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: September 30, 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 for 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 September 30, 1999 was 20,483,570. Total number of pages in this report: 29
RenaissanceRe Holdings Ltd. INDEX TO FORM 10-Q Part I -- Financial Information Item 1 -- Financial Statements Consolidated Balance Sheets as of September 30, 1999 3 (Unaudited) and December 31, 1998 Unaudited Consolidated Statements of Operations for 4 the three and nine month periods ended September 30, 1999 and 1998 Unaudited Consolidated Statements of Changes in Shareholders' 5 Equity for the nine month period ended September 30, 1999 and 1998 Unaudited Consolidated Statements of Cash Flows 6 for the nine month period ended September 30, 1999 and 1998 Notes to Unaudited Consolidated Financial Statements 7 Item 2 -- Management's Discussion and Analysis of 14 Results of Operations and Financial Condition Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 27 Part II -- Other Information 28 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. 29 -2-
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 -------------------------------------------- Sept. 30, 1999 Dec. 31, 1998 ---------------------- ------------------- (Unaudited) <S> <C> <C> Assets Fixed maturity investments available for sale, at fair value (Amortized cost $927,758 and $804,968 at Sept. 30, 1999 and December 31, 1998, respectively) $ 910,728 $ 799,995 Short term investments, at cost 19,605 24,983 Other investments 25,378 1,630 Cash and cash equivalents 169,636 115,701 -------------------- ------------------ Total investments and cash 1,125,347 942,309 Premiums receivable 158,360 96,761 Ceded reinsurance balances 69,193 41,370 Losses and premiums recoverable 161,152 200,379 Accrued investment income 12,949 9,968 Deferred acquisition costs 18,690 10,997 Other assets 53,880 54,380 -------------------- ------------------ Total assets $ 1,599,571 $ 1,356,164 ==================== ================== Liabilities, Minority Interest and Shareholders' Equity Liabilities Reserve for claims and claim expenses $ 336,759 $ 298,829 Reserve for unearned premiums 163,228 94,466 Bank loans 250,000 100,000 Reinsurance balances payable 72,155 121,658 Investment balances due 48,504 -- Accounts payable and other 21,997 28,979 -------------------- ------------------ Total liabilities 892,643 643,932 -------------------- ------------------ Minority Interest - Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 94,100 100,000 Shareholders' Equity Common shares and additional paid-in capital 20,484 39,035 Unearned stock grant compensation (10,997) (8,183) Accumulated other comprehensive income (16,816) (5,144) Retained earnings 620,157 586,524 -------------------- ------------------ Total shareholders' equity 612,828 612,232 -------------------- ------------------ Total liabilities, minority interest, and shareholders' equity $ 1,599,571 $ 1,356,164 ==================== ================== Book value per Common Share $ 29.92 $ 28.28 ==================== ================== Common Shares outstanding 20,484 21,646 ==================== ================== </TABLE> The accompanying notes are an integral part of these financial statements -3-
RenaissanceRe Holdings Ltd. and Subsidiaries Consolidated Statements of Operations For the three and nine month periods ended September 30, 1999 and 1998 (in thousands of United States Dollars, except per share amounts) (Unaudited) <TABLE> <CAPTION> Quarters Ended Year to date ----------------------------------- --------------------------------- Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998 ----------------- ---------------- ---------------- --------------- <S> <C> <C> <C> <C> Revenues Gross Premiums Written $ 97,582 $ 78,117 $ 320,051 $ 243,113 ================= ================ ================ =============== Net premiums written $ 58,238 $ 66,381 $ 209,451 $ 183,995 Increase in unearned premiums (4,115) (7,715) (39,672) (32,191) ----------------- ---------------- ---------------- --------------- Net premiums earned 54,123 58,666 169,779 151,804 Net investment income 15,714 13,305 42,859 39,563 Net foreign exchange gains (losses) 107 49 (165) (802) Other income 882 642 1,073 989 Net realized losses on investments (6,020) (5,833) (11,547) (6,760) ----------------- ---------------- ---------------- --------------- Total revenues 64,806 66,829 201,999 184,794 ----------------- ---------------- ---------------- --------------- Expenses Claims and claim expenses incurred 19,420 26,696 56,120 44,866 Acquisition expenses 7,540 7,536 20,349 19,364 Operational expenses 8,771 9,581 27,379 23,783 Corporate expenses 693 1,252 8,590 2,854 Interest expense 2,675 1,381 5,793 2,961 ----------------- ---------------- ---------------- --------------- Total expenses 39,099 46,446 118,231 93,828 ----------------- ---------------- ---------------- --------------- Income before minority interests and taxes 25,707 20,383 83,768 90,966 Minority interest - Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 1,861 2,088 6,100 6,358 Minority interest - Glencoe -- -- -- 705 ----------------- ---------------- --------------- --------------- Income before taxes 23,846 18,295 77,668 83,903 Income tax benefit (128) (2,077) (373) (681) ----------------- ---------------- ---------------- --------------- Net income $ 23,974 $ 20,372 $ 78,041 $ 84,584 ================= ================ ================ =============== Earnings per Common Share - basic $ 1.18 $ 0.93 $ 3.78 $ 3.81 Earnings per Common Share - diluted $ 1.17 $ 0.91 $ 3.74 $ 3.74 Operating earnings per Common Share - diluted $ 1.46 $ 1.17 $ 4.30 $ 4.04 Average shares outstanding - basic 20,356 21,962 20,673 22,173 Average shares outstanding - diluted 20,536 22,393 20,854 22,613 Claims and claim expense ratio 35.9% 45.5% 33.1% 29.6% Expense ratio 30.1% 29.2% 28.1% 28.4% ----------------- ---------------- ---------------- --------------- Combined ratio 66.0% 74.7% 61.2% 58.0% ================= ================ ================ =============== </TABLE> The accompanying notes are an integral part of these financial statements -4-
