<PAGE>
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to __________________
Commission file number: 34-0-26512
RenaissanceRe Holdings Ltd.
---------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-013-8020
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Renaissance House
8-12 East Broadway
Pembroke, Bermuda HM 19
(Address of principal executive offices) (Zip Code)
(441) 295-4513
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
----- -----
The number of outstanding shares of RenaissanceRe Holding Ltd.'s common stock,
par value US $1.00 per share, as of March 31, 1999 was 20,918,002.
Total number of pages in this report: 25
<PAGE>
RenaissanceRe Holdings Ltd.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
Part I -- Financial Information
Item I -- Financial Statements
Consolidated Balance Sheets as of March 31, 1999 3
(Unaudited) and December 31, 1998
Unaudited Consolidated Statements of Operations for 4
the three months ended March 31, 1999 and 1998
Unaudited Consolidated Statements of Changes in Shareholders' 5
Equity for the three months ended March 31, 1999 and 1998
Unaudited Consolidated Statements of Cash Flows 6
for the three months ended March 31, 1999 and 1998
Notes to Unaudited Consolidated Financial Statements 7
Item II -- Management's Discussion and Analysis of 13
Results of Operations and Financial Condition
Item III -- Quantitative and Qualitative Disclosures About Market Risk 23
Part II -- Other Information 24
Item 1 -- Legal Proceedings
Item 2 -- Changes in Securities
Item 3 -- Defaults Upon Senior Securities
Item 4 -- Submission of Matters to a Vote of Security Holders
Item 5 -- Other Information
Item 6 -- Exhibits and Reports on Form 8-K
Signature - RenaissanceRe Holdings Ltd. 25
</TABLE>
-2-
<PAGE>
Part I - Financial information
Item 1 - Financial statements
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Balance Sheets
(in thousands of United States dollars, except per share amounts)
<TABLE>
<CAPTION>
As at
------------------------------------
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Fixed maturity investments available for sale, at fair value
(Amortized cost $724,497 and $804,968 at March 31, 1999 and
December 31, 1998, respectively) $ 715,247 $ 799,995
Short term investments 27,824 24,983
Other investments 11,839 1,630
Cash and cash equivalents 175,232 115,701
----------- -----------
Total investments and cash 930,142 942,309
Premiums receivable 164,416 96,761
Ceded reinsurance balances 58,616 41,370
Losses and premiums recoverable 184,588 200,379
Accrued investment income 14,008 9,968
Deferred acquisition costs 18,103 10,997
Other assets 59,436 54,380
----------- -----------
Total assets $ 1,429,309 $ 1,356,164
=========== ===========
Liabilities, Minority Interest and Shareholders' Equity
Liabilities
Reserve for claims and claim expenses $ 316,284 $ 298,829
Reserve for unearned premiums 168,752 94,466
Bank loans 125,000 100,000
Reinsurance balances payable 83,290 121,658
Other 29,576 28,979
----------- -----------
Total liabilities 722,902 643,932
----------- -----------
Minority Interest - Company obligated mandatorily redeemable
capital securities of a subsidiary trust holding solely junior
subordinated debentures of the Company 100,000 100,000
Shareholders' Equity
Common shares and additional paid in capital 20,918 39,035
Unearned stock grant compensation (7,137) (8,183)
Accumulated other comprehensive income (9,288) (5,144)
Retained earnings 601,914 586,524
----------- -----------
Total shareholders' equity 606,407 612,232
----------- -----------
Total liabilities, minority interest, and
shareholders' equity $ 1,429,309 $ 1,356,164
=========== ===========
Book value per Common Share $ 28.99 $ 28.28
=========== ===========
Common Shares outstanding 20,918 21,646
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
-3-
<PAGE>
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Operations
For the three months ended March 31, 1999 and 1998
(in thousands of United States Dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenues
Gross Premiums Written $155,095 $119,145
======== ========
Net premiums written $116,284 $112,452
Increase in unearned premiums (58,296) (66,355)
-------- --------
Net premiums earned 57,988 46,097
Net investment income 13,106 13,629
Net foreign exchange losses (666) (24)
Other income (269) -
Net realized gains (losses) on investments (497) 1,236
-------- --------
Total revenues 69,662 60,938
-------- --------
Expenses
Claims and claim expenses incurred 15,695 7,876
Acquisition expenses 6,784 6,392
Operational expenses 9,516 6,375
Corporate expenses 3,961 790
Interest expense 1,406 786
-------- --------
Total expenses 37,362 22,219
-------- --------
Income before minority interests and taxes 32,300 38,719
Minority interest - Company Obligated Mandatorily
redeemable Capital Securities of a Subsidiary
trust holding solely Junior Subordinated
debentures of the Company 2,111 2,111
Minority interest - Glencoe - 422
-------- --------
Income before taxes 30,189 36,186
Income tax expense 171 512
======== ========
Net income $ 30,018 $ 35,674
======== ========
Earnings per Common Share - basic $ 1.42 $ 1.60
Earnings per Common Share - diluted $ 1.41 $ 1.57
Operating earnings per Common Share - diluted $ 1.43 $ 1.52
Average shares outstanding - basic 21,138 22,298
Average shares outstanding - diluted 21,323 22,708
Claims and claim expense ratio 27.1% 17.1%
Expense ratio 28.1% 27.7%
-------- --------
Combined ratio 55.2% 44.8%
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<PAGE>
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity For the three
months ended March 31, 1999 and 1998
(in thousands of United States Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Common Stock
Balance -- January 1 $ 21,646 $ 22,441
