Federal
Securities Laws......................................................... 3
Incorporation of Certain Documents
by Reference............................................................ 3
Summary.................................................................. 5
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 20
Price Range of Common Shares and Dividends............................... 20
Capitalization........................................................... 21
Dividend Policy.......................................................... 21
Selected Financial Data.................................................. 23
Business................................................................. 25
Management............................................................... 40
Principal and Selling Shareholders....................................... 43
Certain Tax Considerations............................................... 45
Certain Bermuda Law Considerations....................................... 51
Underwriting............................................................. 53
Legal Matters............................................................ 56
Experts.................................................................. 56
Glossary of Selected Insurance Terms..................................... 57
Consolidated Financial Statements........................................ F-1
</TABLE>
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF RENAISSANCERE HOLDINGS APPEARS HERE]
3,000,000 SHARES
RENAISSANCERE HOLDINGS LTD.
COMMON SHARES
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
BT ALEX. BROWN INTERNATIONAL
LEHMAN BROTHERS
SALOMON BROTHERS INTERNATIONAL LIMITED
NOVEMBER 17, 1997
- -------------------------------------------------------------------------------
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