RenaissanceRe Holdings Ltd. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the nine months ended September 30, 1999 and 1998 (in thousands of United States Dollars) (Unaudited) <TABLE> <CAPTION> Year to date ---------------------------------------- Sept. 30, 1999 Sept. 30, 1998 ------------------ ----------------- <S> <C> <C> Common Stock & Paid-in Capital Balance -- January 1 $ 39,035 $ 74,922 Exercise of stock options & restricted stock awards 6,422 6,637 Repurchase of capital securities 885 -- Repurchase of shares (25,858) (25,389) ------------------ -------------- Balance -- September 30 20,484 56,170 ------------------ -------------- Unearned stock grant compensation Balance -- January 1 (8,183) (4,731) Stock grants awarded (5,387) (5,964) Amortization 2,573 1,799 ------------------ -------------- Balance -- September 30 (10,997) (8,896) ------------------ -------------- Accumulated other comprehensive income (1) Balance -- January 1 (5,144) (10,155) Net unrealized gains (losses) on securities, net of adjustment (see disclosure) (11,672) 8,741 ------------------ -------------- Balance -- September 30 (16,816) (1,414) ------------------ -------------- Retained earnings Balance -- January 1 586,524 538,667 Net income 78,041 84,584 Dividends paid (22,001) (20,204) Repurchase of shares (22,761) -- Exercise of stock options 354 -- ------------------ -------------- Balance -- September 30 620,157 603,047 ------------------ -------------- Total Shareholders' Equity $ 612,828 $ 648,907 ================== ============== Comprehensive income Net income $ 78,041 $ 84,584 Change in comprehensive income (11,672) 8,741 ------------------ -------------- Comprehensive income $ 66,369 $ 93,325 ================== ============== Disclosure regarding net unrealized gains (losses) Net unrealized holding gains (losses) arising during period $ (23,219) $ 1,981 Less: net realized losses (gains) included in net income 11,547 6,760 ------------------ -------------- Net unrealized gains (losses) on securities during the period $ (11,672) $ 8,741 ================== ============== </TABLE> (1) Note - comprehensive income for the quarters ended September 30, 1999 and 1998 were $(0.6) and $3.8 mil., respectively. The accompanying notes are an integral part of these financial statements -5-
RenaissanceRe Holdings Ltd. and Subsidiaries Consolidated Statements of Cash Flows For the nine months ended September 30, 1999 and 1998 (in thousands of United States Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Year to date -------------------------------------- Sept. 30, 1999 Sept. 30, 1998 ----------------- ----------------- <S> <C> <C> Cash flows from operating activities Net income $ 78,041 $ 84,584 Adjustments to reconcile net income to cash provided by operating activities Amortization and depreciation 2,082 3,651 Realized investment losses (gains) 11,547 6,760 Amortization/writeoff of goodwill 6,888 -- Minority share of income -- 705 Change in: Reinsurance balances, net (111,102) (10,072) Ceded reinsurance balances (27,823) (2,043) Deferred acquisition costs (7,693) (9,125) Reserve for claims and claim expenses, net 77,157 6,806 Reserve for unearned premiums 68,762 -- Other (13,351) (6,453) ----------------- ----------------- Net cash provided by operating activities 84,508 74,813 ----------------- ----------------- Cash flows used in investing activities Proceeds from maturities and sales of investments 1,571,937 536,867 Purchase of investments available for sale (1,676,875) (544,595) Purchase of minority interest's share in Glencoe -- (15,204) Payment for purchase of Nobel, net of cash acquired -- (58,869) ----------------- ----------------- Net cash used in investing activities (104,938) (81,801) ----------------- ----------------- Cash flows provided by financing activities Proceeds from bank loan 150,000 50,000 Purchase of capital securities (5,015) -- Dividends paid (22,001) (20,204) Purchase of Common Shares (48,619) (25,389) ----------------- ----------------- Net cash provided by financing activities 74,365 4,407 ----------------- ----------------- Net increase in cash and cash equivalents 53,935 (2,581) Cash and cash equivalents, beginning of period 115,701 122,929 ----------------- ----------------- Cash and cash equivalents, end of period $ 169,636 $ 120,348 ================= ================= </TABLE> The accompanying notes are an integral part of these financial statements -6-
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") and its wholly owned subsidiaries, including 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 the 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. 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, 2000. Currently, the -7-