Exercise of stock options - 106
Repurchase of shares (728) -
-------- --------
Balance -- March 31 20,918 22,547
-------- --------
Paid-in Capital
Balance -- January 1 17,389 52,481
Exercise of stock options (210) 2,956
Repurchase of shares (17,179) -
-------- --------
Balance -- March 31 - 55,437
-------- --------
Unearned stock grant compensation
Balance -- January 1 (8,183) (4,731)
Stock grants cancelled (awarded) 256 (3,131)
Amortization 790 207
-------- --------
Balance -- March 31 (7,137) (7,655)
-------- --------
Accumulated other comprehensive income
Balance -- January 1 (5,144) (10,155)
Net unrealized gains (losses) on securities, net of
adjustment (see disclosure) (4,144) 3,846
-------- --------
Balance -- March 31 (9,288) (6,309)
-------- --------
Retained earnings
Balance -- January 1 586,524 538,667
Net income 30,018 35,674
Dividends paid (7,501) (6,755)
Repurchase of shares (7,127) -
-------- --------
Balance -- March 31 601,914 567,586
-------- --------
Total Shareholders' Equity $606,407 $631,606
======== ========
Comprehensive income
Net income $ 30,018 $ 35,674
Change in comprehensive income (4,144) 3,846
-------- --------
Comprehensive income $ 25,874 $ 39,520
======== ========
Disclosure regarding net unrealized gains (losses)
Net unrealized holding gains (losses) arising during period $ (4,641) $ 5,082
Less: net realized losses (gains) included in net income 497 (1,236)
-------- --------
Net unrealized gains (losses) on securities $ (4,144) $ 3,846
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
RenaissanceRe Holdings Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 1999 and
1998 (in thousands of United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 30,018 $ 35,674
Adjustments to reconcile net income to
cash provided by operating activities
Amortization and depreciation 1,022 1,352
Realized investment losses (gains) 497 (1,236)
Amortization of goodwill 3,335 -
Minority share of income - 422
Change in:
Reinsurance balances, net (106,023) (49,284)
Ceded reinsurance balances (17,246) 3,681
Deferred acquisition costs (7,106) (6,684)
Reserve for claims and claim expenses, net 33,246 893
Reserve for unearned premiums 74,286 65,347
Other (11,291) (227)
-------- --------
Net cash provided by operating activities 738 49,938
-------- --------
Cash flows provided from investing activities
Proceeds from sale of investments 419,326 243,888
Purchase of investments available for sale (352,998) (210,382)
-------- --------
Net cash provided by investing activities 66,328 33,506
-------- --------
Cash flows used in financing activities
Proceeds from bank loan 25,000 -
Dividends paid (7,501) (6,755)
Purchase of Common Shares (25,034) -
-------- --------
Net cash used in financing activities (7,535) (6,755)
-------- --------
Net increase in cash and cash equivalents 59,531 76,689
Cash and cash equivalents, beginning of period 115,701 122,929
-------- --------
Cash and cash equivalents, end of period $175,232 $199,618
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
-6-
<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") for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. The
consolidated financial statements include the accounts of RenaissanceRe
Holdings Ltd. ("RenaissanceRe"), its wholly owned subsidiaries, Renaissance
Reinsurance Ltd. ("Renaissance Reinsurance"), Glencoe Insurance Ltd.
("Glencoe"), Renaissance U.S. Holdings, Inc. ("Renaissance U.S.") and
RenaissanceRe Capital Trust (the "Trust"). Other related entities include
DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of Glencoe;
Nobel Insurance Company ("Nobel"), a wholly owned subsidiary of Renaissance
U.S.; and Renaissance Reinsurance of Europe ("Renaissance Europe"), a
subsidiary of Renaissance Reinsurance. RenaissanceRe and its subsidiaries
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 and the Trust. 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. Significant Accounting Policies
a) Segment Reporting
-----------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which revises
disclosure requirements about operating segments and establishes standards
for related disclosures about products and services, geographic areas and
major customers. SFAS No. 131 requires that public business enterprises
report financial and descriptive information about their reportable
operating segments. The Company's reportable segments are the reinsurance
and primary insurance segments. The Company adopted SFAS No. 131 as of
December 31, 1998, and presents the initial quarterly information in this
Form 10-Q.
b) Derivative Instruments and Hedging Activities
----------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 1999. Currently, the
-7-
<PAGE>
Company does not expect the adoption of SFAS No. 133 to have a material
impact on its consolidated financial statements.
8. The Company utilizes reinsurance to reduce its exposure to large losses.
The Company currently has in place contracts that provide for recovery of a
portion of certain claims and claims expenses from reinsurers in excess of
various retentions and loss warranties. The Company would remain liable to
the extent that any third party reinsurance company fails to meet its
obligations. The earned reinsurance premiums ceded were $28.1 million and
$9.7 million for the first quarter of 1999 and 1998, respectively. Other
than loss recoveries, certain of the Company's ceded reinsurance contracts
provide for recoveries of additional premiums, reinstatement premiums and
coverage for lost no claims bonuses which are incurred when losses are
ceded to those reinsurance contracts. Total recoveries netted against
premiums and claims and claim expenses incurred for the quarter ended March
31, 1999 were $60.9 million (for the quarter ended March 31, 1998 - $0).
