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, 1998 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, 1998 was 22,547,124. Total number of pages in this report: 18
RenaissanceRe Holdings Ltd. INDEX TO FORM 10-Q Part I -- Financial Information <TABLE> <CAPTION> Item 1 -- Financial Statements <S> <C> Consolidated Balance Sheets as of March 31, 1998 3 (unaudited) and December 31, 1997 Unaudited Consolidated Statements of Operations for 4 the Three Months Ended March 31, 1998 and 1997 Unaudited Consolidated Statements of Changes in Shareholders' 5 Equity for the Three Months Ended March 31, 1998 and 1997 Unaudited Consolidated Statements of Cash Flows 6 for the Three Months Ended March 31, 1998 and 1997 Notes to Unaudited Consolidated Financial Statements 7 Item II -- Management's Discussion and Analysis of 10 Results of Operations and Financial Condition Part II -- Other Information 17 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. 18 </TABLE> 2
Part I - Financial Information Item 1 - Financial Statements RenaissanceRe Holdings Ltd. and Subsidiaries Consolidated Balance Sheets (United States Dollars) (in thousands, except per share amounts) <TABLE> <CAPTION> As at ---------------------------------------------- March 31, 1998 December 31, 1997 ---------------------- --------------------- <S> <C> <C> Assets (Unaudited) Fixed maturity investments available for sale, at fair value (Amortized cost $716,768 and $722,447, at March 31, 1998 and December 31, 1997, respectively) $ 710,435 $ 710,166 Equity securities at fair value (cost $24,229) - 26,372 Cash and cash equivalents 199,618 122,929 ---------------------- --------------------- Total investments and cash 910,053 859,467 Premiums receivable 101,352 56,568 Ceded reinsurance balances 13,774 17,454 Accrued investment income 14,628 12,762 Deferred acquisition costs 12,423 5,739 Other assets 5,993 8,759 ---------------------- --------------------- Total assets $ 1,058,223 $ 960,749 ====================== ===================== Liabilities, Minority Interests and Shareholders' Equity Liabilities Reserve for claims and claim adjustment expenses $ 110,931 $ 110,037 Reserve for unearned premiums 122,354 57,008 Bank loan 50,000 50,000 Reinsurance balances payable 17,278 21,778 Other 11,943 9,541 ---------------------- --------------------- Total liabilities 312,506 248,364 ---------------------- --------------------- Minority Interest - Company obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Company 100,000 100,000 Minority interest - Glencoe 14,111 13,682 Shareholders' Equity Common shares 22,547 22,441 Additional paid-in capital 55,437 52,481 Unearned stock grant compensation (7,655) (4,731) Accumulated other comprehensive income (net unrealized appreciation (depreciation) on investments) (6,309) (10,155) Retained earnings 567,586 538,667 ---------------------- --------------------- Total shareholders' equity 631,606 598,703 ---------------------- --------------------- Total liabilities, minority interests, and shareholders' equity $ 1,058,223 $ 960,749 ====================== ===================== Book value per Common Share $ 28.01 $ 26.68 ====================== ===================== Common Shares outstanding 22,547 22,441 ====================== ===================== </TABLE> The accompanying notes are an integral part of these financial statements 3
RenaissanceRe Holdings Ltd. and Subsidiaries Consolidated Statements of Operations (United States Dollars) (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Quarters Ended ------------------------------------------------- March 31, 1998 March 31, 1997 --------------------- --------------------- Revenues <S> <C> <C> Gross Premiums Written $ 119,145 $ 120,359 ===================== ===================== Net premiums written $ 112,452 $117,648 Increase in unearned premiums (66,355) (61,747) --------------------- --------------------- Net premiums earned 46,097 55,901 Net investment income 13,629 12,125 Net foreign exchange losses (24) (1,643) Net realized gains on investments 1,236 166 --------------------- --------------------- Total revenues 60,938 66,549 --------------------- --------------------- Expenses Claims and claim expenses incurred 7,876 14,238 Acquisition expenses 6,392 6,378 Operational expenses 6,375 5,918 Corporate expenses 790 1,957 Interest expense 786 1,933 --------------------- --------------------- Total expenses 22,219 30,424 --------------------- --------------------- Income before minority interests and taxes 38,719 36,125 Minority interest - Company Obligated Mandatorily Redeemable Capital Securities of a Subsidiary trust holding solely Junior Subordinated Debentures of the Company 2,111 545 Minority interest - Glencoe 422 143 --------------------- --------------------- Income before taxes 36,186 35,437 Income tax expense 512 - --------------------- --------------------- Net income $ 35,674 $ 35,437 ===================== ===================== Earnings