Company does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial statements. 3. 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 $89.7 and $35.2 million for the nine months ended September 30, 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 nine months ended September 30, 1999 were $85.9 million compared to $55.5 million for the nine months ended September 30, 1998. Included in losses and premiums recoverable are recoverables of $30.1 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," adverse development related to these retroactive reinsurance 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 operations in future periods, based on the recovery method. As of September 30, 1999, the Company has deferred $16.4 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 operations. During the first nine months of 1999, the Company recognized $11.2 million as claim recoveries under this contract. 4. Interest expense on outstanding loans was $5.8 million for the nine month period ended September 30, 1999 and $3.0 million for the same period in the previous year. The increase in interest expense is due to additional borrowings of $50 million in 1998 and $150 million in 1999. See "Financial Condition Capital Resources and Shareholders' Equity" for further discussion. On September 1, 1999, the Company paid a semi-annual dividend of $4.3 million on Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company ("Capital Securities"). 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: -8-
<TABLE> <CAPTION> - --------------------------------------------------------------------------------------------- Quarter ended September 30, 1999 1998 - --------------------------------------------------------------------------------------------- (in thousands of U.S. dollars except share and per share data) - --------------------------------------------------------------------------------------------- Numerator: <S> <C> <C> Net income $ 23,974 $ 20,372 ============================= Denominator: Denominator for basic earnings per share - Weighted average shares 20,356,231 21,962,000 Per share equivalents of employee stock Options and restricted shares 179,507 431,000 ----------------------------- Denominator for diluted earnings per share - Adjusted weighted average shares and Assumed conversions 20,535,737 22,393,000 ============================= Basic earnings per share $1.18 $0.93 Diluted earnings per share $1.17 $0.91 <CAPTION> - --------------------------------------------------------------------------------------------- Nine months to September 30, 1999 1998 - --------------------------------------------------------------------------------------------- (in thousands of U.S. dollars except share and per share data) <S> <C> <C> Numerator: Net income $ 78,041 $ 84,584 ============================= Denominator: Denominator for basic earnings per share - Weighted average shares 20,672,528 22,173,000 Per share equivalents of employee stock Options and restricted shares 181,186 440,000 ----------------------------- Denominator for diluted earnings per share - Adjusted weighted average shares and Assumed conversions 20,853,714 22,613,000 ============================= Basic earnings per share $3.78 $3.81 Diluted earnings per share $3.74 $3.74 </TABLE> 6. The Board of Directors of the Company declared, and the Company paid, a dividend of $0.35 per share to shareholders of record on each of February 18, May 28, and August 19, 1999. On November 4, 1999, the Board of Directors declared a dividend of $0.35 per share payable on December 2, 1999 to shareholders of record on November 18, 1999. 7. In May 1999, the Company announced a $25 million share repurchase program. Through September 30, 1999 the Company repurchased 1,389,500 shares at a cost of $48.6 million. Also, through September 30, 1999 the Company repurchased $5.9 million of the -9-
Capital Securities recognizing a gain of $0.9 million, which was reflected in additional paid-in capital. 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. Segment data for the three and nine month periods ended September 30, 1999 and 1998 are as follows: <TABLE> <CAPTION> (in thousands) Quarter ended September 30, 1999 Reinsurance Primary Other Total ----------------------------------------------------------------- <S> <C> <C> <C> <C> Gross premiums written $ 79,466 $ 18,117 $ -- $ 97,582 Total revenues 54,248 9,176 1,383 64,806 Income (loss) before taxes 27,885 (2,465) (1,574) 23,846 Assets 1,090,097 321,888 187,586 1,599,571 ----------------------------------------------------------------- Claims and claim expense ratio 29.4% 75.9% 35.9% Expense ratio 27.2% 48.4% 30.1% ----------------------------------------------------------------- Combined ratio 56.6% 124.3% 66.0% ----------------------------------------------------------------- <CAPTION> Quarter ended September 30, 1998 Reinsurance Primary Other Total ----------------------------------------------------------------- <S> <C> <C> <C> <C> Gross premiums written $ 53,976 $ 24,141 $ -- $ 78,117 Total revenues 48,282 18,025 522 66,829 Income (loss) before taxes 27,477 (5,346) (3,835) 18,295 Assets 934,402 301,568 104,336 1,340,306 ----------------------------------------------------------------- Claims and claim expense ratio 19.8% 112.6% 45.5% Expense ratio 29.3% 28.8% 29.2% ----------------------------------------------------------------- Combined ratio 49.1% 141.4% 74.7% ================================================================= </TABLE> -10-