Included in losses and premiums recoverable are recoverables of $71.6
million which are related to retroactive reinsurance agreements. In
accordance with SFAS No. 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration," contracts are required to be included in
claims and claim expenses incurred as they become known. However, the
offsetting recoverable is deferred and reflected in the statement of income
based on the recovery method. As of March 31, 1999, the Company has
deferred $24.1 million (as of December 31, 1998 - $27.6 million) of
recoveries related to a retroactive reinsurance contract. This has been
included in reinsurance balances payable on the consolidated balance sheet.
As the amounts are recovered, the recoveries will offset claims and claim
expenses incurred in the consolidated statement of income. During the
first quarter of 1999, the Company recognized $3.1 million as claim
recoveries under this contract.
4. During the first quarter of 1999, the Company borrowed an additional $25
million under its revolving credit facility. Interest paid on the loans was
$3.5 million for the quarter ended March 31, 1999 and $2.9 million for the
same period in the previous year. On March 1, 1999, the Company paid a
semi-annual dividend on the Company obligated mandatorily redeemable
capital securities of a subsidiary trust holding solely junior subordinated
debentures of the Company ("Capital Securities") of $4.3 million.
-8-
<PAGE>
5. Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and restricted stock. Diluted
earnings per share assumes the exercise of all dilutive stock options and
restricted stock grants. The following table sets forth the computation of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Quarter ended March 31,
1999 1998
- --------------------------------------------------------------------------------
(in thousands of U.S. dollars except share and per share data)
- --------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net income $ 30,018 $ 35,674
===========================
Denominator:
Denominator for basic earnings per share -
Weighted average shares 21,138,139 22,297,935
Per share equivalents of employee stock
Options and restricted shares 184,894 409,797
---------------------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
Assumed conversions 21,323,033 22,707,732
===========================
Basic earnings per share $1.42 $1.60
Diluted earnings per share $1.41 $1.57
</TABLE>
6. During the quarter ended March 31, 1999, the Board of Directors of the
Company declared, and the Company paid, a dividend of $0.35 per share to
shareholders of record as of February 22, 1999.
7. In May 1999, the Company announced a $25 million share repurchase program.
During the first quarter of 1999 the Company repurchased 728,100 shares
under its existing repurchase program at a cost of $25.0 million.
8. As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
two reportable segments: reinsurance operations and primary operations. The
reinsurance segment provides property catastrophe reinsurance as well as
other reinsurance to selected insurers and reinsurers on a worldwide basis.
The primary segment provides insurance both on a direct and on a surplus
lines basis for commercial and homeowners catastrophe-exposed property
business. Also included in the primary segment are commercial auto and
general liability covers as well as surety business which provides coverage
to small and mid-size contractors. Data for the quarters ended March 31,
1999 and 1998 are as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
Quarter ended March 31, 1999
Reinsurance Primary Other Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written $133,647 $ 21,448 $ - $ 155,095
Total revenues 55,259 13,597 806 69,662
Pre-tax profit (loss) 31,205 2,753 (3,769) 30,189
Assets 997,974 317,839 113,496 1,429,309
-----------------------------------------------------
Claims and claim expense
ratio 25.1% 35.4% - 27.1%
Underwriting ratio 26.3% 32.9% - 28.1%
-----------------------------------------------------
Combined ratio 51.4% 68.3% - 55.2%
-----------------------------------------------------
Quarter ended March 31, 1998
Reinsurance Primary Other Total
-------------------------------------------------------
Gross premiums written $105,541 $ 13,604 $ - $ 119,145
Total revenues 54,566 6,111 261 60,938
Pre-tax profit (loss) 37,412 2,110 (3,336) 36,186
Assets 888,526 87,182 82,515 1,058,223
-----------------------------------------------------
Claims and claim expense
ratio 14.9% 34.8% - 17.1%
Underwriting ratio 27.0% 32.9% - 27.7%
-----------------------------------------------------
Combined ratio 41.9% 67.7% - 44.8%
-----------------------------------------------------
</TABLE>
The activities of the Company's Bermuda and U.S. holding companies are
the primary contributors to the results reflected in the other segment.
The pre tax loss of the holding companies primarily consisted of interest
expense on bank loans, the minority interest on the Capital Securities,
goodwill amortization and a writedown of goodwill related to Nobel and its
affiliates, and realized investment losses on the sales of investments,
partially offset by investment income on the assets of the holding
companies.
9. On June 25, 1998, RenaissanceRe, through its U.S. holding company,
Renaissance U.S., completed its acquisition of the U.S. operating
subsidiaries of Nobel Insurance Limited, a Bermuda company ("Nobel
Limited"), for $56.1 million. The Company has accounted for this
acquisition using the purchase method of accounting.
Operating results of Nobel and its affiliates acquired by the Company have
been included in the consolidated financial statements from their date of
acquisition. As required by Accounting Principles Board Opinion No. 16,
the following selected unaudited pro forma information is being provided to
present a summary of the combined results of the Company and Nobel and its
affiliates assuming the acquisition of Nobel and its affiliates
-10-
<PAGE>
had occurred as of January 1 of each year. The pro forma data is for
informational purposes only and does not necessarily represent results
which would have occurred if the acquisition had taken place on the basis
assumed above, nor is it indicative of the results of future combined
operations.