per Common Share - basic $ 1.60 $ 1.56 Earnings per Common Share - diluted $ 1.57 $ 1.52 Average shares outstanding - basic 22,298 22,779 Average shares outstanding - diluted 22,708 23,295 Claims and claim expense ratio 17.1% 25.5% Expense ratio 27.7% 22.0% --------------------- --------------------- Combined ratio 44.8% 47.5% ===================== ===================== </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 three months ended March 31, 1998 and 1997 (United States Dollars) (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> 1998 1997 ------------------------------ ----------------------------- Retained earnings <S> <C> <C> <C> <C> Balance -- January 1 $ 538,667 $ 422,061 Net income 35,674 $ 35,674 35,437 $ 35,437 Dividends paid (6,755) (5,716) -------------- -------------- Balance -- March 31 567,586 451,782 -------------- -------------- Accumulated other comprehensive income Balance -- January 1 (10,155) 1,577 Net unrealized gains on securities, net of adjustment (see disclosure) 3,846 3,846 (5,495) (5,495) -------------- ------------- Comprehensive income $ 39,520 $ 29,942 -------------- ============== -------------- ============= Balance -- March 31 (6,309) (3,918) -------------- -------------- Unearned stock grant compensation & loans to officers Balance -- January 1 (4,731) (3,868) Stock grants awarded (3,131) - Amortization and/or interest on loans 207 (59) -------------- -------------- Balance -- March 31 (7,655) (3,927) -------------- -------------- Common Stock Balance -- January 1 22,441 23,531 Exercise of stock options 106 159 Repurchase of shares - (813) -------------- -------------- Balance -- March 31 22,547 22,877 -------------- -------------- Paid-in Capital Balance -- January 1 52,481 102,902 Exercise of options for Ordinary Shares 2,956 (2,138) Repurchase of Ordinary Shares - (27,242) -------------- -------------- Balance -- March 31 55,437 73,522 -------------- -------------- Total Equity $ 631,606 $ 540,336 ============== ============== Disclosure regarding net unrealized gains Net unrealized holding gains (losses) arising during period $ 5,082 $ (5,329) Less: net realized gains included in net income (1,236) (166) -------------- -------------- Net unrealized gains (losses) on securities $ 3,846 $ (5,495) ============== ============== </TABLE> The accompanying notes are an integral part of these financial statements. 5
RenaissanceRe Holdings Ltd. and Subsidiaries Consolidated Statements of Cash Flows (United States Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Quarters Ended -------------------------------------- March 31, 1998 March 31, 1997 ----------------- ----------------- Cash flows from operating activities <S> <C> <C> Net income $ 35,674 $ 35,437 Adjustments to reconcile net income to cash provided by operating activities Amortization and depreciation 1,352 1,331 Net realized investment gains (1,236) (166) Minority share of income 422 143 Change in: Reinsurance balances, net (49,284) (50,095) Ceded reinsurance balances receivable 3,681 3,933 Deferred acquisition costs (6,684) (6,137) Reserve for claims and claim adjustment expenses 893 4,717 Reserve for unearned premiums 65,347 58,649 Other (227) 1,227 ----------------- ----------------- Cash provided by operating activities 49,938 49,039 ----------------- ----------------- Cash flows from investing activities Proceeds from sale of investments 217,740 191,473 Purchase of investments available for sale (210,382) (238,051) Net proceeds from sale of equity securities 26,148 - ----------------- ----------------- Cash provided by (applied to) investing activities 33,506 (46,578) ----------------- ----------------- Cash flows from financing activities Proceeds from issuance of capital securities - 98,500 Repayment of bank loan - (100,000) Dividends paid (6,755) (5,716) Purchase of Common Shares - (28,055) ----------------- ----------------- Cash used in financing activities (6,755) (35,271) ----------------- ----------------- Net increase (decrease) in cash and cash equivalents 76,689 (32,810) Cash and cash equivalents, beginning of period 122,929 198,982 ----------------- ----------------- Cash and cash equivalents, end of period $ 199,618 $ 166,172 ================= ================= </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"), its wholly owned subsidiary, Renaissance Reinsurance Ltd. ("Renaissance Reinsurance") and its majority owned subsidiary Glencoe Insurance Ltd. ("Glencoe"). RenaissanceRe, Renaissance Reinsurance and Glencoe are collectively referred to herein as the "Company". In the opinion of the Company's management, these financial statements reflect all the normal recurring adjustments necessary for a fair presentation of the Company's financial position at March 31, 1998 and December 31, 1997, its results of operations for the three months ended March 31, 1998 and 1997 and cash flows for the three months ended March 31, 1998 and 1997. These consolidated