<TABLE> <CAPTION> (in thousands) Nine months ended September 30, 1999 Reinsurance Primary Other Total ---------------------------------------------------------------- <S> <C> <C> <C> <C> Gross premiums written $ 269,687 $ 50,364 $ - $ 320,051 Total revenues 166,614 32,193 3,192 201,999 Income (loss) before taxes 86,619 201 (9,152) 77,668 Assets 1,090,097 321,888 187,586 1,599,571 ---------------------------------------------------------------- Claims and claim expense ratio 29.5% 52.0% - 33.1% Expense ratio 26.5% 22.0% - 28.1% ---------------------------------------------------------------- Combined ratio 56.0% 74.0% - 61.2% ---------------------------------------------------------------- <CAPTION> Nine months ended September 30, 1998 Reinsurance Primary Other Total ---------------------------------------------------------------- <S> <C> <C> <C> <C> Gross premiums written $ 201,259 $ 41,854 $ - $ 243,113 Total revenues 154,225 29,938 631 184,794 Income (loss) before taxes 95,693 92 (11,882) 83,903 Assets 934,402 301,568 104,336 1,340,306 ---------------------------------------------------------------- Claims and claim expense ratio 18.5% 83.5% - 29.6% Expense ratio 28.0% 30.2% - 28.4% ---------------------------------------------------------------- Combined ratio 46.5% 113.7% - 58.0% ---------------------------------------------------------------- </TABLE> The Company's Bermuda holding company is the primary contributor to the results reflected in "Other" segment. The pre tax loss of the holding company primarily consisted of interest expense on bank loans, the minority interest on the Capital Securities, and realized investment losses on the sales of investments, partially offset by investment income on the assets of the holding company. 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 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. -11-
<TABLE> <CAPTION> Pro Forma Statements - ---------------------------------------------- (in thousands except per share data) Historic Proforma Nine months ended 30-Sep-99 30-Sep-98 30-Sep-98 ------------------------------------------------- <S> <C> <C> <C> Total revenues 201,999 184,794 218,076 Net income 78,041 84,584 70,327 Earnings per common share - basic $ 3.78 $ 3.81 $ 3.17 Earnings per common share - diluted $ 3.74 $ 3.74 $ 3.11 Shares o/s - basic 20,673 22,173 22,173 Shares o/s - diluted 20,854 22,613 22,614 </TABLE> As of September 30, 1999, the Company has completed the sale and/or reinsurance of Nobel's principal business units. Accordingly, future periods will reflect a reduced impact from Nobel and its affiliates. 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 $22.3 million which are expected to 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. <TABLE> <CAPTION> Nine months ended September 30, 1999 (in thousands) Current Deferred Total ------------------------------------------ <S> <C> <C> <C> U.S. federal tax expense (benefit) $ 924 $ (1,852) $ (928) U.S. state and local tax expense (benefit) 555 -- 555 ------------------------------------------ $ 1,479 $ (1,852) $ (373) ------------------------------------------ </TABLE> The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1999 are presented below: Deferred tax assets: Net operating loss carryforwards $ 11,304 Retroactive reinsurance gain 5,571 Claims reserves, principally due to discounting for tax 3,227 Unearned premiums 416 Other 2,243 ----------- 22,761 Deferred tax liabilities: Deferred policy acquisition costs (261) Unrealized gains 214 Other 539 ----------- Net deferrred tax asset $ 23,253 =========== -12-
11. Subsequent to the quarter ended September 30, 1999, the Company entered into the following transactions: a. Effective October 5, 1999 the Company re-negotiated its revolving credit facility increasing the aggregate amount available under the facility from $200 million to $275 million. Effective November 8, 1999 the facility was increased to $300 million. The interest rate under the new facility is 72.5 basis points above LIBOR. b. Effective October 28, 1999 the Company purchased an additional $4.5 million of its Capital Securities, recognizing a gain of $0.9 million, which is reflected in additional paid-in capital. c. Effective November 4, 1999 the Company's Board of Directors authorized the Company to buy back an additional $25 million of common stock. -13-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is a discussion and analysis of the Company's results of operations for the three months and nine months ended September 30, 1999 and 1998 and financial condition as of September 30, 1999. This discussion and analysis should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 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. RESULTS OF OPERATIONS For the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 For the quarter ended September 30, 1999, net income available to common shareholders was $24.0 million or $1.17 per share, compared to $20.4 million or $0.91 per share for the same quarter in 1998. Gross premiums written for the third quarter of 1999 and 1998 were as follows: Quarter ended (in thousands) 30-Sep-99 30-Sep-98 ------------------------------- Renaissance Reinsurance $ 79,466 $ 54,377 Nobel 12,703 18,297 DeSoto 2,951 3,338 Glencoe 2,462 2,105 ------------------------------- $ 97,582 $ 78,117 ------------------------------- -14-