<TABLE>
<CAPTION>
Pro Forma Statements
(in thousands except per share data) Historic Proforma
Quarters Ended 31-Mar-99 31-Mar-98 31-Mar-98
-----------------------------------
<S> <C> <C> <C>
Total revenues $69,662 $60,938 $78,463
Net income $30,018 $35,674 $34,386
Earnings per common share - basic $ 1.42 $ 1.60 $ 1.54
Earnings per common share - diluted $ 1.41 $ 1.57 $ 1.51
Shares outstanding - basic 21,138 22,298 22,298
Shares outstanding - diluted 21,323 22,708 22,708
</TABLE>
10. The provision for income taxes is based on income recognized for financial
statement purposes and includes the effects of temporary differences
between financial and tax reporting. Deferred tax assets and liabilities
are determined based on the difference between the financial statement
bases and tax bases of assets and liabilities using enacted tax rates.
The Company has U.S. net operating loss carryforwards and future tax
deductions of $18.8 million which will be available to offset regular
taxable U.S. income during the carryforward period (through 2018), subject
to certain limitations. The tax benefits of these items are reflected in
the accompanying table of deferred tax assets and liabilities.
-11-
<PAGE>
Income tax expense consists of:
(in thousands)
March 31, 1999 Current Deferred Total
-----------------------------------
U.S. federal 526 (429) 97
U.S. state and local 74 - 74
-----------------------------------
600 (429) 171
-----------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1999 are
presented below:
Deferred tax assets:
Allowance for doubtful accounts 258
Unearned premiums 854
Claims reserves, principally due to
discounting for tax 4,002
Retroactive reinsurance gain 8,210
Net operating loss carryforwards 6,420
Other 4,178
------
23,922
------
Deferred tax liabilities:
Deferred policy acquisition costs (980)
Other (388)
------
Net deferred tax asset 22,554
------
-12-
<PAGE>
Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
For the quarter ended March 31, 1999 compared to the quarter ended March 31,
1998
For the quarter ended March 31, 1999, net income available to common
shareholders was $30.0 million or $1.41 per share, compared to $35.7 million or
$1.57 per share for the same quarter in 1998.
Gross premiums written for the first quarters of 1999 and 1998 are as follows:
31-Mar-99 31-Mar-98
-----------------------------
Renaissance Reinsurance 133,647 105,541
Nobel 17,101 -
DeSoto 3,335 12,334
Glencoe 1,012 1,270
-----------------------------
155,095 119,145
-----------------------------
The 26.6 percent increase in written premiums for Renaissance Reinsurance was
the result of a 38.1 percent increase in premiums related to new business, a
16.9 percent decrease in premiums due to the Company not renewing coverage and a
5.5 percent increase related to changes in pricing, participation level and
coverage on renewed business. The purchase of Nobel was completed in June of
1998, and therefore no premium is included in the first quarter of 1998 for
comparative purposes. DeSoto commenced operations in January 1998, assuming and
renewing homeowners' policies from the Florida JUA, a state-sponsored insurance
company. Accordingly, the higher premium volume in the first quarter of 1998 is
specifically related to DeSoto's initial assumption of approximately 12,000
policies and in-force premium of approximately $10 million in the first quarter
of 1998.
During 1999, the Company continued to purchase reinsurance to reduce its
exposure to certain losses. During the first quarter of 1999, ceded premiums
written were $38.8 million, compared with $6.7 million for the same quarter in
1998. Although ceded reinsurance reduces net premiums earned, management
believes that purchases of reinsurance significantly reduce the level of risk to
the Company that would otherwise exist.
-13-
<PAGE>
The table below sets forth the Company's combined ratio and components thereof,
split by segment for the quarters ended March 31, 1999 and 1998:
----------------------------------------------------------------
Reinsurance Primary Total
----------------------------------------------------------------
31-Mar-99 31-Mar-98 31-Mar-99 31-Mar-98 31-Mar-99 31-Mar-98
----------------------------------------------------------------
Loss ratio 25.1% 14.9% 35.4% 34.8% 27.1% 17.1%
Expense ratio 26.3% 27.0% 32.9% 32.9% 28.1% 27.7%
----------------------------------------------------------------
Combined ratio 51.4% 41.9% 68.3% 67.7% 55.2% 44.8%
----------------------------------------------------------------
Claims and claim expenses incurred for the quarter ended March 31, 1999, as a
percentage of net earned premiums, were relatively flat for the Primary
operations. The Reinsurance operations included net losses of $11.8 million or
25.1% of net premiums earned, compared with $6.1 million for the same period in
1998 or 14.9% of net premiums earned. The primary reason for the increase
related to initial reserve estimates on events related to the 1999 year,
partially offset by reductions in reserves related to accidents occurring in
1997 and earlier.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Acquisition expenses were $6.8 million for the quarter ended March
31, 1999 and $6.4 million for the same period in 1998. Operating expenses for
the first quarter of 1999 increased to $9.5 million compared with $6.4 million
for the same quarter of 1998. The primary cause for the increase in operating
expenses is higher operating costs associated with the continued development of
the Company's primary operations, in particular the addition of Nobel and its
affiliates.
Net investment income, excluding realized investment gains and losses, for the
first quarter of 1999 was $13.1 million, compared to $13.6 million for the same
period in 1998. The decrease in net investment income reflects the continued
share repurchases and lower investment yields on the reduced asset base.
Corporate expenses increased to $4.0 million for the quarter ended March 31,
1999, compared with $0.8 million for the same period in 1998. The increase
primarily relates to a write-off of $3.0 million of goodwill related to the
purchase of the operating subsidiaries of Nobel Limited.