financial statements should be read in conjunction with the 1997 audited consolidated financial statements and related notes thereto. Certain comparative information has been reclassified to conform to current presentation. Because of the seasonality of the Company's business the results of operations for any interim period will not necessarily be indicative of results of operations for the full fiscal year. 2. Significant Accounting Policies a) Earnings per share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the requirements of SFAS No.128. b) Comprehensive Income As of January 1, 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately in the equity section of a statement of financial position. SFAS No. 130 requires net unrealized appreciation (depreciation) on the Company's available for sale investments, which were previously reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform with the 1998 presentation. The adoption of this accounting statement had no impact on the Company's net income or shareholders' equity. Currently, other than the net unrealized gain (loss) on 7
the Company's investments available for sale, there are no other Company balances which are required to be included as a component of other comprehensive income. 3. Earnings per share The following table sets forth the computation of basic and diluted earnings per share. <TABLE> <CAPTION> -------------------------------------------------------------------------------------- March 31 1998 1997 -------------------------------------------------------------------------------------- (in thousands of U.S. dollars except share and per share data) -------------------------------------------------------------------------------------- <S> <C> <C> Numerator: Net income $ 35,674 $ 35,437 =============================== Denominator: Denominator for basic earnings per share - weighted average shares 22,297,935 22,779,461 Per share equivalents of employee stock options and restricted shares 409,797 515,250 ------------------------------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 22,707,732 23,294,711 =============================== Basic earnings per share $1.60 $1.56 Diluted earnings per share $1.57 $1.52 </TABLE> 1. During the quarter ended March 31, 1998, the Board of Directors of the Company declared, and the Company paid, a dividend of $0.30 per share to shareholders of record as of February 18, 1998. 2. Interest paid was $2.9 million for the quarter ended March 31, 1998 and $1.7 million for the same period in the previous year. On March 1, 1998 the Company paid a semi-annual dividend on the Capital Securities of $4.3 million. 3. In January 1998, the Company began to provide personal lines coverages through DeSoto Insurance Company ("DeSoto"), a wholly owned subsidiary of Glencoe. DeSoto is a special purpose Florida homeowners insurance company that is licensed to assume and renew homeowner policies from the Florida JUA, a state sponsored insurance company. DeSoto's initial assumption approximated 12,000 policies and an in-force premium of approximately $10 million. 4. On December 19, 1997, the Company announced it had executed a definitive agreement to acquire the operating subsidiaries of Nobel Insurance Limited, through a newly established U.S. holding company. The principal businesses of Nobel Insurance Limited are the service and underwriting of commercial property, casualty and surety risks for specialized industries and personal lines coverage for low value dwellings. The casualty business will 8
be substantially reinsured by Inter-Ocean Reinsurance Company Ltd., who will provide comprehensive retrospective reinsurance. Nobel Insurance Limited's principal operating unit, Nobel Insurance Company ("Nobel"), is a Texas domiciled company, licensed in 50 states. The purchase of the operating subsidiaries of Nobel Insurance Limited is expected to close by the end of June 1998. Effective April 20, 1998, Nobel sold the renewal rights to its surety business for $3.5 million plus an additional contingent fee of up to an additional $3.5 million. Nobel does not currently anticipate receiving any portion of this contingent fee. 5. Subsequent Events Glencoe has agreed to repurchase from Underwriters Reinsurance Company ("Underwriter Re") its 20 percent interest in Glencoe. The estimated purchase price is $15.2 million. Following this repurchase, RenaissanceRe will own 100% of the outstanding stock of Glencoe. On May 5, 1998, the Company conducted its Annual General Meeting of Shareholders, at which each proposal to be considered by the shareholders described in the Company's Proxy Statement relating to the Annual Meeting (the "Proxy Statement") was adopted. Accordingly, the Memorandum of Association and Bye-laws of the Company have been amended pursuant to such shareholder approval, as described more fully in the Proxy Statement. 