The 46.1 percent increase in written premiums for Renaissance Reinsurance was the result of a 42.6 percent increase in premiums related to new business, a 11.2 percent decrease in premiums due to the Company not renewing coverage and a 14.7 percent increase related to changes in pricing, participation level and coverage on renewed business. As discussed in the Company's 1998 10-K and its 10-Q's for the quarters ended March 31 and June 30, 1999, the Company has entered into agreements which provide for the sale or reinsurance of Nobel's principal operating units. Accordingly, the Company expects a decrease in future premium volumes, interest income, and related expenses. (See Financial Condition -- Nobel). During 1999, the Company continued to purchase reinsurance to reduce its exposure to certain losses. During the third quarter of 1999, ceded premiums written were $39.3 million, compared with $11.7 million for the same quarter in 1998. The $27.6 million increase in ceded premiums written is a result of Renaissance Reinsurance purchasing $17.8 million of additional reinsurance protection during the third quarter of 1999. Also, in conjunction with the process of discontinuing the operations at Nobel, Nobel ceded the majority of its $12.7 million gross written premiums for the quarter, reflecting net written premiums of only $0.8 million. The table below sets forth the Company's combined ratio and components thereof, split by segment for the quarters ended September 30, 1999 and 1998: <TABLE> <CAPTION> ---------------------------------------------------------------------------------- Reinsurance Primary Total ---------------------------------------------------------------------------------- Quarter ended: 30-Sep-99 30-Sep-98 30-Sep-99 30-Sep-98 30-Sep-99 30-Sep-98 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loss ratio 29.4% 19.8% 75.9% 112.6% 35.9% 45.5% Expense ratio 27.2% 29.3% 48.4% 28.8% 30.1% 29.2% ---------------------------------------------------------------------------------- Combined ratio 56.6% 49.1% 124.3% 141.4% 66.0% 74.7% ---------------------------------------------------------------------------------- </TABLE> Claims and claim expenses incurred for the quarter ended September 30, 1999, as a percentage of net earned premiums, were lower for the quarter ended September 30, 1999 due to the inclusion of $7.4 million of losses related to Nobel in the comparative quarter ended September 30, 1998. The Reinsurance operations included net losses of $13.7 million or 29.4% of net premiums earned, compared with $8.4 million for the same period in 1998 or 19.8% of net premiums earned. The primary reason for the increase in net losses for the Reinsurance operations was due to the frequency of catastrophic events reported in the quarter ended September 30, 1999, including earthquakes in Turkey and Taiwan, Hurricane Floyd, and Typhoon Bart. Although individually none of these events contributed materially to the losses reported during the quarter, in the aggregate these events were the primary cause of the increase in the quarterly losses. Underwriting expenses are comprised of acquisition expenses and operational expenses. Acquisition expenses were $7.5 million for the quarter ended September 30, 1999 and for the same period in 1998. Operating expenses for the third quarter of 1999 decreased to $8.8 million compared with $9.6 million for the same quarter of 1998. Although total operating expenses decreased, operating expenses as a percentage of earned premiums have increased slightly due to the continuation of certain administrative costs for Nobel, with no corresponding net premiums earned. -15-
Net investment income, excluding realized investment gains and losses, for the third quarter of 1999 was $15.7 million, compared to $13.3 million for the same period in 1998. The increase in net investment income reflects an increase in investment yields and an increase in invested assets, partially due to the $150 million of increased borrowings under the Company's revolving credit facility. Interest expense and minority interest for the quarter ended September 30, 1999 increased to $4.5 million from $3.5 million for the same period in 1998. The increase was primarily related to $150 million of additional borrowings under the Company's revolving credit facility, $125 million of which was drawn on August 13, 1999. See Financial Condition - Capital Resources and Shareholders' Equity. For the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998 For the nine months ended September 30, 1999, net income available to common shareholders was $78.0 million or $3.74 per share, compared to $84.6 million or $3.74 per share for the same period in 1998. Gross premiums written for the nine months ended September 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> Nine months ended (in thousands) 30-Sep-99 30-Sep-98 ------------------------------ <S> <C> <C> Renaissance Reinsurance $ 269,688 $ 201,259 Nobel 39,280 18,297 DeSoto 7,444 18,591 Glencoe 3,639 4,966 ------------------------------ $ 320,051 $ 243,113 ============================== </TABLE> The 34.0 percent increase in written premiums for Renaissance Reinsurance was the result of a 45.1 percent increase in premiums related to new business, timing differences and non-recurring business, a 18.5 percent decrease in premiums due to the Company not renewing coverage and a 17.4 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 accordingly premiums written in the first nine months of 1998 reflect only three months of premiums written by Nobel, whereas the gross premiums written for the nine months ended September 30, 1999 reflect three quarters of premiums related to Nobel. The 1998 premium volume in DeSoto includes its initial assumption of approximately 12,000 policies and in force premium of approximately $10 million. -16-