Interest expense and minority interest for the quarter ended March 31, 1999
increased to $3.5 million from $2.9 million for the same period in 1998. The
increase was primarily related to the Company's purchase of the operating
subsidiaries of Nobel Limited, and the related borrowings under the revolving
credit facility and the term loan facility utilized for such purchase.
-14-
<PAGE>
FINANCIAL CONDITION
General
The Company provides reinsurance and insurance where risk of natural catastrophe
represents a significant component of the overall exposure. The Company's
results depend to a large extent on the frequency and severity of catastrophic
events, and the concentration and coverage offered to clients impacted thereby.
In addition, 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, the ability to
develop or capitalize on a competitive advantage and opportunities that will not
detract from its core reinsurance operations. Accordingly, the Company
regularly reviews strategic opportunities and periodically engages in
discussions regarding possible transactions.
Liquidity and Capital Requirements
As a holding company, RenaissanceRe relies on investment income, cash dividends
and permitted payments from its subsidiaries to make principal payments,
interest payments, cash distributions on outstanding obligations and pay
quarterly dividends, if any, to its shareholders. The payment of dividends by
the Company's Bermuda subsidiaries to RenaissanceRe is, under certain
circumstances, limited under Bermuda insurance law. The Bermuda Insurance Act
of 1978, amendments thereto (the "Act") and related regulations of Bermuda
requires the Company's Bermuda subsidiaries to maintain certain measures of
solvency and liquidity. As at March 31, 1999 the statutory capital and surplus
of the Company's Bermuda subsidiaries was $661.3 million, and the amount
required to be maintained was $101.0 million.
Glencoe is also eligible as an excess and surplus lines insurer in a number of
states in the U.S. There are various capital and surplus requirements in these
states, with the most onerous requiring the Company to maintain a minimum of $15
million in capital and surplus. In this regard the declaration of dividends
from retained earnings and distributions from additional paid-in capital are
limited to the extent that the above requirements are met. During the first
quarter of 1999, Renaissance Reinsurance paid aggregate cash dividends of $16.7
million compared to $36.4 for the same period in 1998.
The Company's U.S. insurance subsidiaries are subject to various statutory and
regulatory restrictions regarding the payment of dividends. The restrictions
are primarily based upon statutory surplus and statutory net income. The U.S.
insurance subsidiaries' combined statutory surplus amounted to $26.5 million at
March 31, 1999 and the amount required to be maintained was $22.4 million.
Nobel
- -----
As previously announced, the Company recorded an after-tax charge of $40.1
million in the fourth quarter of 1998, related to the operations of Nobel and
its affiliates. As a result, the Company has been in the process of selling or
reinsuring the remaining Nobel businesses and reserves, including the casualty,
surety, low-value dwelling and bail bond businesses. During the first quarter
of
-15-
<PAGE>
1999, the Company completed the reinsurance of the casualty and surety books
of business. Nobel recently signed an agreement under which its bail business
will be assumed by a third party, with an obligation to make payments in the
future to Nobel based on the profitability of the bail business. The Company is
in the process of negotiating a transaction on the low-value dwelling business.
While the Company intends to pursue an exit from Nobel's low-value dwelling
business, there can be no assurance that the Company will complete any specific
transactions and, if a transaction does occur, there can be no assurance that
the Company will receive the estimated fair value for the remaining Nobel
business. Accordingly, the future results of the Company's operations could be
adversely affected by a potential write-down of goodwill, a partial write-off of
the deferred tax asset or by other costs or loss in value which could occur
during the transaction process. The Company expects that Nobel and its
affiliates will continue to operate the casualty, surety, low-value dwelling and
bail businesses on a transitional basis. Subsequent to the sale or reinsurance
of the businesses, Renaissance U.S. expects to retain ownership of Nobel along
with its licenses in the 50 states of America although there can be no assurance
that such licenses can be successfully maintained following such sales.
Cash Flows
- ----------
The Company's operating subsidiaries have historically produced sufficient cash
flows to meet expected claims payments and operational expenses and to provide
dividend payments to RenaissanceRe. RenaissanceRe's subsidiaries also maintain
a concentration of investments in high quality liquid securities, which
management believes will provide sufficient liquidity to meet extraordinary
claims payments should the need arise. Additionally, the Company maintains a
credit facility from which $125 million is currently unborrowed and available to
meet the liquidity needs of the Company.
Cash flows from operating activities for the first quarter of 1999 resulted
principally from premium and investment income, net of paid losses, acquisition
costs and underwriting expenses. Cash flows from operations in the first
quarter of 1999 were $0.7 million, compared to $49.9 million for the same period
in 1998. The reduction is primarily related to increased payments on the
Company's ceded reinsurance and an increase in written premiums which have yet
to be collected. The Company has produced cash flows from operations for the
full years of 1998 and 1997 significantly in excess of its commitments. To the
extent that capital is not utilized in the Company's reinsurance business, the
Company will consider using such capital to invest in new opportunities or will
consider returning such capital to its shareholders.
Because of the potential high severity and low frequency of losses on the
coverages written by the Company, and the seasonality of the Company's business,
it is not possible to accurately predict the Company's future cash flows from
operating activities. As a consequence, cash flows from operating activities
may fluctuate, perhaps significantly, between individual quarters and years.