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS For the quarter ended March 31, 1998 compared to the quarter ended March 31, 1997 For the quarter ended March 31, 1998, net income available to common shareholders was $35.7 million or $1.57 per share, compared to $35.4 million or $1.52 per share for the same quarter in 1997. Gross premiums written for the first quarter of 1998 have remained relatively flat at $119.1 million compared to gross written premiums of $120.4 million for the same quarter of 1997. The 1.1 percent decrease in written premiums was the result of a 12.3 percent decrease in premiums due to the Company not renewing coverage and a 10.1 percent decrease related to changes in pricing, participation level and coverage on renewed business, which was partially offset by a 23.5 percent increase in premiums related to new business, which is primarily the result of new business written by the primary operations. During 1998, the Company continued to purchase reinsurance to reduce its exposure to certain losses. During the first quarter of 1998, ceded premiums written were $6.7 million compared with $2.7 million for the same quarter in 1997. The table below sets forth the Company's combined ratio and components thereof for the quarters ended March 31, 1998 and 1997: <TABLE> <CAPTION> Quarters Ended March 31, 1998 1997 ---- ---- <S> <C> <C> Loss ratio 17.1% 25.5% Expense ratio 27.7% 22.0% ----------------------------------------- Combined ratio 44.8% 47.5% ========================================= </TABLE> Claims and claim adjustment expenses incurred for the quarter ended March 31, 1998 were $7.9 million or 17.1 percent of net premiums earned. In comparison, claims and claim adjustment expenses for the quarter ended March 31, 1997 were $14.2 million or 25.5 percent of net premiums earned. The decrease relates primarily to a lower level of catastrophe events in the first quarter of 1998. Underwriting expenses are comprised of acquisition expenses and operational expenses. Acquisition expenses were $6.4 million for each of the quarters ended March 31, 1998 and 1997. Operating expenses for the first quarter of 1998 increased to $6.4 million compared with $5.9 million for the same quarter of 1997. The primary cause for the increase in operating expenses, is the continued development of the Company's primary operations. Net investment income, excluding realized investment gains and losses, for the first quarter of 1998 was $13.6 million, compared to $12.1 million for the same period in 1997. The increase in 10
net investment income was the result of an increased return on the investment portfolio and higher average invested assets which is primarily related to cash flows from operations. Interest expense and minority interest for the quarter ended March 31, 1998 increased to $2.9 million from $2.7 million for the same period in 1997. The increase was primarily related to the higher interest rate on the $100.0 million of Capital Securities which were issued during the first quarter of 1997. As of January 1, 1998 the company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately in the equity section of a statement of financial position. SFAS No. 130 requires net unrealized appreciation (depreciation) on the Company's available for sale investments, which were previously reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform with the 1998 presentation. The adoption of this accounting statement had no impact on the Company's net income or shareholders' equity. Currently, other than the net unrealized gain (loss) on the Company's investments available for sale, there are no other Company balances which are required to be included as a component of other comprehensive income. 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, the Company writes other lines of insurance and reinsurance on a limited basis, and is actively exploring new opportunities. Liquidity and Capital Requirements As a holding company, RenaissanceRe relies on invested assets, 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 RenaissanceRe's shareholders. The payment of dividends by its subsidiaries to RenaissanceRe is, under certain circumstances, limited under Bermuda insurance law. The Bermuda Insurance Act 1978, amendments thereto and related regulations of Bermuda (the "Act"), requires the subsidiaries to maintain certain measures of solvency and liquidity. As at March 31, 1998 the statutory capital and surplus of the Company's subsidiaries was $655.0 million, and the amount required to be maintained was $150.0 million. The operating subsidiaries have historically produced sufficient cash flows to meet expected claims payments and operational expenses and to provide dividend payments to RenaissanceRe. The subsidiaries also maintain a concentration of their investments in high quality liquid securities, which management believes will provide sufficient liquidity to meet extraordinary claims payments should the need arise. 11