As discussed in the Company's 1998 10-K and its 10-Q's for the quarters ended March 31 and June 30, 1999, the Company has entered into agreements which provide for the sale or reinsurance of Nobel's principal operating units. Accordingly, the Company expects a decrease in future premium volumes, interest income, and related expenses. (See Financial Condition -- Nobel). During 1999, the Company continued to purchase reinsurance to reduce its exposure to certain losses. During the first nine months of 1999, ceded premiums written were $110.6 million, compared with $59.1 million for the same period in 1998. The increase in ceded premiums primarily relates to two items; 1) Renaissance Reinsurance purchased a greater amount of reinsurance coverage for the first nine months of 1999 ($70.9 million), compared with the first nine months of 1998 ($39.8 million), and 2) with the reduction in the operations at Nobel, Nobel has ceded the majority of its gross premiums written, totaling $24 million of ceded premium in the first nine months of 1999 compared with $5.0 million for the first nine months of 1998. The table below sets forth the Company's combined ratio and components thereof, split by segment for the nine months ended September 30, 1999 and 1998: <TABLE> <CAPTION> ---------------------------------------------------------------------------------- Reinsurance Primary Total ---------------------------------------------------------------------------------- Nine months ended: 30-Sep-99 30-Sep-98 30-Sep-99 30-Sep-98 30-Sep-99 30-Sep-98 ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loss ratio 29.5% 18.5% 52.0% 83.5% 33.1% 29.6% Expense ratio 26.5% 28.0% 22.0% 30.2% 28.1% 28.4% ---------------------------------------------------------------------------------- Combined ratio 56.0% 46.5% 74.0% 113.7% 61.2% 58.0% ---------------------------------------------------------------------------------- </TABLE> Claims and claim expenses incurred for the nine months ended September 30, 1999, as a percentage of net earned premiums, increased from the prior year due to a $19 million increase in losses for the Reinsurance operations. The increase in losses of the Reinsurance operations primarily related to 1) increased catastrophic events during the third quarter of 1999 (Hurricane Floyd, earthquakes in Turkey and Taiwan and Typhoon Bart); 2) losses related to Australia hail storms and Oklahoma tornadoes during the second quarter of 1999; and 3) initial reserve estimates on events occurring during the first quarter of 1999, partially offset by reductions in reserves relating to accident years 1997 and prior. Underwriting expenses are comprised of acquisition expenses and operational expenses. Acquisition expenses were $20.3 million for the nine months ended September 30, 1999 and $19.4 million for the same period in 1998. Although operating expenses, as a percentage of net premiums earned, remained relatively flat for the period, total operating expenses for the first nine months of 1999 increased to $27.4 million compared with $23.8 million for the same period of 1998. The primary cause for the increase in operating expenses was an increase in operating costs associated with the Company's primary operations, and certain one time costs, including severance costs, related to Nobel and the discontinuance of the majority of its operations. Net investment income, excluding realized investment gains and losses, for the nine months ended September 30, 1999 was $42.9 million, compared to $39.6 million for the same period in 1998. The increase in net investment income reflects an increase in investment yields and an -17-
increase in invested assets, partially due to the $150 million of increased borrowings under the Company's revolving credit facility. Corporate expenses increased to $8.6 million for the nine months ended September 30, 1999, compared with $2.9 million for the same period in 1998. The increase primarily relates to a write-off of $6.6 million of goodwill related to the purchase of the operating subsidiaries of Nobel Limited. Interest expense and minority interest for the nine months ended September 30, 1999 increased to $11.9 million from $10.0 million for the same period in 1998. The increase was primarily related to $150 million of additional borrowings under the Company's revolving credit facility, $125 million of which was drawn on August 13, 1999. FINANCIAL CONDITION Liquidity and Capital Requirements As a holding company, RenaissanceRe relies on investment income and 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 require the Company's Bermuda subsidiaries to maintain certain measures of solvency and liquidity. As at September 30, 1999 the statutory capital and surplus of the Company's Bermuda subsidiaries was $655.0 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 Glencoe 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. Through September 30, 1999, Renaissance Reinsurance paid aggregate cash dividends of $64.4 million compared to $94.8 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 $29.1 million at September 30, 1999 and the amount required to be maintained was $27.6 million. 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. Also, the Company maintains a revolving credit facility from which it has recently drawn $125 million bringing the balance of bank loans to $250 -18-