Reserves
During the quarter ended March 31, 1999 the Company incurred net claims of $15.7
million and paid losses of $32.9 million. The Company's policy of purchasing
reinsurance protections
-16-
<PAGE>
continues to have a favorable impact on net incurred claims. Due to the high
severity and low frequency of losses related to the property catastrophe
insurance and reinsurance business, there can be no assurance that the Company
will continue to experience this reduced level of losses.
For the Company's reinsurance operations, estimates of claims and claim expenses
are based in part upon estimation of claims resulting from catastrophic events.
Estimation by the Company of claims resulting from catastrophic events based
upon its own historical claim experience is inherently difficult because of the
Company's short operating history and the potential severity of property
catastrophe claims. Therefore the Company utilizes both proprietary and
commercially available modes, as well as historical reinsurance industry
property catastrophe claims experience, for purposes of evaluating future trends
and providing an estimate of ultimate claims costs.
On both the Company's reinsurance and primary operations, the Company uses
statistical and actuarial methods to reasonably estimate ultimate expected
claims and claim expenses. The period of time between the reporting of a loss
to the Company and the settlement of the Company's liability may be several
years. During this period, additional facts and trends may be revealed. As
these factors become apparent, case reserves may be adjusted, sometimes
requiring an increase in the overall reserves of the Company, and at other times
requiring a reallocation of IBNR reserves to specific case reserves. These
estimates are reviewed regularly and such adjustments, if any, are reflected in
results of operations in the period in which they become known and are accounted
for as changes in estimates.
Capital Resources & Shareholders' Equity
The total capital resources of the Company as at March 31, 1999 and December 31,
1998 was as follows:
- --------------------------------------------------------------------------------
March 31, December 31,
(in thousands) 1999 1999
- --------------------------------------------------------------------------------
Term loan payable $ 35,000 $ 35,000
Revolving Credit Facility -- borrowed 90,000 65,000
Revolving Credit Facility -- unborrowed 125,000 150,000
Minority interest -- Company obligated mandatorily
redeemable capital securities of a subsidiary trust 100,000 100,000
Shareholders' Equity 606,407 612,232
- --------------------------------------------------------------------------------
TOTAL CAPITAL RESOURCES $956,407 $962,232
================================================================================
The Company has a $200 million committed revolving credit and term loan
agreement with a syndicate of commercial banks. Interest rates on the facility
are based on a spread above LIBOR and averaged approximately 5.5 percent during
the first quarter of 1999 (6.3 percent for the first quarter of 1998). The
credit agreement contains certain financial covenants including requirements of
a consolidated debt to capital ratio of 0.35:1; a consolidated net worth of not
less
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<PAGE>
than 125 percent of consolidated debt; and 80 percent of invested assets to
be rated BBB- or better. The Company was in compliance with all the covenants
of this revolving credit and term loan agreement as at March 31, 1999.
In connection with the Company's purchase of Nobel in June 1998, Renaissance
U.S. has a $35 million term loan and $15 million revolving loan facility with a
syndicate of commercial banks. Interest rates on the facility are based upon a
spread above LIBOR, and averaged approximately 5.8 percent during the first
quarter of 1999. The Credit Agreement contains certain financial covenants, the
primary one being that RenaissanceRe, as the principal guarantor, maintains a
ratio of liquid assets to debt service of 4:1. This five year term loan has
mandatory repayment provisions approximating 25 percent in each of years two
through five. The Company was in compliance with all the covenants of this term
loan and revolving loan facility as at March 31, 1999.
The Capital Securities pay cumulative cash distributions at an annual rate of
8.54 percent, payable semi-annually. The Indenture relating to the Capital
Securities contains certain covenants, including a covenant prohibiting the
payment of dividends by the Company if the Company shall be in default under the
Indenture. The Company was in compliance with all of the covenants of the
Indenture at March 31, 1999.
During the first quarter of 1999, shareholders' equity decreased by $5.8
million, from $612.2 million at December 31, 1998 to $606.4 million at March 31,
1999. The significant components of the decrease included net income from
continuing operations of $30.0 million offset by a decrease in the unrealized
depreciation on investments of $4.1 million, payment of dividends of $7.5
million and the repurchase of shares of $25.0 million.
Investments
The table below shows the aggregate amounts of investments available for sale,
equity securities and cash and cash equivalents comprising the Company's
portfolio of invested assets:
- --------------------------------------------------------------------------------
March 31, December 31,
(in thousands) 1999 1999
- --------------------------------------------------------------------------------
Investments available for sale, at fair value $715,247 $799,995
Short term investments 27,824 24,983
Other investments 11,839 1,630
Cash and cash equivalents 175,232 115,701
- --------------------------------------------------------------------------------
TOTAL INVESTED ASSETS $930,142 $942,309
================================================================================
The Company's current investment guidelines call for the invested asset
portfolio, including cash and cash equivalents, to have at least an average AA
rating as measured by Standard & Poor's Ratings Group. At March 31, 1999, the
invested asset portfolio had a dollar weighted average
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<PAGE>
rating of AA, an average duration of 3.11 years and an average yield to maturity
of 5.83 percent, after investment expenses.
All fixed income securities in the Company's investment portfolio are classified
as securities available for sale and are carried at fair value. Any unrealized
gains or losses as a result of changes in fair value over the period such
investments are held are not reflected in the Company's statement of operations,
but rather are reflected in accumulated other comprehensive income in the
consolidated statement of shareholders' equity, in accordance with SFAS No. 115
and 130.