During the second quarter of 1998, Glencoe entered into an agreement to purchase the 20 percent minority interest in Glencoe held by Underwriters Re. Following the purchase of Glencoe's shares from Underwriters Re, Glencoe will be wholly owned by RenaissanceRe. Under the terms of its agreement to acquire the operating subsidiaries of Nobel Insurance Limited, the Company is required to pay $54.1 million in cash to consummate the purchase, and will provide approximately $8.9 million of limited recourse financing, in exchange for a promissory note from Nobel Insurance Limited, to enable Nobel Insurance Limited to support certain of its obligations in the liquidation of the remaining operations. The Company's U.S. holding company has received a commitment from a syndicate of banks to provide $35 million of term debt and a $15 million revolving credit facility. The loan will be guaranteed by RenaissanceRe. The Company anticipates that its primary insurance operations, including Glencoe, DeSoto and Nobel, will become an increasingly important element of the Company over time. The Company currently believes that internally generated capital will be sufficient to support its reinsurance and insurance businesses, however external financing may be utilized to finance significant transactions. 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 transaction opportunities and periodically engages in discussions regarding possible transactions. However, other than with respect to the anticipated acquisition of Nobel, the Company has no definitive agreements with respect to any material transaction and there can be no assurance that the Company will enter into any such agreement in the future, or that any consummated transaction would contribute materially to the Company's results. Cash flows from operating activities for the first quarter of 1998 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 1998 were $49.9 million, compared to $49.0 million for the same period in 1997. The Company has produced cash flows from operations in the first quarter of 1998, and the full years of 1997 and 1996 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. 12
Reserves The Company's policy is to establish claim reserves for the settlement costs of all claims and claim adjustment expenses incurred by the Company when an event occurs. During the quarter ended March 31, 1998 the Company incurred claims of $7.9 million and paid losses of $7.0 million. This was a relatively light quarter for natural catastrophes which therefore positively affected the Company's results of operations. 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. Claim reserves represent estimates, including actuarial and statistical projections at a given point in time, of an insurer's or reinsurer's expectations of the ultimate settlement and administration costs of claims incurred, and it is possible that the ultimate liability may exceed or be less than such estimates. Such estimates are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends in claim severity and frequency and other variable factors such as inflation. During the claim settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates. Reserves for claims and claim expenses may include reserves for unpaid reported claims and claim expenses and reserves for estimated losses that have been incurred but not reported to the Company. Such reserves are estimated by management based upon reports received from ceding companies, as supplemented by the Company's own estimates of reserves on such reported losses as well as reserves for losses that are incurred but not reported. The Company's reserve estimates are continually reviewed and, in accordance with GAAP, as adjustments to these reserves become necessary, such adjustments are reflected in current operations. Capital Resources & Shareholders' Equity <TABLE> <CAPTION> The total capital resources of the Company as at March 31, 1998 and December 31, 1997 was as follows: - --------------------------------------------------------------------------------------------- March 31, December 31, (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> Revolving Credit Facility - borrowed $ 50,000 $ 50,000 Revolving Credit Facility - unborrowed 150,000 150,000 Minority interest - Company obligated mandatorily redeemable capital securities of a subsidiary trust 100,000 100,000 Shareholders' Equity 631,606 598,703 - --------------------------------------------------------------------------------------------- TOTAL CAPITAL RESOURCES $931,606 $898,703 ============================================================================================= </TABLE> During the first quarter of 1998, shareholders' equity increased by $32.9 million, from $598.7 million at December 31, 1997 to $631.6 million at March 31, 1998. The significant components of the increase included net income from continuing operations of $35.7 million and a decrease in the unrealized depreciation on investments of $3.8 million, partially offset by the payment of dividends of $6.8 million and the issuance of restricted stock under the Company's 1993 Stock Incentive Plan. 13