million as of September 30, 1999. See Financial Condition - Capital Resources and Shareholders' Equity. Nobel - ----- As previously announced, during the fourth quarter of 1998 the Company recorded an after-tax charge of $40.1 million, related to the operations of Nobel and its affiliates. As a result, during the first nine months of 1999, the Company completed the reinsurance of the casualty and surety books of business and signed agreements under which its bail and low-value dwelling books of business have been assumed by third parties, with obligations to make certain future payments to Nobel based on future revenues and/or profitability of these businesses. Also, Nobel has completed the sale of its IAS/Cat Crew subsidiary to its management team in an earn-out transaction. The Company expects that Nobel and its affiliates will continue to conduct certain functions of the casualty, surety, low-value dwelling and bail businesses on a transitional basis. Renaissance U.S. expects to retain ownership of Nobel along with its licenses in the 50 U.S. states, although there can be no assurance that such licenses can be successfully maintained following such sales. Cash Flows - ---------- The Company's Bermuda operating subsidiaries have historically produced sufficient cash flows to meet expected claims payments and operational expenses and to provide dividend payments to RenaissanceRe. Cash flows from operating activities for the nine months ended September 30, 1999 resulted principally from premium and investment income, reinsurance recoveries, net of paid losses, acquisition costs and underwriting expenses. Cash flows from operations in the first nine months of 1999 were $84.5 million, compared to $74.8 million for the same period in 1998. 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. -19-
Reserves During the nine months ended September 30, 1999 the Company incurred net claims of $56.1 million and paid net losses of $20.2 million. The Company's policy of purchasing reinsurance coverage 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 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 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. With respect to 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 and Shareholders' Equity The total capital resources of the Company as at September 30, 1999 and December 31, 1998 was as follows: <TABLE> <CAPTION> September 30, December 31, (in thousands) 1999 1998 - -------------------------------------------------------------------------------------- <S> <C> <C> Term loan payable $ 35,000 $ 35,000 Revolving Credit Facility -- borrowed 215,000 65,000 Revolving Credit Facility -- unborrowed - 150,000 Minority interest -- Company obligated mandatorily 94,100 100,000 redeemable capital securities of a subsidiary trust Shareholders' Equity 612,828 612,232 - -------------------------------------------------------------------------------------- TOTAL CAPITAL RESOURCES $956,928 $962,232 ====================================================================================== </TABLE> -20-
RenaissanceRe has a $200 million revolving credit agreement with a syndicate of commercial banks. During the third quarter of 1999, the Company drew down an additional $125 million under this facility, bringing total drawings under the facility to $200 million as of September 30, 1999. The funds drawn during the quarter were deposited in the accounts of RenaissanceRe and have increased the liquidity at the parent company. The additional borrowings are available, if necessary, to be contributed to the operating subsidiaries following a large catastrophic event. As of September 30, 1999 the liquidity at the Parent Company, RenaissanceRe, is greater than $230 million. Subsequent to September 30, 1999 the Company re-negotiated the revolving credit facility and, among other things, increased the commitment from $200 million to $300 million. See Footnote 11, Subsequent Events. Interest rates on the facility are based on a spread above LIBOR and averaged approximately 5.6 percent during the first nine months of 1999 (6.1 percent for the same period in 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 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 September 30, 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 nine months 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 September 30, 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 September 30, 1999. During the first nine months of 1999, shareholders' equity increased by $0.6 million, from $612.2 million at December 31, 1998 to $612.8 million at September 30, 1999. The significant components of the change included an increase in the unrealized depreciation on investments of $11.7 million, the payment of dividends of $22.0 million and the repurchase of common shares of $48.6 million, offset by net income from continuing operations of $78.0 million. Investments -21-
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: <TABLE> <CAPTION> September 30, December 31, (in thousands) 1999 1998 - ------------------------------------------------------------------------------------- <S> <C> <C> Investments available for sale, at fair value $ 910,728 $799,995 Short term investments 19,605 24,983 Other investments 25,378 1,630 Cash and cash equivalents 169,636 115,701 - ------------------------------------------------------------------------------------- TOTAL INVESTED ASSETS $1,125,347 $942,309 ===================================================================================== </TABLE> 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 September 30, 1999, the invested asset portfolio had a dollar weighted average rating of AA, an average duration of 2.75 years and an average yield to maturity of 6.8 percent, prior to 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 September 30, 1999 the Company held investments and cash totaling $1.1 billion with a net unrealized depreciation balance of $16.8 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 September 30, 1999, $14.0 million of cash and cash equivalents were invested in currencies other than the U.S. dollar, which represented less than 1 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 nine months ended September 30, 1999 the Company's activities with respect to these securities has approximated $1.1 million of fees and risk premiums compared to $2.2 million for the same period in 1998. To date the Company has not experienced any losses from such securities or derivatives. The Company may in the future also utilize other derivatives. -22-