As at March 31, 1999 the Company held investments and cash totaling $930.1
million with a net unrealized depreciation balance of $9.3 million. The
Company's investment portfolio, is subject to the risks of declines in
realizable value. The Company attempts to mitigate this risk through the
diversification and active management of its portfolio.
At March 31, 1999, $21.2 million of cash and cash equivalents were invested in
currencies other than the U.S. dollar, which represented approximately 2.3
percent of the Company's invested assets.
Derivative Instruments
The Company has assumed risk through catastrophe and weather linked securities
and derivative instruments under which losses could be triggered by an industry
loss index or natural parameters. For the three months ended March 31, 1999 the
Company's activities with respect to these securities has approximated $0.5
million of fees and risk premiums. To date the Company has not experienced any
losses from such securities or derivatives. The Company may in the future also
utilize other derivatives.
Effects of Inflation
The potential exists, after a catastrophe loss, for the development of
inflationary pressures in a local or regional economy. The anticipated effects
on the Company are implicitly considered in the Company's catastrophe loss
models. The effects of inflation are also considered in pricing and in
estimating reserves for unpaid claims and claim adjustment expenses. The actual
effects of this post event inflation on the results of the Company cannot be
accurately known until claims are ultimately settled.
Year 2000 Readiness Disclosures
Certain computer programs and embedded computer chips use only the last two
digits to refer to a year. Therefore, during computer operations, the "00" may
be interpreted as being the year 1900, instead of the Year 2000. If not
corrected, many computer systems could fail or create erroneous results.
Computer systems, equipment and programs that are free from the Year 2000
problem are generally referred to as being compliant.
-19-
<PAGE>
Year 2000 - Internal Systems
The Company has completed an assessment of its internal business applications
and computer systems, including those used in underwriting, policy processing
and recording policy details. The Company believes that all critical business
applications and systems will function properly with respect to dates in the
Year 2000 problem. The Company has backup systems in place for power, certain
infrastructure facilities and computer systems in the event of such system
failures. While there can be no assurance that these systems will be free from
failure, the Company believes that any failure from its internal systems will
not materially impact the Company's results of operations or financial
condition.
Year 2000 Exposure from Third Parties; Contingency Plan
The Company has evaluated its potential exposures from the non-compliance, if
any, of its vendors' and customers' systems with the Year 2000. The Company
does not believe that there will be any significant disruption of business from
such vendors and customers. However, there can be no assurance that the systems
of its vendors and customers, on which the Company relies on for supporting
information and certain services, will be Year 2000 compliant and will not have
an effect on the Company's business operations, financial results or financial
condition.
The Company has a contingency plan in the event that certain communication
systems, key utilities, or vendor systems prove not to be Year 2000 compliant.
However, the Company realizes that any reasonable contingency plan cannot
accurately account for all possible scenarios which may arise as a result of
Year 2000 related computer problems. The Company continually evaluates the
status of its Year 2000 exposures and modifies its contingency plan as needed.
Year 2000 Policy Coverage
In addition to the risks and costs associated with its internal systems and
third party vendors, the Company continues to evaluate its underwriting risk
arising from potential losses associated with Year 2000 failures. Variables
which may affect the pervasiveness and severity of Year 2000 problem include,
but are not limited to, the magnitude of the amount of costs and expenses
directly attributable to Year 2000 failures, the portion of such amount, if any,
that constitutes insurable losses, and the extent of governmental intervention.
Moreover, standard insurance and reinsurance contracts neither explicitly
include nor explicitly exclude coverage for Year 2000 failures. The Company
does not believe that Year 2000 losses should be covered under the standard
forms of contracts that it provides. However, some Year 2000 related losses may
or may not be determined to be covered under standard insurance and reinsurance
contracts, depending upon the specific contract language, the applicable case
law, and the facts and circumstances of each loss. The Company's Year 2000
initiative seeks to minimize its potential Year 2000 underwriting exposure by
(1) performing an underwriting evaluation of potential Year 2000 exposures; (2)
declining to renew certain contracts where the Company believes the potential
risk from Year 2000 losses is too great, and (3) structuring reinsurance
contractual language to mitigate potential exposure. The Company cannot be
certain that these steps will adequately minimize its Year 2000 underwriting
exposures, and given the possible magnitude of the Year 2000 problem, the
Company may incur Year 2000 insurance coverage related losses.
-20-
<PAGE>
The Company believes it is taking reasonable and appropriate measures in the
course of its business operations and client relationship to avoid or mitigate
such Year 2000 related exposures.
Current Outlook
It is anticipated that the competitive pressures that have existed since 1995
will continue into 1999. During the past four years, these pressures have
suppressed the premiums for property catastrophe coverages. However, partially
as a result of the $10.1 billion of U.S. catastrophe losses reported in 1998 as
estimated by Property Claims Services, the Company believes that the rate
reductions, which have been evident in the past four years, may subside. Also,
the Company believes that opportunities in certain select markets will continue
to exist, which because of the Company's competitive advantages, including its
technological capabilities and its relationships with leading brokers and ceding
companies, will enable the Company to find additional opportunities in the
property catastrophe reinsurance business that otherwise would not be available.
The Company also believes that its purchase of reinsurance protection will
increase during the year. This is partially due to rate increases on certain
policies that the Company accessed for protection during 1998, plus additional
protection which the Company believes it will purchase during the year.
The Company announced an additional $25 million share buyback in May 1999.