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: <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- March 31, December 31, (in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Investments available for sale, at fair value $ 710,435 $ 710,166 Equity securities, at fair value - 26,372 Cash and cash equivalents 199,618 122,929 - ----------------------------------------------------------------------------------------------------------- TOTAL INVESTED ASSETS $ 910,053 $ 859,467 =========================================================================================================== </TABLE> The growth in the Company's portfolio of invested assets for the quarter ended March 31, 1998 primarily resulted from net cash provided by operating activities of $49.9 million. 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, 1998, the invested asset portfolio had a dollar weighted average rating of AA, an average duration of 2.3 years and an average yield to maturity of 5.87 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, 1998 the Company held investments and cash totaling $910.0 million with a net unrealized depreciation balance of $6.3 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, 1998, $20.6 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. The Company's investment portfolio does not contain any investments in derivatives. Also, the Company's investment portfolio does not contain any direct investments in real estate, mortgage loans or similar securities. 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 14
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 Certain computer programs and/or software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has completed an assessment of its business applications and computer systems, and believes that all critical business applications and systems will function properly with respect to dates in the year 2000 and thereafter. The Company is in the process of evaluating its potential exposures from the non-compliance, if any, of its vendors' and customers' systems with the Year 2000. There can be no assurance that the systems of its vendors and customers, on which the Company relies for supporting information, will be timely converted and would not have an effect on the Company's business operations. Currently, none of the Company's reinsurance or insurance policies specifically provides coverage for Year 2000 losses. The Company has begun to explicitly exclude coverage for Year 2000 losses from its policies, and expects to adopt this wording for the majority of its policies and contracts going forward. The Company believes that the potential for a material loss due to this exposure has been, or will be, minimized; however, there can be no assurance that potential losses would not have an adverse effect on the future results of operations. The Company anticipates completing the Year 2000 evaluation prior to December 31, 1998 and it is anticipated that any future costs associated with the Year 2000 project will be minimal and accordingly not have an adverse effect on the future results of operations. Current Outlook It is anticipated that the competitive pressures that have existed since 1995 will continue into 1998. The Company anticipates that these pressures will continue to suppress the growth in premiums from property catastrophe reinsurance contracts. However, although no assurance can be given, 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. Additionally, 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. 15
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 owing to increased capacity of property catastrophe reinsurers; (iii) any lowering or loss of one of the financial or claims-paying ratings of the Company or one or more of its subsidiaries; (iv) actions of competitors; (v) loss of services of any one of the Company's key executive officers; (vi) the passage of federal or state legislation subjecting Renaissance Reinsurance to supervision or regulation in the United States; (vii) challenges by insurance regulators in the United States to Renaissance Reinsurance's claim of exemption from insurance regulation under the current laws; (viii) changes in economic conditions, including currency rate conditions; or (ix) 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. 16
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 3.1 - Memorandum of Increase in Share Capital of the Company. Exhibit 3.2 - Amended and Restated Bye-laws of the Company. Exhibit 27 - Financial Data Schedule. b. Current Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K on January 6, 1998. 17
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. Date: May 14, 1998 By: /s/ John M. Lummis ------------------------- John M. Lummis Senior Vice President and Chief Financial Officer 18