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 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. 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 associated with the Year 2000. 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 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 has evaluated the status of its Year 2000 exposures and has modified its contingency plan as needed. Year 2000 Policy Coverage -23-
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, many 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 and insurance 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. The Company believes it is taking reasonable and appropriate measures in the course of its business operations and client relationships to avoid or mitigate such Year 2000 related exposures. Current Outlook The competitive pressures that have existed since 1995 have continued in the property catastrophe market during 1999. However, due to recent industry losses, and the related contraction of capacity in the market, the Company has seen price increases in certain pockets of the property catastrophe market, and has accordingly increased it's gross written premiums during the year. Because of continued catastrophic loss activity, the Company anticipates that additional price increases may occur in other pockets of the property catastrophe market. At this time, the Company does not believe that there will be a large upswing in pricing across all market segments, and believes that there continues to be numerous transactions in the market that are under priced. Identifying and avoiding such transactions requires significant underwriting skill, which the Company believes it possesses. The Company believes that because of its competitive advantages, including its technological capabilities and its relationships with leading brokers and ceding companies, that it will continue to find additional opportunities in the property catastrophe reinsurance business that otherwise would not be available. The Company believes that its aggregate cost for reinsurance protection may level off during the upcoming year. It is possible that a portion of the Company's reinsurance protection may become uneconomical to justify continued purchases by the Company. Further, because of -24-
recent loss activity, the cost of the Company's "core" reinsurance protection may increase slightly during the upcoming year. The Company announced an additional $25 million share buyback in November 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 has entered into agreements which provide for the sale and reinsurance of Nobel's principal operating units. Accordingly, the Company believes that its future consolidated results will reflect a reduced impact from Nobel and its affiliates. During the first nine months of 1999, the Company recorded $39.2 million of gross written premiums, $15.2 million of net premiums written and net income of $2.4 million related to Nobel and its affiliates. The Company expects that Nobel and its affiliates will continue to conduct certain functions on a transitional basis and that the Company will continue to maintain ownership of Nobel along with its licenses in the 50 U.S states although there can be no assurance that such licenses can be successfully maintained. 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, 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) -25-
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) risks relating to the Year 2000 issue; or (xiii) 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. -26-
Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Sensitive Instruments The Company's investment portfolio includes investments which are available for trading purposes and 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 2.75 percent, which equates to a decrease in market value of approximately $30.0 million on a portfolio valued at $825.0 million at September 30, 1999. An immediate time horizon was used, as this presents the worst-case scenario. -27-
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 10.1 - Credit Agreement, dated as of October 5, 1999 among RenaissanceRe Holdings Ltd., as Borrower, Various Financial Institutions, as Lenders, Deutsche Bank AG, as LC issuer and Syndication Agent, Fleet National Bank, as Co-Agent, Bank of America National Trust and Savings Association, as Administrative Agent for the Lenders, and Bank of America Securities LLC, as Lead Arranger and Book Manager. Exhibit 27 - Financial Data Schedule. b. Current Reports on Form 8-K: The Registrant did not file any reports on Form 8-K during the period beginning July 1, 1999 and ending September 30, 1999. -28-
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: November 12, 1999 -29-