Although any share repurchase activity is subject to market conditions, if the
Company were to complete these repurchases, such repurchases could reduce the
Company's interest income in the future.
The Company expects to continue with its sale and reinsurance transactions for
Nobel. Accordingly, the Company believes that its future quarters consolidated
results will reflect a reduced impact from Nobel and its affiliates. During the
first quarter of 1999, the Company recorded $17.1 million of gross written
premiums, $8.9 million of net premiums written and net income of $0.8 million
related to Nobel and its affiliates. While the Company intends to continue to
pursue an exit from Nobel's low-value dwelling business, there can be no
assurance that the Company will complete any specific transaction and, if a
sales transaction does occur, there can be no assurance that the Company will
receive the estimated fair value of the remaining Nobel business. Accordingly,
the future results of the Company's operations could be adversely affected by a
potential write-down of goodwill, a partial write-off of the deferred tax asset
or by other costs or loss in value which could occur during the transaction
process. The Company expects that Nobel and its affiliates will continue to
operate its business units on a transitional basis.
The Company's financial strength has enabled it to pursue opportunities outside
of the property catastrophe reinsurance market into the catastrophe exposed
primary insurance market. The Company believes that its financial strength will
enable it to continue to pursue other opportunities in the future. There can be
no assurance that the Company's pursuit of such opportunities will materially
impact the Company's financial condition and results of operations.
During recent fiscal years there has been considerable consolidation among
leading brokerage firms and also among the Company's customers. Although
consolidations may continue to occur,
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<PAGE>
the Company believes that its financial strength, its position as one of the
market leaders in the property catastrophe reinsurance industry and its ability
to provide innovative products to the industry will minimize any effect on the
Company's business.
Note on Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. Forward-looking statements are statements other than historical
information or statements of current condition. Some forward-looking statements
may be identified by use of terms such as "believes," "anticipates," "intends,"
or "expects." These forward-looking statements relate, among other things, to
the plans and objectives of the Company for future operations. In light of the
risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be considered as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. Numerous factors could cause the Company's
actual results to differ materially from those in the forward-looking
statements, including the following: (i) the occurrence of catastrophic events
with a frequency or severity exceeding the Company's estimates; (ii) a decrease
in the level of demand for property catastrophe reinsurance, or increased
competition in the industry; (iii) the lowering or loss of one of the financial
or claims-paying ratings of the Company or one or more of its subsidiaries; (iv)
risks associated with implementing business strategies of the Company; (v)
uncertainties in the Company's reserving process; (vi) failure of the Company's
reinsurers to honor their obligations; (vii) actions of competitors including
industry consolidation; (viii) loss of services of any one of the Company's key
executive officers; (ix) the passage of federal or state legislation subjecting
Renaissance Reinsurance to supervision or regulation including additional tax
regulation, in the United States or other jurisdictions in which the Company
operates; (x) challenges by insurance regulators in the United States to
Renaissance Reinsurance's claim of exemption from insurance regulation under the
current laws; (xi) changes in economic conditions, including currency rate
conditions which could affect the Company's investment portfolio; (xii)
uncertainties with respect to the Company's planned reinsurance or distribution
of certain operating units of Nobel Insurance Company; (xiii) risks relating to
the Year 2000 issue; or (xiv) a contention by the United States Internal Revenue
Service that the Company or Renaissance Reinsurance is engaged in the conduct of
a trade or business within the U.S. The foregoing review of important factors
should not be construed as exhaustive; the Company undertakes no obligation to
release publicly the results of any future revisions it may make to forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
-22-
<PAGE>
Item III Quantitative and Qualitative Disclosures About Market Risk
Market Sensitive Instruments
In accordance with the Securities and Exchange Commission's Financial Reporting
Release No. 48, the Company's investment portfolio includes investments which
are subject to changes in market values with changes in interest rates. The
aggregate hypothetical loss generated from an immediate adverse parallel shift
in the treasury yield curve of 100 basis points would cause a decrease in total
return of 3.4 percent, which equates to a decrease in market value of
approximately $27.3 million on a portfolio valued at $803.0 million at March 31,
1999. An immediate time horizon was used as this presents the worst-case
scenario.
-23-
<PAGE>
Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
None
Item 2 -- Changes in Securities and Use of Proceeds
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 27 - Financial Data Schedule.
b. Current Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on January 11, 1999.
-24-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
RenaissanceRe Holdings Ltd.
By: /s/ John M. Lummis
-------------------------
John M. Lummis
Senior Vice President and
Chief Financial Officer
Date: May 17, 1999
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 715,247
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 743,071
<CASH> 175,232
<RECOVER-REINSURE> 184,588
<DEFERRED-ACQUISITION> 18,103
<TOTAL-ASSETS> 1,429,309
<POLICY-LOSSES> 316,284
<UNEARNED-PREMIUMS> 168,752
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 125,000
0
0
<COMMON> 20,918
<OTHER-SE> 585,489
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57,988
<INVESTMENT-INCOME> 13,106
<INVESTMENT-GAINS> (497)
<OTHER-INCOME> (269)
<BENEFITS> 15,695
<UNDERWRITING-AMORTIZATION> 6,784
<UNDERWRITING-OTHER> 13,477
<INCOME-PRETAX> 30,189
<INCOME-TAX> 171
<INCOME-CONTINUING> 30,018
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<EXTRAORDINARY> 0
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<NET-INCOME> 30,018
<EPS-PRIMARY> 1.42
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